CarGurus, Inc. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2020

OR

For the transition period from _________________ to _________________

Commission File Number: 001-38233

CARGURUS, INC.

(Exact Name of Registrant as Specified in its Charter)

Registrant’s telephone number, including area code: (617) 354-0068

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of April 30, 2020, the registrant had 92,673,364 shares of Class A common stock, $0.001 par value per share, and 19,978,903 shares of Class B common stock, par value $0.001 per share, outstanding.

Table of Contents

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SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

This report contains forward‑looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward‑looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward‑looking statements because they contain words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “likely,” “may,” “might,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. Forward-looking statements contained in this report include, but are not limited to, statements about:

You should not rely upon forward‑looking statements as predictions of future events. We have based the forward‑looking statements contained in this report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and growth prospects. The outcome of the events described in these forward‑looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward‑looking statements contained in this report. Further, our forward‑looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions or joint ventures in which we may be involved, or investments we may make. We cannot assure you that the results, events, and circumstances reflected in the forward‑looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward‑looking statements.

The forward‑looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward‑looking statement made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

CarGurus, Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

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CarGurus, Inc.

Unaudited Condensed Consolidated Income Statements

(in thousands, except share and per share data)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

2

CarGurus, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Income

(in thousands)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

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CarGurus, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

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CarGurus, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

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CarGurus, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data, unless otherwise noted)

1. Organization and Business Description

CarGurus, Inc. (the “Company”), is a global, online automotive marketplace connecting buyers and sellers of new and used cars. Using proprietary technology, search algorithms, and innovative data analytics, the Company provides information and analysis that create a differentiated automotive search experience for consumers. The Company’s marketplace empowers users worldwide with unbiased third-party validation on pricing and dealer reputation, as well as other useful information that aids them in finding “Great Deals from Top-Rated Dealers.”

The Company is headquartered in Cambridge, Massachusetts and was incorporated in the State of Delaware on June 26, 2015. The Company operates principally in the United States. In addition to the United States, it operates online marketplaces under the CarGurus brand in Canada and the United Kingdom. The Company also operates online marketplaces in Germany, Italy, and Spain; the Company intends to cease the operations of each of these marketplaces in the second quarter of 2020 (see Note 13). The Company has subsidiaries in the United States, Canada, Ireland, and the United Kingdom. In the United States and the United Kingdom, it also operates the Autolist and PistonHeads online marketplaces, respectively, as independent brands.             

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements (the “Unaudited Condensed Consolidated Financial Statements”) and related disclosures have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative U.S. generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

The Unaudited Condensed Consolidated Financial Statements are unaudited. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on February 14, 2020 (the “2019 Annual Report”).

The Unaudited Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The Unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of March 31, 2020 and December 31, 2019, results of operations, comprehensive income, changes in shareholders’ equity and cash flows for the three months ended March 31, 2020 and 2019. These interim period results are not necessarily indicative of the results to be expected for any other interim period or the full year.

The accompanying Unaudited Condensed Consolidated Financial Statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the Unaudited Condensed Consolidated Financial Statements. As of March 31, 2020, there have been no material changes in the Company's significant accounting policies from those that were disclosed in the 2019 Annual Report.

Principles of Consolidation

The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

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Subsequent Event Considerations

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required. The Company has evaluated all subsequent events and determined that there are no material recognized or unrecognized subsequent events requiring disclosure, other than those disclosed in Note 13 of these Unaudited Condensed Consolidated Financial Statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.

Significant estimates relied upon in preparing these Unaudited Condensed Consolidated Financial Statements include revenue recognition, allowance for doubtful accounts and sales allowances, variable consideration, the recoverability of long-lived assets, the valuation and recoverability of goodwill and intangible assets, the expensing and capitalization of product, technology, and development costs for website development and internal‑use software, and the recoverability of the Company’s net deferred tax assets and related valuation allowance.

Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from management’s estimates if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made.

Concentration of Credit Risk

The Company has no significant off‑balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments, and trade accounts receivable.

The Company maintains its cash, cash equivalents, and investments principally with accredited financial institutions of high credit standing. Although the Company deposits its cash, cash equivalents, and investments with multiple financial institutions, its deposits may often exceed governmental insured limits.

Credit risk with respect to accounts receivable is dispersed due to the large number of customers. The Company routinely assesses the creditworthiness of its customers. The Company generally has not experienced any material losses related to receivables from individual customers, or groups of customers. The Company does not require collateral. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in the Company’s accounts receivable. In light of the novel strain of coronavirus that surfaced in Wuhan, China in December 2019 and was subsequently declared a Public Health Emergency of International Concern by the World Health Organization (“COVID-19”), the Company assessed the implications on accounts receivable and increased its allowance for doubtful accounts to $1,247 as of March 31, 2020 as compared to $240 as of December 31, 2019 due to increased risk of collectability of its outstanding trade receivables.

For the three months ended March 31, 2020 and 2019, no individual customer accounted for more than 10% of total revenue.

As of March 31, 2020, one customer accounted for 12% of net accounts receivable. As of December 31, 2019, one customer accounted for 18% of net accounts receivable. No other individual customer accounted for more than 10% of net accounts receivable at March 31, 2020 or December 31, 2019.

Included in net accounts receivable at March 31, 2020 and December 31, 2019, are $5,980 and $8,880, respectively, of unbilled accounts receivable primarily related to advertising customers that are generally billed within a quarter subsequent to services being rendered. The decrease in unbilled accounts receivable of $2,900 is due to a decrease in advertising revenues, a decrease in revenue from partnerships with certain financing services companies and the impact of price concessions offered to customers in response to the COVID-19 pandemic.

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Allowance for Credit Losses

The Company is exposed to credit losses primarily through its trade accounts receivable. The Company determines the required allowance for expected credit losses using information such as historical loss trends, current conditions, and reasonable and supportable forecasts of economic conditions such as the impacts of the COVID-19 pandemic in the first quarter of 2020. Amounts are charged against the allowance when it is determined that expected credit losses may occur. At March 31, 2020, the Company reported allowances for doubtful accounts of $1,247 reflecting an increase of $1,007 primarily due to the impact of the COVID-19 pandemic and increased risk of collectability.

Revenue Recognition

The following table summarizes revenue from contracts with customers by revenue source for the three months ended March 31, 2020 and 2019.

The Company provides disaggregation of revenue based on the marketplace subscription versus advertising and other revenue classification in the table above and based on geographic region (see Note 12) as it believes these categories best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

The Company enters into contracts that include variable consideration, for which the Company estimates the value of the variable consideration in determining the transaction price and allocates it to the appropriate performance obligations. The Company reassesses any estimates of variable consideration at each reporting period.

ASC Topic 606, Revenue from Contracts with Customers (“Topic 606”) requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of the relevant quarter end.

For contracts with an original expected duration greater than one year, the aggregate amount of the transaction price allocated to the performance obligations that were unsatisfied as of March 31, 2020 was approximately $27.6 million, which the Company expects to recognize over the next twelve months.

For contracts with an original expected duration of one year or less, the Company has applied the practical expedient available under Topic 606 to not disclose the amount of transaction price allocated to unsatisfied performance obligations as of March 31, 2020. For performance obligations not satisfied as of March 31, 2020, and to which this expedient applies, the nature of the performance obligations, the variable consideration and any consideration from contracts with customers not included in the transaction price is consistent with performance obligations satisfied as of March 31, 2020. The remaining duration is less than one year.

Revenue recognized during the three months ended March 31, 2020 from amounts included in deferred revenue at the beginning of the period was approximately $9,984.        

On March 18, 2020, in response to the COVID-19 pandemic, the Company announced a 50% fee reduction on all marketplace subscriptions for the April service period for paying dealers in the United States, Canada and the United Kingdom as well as a 100% fee reduction for paying dealers in Italy as the Company intends to cease the operations of its Italian marketplace in the second quarter of 2020. This discount resulted in a modification to contracts with initial contractual periods greater than one month. For any contract modified, the Company calculated the remaining transaction price and allocated the consideration over the remaining performance obligations. In the Company’s calculation of the remaining transaction price it also included estimated discounts for future service periods beyond April. These modifications had an immaterial impact on the Company’s revenues for the first quarter of 2020. For additional discussion of fee reductions provided to customers announced subsequent to March 31, 2020, refer to Note 13.

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Recent Accounting Pronouncements Adopted

Goodwill and Intangibles

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating Step 2 of the goodwill impairment test. Under previous guidance, Step 2 of the goodwill impairment test required entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value was recognized as goodwill impairment. Under ASU 2017-04, goodwill impairment is recognized based on Step 1 of the goodwill impairment test, which calculates the carrying value in excess of the reporting unit’s fair value. The standard was effective beginning in January 2020, with early adoption permitted. The Company adopted the guidance on January 1, 2020 and applied it on a prospective basis. The adoption did not have a material impact on the Unaudited Condensed Consolidated Financial Statements.

Credit Losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 and its subsequent related updates establish a forward-looking “expected loss model” that requires entities to estimate current expected credit losses on accounts receivable and financial instruments by using all practical and relevant information. ASU 2016-13 and its subsequent related updates were effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2020 and applied it on a prospective basis. The adoption did not have a material impact on the Unaudited Condensed Consolidated Financial Statements.

Recent Accounting Pronouncements Not Yet Adopted

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company on or prior to the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

Income Taxes

In December 2019, the FASB issued ASU 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes. The guidance simplifies the accounting for income taxes by removing several exceptions in the current standard and adding guidance to reduce complexity in certain areas, such as requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently assessing the impact that adopting this guidance will have on its Unaudited Condensed Consolidated Financial Statements.

3. Acquisitions

On January 16, 2020, the Company acquired Autolist, an automotive shopping platform based in San Francisco, California, pursuant to an Agreement and Plan of Merger by and among the Company, Alpine Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Merger Sub”), Auto List, Inc., a Delaware corporation (“Target”), and the securityholders’ representative therein, pursuant to which, among other things, the Company acquired Target through the merger of Merger Sub with and into Target (the “Merger”), with Target surviving as a wholly owned subsidiary of the Company. The Company paid an aggregate of $21.0 million, net of cash acquired, to consummate the Merger. The amount paid includes $2.2 million that is held in escrow to secure post-closing claims.  The Merger is intended to both expand the Company’s consumer audience in the United States and enhance its value proposition for subscribing dealers.

As of March 31, 2020, the Company incurred total acquisition-related costs of $1.4 million related to the Merger.  For the three months ended March 31, 2020 the Company incurred total acquisition-related costs of $0.9 million.  Acquisition-related costs were excluded from the purchase price allocation as they were primarily comprised of one-time severance and bonus related expenses. For the three months ended March 31, 2020, $0.5 million, $0.2 million and $0.2 million of acquisition-related costs were recorded as operating expense and allocated to product, technology, and development, general and administrative, and sales and marketing, respectively, within the Unaudited Condensed Consolidated Income Statement.

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The acquisition has been accounted for as a business combination under the acquisition method and, accordingly, the total purchase price is allocated to the acquired assets and assumed liabilities. The following table presents the preliminary purchase price allocation recorded in the Company’s Unaudited Condensed Consolidated Balance Sheet as of the acquisition date, which is subject to finalization for estimates of the  fair value of assets acquired and liabilities assumed as of the acquisition date, including, but not limited to tangible assets, intangible assets and tax-related items, and the related tax and effects of any changes made:

Actual and pro forma results for this acquisition have not been presented as the financial impact to the Company’s Unaudited Condensed Consolidated Financial Statements is not material.

4. Fair Value of Financial Instruments Including Cash, Cash Equivalents and Investments

The following tables present, for each of the fair value levels, the Company’s assets that are measured at fair value on a recurring basis at March 31, 2020 and at December 31, 2019:

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Certificates of deposit at March 31, 2020 and December 31, 2019 had maturity dates of one year or less.

The Company measures eligible assets and liabilities at fair value with changes in value recognized in earnings. There were no liabilities that were measured at fair value as of March 31, 2020 and December 31, 2019. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to remeasure any of its existing financial assets and did not elect the fair value option for any financial assets transacted during the three months ended March 31, 2020 or the year ended December 31, 2019.

The Company considers all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. Investments not classified as cash equivalents with maturities one year or less from the balance sheet date are classified as short-term investments, while investments with maturities in excess of one year from the balance sheet date are classified as long-term investments. Management determines the appropriate classification of investments at the time of purchase and re-evaluates such determination at each balance sheet date.

Cash and cash equivalents primarily consist of cash on deposit with banks, and amounts held in interest-bearing money market accounts. Cash equivalents are carried at cost, which approximates their fair market value.

The following is a summary of investments as of March 31, 2020 and December 31, 2019:

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5. Property and Equipment, Net

Property and equipment consists of the following:

Depreciation and amortization expense, excluding amortization of intangible assets, was $2,558 and $1,472 for the three months ended March 31, 2020 and 2019, respectively.

6. Goodwill and Other Intangible Assets

Goodwill

The changes in the carrying value of goodwill were as follows:

The Company tests goodwill for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. As a result of the COVID-19 pandemic, the Company assessed its goodwill for impairment concluding that there was no impairment as of March 31, 2020.

Other Intangible Assets

Intangible assets as of March 31, 2020 and December 31, 2019 consist of the following:

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The Company recorded amortization expense related to intangible assets of $432 and $155 for the three months ended March 31, 2020 and 2019, respectively.

The estimated useful life of the PistonHeads brand and customer relationships is 11 years and 3 years, respectively. The estimated useful life of the Autolist brand, customer relationships and developed technology is 9 years, 3 years and 3 years, respectively. The Company evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. As a result of the COVID-19 pandemic, the Company assessed its long-lived assets for impairment and concluded that there was no impairment as of March 31, 2020.

Estimated amortization expense of intangible assets for future periods as of March 31, 2020 is as follows:

7. Accrued Expenses, Accrued Income Taxes and Other Current Liabilities

Accrued expenses, accrued income taxes and other current liabilities consist of the following:

The decrease of $7,762 in accrued bonus balances is primarily due to the payout of the fiscal year 2019 bonus in the first quarter of 2020 as well as a lower overall estimated bonus payout for fiscal year 2020. The increase of $4,993 in customer credit balances is primarily due to credits owed to customers who paid their full April balances before the Company issued concessions in response to the COVID-19 pandemic (Note 2). These payments in advance of service would otherwise have been classified in deferred revenue as of March 31, 2020.  

8. Commitments and Contingencies

Contractual Obligations and Commitments

All of the Company’s property, equipment, and internal-use software have been purchased with cash with the exception of $967 of unpaid property and equipment and immaterial amounts related to obligations under one finance lease as of March 31, 2020. The Company has no material long-term purchase obligations outstanding with any vendor or third party.

Leases

The Company's operating lease obligations consist of various leases for office space in: Boston, Massachusetts; Cambridge, Massachusetts; Detroit, Michigan; Los Angeles, California; San Francisco, California; Austin Texas; New York City, New York; Dublin, Ireland; and London, United Kingdom. The Detroit, Los Angeles, Austin, New York City and London leases are immaterial to the Company. The Los Angeles and New York City leases will be terminated in the second quarter of 2020. The Company also has an operating lease obligation for data center space in Needham, Massachusetts.

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As of March 31, 2020, there were no material changes in the Company’s leases from those disclosed in the 2019 Annual Report, other than as discussed below.

On January 10, 2019, Auto List, Inc., which the Company acquired on January 16, 2020, entered into an operating lease in San Francisco, California at 332 Pine St. for the lease of 6,345 square feet of office space with a non-cancellable lease term through 2024. The lease provides for annual rent increases through the term of the lease.

The Company’s leases in Boston, Massachusetts, Cambridge, Massachusetts and San Francisco, California have associated letters of credit, which are recorded as restricted cash within the Unaudited Condensed Consolidated Balance Sheet. At March 31, 2020 and December 31, 2019, restricted cash was $11,020 and $10,803, respectively, and primarily related to cash held at a financial institution in an interest‑bearing cash account as collateral for the letters of credit related to the contractual provisions for the Company’s building leases. At March 31, 2020 and December 31, 2019, portions of restricted cash were classified as a short-term asset and long‑term asset, as disclosed on the Unaudited Condensed Consolidated Balance Sheet. Additionally, the Company’s lease agreement for 121 First St. in Cambridge, Massachusetts has an associated security deposit, which is recorded in other assets, net within the Unaudited Condensed Consolidated Balance Sheet.

Legal Matters

From time to time the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. The Company is not presently subject to any pending or threatened litigation that it believes, if determined adversely to the Company, individually, or taken together, would reasonably be expected to have a material adverse effect on its business or financial results.

Guarantees and Indemnification Obligations

In the ordinary course of business, the Company enters into agreements with its customers, partners and service providers that include commercial provisions with respect to licensing, infringement, indemnification, and other common provisions. The Company does not, in the ordinary course, agree to guaranty or indemnification obligations for the Company under its contracts with customers. Based on historical experience and information known at March 31, 2020 and December 31, 2019, the Company has not incurred any costs for guarantees or indemnities. 

9. Stock-based Compensation

Total stock-based compensation expense was $11,681 and $7,686 for the three months ended March 31, 2020 and 2019.  The following two tables show stock compensation expense by award type and where the stock compensation expense is recorded in the Company’s Unaudited Condensed Consolidated Income Statements:

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Excluded from stock-based compensation expense is $248 and $309 of capitalized website development and internal-use software costs for the three months ended March 31, 2020 and 2019.  

During the three months ended March 31, 2020 and 2019, the Company withheld 106,934, and 102,034 shares of Class A common stock, respectively, to satisfy employee tax withholding requirements due to net share settlements. The shares withheld return to the authorized, but unissued pool under the Company’s Omnibus Equity Compensation Plan and can be reissued by the Company. Total payments for the employees’ tax obligations to the taxing authorities due to net share settlements were $3,397 and $3,954 for the three months ended March 31, 2020 and 2019, respectively, and are reflected as a financing activity within the Unaudited Condensed Consolidated Statements of Cash Flows.

10. Earnings Per Share

Net income per share for the three months ended March 31, 2020 and 2019 is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. The Company computes the weighted-average number of common shares outstanding during the reporting period using the total number of shares of Class A common stock and Class B common stock outstanding as of the last day of the previous year end reporting period plus the weighted-average of any additional shares issued and outstanding during the reporting period.    

The Company has two classes of common stock authorized: Class A common stock and Class B common stock. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock is convertible into one share of Class A common stock at the option of the holder at any time or automatically upon certain events described in the Company’s amended and restated certificate of incorporation, including on either the death or voluntary termination of the Company’s Chief Executive Officer. The Company allocates undistributed earnings attributable to common stock between the common stock classes on a one‑to‑one basis when computing net income per share. As a result, basic and diluted net income per share of Class A common stock and per share of Class B common stock are equivalent.

During the three months ended March 31, 2020, holders of Class B common stock converted 335,741 shares of Class B common stock to Class A common stock. During the three months ended March 31, 2019, no holders of Class B common stock converted shares of Class B common stock to Class A common stock.

Diluted net income per share gives effect to all potentially dilutive securities. Potential dilutive securities for the three months ended March 31, 2020 and 2019 consist of shares of common stock issuable upon the exercise of stock options and shares of common stock issuable upon the vesting of restricted stock units (“RSUs”). The dilutive effect of these common stock equivalents is reflected in diluted earnings per share by application of the treasury stock method.

For the three months ended March 31, 2020 and 2019, diluted net income per share was calculated by dividing net income by the weighted-average number of shares of common stock outstanding during the period plus the dilutive impact of stock options and shares of common stock issuable upon the vesting of RSUs.

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The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share:

The following potentially dilutive common stock equivalents have been excluded from the calculation of diluted weighted-average shares outstanding for the three months ended March 31, 2020 and 2019, as their effect would have been anti-dilutive for the periods presented:

11. Income Taxes

During the three months ended March 31, 2020, the Company recorded an income tax provision of $51 representing an effective tax rate of 0.4%. The effective tax rate for the three months ended March 31, 2020 was lower than the statutory tax rate of 21% principally due to a discrete benefit recognized as a result of the enactment of the CARES Act (as defined below), excess stock deductions from the taxable compensation of share-based awards and federal and state research and development tax credits, partially offset by state and local income taxes.

During the three months ended March 31, 2019, the Company recorded an income tax benefit of $3,503, representing an effective tax rate of (38.6)%. The effective tax rate for the three months ended March 31, 2019 was lower than the statutory tax rate of 21% principally due to the excess stock deductions from the taxable compensation of stock-based awards and federal and state research and development tax credits, partially offset by state and local income taxes.

The Company and its subsidiaries are subject to various U.S. federal, state, and foreign income taxes.  The Company is currently not subject to examination under the statute of limitations by the Internal Revenue Service and state jurisdictions for the tax years of 2015 and prior. The Company is currently open to examination in its foreign jurisdictions for tax years 2017 and after.  In 2019, the Internal Revenue Service commenced a federal employment tax audit with respect to the 2016, 2017 and 2018 calendar years, which is still open.

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  Among other things, the CARES Act includes a net operating loss (“NOL”) carryback provision allowing for NOLs from the 2018, 2019, or 2020 tax years to be used to offset taxable income for the 2013 to 2017 tax years.  The Company has performed an initial analysis and intends to avail itself of this option, which will reduce its current gross NOL balance by approximately $18,723 and increase its deferred federal research and development credit by approximately $2,645.  The Company does not expect this election to negatively impact its analysis on the valuation allowance for its NOLs or deferred federal research and development credit.  

The CARES Act also updates the Tax Cuts and Jobs Act of 2017, allowing for the depreciation of leasehold improvements over 15 years, rather than 39 years, and eligibility for bonus depreciation, rather than non-eligibility for bonus depreciation.  Although the Company continues to analyze the impact of these allowances, including any possible benefit to the 2018 tax year, the Company has

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made an estimate for the impact as it relates to the 2019 tax year and will file its 2019 return in accordance with the updated guidance in the CARES Act.

The CARES Act includes other provisions that may be utilized if the Company meets the eligibility requirements.  Although the Company continues to review and evaluate the potential impact and benefit of the CARES Act on its entire business, the Company has primarily focused its review on three provisions that affect both income taxes and non-income taxes. First, the CARES Act temporarily removes the 80% limitation on NOLs to offset taxable income for tax years prior to 2021. Second, the CARES Act allows for the deferral of the employer portion of the Social Security Tax for up to two years, with half due by December 31, 2021 and the remainder due by December 31, 2022. Finally, the Company is evaluating whether it qualifies for the Employee Retention Credit program.

12. Segment and Geographic Information

The Company has two reportable segments, United States and International. Segment information is presented in the same manner as the Company’s chief operating decision maker (the “CODM”) reviews the Company’s operating results in assessing performance and allocating resources. The CODM reviews revenue and operating income (loss) for each reportable segment as a proxy for the operating performance of the Company’s United States and International operations. The Company’s Chief Executive Officer is the CODM on behalf of both reportable segments.

The United States segment derives revenues from marketplace subscriptions, advertising services, and other revenues from customers within the United States. The International segment derives revenues from marketplace subscriptions, advertising services, and other revenues from customers outside of the United States. A majority of the Company’s operational overhead expenses, including technology and personnel costs, and other general and administrative costs associated with running the Company’s business, are incurred in the United States and not allocated to the International segment. Assets and costs discretely incurred by reportable segments, including depreciation and amortization, are included in the calculation of reportable segment income (loss) from operations. Segment operating income (loss) does not reflect the transfer pricing adjustments related to the Company’s foreign subsidiaries, which are recorded for statutory reporting purposes. Asset information is assessed and reviewed on a global basis.

Information regarding the Company’s operations by segment and geographical area is presented as follows:

As of March 31, 2020, total assets held outside of the United States were $29,357, primarily attributable to $14,889 of goodwill and $3,676 of intangible assets. As of December 31, 2019, total assets held outside of the United States were $32,528, primarily attributable to $15,207 of goodwill and $3,920 of intangible assets. The Company will be ceasing the operations of the International segment online marketplaces in Germany, Italy, and Spain in the second quarter of 2020.

13. Subsequent Event

On April 13, 2020, the Board of Directors (the “Board”) of the Company approved an expense reduction plan to address the impact of the COVID-19 pandemic on the Company’s business (the “Expense Reduction Plan”), pursuant to which the Company initiated a reduction in its workforce of approximately 13%, will cease operation of its Germany, Italy and Spain marketplaces, and is halting expansion efforts in any new international markets. The Company expects to incur total estimated pre-tax restructuring and related charges of approximately $4.3 million during the second quarter of 2020 to implement the Expense Reduction Plan,

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approximately 75% of which is related to employee severance and related benefits costs, with the remainder attributable to the write-off of long-lived assets from international marketplaces. The Company expects that approximately $2.6  million of these charges will result in future cash expenditures. The discontinuation of operations in certain markets does not impact the Company’s segment reporting.

On April 16, 2020, in response to the COVID-19 pandemic, the Company announced a 50% fee reduction on all May marketplace subscriptions for paying dealers in the United States, Canada and the United Kingdom and suspension of all charges for paying dealers in Italy as the Company intends to cease the operations of its Italian marketplace in the second quarter of 2020. On April 29, 2020, in further response to the COVID-19 pandemic, the Company announced a 20% and 50% fee reduction on all June marketplace subscriptions for paying dealers in the United States and United Kingdom, respectively. On May 5, 2020, the Company also announced a 20% fee reduction on all June marketplace subscriptions for paying dealers in Canada. These modifications had an immaterial impact on the Company’s revenues for the first quarter of 2020. The Company expects these fee reductions, together with the fee reductions for the April service period, to negatively impact revenue for the second quarter of 2020 by approximately $50.0 million.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our Unaudited Condensed Consolidated Financial Statements, and the related notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and our consolidated financial statements and the related notes and other financial information included in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission, or SEC, on February 14, 2020, or our 2019 Annual Report. Some of the information contained in this discussion and analysis or elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and our performance and future success, includes forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements.” You should review the “Risk Factors” section of this Quarterly Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. In this discussion, we use financial measures that are considered non-GAAP financial measures under SEC rules. These rules regarding non-GAAP financial measures require supplemental explanation and reconciliation, which are included elsewhere in this Quarterly Report. Investors should not consider non-GAAP financial measures in isolation from or in substitution for, financial information presented in compliance with United States generally accepted accounting principles, or GAAP.  

Company Overview

CarGurus is a global, online automotive marketplace connecting buyers and sellers of new and used cars. Using proprietary technology, search algorithms, and innovative data analytics, we provide information and analysis that create a differentiated automotive search experience for consumers. Our trusted marketplace empowers users with unbiased third‑party validation on pricing and dealer reputation as well as other information that aids them in finding “Great Deals from Top-Rated Dealers.” In addition to the United States, we operate online marketplaces under the CarGurus brand in Canada and the United Kingdom. We also operate online marketplaces in Germany, Italy, and Spain; we intend to cease the operations of each of these marketplaces in the second quarter of 2020. In the United States and the United Kingdom, we also operate the Autolist and PistonHeads online marketplaces, respectively, as independent brands.

We generate marketplace subscription revenue from dealers primarily through Listings and Dealer Display subscriptions, and advertising and other revenue from automobile manufacturers and other auto-related brand advertisers as well as partnerships with financing services companies. Our revenue for the three months ended March 31, 2020 was $157.7 million, a 17% increase from $135.3 million of revenue in the three months ended March 31, 2019.

For the three months ended March 31, 2020, we generated net income of $12.7 million and our Adjusted EBITDA was $27.6 million, compared to net income of $12.6 million and Adjusted EBITDA of $16.8 million for the three months ended March 31, 2019. See “Adjusted EBITDA” below for more information regarding our use of Adjusted EBITDA, a non-GAAP financial measure, and a reconciliation of Adjusted EBITDA to our net income.

We have two reportable segments, United States and International. See Note 12 of our Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.

COVID-19 Update

In December 2019, a novel strain of coronavirus, or COVID-19, surfaced in Wuhan, China and in January 2020, the World Health Organization, or the WHO, declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic.

The long-term implications of the COVID-19 pandemic and the resulting global crisis on our results of operations and overall financial performance remain uncertain. The COVID-19 pandemic and its adverse effects have become widespread in the locations where we, and our customers, suppliers and third-party business partners conduct business and as a result, we have experienced disruptions in our operations.  

For example, in an effort to limit the spread of COVID-19, several countries, including the United States, have placed significant restrictions on travel and many businesses have announced extended closures. In March, we closed all of our offices (including our corporate headquarters) in the United States, Ireland and United Kingdom and began requiring our employees to work remotely. A number of states and other governments have issued shelter in place or stay-at-home orders and have restricted the ability to buy and sell automobiles by excluding dealerships from the list of essential businesses and/or by closing the agencies that process the transfer of automotive titles. In addition, as a result of these restrictions and concerns about the spread of the disease, the

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operations of car dealerships have been disrupted, which has adversely affected the market for automobile purchases. As a result of these restrictions and the impact on their businesses, a number of our paying dealers have temporarily closed, plan to temporarily close or are operating on a reduced capacity, and many dealerships are facing significant financial challenges.

On March 18, 2020, in response to the COVID-19 pandemic, we announced a 50% fee reduction on all marketplace subscriptions for the April service period for paying dealers in the United States, Canada and the United Kingdom, as well as a suspension of all charges for paying dealers in Italy as we intend to cease the operations of our Italian marketplace in the second quarter of 2020. This discount resulted in a modification to contracts with initial contractual periods greater than one month. For any contract modified, we calculated the remaining transaction price and allocated the consideration over the remaining performance obligations. In our calculation of the remaining transaction price we also included estimated discounts for future service periods. These modifications had an immaterial impact on our revenues for the first quarter of 2020. On April 16, 2020, we announced a 50% fee reduction on all May marketplace subscriptions for paying dealers in the United States, Canada and the United Kingdom, as well as a continuation of our suspension of all charges for paying dealers in Italy. On April 29, 2020, in further response to the COVID-19 pandemic, we announced a 20% and 50% fee reduction on all June marketplace subscriptions for paying dealers in the United States and United Kingdom, respectively. On May 5, 2020, we also announced a 20% fee reduction on all June marketplace subscriptions for paying dealers in Canada.  We expect these fee reductions, together with the fee reductions for the April service period, to negatively impact revenue for the second quarter of 2020 by approximately $50.0 million.

We have experienced and may continue to experience constrained customer demand that could have a materially adverse impact on our business, results of operations and overall financial performance. Specifically, we have experienced and may continue to experience an adverse impact on our revenue as a result of customers cancelling their subscriptions due to closures of their dealerships and customers reducing advertising spend due to cost constraints, as well as our issuance of discounts to our paying dealers.

As a result of the customer discounts that we announced for the April, May and June service periods, we will generate much less revenue from our paying dealers in the near term. In an effort to offset this decrease in near term revenue, we initiated a reduction in our workforce of approximately 13% and are implementing several other cost saving initiatives. These cost saving initiatives include a reduction in consumer marketing spend and a reduction in discretionary spend across the business as well as a 50% executive base salary reduction for three months. Additionally, we decided to cease marketplace operations in Germany, Italy, and Spain, and halt new international expansion efforts, which we believe will allow us to focus our financial and human capital resources on our more established international markets in Canada and the United Kingdom.

While our near term revenue and earnings had been relatively predictable as a result of our subscription-based business model, the effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. See the “Risk Factors” section of this Quarterly Report for further discussion of the possible impact of the COVID-19 pandemic on our business.

Key Business Metrics

We regularly review a number of metrics, including the key metrics listed below, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make operating and strategic decisions. We believe it is important to evaluate these metrics for the United States and International segments. The International segment derives revenues from marketplace subscriptions, advertising services, and other revenues from customers outside of the United States. International markets perform differently from the United States market due to a variety of factors, including our operating history in each market, our rate of investment, market size, market maturity, competition and other dynamics unique to each country.

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Monthly Unique Users

For each of our websites, we define a monthly unique user as an individual who has visited such website within a calendar month, based on data as measured by Google Analytics. We calculate average monthly unique users as the sum of the monthly unique users in a given period, divided by the number of months in that period. We count a unique user the first time a computer or mobile device with a unique device identifier accesses one of our websites during a calendar month. If an individual accesses a website using a different device within a given month, the first access by each such device is counted as a separate unique user. We view our average monthly unique users as a key indicator of the quality of our user experience, the effectiveness of our advertising and traffic acquisition, and the strength of our brand awareness. Measuring unique users is important to us and we believe it provides useful information to our investors because our marketplace subscription revenue depends, in part, on our ability to provide dealers with connections to our users and exposure to our marketplace audience. We define connections as interactions between consumers and dealers on our marketplace through phone calls, email, managed text and chat, and clicks to access the dealer’s website or map directions to the dealership.

Monthly Sessions

We define monthly sessions as the number of distinct visits to our websites that take place each month within a given time frame, as measured and defined by Google Analytics. We calculate average monthly sessions as the sum of the monthly sessions in a given period, divided by the number of months in that period. A session is defined as beginning with the first page view from a computer or mobile device and ending at the earliest of when a user closes their browser window, after 30 minutes of inactivity, or each night at midnight (i) Eastern Time for our United States and Canada websites, other than the Autolist website, (ii) Pacific Time for the Autolist website, (iii) Greenwich Mean Time for our U.K. websites, and (iv) Central European Time (or Central European Summer Time when daylight savings is observed) for our Germany, Italy, and Spain websites. A session can be made up of multiple page views and visitor actions, such as performing a search, visiting vehicle detail pages, and connecting with a dealer. We believe that measuring the volume of sessions in a time period, when considered in conjunction with the number of unique users in that time period, is an important indicator to us of consumer satisfaction and engagement with our marketplace, and we believe it provides useful information to our investors because the more satisfied and engaged consumers we have, the more valuable our service is to dealers.

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Number of Paying Dealers

A paying dealer is a dealer, based on a distinct associated inventory feed, that subscribes to one of our paid Listings packages or Dealer Display advertising and audience targeting products at the end of a defined period. The number of paying dealers we have is important to us and we believe it provides valuable information to investors because it is indicative of the value proposition of our marketplace products, as well as our sales and marketing success, including our ability to retain paying dealers and develop new dealer relationships.

Average Annual Revenue per Subscribing Dealer (AARSD)

We measure the average annual revenue we receive from each paying dealer. We define AARSD, which is measured at the end of a defined period, as the total marketplace subscription revenue during the trailing 12 months divided by the average number of paying dealers during the same trailing 12-month period. This information is important to us, and we believe it provides useful information to investors because we believe that our ability to grow AARSD is an indicator of the value proposition of our products and the return on investment, or ROI, our paying dealers realize from our products. In addition, increases in AARSD, which we believe reflect the value of exposure to our engaged audience in relation to subscription cost, are driven by our ability to grow the volume of connections to our users and the quality of those connections, which result in increased opportunity to upsell package levels and cross-sell additional products to our paying dealers.

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we monitor and have presented within this Quarterly Report, Adjusted EBITDA, which is a non‑GAAP financial measure. This non‑GAAP financial measure is not based on any standardized methodology prescribed by U.S. generally accepted accounting principles, or GAAP, and is not necessarily comparable to similarly titled measures presented by other companies.

We define Adjusted EBITDA as net income, adjusted to exclude: depreciation and amortization, stock‑based compensation expense, acquisition-related expenses, other income, net, and the provision for (benefit from) income taxes. We have presented Adjusted EBITDA within this Quarterly Report, because it is a key measure used by our management and board of directors to understand and evaluate our operating performance, generate future operating plans, and make strategic decisions regarding the allocation of capital. In particular, we believe that the exclusion of certain items in calculating Adjusted EBITDA can produce a useful measure for period‑to‑period comparisons of our business.

We use Adjusted EBITDA to evaluate our operating performance and trends and make planning decisions. We believe Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision‑making. In

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addition, we evaluate our Adjusted EBITDA in relation to our revenue. We refer to this as Adjusted EBITDA margin and define it as Adjusted EBITDA divided by total revenue.

Our Adjusted EBITDA is not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of Adjusted EBITDA rather than net income, which is the most directly comparable GAAP equivalent. Some of these limitations are:

Because of these limitations, we consider, and you should consider, Adjusted EBITDA together with other operating and financial performance measures presented in accordance with GAAP.

The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable measure calculated in accordance with GAAP, for each of the periods presented.

Components of Unaudited Condensed Consolidated Income Statements

Revenue

We derive revenue from two primary sources: (1) marketplace subscription revenue, which consists primarily of Listings, and Dealer Display subscriptions, and (2) advertising and other revenue, which consists primarily of display advertising revenue from auto manufacturers and other auto‑related brand advertisers as well as partnerships with financing services companies.

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Marketplace Subscription Revenue

We offer multiple types of marketplace Listings packages to our dealers through our platform: Restricted Listings (formerly referred to as Basic Listings), which is free; and various levels of Listings packages, which each require a paid subscription under a monthly, quarterly, semiannual, or annual subscription basis.

During the first quarter of 2020, we temporarily suspended our Restricted Listings product on a limited basis and put certain non-paying dealers into a suspended activity program. In this temporary program, we continue to collect leads from consumers but do not provide these leads to non-paying dealers. This program includes formerly paying dealers who terminated their paid subscription with us due to the COVID-19 pandemic. We intend to forward leads collected under this suspended activity program to dealers once they restore their paid subscription or on an anonymized basis once we reinstate Restricted Listings, as the case may be.

Our subscriptions for customers generally auto-renew on a monthly basis and are cancellable by dealers with 30 days’ advance notice at the end of the committed term, although we did not require dealers to provide 30 days’ advance notice of termination for dealers who have canceled as a result of the COVID-19 pandemic. We also offer all dealers on our platform access to our Dealer Dashboard, which includes a performance summary, Dealer Insights tool, and user review management platform. Only dealers subscribing to a paid Listings package also have access to the Pricing Tool and Market Analysis tool. Subscription pricing is determined based on a dealer’s inventory size, region, and our assessment of the connections and ROI the platform will provide them and is subject to discounts that the Company may offer from time to time.

In addition to displaying inventory in our marketplace and providing access to the Dealer Dashboard, we offer dealers subscribing to one of our Enhanced, Featured, or Featured Priority Listings packages other subscription advertising and customer acquisition products, including Dealer Display, pursuant to which dealers can buy display advertising that appears in our marketplace, and on other sites on the internet, and for which such advertisements can be targeted by the user’s geography, search history, CarGurus website activity (including showing a user relevant vehicles from a dealer’s inventory that the user has not yet discovered on our marketplace), and a number of other targeting factors, allowing dealers to increase their visibility with in-market consumers and drive qualified traffic for dealers.

We also offer paid Listings packages for the Autolist website and paid Listings and display products for the PistonHeads website.

Due to the impact of the COVID-19 pandemic, we expect a reduction in marketplace revenue in the near term as paying dealers cancel their subscriptions with us (including, with our permission, prior to the end of the applicable contract term and without the full notice period) and as we recognize the discounts provided to customers in April, May and June, which is a reduction in the overall transaction price and will be spread over the remaining contract term.

Advertising and Other Revenue

Advertising and other revenue consists primarily of non-dealer display advertising revenue from auto manufacturers and other auto-related brand advertisers sold on a cost per thousand impressions, or CPM, basis. An impression is an advertisement loaded on a web page. In addition to advertising sold on a CPM basis, we also have advertising sold on a cost per click basis. Auto manufacturers and other brand advertisers can execute advertising campaigns that are targeted across a wide variety of parameters, including demographic groups, behavioral characteristics, specific auto brands, categories such as Certified Pre-Owned, and segments such as hybrid vehicles.

Advertising and other revenue also includes revenue from partnerships with certain financing services companies pursuant to which we enable eligible consumers on our United States website to pre-qualify for financing on cars from dealerships that offer financing through such companies. Our revenues from these financing partnerships are based on a funded-loan basis.

We also offer non-dealer display products for the Autolist and PistonHeads websites.

Due to the impact of the COVID-19 pandemic, we expect a reduction in advertising revenue in the near term as some advertisers cancel or reduce their advertising with us (including, with our permission, prior to the end of the applicable contract term).

Cost of Revenue

Cost of revenue primarily consists of costs related to supporting and hosting our product offerings. These costs include salaries, benefits, incentive compensation, and stock-based compensation for our customer support team and third-party service provider costs such as data center and networking expenses, allocated overhead costs, depreciation expense associated with our property and

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equipment, and amortization of capitalized website development costs. We allocate overhead costs, such as rent and facility costs, information technology costs, and employee benefit costs, to all departments based on headcount. As such, general overhead expenses are reflected in cost of revenue and each operating expense category. We expect these expenses to increase as we continue to scale our business and introduce new products.

Operating Expenses

Sales and Marketing

Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing team, including salaries, benefits, incentive compensation, commissions, stock-based compensation, and travel costs; costs associated with consumer marketing, such as traffic acquisition, brand building, and public relations activities; costs associated with dealer marketing, such as content marketing, customer and promotional events, and industry events; amortization of internal-use software; and allocated overhead costs. A portion of our commissions that are related to obtaining a new contract is capitalized and amortized over the estimated benefit period of customer relationships. All other sales and marketing costs are expensed as incurred. We expect sales and marketing expenses to fluctuate from quarter to quarter as we respond to the COVID-19 pandemic and any resulting changes in the competitive landscape and attempt to restore our consumer audience and our brand awareness, which will impact our quarterly results of operations.

Product, Technology, and Development

Product, technology, and development expenses, which include research and development costs, consist primarily of personnel and related expenses for our development team, including salaries, benefits, incentive compensation, stock-based compensation and allocated overhead costs. Other than website development and internal-use software costs as well as other costs that qualify for capitalization, research and development costs are expensed as incurred. Despite our implementation of several cost saving initiatives associated with the COVID-19 pandemic, we expect product, technology, and development expenses to increase as we develop new solutions and make improvements to our existing platform.

General and Administrative

General and administrative expenses consist primarily of personnel and related expenses for our executive, finance, legal, human resources, and administrative teams, including salaries, benefits, incentive compensation, and stock-based compensation, in addition to the costs associated with professional fees for external legal, accounting and other consulting services, insurance premiums, payment processing and billing costs, and allocated overhead costs. General and administrative costs are expensed as incurred. In connection with our implementation of several cost saving initiatives associated with the COVID-19 pandemic, we expect to reduce our general and administrative expenses in the near term.  Nevertheless, we generally expect general and administrative expenses to increase as we grow our business.

Depreciation and Amortization

Depreciation and amortization expenses consist of depreciation on property and equipment and amortization of intangible assets.

Other Income, Net

Other income, net consists primarily of interest income earned on our cash, cash equivalents, and investments, sublease income and net foreign exchange gains and losses.

Provision for (Benefit from) Income Taxes

We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions in which we operate. We have recognized a provision for income taxes for the three months ended March 31, 2020 and a benefit from income taxes for the three months ended March 31, 2019. We recognize deferred tax assets and liabilities based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. We regularly assess the need to record a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Our valuation allowance against our net deferred tax assets as of March 31, 2020 and December 31, 2019 was immaterial.

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Results of Operations

The following table sets forth our selected consolidated statements of operations data for each of the periods indicated. The period-to-period comparison of financial results is not necessarily indicative of future results.