# CarGurus, Inc. (CARG) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from CarGurus, Inc.'s 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1494259/000095017024020157/carg-20231231.htm Accession: 0000950170-24-020157 Filing date: 2024-02-26 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/CARG/ All MD&A years: /company/CARG/mda/ Previous year: /company/CARG/mda/fy2022/ (FY 2022) Next year: /company/CARG/mda/fy2024/ (FY 2024) Item 7. 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 consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or elsewhere in this Annual 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 Annual 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 Annual Report. Investors should not consider non-GAAP financial measures in isolation from or in substitution for, financial information presented in compliance with U.S. generally accepted accounting principles, or GAAP. This section of this Annual Report discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. This section of this Annual Report also discusses 2022 and 2021 segment revenue and segment operating income (loss) from operations and year-to-year comparisons between 2022 and 2021 segment revenue and segment operating income (loss) from operations. Discussions of all other 2021 items and year-to-year comparisons between 2022 and 2021 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The period‑to‑period comparison of financial results is not necessarily indicative of future results. Company Overview CarGurus, Inc. is a multinational, online automotive platform for buying and selling vehicles that is building upon its industry-leading listings marketplace with both digital retail solutions and the CarOffer online wholesale platform. The CarGurus platform gives consumers the confidence to purchase and/or sell a vehicle either online or in person, and it gives dealerships the power to accurately price, effectively market, instantly acquire, and quickly sell vehicles, all with a nationwide reach. We use proprietary technology, search algorithms, and data analytics to bring trust, transparency, and competitive pricing to the automotive shopping experience. We operate principally in the U.S. In the U.S., we also operate as independent brands the Autolist online marketplace and the CarOffer online wholesale platform, both of which we wholly own. In addition to the U.S., we operate online marketplaces under the CarGurus brand in Canada and the U.K. In the U.K., we also operate as an independent brand the PistonHeads online marketplace, which we wholly own. We have subsidiaries in the U.S., Canada, Ireland, and the U.K. During the year ended December 31, 2023, we managed our business and reported earnings through two reportable segments: U.S. Marketplace and Digital Wholesale. Prior to the first quarter of 2022 we had two reportable segments – U.S. and International. Effective as of the first quarter of 2022 we revised our segment reporting from two reportable segments to one reportable segment. Effective as of the fourth quarter of 2022 we again revised our segment reporting from one reportable segment to our two current reportable segments. See Note 14 to our consolidated financial statements included elsewhere in this Annual Report for further segment reporting and geographic information. 48 We derive our revenue from marketplace revenue, wholesale revenue, and product revenue. Marketplace revenue is included in the U.S. Marketplace segment and Other category of segment reporting. Wholesale revenue and product revenue are included in the Digital Wholesale segment. We generate marketplace revenue primarily from (i) dealer subscriptions to our Listings packages, RPM, digital advertising suite, Digital Retail, and Sell My Car - TDO, (ii) advertising revenue from auto manufacturers and other auto‑related brand advertisers, and (iii) revenue from partnerships with financing services companies. We generate wholesale revenue primarily from (x) transaction fees earned from Dealer-to-Dealer transactions, (y) transaction fees earned from the sale of vehicles to dealers that we acquire at other marketplaces, and (z) transaction fees earned from performing inspection and transportation services, inclusive of Dealer-to-Dealer transactions, other marketplace-to-dealer transactions, and IMCO transactions (as defined below). We generate product revenue primarily from (A) aggregate proceeds received from the sale of vehicles to dealers that were acquired directly from customers, or CarGurus Instant Max Cash Offer, or IMCO transactions, and (B) proceeds received from the sale of vehicles that were acquired through arbitration. For the year ended December 31, 2023, we generated revenue of $914.2 million, a 45% decrease from $1,655.0 million of revenue for the year ended December 31, 2022. For the year ended December 31, 2023, we generated consolidated net income of $22.1 million and Consolidated Adjusted EBITDA of $195.8 million, compared to consolidated net income of $79.0 million and Consolidated Adjusted EBITDA of $187.7 million for the year ended December 31, 2022. See “Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest” below for more information regarding our use of Adjusted EBITDA, a non-GAAP financial measure, and a reconciliation of Adjusted EBITDA to our consolidated net income. CarOffer Purchase Agreement On November 6, 2023, we entered into a Membership Interest Purchase Agreement, or the 2023 Purchase Agreement, with CarOffer, CarOffer Investors Holding, LLC, CarOffer Midco, LLC, each of the persons set forth on Schedule 1.1(a) to the 2023 Purchase Agreement, which we refer to as the Indirect Members, Bruce T. Thompson, an individual residing in Texas, as the sellers’ representative, and the responsible party signatory thereto. Pursuant to the 2023 Purchase Agreement we acquired the remaining minority equity interests in CarOffer for an aggregate consideration of $75.0 million in cash, or the 2023 Consideration, subject to certain adjustments set forth in the 2023 Purchase Agreement. A portion of the 2023 Consideration is held in escrow to secure certain payment and indemnification obligations of the Indirect Members in accordance with the terms of the 2023 Purchase Agreement. The acquisition was completed on December 1, 2023. We refer to this acquisition as the 2023 CarOffer Transaction. Following the 2023 CarOffer Transaction, CarOffer is a wholly-owned subsidiary and we entered into the Fourth Amended and Restated Limited Liability Company Agreement, or the 2023 CarOffer Operating Agreement, pursuant to which, among other matters, the existing put and call rights were terminated. See Note 4 to our consolidated financial statements included elsewhere in this Annual Report for further information regarding the 2023 CarOffer Transaction. 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 U.S. and International geographic regions. The International region derives revenue from marketplace revenue from customers outside of the U.S. International markets perform differently from the U.S. 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. 49 Monthly Unique Users For each of our websites (excluding the CarOffer website), we define a monthly unique user as an individual who has visited any 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 of each of our websites 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 any 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. If an individual uses multiple browsers on a single device and/or clears their cookies and returns to our website within a calendar month, each such visit 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 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. [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["Average Monthly Unique Users","","2023","","","2022"],["","","(in thousands)"],["United States","","","31,205","","","","29,083"],["International","","","7,135","","","","6,645"],["Total","","","38,340","","","","35,728"]] [[/GREPCENT_TABLE]] Monthly Sessions We define monthly sessions as the number of distinct visits to our websites (excluding the CarOffer website) 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 U.S. and Canada websites, other than the Autolist website, (ii) Pacific Time for the Autolist website, and (iii) Greenwich Mean Time for our U.K. 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. [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["Average Monthly Sessions","","2023","","","2022"],["","","(in thousands)"],["United States","","","82,340","","","","77,724"],["International","","","16,503","","","","15,219"],["Total","","","98,843","","","","92,943"]] [[/GREPCENT_TABLE]] Number of Paying Dealers We define a paying dealer as a dealer account with an active, paid marketplace subscription 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 and opportunity, including our ability to retain paying dealers and develop new dealer relationships. [[GREPCENT_TABLE]] [["","","As of December 31,"],["Number of Paying Dealers","","2023","","","2022"],["United States","","","24,318","","","","24,567"],["International","","","6,617","","","","6,740"],["Total","","","30,935","","","","31,307"]] [[/GREPCENT_TABLE]] 50 Transactions We define Transactions within the Digital Wholesale segment as the number of vehicles processed from car dealers, consumers, and other marketplaces through the CarOffer website within the applicable period. Transactions consists of each unique vehicle (based on vehicle identification number) that reaches "sold and invoiced" status on the CarOffer website within the applicable period, including vehicles sold to car dealers, vehicles sold at third-party auctions, vehicles ultimately sold to a different buyer, and vehicles that are returned to their owners without completion of a sale transaction. We exclude vehicles processed within CarOffer's intra-group trading solution (Group Trade) from the definition of Transactions, and we only count any unique vehicle once even if it reaches sold status multiple times. Digital Wholesale includes Dealer-to-Dealer transactions and IMCO transactions. We view Transactions as a key business metric, and we believe it provides useful information to investors, because it provides insight into growth and revenue for the Digital Wholesale segment. Transactions drive a significant portion of Digital Wholesale segment revenue. We believe growth in Transactions demonstrates consumer and dealer utilization and our market share penetration in the Digital Wholesale segment. [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["Transactions","","2023","","","2022"],["Transactions","","","65,418","","","","190,594"]] [[/GREPCENT_TABLE]] Quarterly Average Revenue per Subscribing Dealer (QARSD) We define QARSD, which is measured at the end of a fiscal quarter, as the marketplace revenue primarily from subscriptions to our Listings packages, RPM, our digital advertising suite, and other digital add-on products during that trailing quarter divided by the average number of paying dealers in that marketplace during the quarter. We calculate the average number of paying dealers for a period by adding the number of paying dealers at the end of such period and the end of the prior period and dividing by two. This information is important to us, and we believe it provides useful information to investors, because we believe that our ability to grow QARSD is an indicator of the value proposition of our products and the ROI that our paying dealers realize from our products. In addition, increases in QARSD, which we believe reflect the value of exposure to our engaged audience in relation to subscription cost, are driven in part 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. [[GREPCENT_TABLE]] [["","","As of December 31,"],["Quarterly Average Revenue per Subscribing Dealer (QARSD)","","2023","","","2022"],["United States","","$","6,532","","","$","5,842"],["International","","$","1,773","","","$","1,522"],["Consolidated","","$","5,503","","","$","4,921"]] [[/GREPCENT_TABLE]] Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest To provide investors with additional information regarding our financial results, we have presented within this Annual Report, Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest, each of which is a non-GAAP financial measure. These non-GAAP financial measures are not based on any standardized methodology prescribed by GAAP, and are not necessarily comparable to any similarly titled measures presented by other companies. We define Consolidated Adjusted EBITDA as consolidated net income, adjusted to exclude: depreciation and amortization, impairment of long-lived assets, stock‑based compensation expense, stock-based compensation expense for CarOffer, LLC Units, as defined below, transaction-related expenses, other income, net, and provision for income taxes. We define Adjusted EBITDA as Consolidated Adjusted EBITDA adjusted to exclude Adjusted EBITDA attributable to redeemable noncontrolling interest. 51 We define Adjusted EBITDA attributable to redeemable noncontrolling interest as net loss attributable to redeemable noncontrolling interest, adjusted to exclude: depreciation and amortization, impairment of long-lived assets, stock‑based compensation expense, stock-based compensation expense for CarOffer, LLC Units, as defined below, other expense, net, and provision for income taxes. These exclusions are adjusted for redeemable noncontrolling interest of 38% by taking the noncontrolling interest's full financial results and multiplying each line item in the reconciliation by 38%. We note that we use 38%, versus 49%, to allocate the share of income (loss) because it represents the portion attributable to the redeemable noncontrolling interest. The 38% is exclusive of CO Incentive Units, Subject Units, and 2021 Incentive Units (as each term is defined in Note 2 to our consolidated financial statements included elsewhere in this Annual Report) liability-classified awards which do not participate in the share of income (loss). Adjusted EBITDA attributable to redeemable noncontrolling interest is reflective of the 2023 CarOffer Transaction completed on December 1, 2023. Following the 2023 CarOffer Transaction, there is no redeemable noncontrolling interest as of December 1, 2023. We have presented Consolidated Adjusted EBITDA and Adjusted EBITDA within this Annual Report because they are key measures 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 Consolidated Adjusted EBITDA and Adjusted EBITDA can produce a useful measure for period‑to‑period comparisons of our business. We have presented Adjusted EBITDA attributable to redeemable noncontrolling interest because it is used by our management to reconcile Consolidated Adjusted EBITDA to Adjusted EBITDA. It represents the portion of Consolidated Adjusted EBITDA that is attributable to our redeemable noncontrolling interest. Adjusted EBITDA attributable to redeemable noncontrolling interest is not intended to be reviewed on its own. We use Consolidated Adjusted EBITDA and Adjusted EBITDA to evaluate our operating performance and trends and make planning decisions. We believe Consolidated Adjusted EBITDA and Adjusted EBITDA help identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. Accordingly, we believe that Consolidated Adjusted EBITDA and Adjusted EBITDA provide 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. We use Adjusted EBITDA attributable to redeemable noncontrolling interest to reconcile Consolidated Adjusted EBITDA to Adjusted EBITDA. It enables an investor to gain a clearer understanding of the portion of Consolidated Adjusted EBITDA that is attributable to our redeemable noncontrolling interest. Our Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest are 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 Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest rather than consolidated net income and net loss attributable to redeemable noncontrolling interest, respectively, which are the most directly comparable GAAP equivalents. Some of these limitations are: • Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest exclude depreciation and amortization expense and, although these are non‑cash expenses, the assets being depreciated may have to be replaced in the future; • Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest exclude impairment of long-lived assets and, although these are non-cash adjustments, the assets being impaired may have to be replaced in the future; • Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest exclude stock‑based compensation expense, which will be, for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy; • Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest exclude stock‑based compensation expense for CarOffer, LLC Units, which consists of one-time modifications and expense associated with our CO Incentive Units and Subject Units, as defined in Note 2 to the consolidated financial statements, and Noncontrolling Interest Units, as defined in Note 4 to the consolidated financial statements, 52 • Consolidated Adjusted EBITDA and Adjusted EBITDA exclude transaction and one-time acquisition-related expenses incurred by us during a reporting period, which are inclusive of certain transaction and integration costs associated with the 2023 CarOffer Transaction and which may not be reflective of our operational performance during such period, for acquisitions that have been completed as of the filing date of our annual or quarterly report (as applicable) relating to such period; • Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest exclude other income, net, which consists primarily of interest income earned on our cash and cash equivalents, foreign exchange gains, and losses and interest expense; • Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest exclude the provision for income taxes; • Adjusted EBITDA excludes Adjusted EBITDA attributable to redeemable noncontrolling interest, which is calculated as the net loss attributable to redeemable noncontrolling interest, adjusted for all exclusions used to calculate Consolidated Adjusted EBITDA as described above; and • other companies, including companies in our industry, may calculate Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest differently, which reduces their usefulness as a comparative measure. Because of these limitations, we consider, and you should consider, Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest together with other operating and financial performance measures presented in accordance with GAAP. For the years ended December 31, 2023 and 2022, the following table presents a reconciliation of Consolidated Adjusted EBITDA and Adjusted EBITDA to consolidated net income, the most directly comparable measure calculated in accordance with GAAP for each of the periods presented. [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2023","","","2022(1)"],["","","(in thousands)"],["Reconciliation of Consolidated Adjusted EBITDA and Adjusted EBITDA:"],["Consolidated net income","","$","22,053","","","$","78,954"],["Depreciation and amortization","","","48,474","","","","45,334"],["Impairment of long-lived assets","","","184","","","","165"],["Stock-based compensation expense","","","57,913","","","","54,777"],["Stock-based compensation expense for CarOffer, LLC Units","","","55,543","","","","(21,095",")"],["Transaction-related expenses","","","1,044","","","","\u2014"],["Other income, net","","","(19,060",")","","","(2,884",")"],["Provision for income taxes","","","29,634","","","","32,408"],["Consolidated Adjusted EBITDA","","","195,785","","","","187,659"],["Adjusted EBITDA attributable to redeemable noncontrolling interest","","","83","","","","1,006"],["Adjusted EBITDA","","$","195,702","","","$","186,653"]] [[/GREPCENT_TABLE]] (1) We have updated the table above to separately disclose the stock-based compensation expense for CarOffer, LLC Units and, as such, have updated the three months and year ended December 31, 2022 for comparative purposes. 53 For the years ended December 31, 2023 and 2022, the following table presents a reconciliation of Adjusted EBITDA attributable to redeemable noncontrolling interest to net loss attributable to redeemable noncontrolling interest, the most directly comparable measure calculated in accordance with GAAP, for each of the periods presented. [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2023","","","2022(1)"],["","","(in thousands)"],["Reconciliation of Adjusted EBITDA attributable to redeemable noncontrolling interest:"],["Net loss attributable to redeemable noncontrolling interest","","$","(14,889",")","","$","(5,433",")"],["Depreciation and amortization (2)","","","10,863","","","","11,702"],["Impairment of long-lived assets (2)","","","67","","","","63"],["Stock-based compensation expense (2)","","","783","","","","731"],["Stock-based compensation expense for CarOffer, LLC Units (2)","","","2,249","","","","(8,043",")"],["Other expense, net (2)","","","985","","","","2,007"],["Provision for income taxes (2)","","","25","","","","(21",")"],["Adjusted EBITDA attributable to redeemable noncontrolling interest","","$","83","","","$","1,006"]] [[/GREPCENT_TABLE]] (1) We have updated the table above to separately disclose the stock-based compensation expense for CarOffer, LLC Units and, as such, have updated the three months and year ended December 31, 2022 for comparative purposes. (2) These exclusions are adjusted to reflect the noncontrolling interest of 38% for the period prior to the 2023 CarOffer Transaction. Components of Consolidated Income Statements Revenue We derive our revenue from marketplace revenue, wholesale revenue, and product revenue. Marketplace revenue is included in the U.S. Marketplace segment and Other category of segment reporting. Wholesale revenue and product revenue are included in the Digital Wholesale segment. We generate marketplace revenue primarily from (i) dealer subscriptions to our Listings packages, RPM, digital advertising suite, Digital Retail, and Sell My Car - TDO, (ii) advertising revenue from auto manufacturers and other auto‑related brand advertisers, and (iii) revenue from partnerships with financing services companies. We generate wholesale revenue primarily from (x) transaction fees earned from Dealer-to-Dealer transactions, (y) transaction fees earned from the sale of vehicles to dealers that we acquire at other marketplaces, and (z) transaction fees earned from performing inspection and transportation services, inclusive of Dealer-to-Dealer transactions, other marketplace-to-dealer transactions, and IMCO transactions. We generate product revenue primarily from (A) aggregate proceeds received from the sale of vehicles that were acquired through IMCO transactions, and (B) proceeds received from the sale of vehicles that were acquired through arbitration. Marketplace Revenue We offer multiple types of marketplace Listings packages to our dealers for our CarGurus U.S. platform (availability varies on our other marketplaces): Restricted 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. Our subscriptions for customers generally auto-renew on a monthly basis and are cancellable by dealers with 30 days' advance notice prior to the commencement of the applicable renewal term. 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 and/or fee reductions that we may offer from time to time. We also offer all dealers on the 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 have access to the Pricing Tool, Market Analysis tool, and IMV Scan tool. We also offer paid Listings packages for the Autolist and PistonHeads websites. 54 In addition to displaying inventory in our marketplace and providing access to the Dealer Dashboard, we offer dealers subscribing to certain of our Listings packages other subscription advertising and customer acquisition products and enhancements marketed under RPM and our digital advertising suite. Through RPM, dealers can buy advertising that appears in our marketplace, on other sites on the internet, and/or on high-converting social media platforms. Such advertisements can be targeted by the user’s geography, search history, CarGurus website activity, 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 dealer advertising products for the PistonHeads website. We also offer dealers subscribing to certain of our Listings packages other subscription advertising and customer acquisition products and enhancements such as Digital Retail, which allows shoppers to complete much of the vehicle-purchase process online through the Dealers’ Listings page. Digital Retail is comprised of (i) the Digital Deal Platform, which gives dealers higher quality leads through upfront consumer-provided information, (ii) Geo Expansion, which expands the visibility of a dealer’s inventory in the search results beyond its local market, and (iii) Hard Pull Financing, which provides loan information. We also offer dealers subscribing to certain of our Listings packages other subscription advertising and customer acquisition products and enhancements such as TDO, which allows dealers to pay for leads to receive direct access to shoppers actively looking to sell their vehicles. Dealers can acquire inventory from shoppers who are looking to sell directly through the CarGurus Sell My Car page. Marketplace revenue also consists of non-dealer advertising revenue from auto manufacturers and other auto-related brand advertisers sold on a cost-per-thousand impressions basis, 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. Pricing is primarily based on advertisement size and position on our websites and mobile applications. 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. We do not provide minimum impression guarantees or other types of minimum guarantees in our contracts with customers. Advertising is also sold indirectly through revenue sharing arrangements with advertising exchange partners. We also offer non-dealer advertising products for the Autolist and PistonHeads websites. Marketplace revenue also includes revenue from partnerships with certain financing services companies pursuant to which we enable eligible consumers on our CarGurus U.S. website to pre-qualify for financing on cars from dealerships that offer financing through such companies. We primarily generate revenue from these partnerships based on the number of funded loans from consumers who pre-qualify with our lending partners through our site. Wholesale Revenue The CarOffer Matrix enables buying dealers to create standing buy orders and provides instant offers to selling dealers. Wholesale revenue includes transaction fees earned from Dealer-to-Dealer transactions, where we collect fees from both the buying and selling dealers. We also sell vehicles to dealers that we acquire at other marketplaces, where we collect a transaction fee from the buying dealers. Wholesale revenue also includes fees earned from performing inspection and transportation services, where we collect fees from the buying dealer. Inspection and transportation service revenue is inclusive of Dealer-to-Dealer transactions, other marketplace to dealer transactions, and IMCO transactions. Wholesale revenue also includes arbitration in which the vehicle is rematched to a new buyer and not acquired by us. Arbitration is the process by which we investigate and resolve claims from buying dealers. Wholesale revenue also includes fees earned from certain guarantees offered to dealers (which include 45-Day Guarantee and OfferGuard products), where we collect fees from the buying dealer or selling dealer, as applicable. 55 Product Revenue The CarOffer Matrix enables consumers who are selling vehicles to be instantly presented with an offer. Product revenue includes the aggregate proceeds received from the sale of vehicles through IMCO transactions, including vehicle sale price and transaction fees collected from the buying dealers. Product revenue also includes proceeds received from the sale of vehicles acquired through arbitration, including vehicle sale price and transaction fees collected from buying dealers. Arbitration is the process by which we investigate and resolve claims from buying dealers. We control the vehicle in these transactions and therefore act as the principal. Cost of Revenue Marketplace Cost of Revenue Marketplace cost of revenue includes expenses related to supporting and hosting marketplace service offerings. These expenses include personnel and related expenses for our customer support team, including salaries, benefits, incentive compensation, and stock-based compensation; third-party service provider expenses such as advertising, data, and hosting expenses; amortization of developed technology; amortization of capitalized website development; amortization of capitalized hosting arrangements; and allocated overhead expenses. We allocate overhead expenses, such as rent and facility expenses, information technology expense, and employee benefit expense, to all departments based on headcount. As such, general overhead expenses are reflected in cost of revenue and each operating expense category. Wholesale Cost of Revenue Wholesale cost of revenue includes expenses related to supporting and hosting Digital Wholesale service offerings, including Dealer-to-Dealer transactions and vehicles sold to dealers acquired at other marketplaces on the CarOffer Matrix. These expenses include vehicle transportation and inspection expenses; net losses on vehicles related to guarantees offered to dealers through Dealer-to-Dealer transactions; personnel and related expenses for employees directly involved in the fulfillment and support of transactions, including salaries, benefits, incentive compensation, and stock-based compensation; third-party service provider expenses; amortization of developed technology; amortization of capitalized website development; and allocated overhead expenses. We allocate overhead expenses, such as rent and facility expenses, information technology expense, and employee benefit expense, to all departments based on headcount. As such, general overhead expenses are reflected in cost of revenue and each operating expense category. Product Cost of Revenue Product cost of revenue includes expenses related to vehicles sold to dealers through IMCO transactions and vehicles sold to dealers acquired through arbitration. These expenses include the cost of the vehicle and transportation expenses. 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, and stock-based compensation; expenses associated with consumer marketing, such as traffic acquisition, brand building, and public relations activities; expenses associated with dealer marketing, such as content marketing, customer and promotional events, and industry events; consulting services; software subscription expenses; travel expenses; amortization of capitalized hosting arrangements; and allocated overhead expenses. A portion of our commissions that are related to obtaining a new contract are capitalized and amortized over the estimated benefit period of customer relationships. All other sales and marketing expenses are expensed as incurred. We expect sales and marketing expenses to fluctuate from quarter to quarter as we respond to changes in the macroeconomic and competitive landscapes affecting our existing dealers, consumer audience, and brand awareness, which will impact our results of operations. 56 Product, Technology, and Development Product, technology, and development expenses consist primarily of personnel and related expenses for our research and development team, including salaries, benefits, incentive compensation, and stock-based compensation; software subscription expenses; consulting services; and allocated overhead expenses. Other than website development, internal-use software, and hosting arrangement expenses, research and development expenses are expensed as incurred. We expect product, technology, and development expenses to increase as we invest in additional engineering resources to 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, people & talent, and administrative teams, including salaries, benefits, incentive compensation, and stock-based compensation; expenses associated with professional fees for audit, tax, external legal, and consulting services; payment processing and billing expenses; insurance expenses; software subscription expenses; and allocated overhead expenses. General and administrative expenses are expensed as incurred. We expect general and administrative expenses to increase as we continue to scale our business. Depreciation and Amortization Depreciation and amortization expenses consist of depreciation on property and equipment and amortization of intangible assets and internal-use software. Other Income, Net Other income, net consists primarily of interest income earned on our cash and cash equivalents, foreign exchange gains and losses, interest expense for undrawn fees related to our credit facility and amortization of deferred financing costs, and gains and losses associated with our investments. Provision for Income Taxes We are subject to federal and state income taxes in the U.S. and taxes in foreign jurisdictions in which we operate. For the years ended December 31, 2023 and 2022, a provision for income taxes was recognized as a result of the consolidated taxable income position. We recognize deferred tax assets and liabilities based on temporary differences between the financial reporting and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. We regularly assess the need to recognize 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. As of December 31, 2023 and 2022, valuation allowances were immaterial. We assess our income tax positions and recognize an income tax benefit or expense based upon our evaluation of the facts, circumstances, and information available at the reporting date. For the year ended December 31, 2023, there was $0.2 million income tax expense related to uncertain tax provisions. As of December 31, 2023, the income tax liability related to uncertain tax positions, exclusive of immaterial interest or penalties related to uncertain tax provisions, was $0.8 million, which would favorably affect our effective tax rate, if recognized. For the year ended December 31, 2022, income tax expense and liability related to uncertain tax positions, exclusive of immaterial interest or penalties related to uncertain tax provisions, was $0.6 million, which would favorably affect our effective tax rate, if recognized. 57 Results of Operations For the years ended December 31, 2023 and 2022, our consolidated income statements are as follows: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2023","","","2022"],["","","(dollars in thousands)"],["Revenue:"],["Marketplace","","$","698,236","","","$","658,771"],["Wholesale","","","100,908","","","","237,635"],["Product","","","115,098","","","","758,629"],["Total revenue","","","914,242","","","","1,655,035"],["Cost of revenue:"],["Marketplace","","","60,020","","","","56,040"],["Wholesale","","","90,066","","","","176,446"],["Product","","","112,702","","","","764,996"],["Total cost of revenue","","","262,788","","","","997,482"],["Gross profit","","","651,454","","","","657,553"],["Operating expenses:"],["Sales and marketing","","","304,070","","","","336,708"],["Product, technology, and development","","","146,169","","","","123,768"],["General and administrative","","","152,757","","","","73,117"],["Depreciation and amortization","","","15,831","","","","15,482"],["Total operating expenses","","","618,827","","","","549,075"],["Income from operations","","","32,627","","","","108,478"],["Other income, net:"],["Interest income","","","18,430","","","","3,845"],["Other income (expense), net","","","630","","","","(961",")"],["Total other income, net","","","19,060","","","","2,884"],["Income before income taxes","","","51,687","","","","111,362"],["Provision for income taxes","","","29,634","","","","32,408"],["Consolidated net income","","","22,053","","","","78,954"],["Net loss attributable to redeemable noncontrolling interest","","","(14,889",")","","","(5,433",")"],["Net income attributable to CarGurus, Inc.","","$","36,942","","","$","84,387"]] [[/GREPCENT_TABLE]] For the years ended December 31, 2023 and 2022, our segment revenue and our segment income (loss) from operations are as follows: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2023","","","2022"],["","","(dollars in thousands)"],["Segment Revenue:"],["U.S. Marketplace","","$","647,284","","","$","614,136"],["Digital Wholesale","","","216,005","","","","996,264"],["Other","","","50,953","","","","44,635"],["Total","","$","914,242","","","$","1,655,035"],["Segment Income (Loss) from Operations:"],["U.S. Marketplace","","$","127,724","","","$","128,455"],["Digital Wholesale","","","(96,383",")","","","(11,834",")"],["Other","","","1,286","","","","(8,143",")"],["Total","","$","32,627","","","$","108,478"]] [[/GREPCENT_TABLE]] 58 For the years ended December 31, 2023 and 2022, our consolidated income statements as a percentage of total revenue are as follows (amounts in the table below may not sum due to rounding): [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2023","","","2022"],["Revenue:"],["Marketplace","","","76","%","","","40","%"],["Wholesale","","","11","","","","14"],["Product","","","13","","","","46"],["Total revenue","","","100","","","","100"],["Cost of revenue:"],["Marketplace","","","7","","","","3"],["Wholesale","","","10","","","","11"],["Product","","","12","","","","46"],["Total cost of revenue","","","29","","","","60"],["Gross profit","","","71","","","","40"],["Operating expenses:"],["Sales and marketing","","","33","","","","20"],["Product, technology, and development","","","16","","","","7"],["General and administrative","","","17","","","","4"],["Depreciation and amortization","","","2","","","","1"],["Total operating expenses","","","68","","","","33"],["Income from operations","","","4","","","","7"],["Other income, net:"],["Interest income","","","2","","","","0"],["Other income (expense), net","","","0","","","","(0",")"],["Total other income, net","","","2","","","","0"],["Income before income taxes","","","6","","","","7"],["Provision for income taxes","","","3","","","","2"],["Consolidated net income","","","2","","","","5"],["Net loss attributable to redeemable noncontrolling interest","","","(2",")","","","(0",")"],["Net income attributable to CarGurus, Inc.","","","4","","","","5"]] [[/GREPCENT_TABLE]] For the years ended December 31, 2023 and 2022, our segment revenue as a percentage of total revenue and our segment income (loss) from operations as a percentage of segment revenue are as follows (amounts in the table below may not sum due to rounding): [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2023","","","2022"],["Segment Revenue:"],["U.S. Marketplace","","","71","%","","","37","%"],["Digital Wholesale","","","24","","","","60"],["Other","","","6","","","","3"],["Total","","","100","%","","","100","%"],["Segment Income (Loss) from Operations:"],["U.S. Marketplace","","","20","%","","","21","%"],["Digital Wholesale","","","(45",")","","","(1",")"],["Other","","","3","","","","(18",")"],["Total","","","4","%","","","7","%"]] [[/GREPCENT_TABLE]] 59 Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 Revenue Revenue by Source [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","Change"],["","","2023","","","2022","","","Amount","","","%"],["","","(dollars in thousands)"],["Revenue:"],["Marketplace","","$","698,236","","","$","658,771","","","$","39,465","","","","6","%"],["Wholesale","","","100,908","","","","237,635","","","","(136,727",")","","","(58",")"],["Product","","","115,098","","","","758,629","","","","(643,531",")","","","(85",")"],["Total","","$","914,242","","","$","1,655,035","","","$","(740,793",")","","","(45",")%"],["Percentage of total revenue:"],["Marketplace","","","76","%","","","40","%"],["Wholesale","","","11","","","","14"],["Product","","","13","","","","46"],["Total","","","100","%","","","100","%"]] [[/GREPCENT_TABLE]] Overall revenue decreased $740.8 million, or 45%, in the year ended December 31, 2023 compared to the year ended December 31, 2022. Marketplace revenue increased $39.5 million, or 6%, in the year ended December 31, 2023 compared to the year ended December 31, 2022 and represented 76% of total revenue for the year ended December 31, 2023 and 40% of total revenue for the year ended December 31, 2022. The increase was due to an increase in Listings revenue, inclusive of certain digital add-on products, as a result of growth in QARSD, which was driven by signing on new dealers with higher average monthly recurring revenue and revenue expansion through product upgrades for existing dealers. Wholesale revenue decreased $136.7 million, or 58%, in the year ended December 31, 2023 compared to the year ended December 31, 2022 and represented 11% of total revenue for the year ended December 31, 2023 and 14% of total revenue for the year ended December 31, 2022. The decrease was due primarily to a 66% decrease in Transactions, which includes Dealer-to-Dealer transactions and IMCO transactions, to 65,418 for the year ended December 31, 2023 from 190,594 for the year ended December 31, 2022, as a result of unfavorable market conditions and operational challenges in the prior year which resulted in our focus in the current year on optimization of internal policies and procedures over volume of Transactions. The decrease in Transactions resulted in a decrease in transaction fee revenue, transportation revenue, inspection revenue, and guarantee revenue. Product revenue decreased $643.5 million, or 85%, in the year ended December 31, 2023 compared to the year ended December 31, 2022 and represented 13% of the total revenue for the year ended December 31, 2023 and 46% of total revenue for the year ended December 31, 2022. The decrease was due primarily to a decrease in proceeds received from the sale of vehicles through IMCO transactions, including vehicle sale price and transaction fees, as a result of decreased Transactions resulting from the purposeful slowdown in volume as we emphasize operational rigor, as well as a decrease in the average selling price, as a result of economic conditions. The decrease in product revenue was also due in part to a decrease in proceeds received from the sale of vehicles acquired through arbitration, including a decrease in the average vehicle sale price, as a result of decreased arbitration claims primarily due to decreased Transactions and process improvements focused on higher quality inspections. 60 Segment Revenue [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","Change"],["","","2023","","","2022","","","Amount","","","%"],["","","(dollars in thousands)"],["Revenue:"],["U.S. Marketplace","","$","647,284","","","$","614,136","","","$","33,148","","","","5","%"],["Digital Wholesale","","","216,005","","","","996,264","","","","(780,259",")","","","(78",")"],["Other","","","50,953","","","","44,635","","","","6,318","","","","14"],["Total","","$","914,242","","","$","1,655,035","","","$","(740,793",")","","","(45",")%"],["Percentage of total revenue:"],["U.S. Marketplace","","","71","%","","","37","%"],["Digital Wholesale","","","24","","","","60"],["Other","","","6","","","","3"],["Total","","","100","%","","","100","%"]] [[/GREPCENT_TABLE]] U.S. Marketplace segment revenue increased $33.1 million, or 5%, in the year ended December 31, 2023 compared to the year ended December 31, 2022 and represented 71% of total revenue for the year ended December 31, 2023 and 37% of total revenue for the year ended December 31, 2022. This increase was due primarily to growth in U.S. QARSD throughout the year, as a result of signing on new dealers with higher average monthly recurring revenue and revenue expansion through product upgrades for existing dealers. Digital Wholesale segment revenue, which is comprised of wholesale revenue and product revenue, decreased $780.3 million, or 78%, in the year ended December 31, 2023 compared to the year ended December 31, 2022 and represented 24% of total revenue for the year ended December 31, 2023 and 60% of total revenue for the year ended December 31, 2022. The decrease in Digital Wholesale segment revenue was due to a decrease in wholesale revenue and product revenue, as described above. Cost of Revenue [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","Change"],["","","2023","","","2022","","","Amount","","","%"],["","","(dollars in thousands)"],["Cost of revenue:"],["Marketplace","","$","60,020","","","$","56,040","","","$","3,980","","","","7","%"],["Wholesale","","","90,066","","","","176,446","","","","(86,380",")","","","(49",")"],["Product","","","112,702","","","","764,996","","","","(652,294",")","","","(85",")"],["Total","","$","262,788","","","$","997,482","","","$","(734,694",")","","","(74",")%"],["Percentage of total revenue:"],["Marketplace","","","7","%","","","3","%"],["Wholesale","","","10","","","","11"],["Product","","","12","","","","46"],["Total","","","29","%","","","60","%"]] [[/GREPCENT_TABLE]] Overall cost of revenue decreased $734.7 million, or 74%, in the year ended December 31, 2023 compared to the year ended December 31, 2022. Marketplace cost of revenue increased $4.0 million, or 7%, in the year ended December 31, 2023 compared to the year ended December 31, 2022 and represented 7% of total revenue for the year ended December 31, 2023 and 3% of total revenue for the year ended December 31, 2022. The increase was due primarily to an increase in data and hosting costs as a result of our migration onto a cloud-based hosting platform and an increase in fees related to provisioning advertising campaigns on our websites from changing to more effective, higher cost service providers. 61 Wholesale cost of revenue decreased $86.4 million, or 49%, in the year ended December 31, 2023 compared to the year ended December 31, 2022 and represented 10% of total revenue for the year ended December 31, 2023 and 11% of total revenue for the year ended December 31, 2022. The decrease was due primarily to less favorable market conditions and operational challenges in the prior year which resulted in our focus in the current year on optimization of internal policies and procedures over volume of Transactions. This decrease in volume resulted in a decrease in transportation expense, third-party service provider expense, inspection expense, personnel expense, and guarantee expense. Product cost of revenue decreased $652.3 million, or 85%, in the year ended December 31, 2023 compared to the year ended December 31, 2022 and represented 12% of the total revenue for the year ended December 31, 2023 and 46% of total revenue for the year ended December 31, 2022. The decrease was due primarily to a decrease in expenses related to vehicles sold to dealers through IMCO transactions as a result of decreased Transactions resulting from the purposeful slowdown in volume as we emphasize operational rigor, as well as a decrease in the average purchase price, as a result of economic conditions. The decrease in product cost of revenue was also due in part to a decrease in expenses related to vehicles sold to dealers acquired through arbitration as a result of decreased arbitration claims primarily due to decreased Transactions and process improvements focused on higher quality inspections. Operating Expenses Sales and Marketing Expense [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","Change"],["","","2023","","","2022","","","Amount","","","%"],["","","(dollars in thousands)"],["Sales and marketing","","$","304,070","","","$","336,708","","","$","(32,638",")","","","(10",")%"],["Percentage of total revenue","","","33","%","","","20","%"]] [[/GREPCENT_TABLE]] Sales and marketing expense decreased $32.6 million, or 10%, in the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was due primarily to a $22.3 million decrease in advertising expense due to decreased spend as a result of a change in advertising strategy implemented in the fourth quarter of 2022. The decrease was also due in part to a $15.3 million decrease in marketing expense due primarily to lower IMCO marketing spend and a $10.5 million decrease in commissions expense due primarily to fewer Transactions as well as an 8% decrease in headcount. The decrease in commissions expense was also due in part to increased capitalization of commissions. The decrease in sales and marketing expense was offset in part by a $6.2 million increase in rent expense due to the commencement of the 1001 Boylston Street lease. The decrease in sales and marketing expense was also offset by a $6.0 million increase in stock-based compensation expense, primarily due to the prior year valuation of the liability-based stock awards, following mark-to-market valuation adjustments, as well as modifications resulting from the 2023 CarOffer Transaction. The decrease in sales and marketing expense was also offset by a $1.0 million increase in software subscriptions, inclusive of amortization of hosting arrangements. Additionally, the decrease in sales and marketing expense was offset by a $0.9 million increase in salaries and employee-related expense, exclusive of stock-based compensation expense and commissions expense, due to increases related to 401(k) expense, as well as higher attainment of bonus targets. Product, Technology, and Development Expense [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","Change"],["","","2023","","","2022","","","Amount","","","%"],["","","(dollars in thousands)"],["Product, technology, and development","","$","146,169","","","$","123,768","","","$","22,401","","","","18","%"],["Percentage of total revenue","","","16","%","","","7","%"]] [[/GREPCENT_TABLE]] 62 Product, technology, and development expense increased $22.4 million, or 18%, in the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was due primarily to a $13.7 million increase in salaries and employee-related expenses, exclusive of stock-based compensation, due primarily to a 6% increase in headcount as well as merit increases. The increase was also due in part to a $5.7 million increase in rent expense due to the commencement of the 1001 Boylston Street lease and a $5.7 million increase in stock-based compensation due to the prior year valuation of the liability-based stock awards, following mark-to-market valuation adjustments, as well as modifications resulting from the 2023 CarOffer Transaction. The increase was offset in part by a $4.1 million decrease in product, technology, and development expense as a result of increased capitalization for our website development. General and Administrative Expense [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","Change"],["","","2023","","","2022","","","Amount","","","%"],["","","(dollars in thousands)"],["General and administrative","","$","152,757","","","$","73,117","","","$","79,640","","","","109","%"],["Percentage of total revenue","","","17","%","","","4","%"]] [[/GREPCENT_TABLE]] General and administrative expense increased $79.6 million, or 109%, in the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was due primarily to a $66.2 million increase in stock-based compensation due to modifications resulting from the 2023 CarOffer Transaction, as well as the impact of the prior year revaluation of the liability-based stock awards, following mark-to-market valuation adjustments. This increase was also due in part to a $6.7 million increase in salaries and employee-related expenses, exclusive of stock-based compensation, due primarily to a 7% increase in headcount as well as merit increases, a $2.8 million increase in legal, audit, and insurance fees due in part to the 2023 CarOffer Transaction, and a $2.5 million increase in rent expense due to the commencement of the 1001 Boylston Street lease. Depreciation and Amortization Expense [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","Change"],["","","2023","","","2022","","","Amount","","","%"],["","","(dollars in thousands)"],["Depreciation and amortization","","$","15,831","","","$","15,482","","","$","349","","","","2","%"],["Percentage of total revenue","","","2","%","","","1","%"]] [[/GREPCENT_TABLE]] Depreciation and amortization expense remained relatively consistent in the year ended December 31, 2023 compared to the year ended December 31, 2022. Other Income, net [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","Change"],["","","2023","","","2022","","","Amount","","","%"],["","","(dollars in thousands)"],["Other income, net:"],["Interest income","","$","18,430","","","$","3,845","","","$","14,585","","","","379","%"],["Other income (expense), net","","","630","","","","(961",")","","","1,591","","","","166"],["Total other income, net","","$","19,060","","","$","2,884","","","$","16,176","","","","561","%"],["Percentage of total revenue:"],["Interest income","","","2","%","","","0","%"],["Other expense, net","","","0","","","","(0",")"],["Total other income, net","","","2","%","","","0","%"]] [[/GREPCENT_TABLE]] Other income, net increased $16.2 million, or 561%, in the year ended December 31, 2023 compared to the year ended December 31, 2022. The $14.6 million increase in interest income was due primarily to interest rate increases since December 31, 2022, as well as an increase related to new interest-bearing accounts. The $1.6 million increase in other income (expense), net was due primarily to a $2.2 million decrease in realized and unrealized loss associated with the fluctuation of certain foreign currencies offset in part by an increase in interest expense. 63 Provision for Income Taxes [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","Change"],["","","2023","","","2022","","","Amount","","","%"],["","","(dollars in thousands)"],["Provision for income taxes","","$","29,634","","","$","32,408","","","$","(2,774",")","","","(9",")%"],["Percentage of total revenue","","","3","%","","","2","%"]] [[/GREPCENT_TABLE]] Provision for income taxes decreased $2.8 million, or 9%, in the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease in provision for income taxes recognized during the year ended December 31, 2023 was due primarily to decreased profitability and increased federal and state research and development tax credits. This was offset by a $4.7 million tax expense related to excess stock-based compensation deductions recognized during 2023, compared to $1.5 million tax expense recognized during 2022. In addition, a $6.9 million deferred state tax expense was recorded during 2023 in association with the recently passed Massachusetts apportionment tax rule. Furthermore, a $2.5 million tax expense was recognized during 2023 in connection with the 2023 CarOffer Transaction. Segment Income (Loss) from Operations [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","Change"],["","","2023","","","2022","","","Amount","","","%"],["","","(dollars in thousands)"],["Segment Income (Loss) from Operations:"],["U.S. Marketplace","","$","127,724","","","$","128,455","","","$","(731",")","","","(1",")%"],["Digital Wholesale","","","(96,383",")","","","(11,834",")","","","(84,549",")","","","(714",")"],["Other","","","1,286","","","","(8,143",")","","","9,429","","","","116"],["Total","","$","32,627","","","$","108,478","","","$","(75,851",")","","","(70",")%"],["Percentage of segment revenue:"],["U.S. Marketplace","","","20","%","","","21","%"],["Digital Wholesale","","","(45",")","","","(1",")"],["Other","","","3","","","","(18",")"],["Total","","","4","%","","","7","%"]] [[/GREPCENT_TABLE]] U.S. Marketplace segment income from operations decreased $0.7 million, or 1%, in the year ended December 31, 2023 compared to the year ended December 31, 2022 and represented 20% of U.S. Marketplace segment revenue for the year ended December 31, 2023 and 21% of U.S. Marketplace segment revenue for the year ended December 31, 2022. The decrease was due to increases in revenue of $33.1 million, offset by increases in cost of revenue of $3.2 million and increases in operating expenses of $30.6 million. Digital Wholesale segment loss from operations increased $84.5 million, or 714%, in the year ended December 31, 2023 compared to the year ended December 31, 2022 and represented (45)% of Digital Wholesale segment revenue for the year ended December 31, 2023 and (1)% of Digital Wholesale segment revenue for the year ended December 31, 2022. The decrease was due to decreases in revenue of $780.3 million, offset by decreases in cost of revenue of $738.7 million and increases in operating expenses of $42.9 million. The increase in operating expenses was primarily driven by the impact of the approximately $50.0 million stock-based compensation charge that resulted from the 2023 CarOffer Transaction. 64 Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Revenue Segment Revenue [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","Change"],["","","2022","","","2021","","","Amount","","","%"],["","","(dollars in thousands)"],["Segment Revenue:"],["U.S. Marketplace","","$","614,136","","","$","594,602","","","$","19,534","","","","3","%"],["Digital Wholesale","","","996,264","","","","314,431","","","","681,833","","","","217"],["Other","","","44,635","","","","42,340","","","","2,295","","","","5"],["Total","","$","1,655,035","","","$","951,373","","","$","703,662","","","","74","%"],["Percentage of segment revenue:"],["U.S. Marketplace","","","37","%","","","62","%"],["Digital Wholesale","","","60","","","","33"],["Other","","","3","","","","4"],["Total","","","100","%","","","100","%"]] [[/GREPCENT_TABLE]] U.S. Marketplace segment revenue increased $19.5 million, or 3%, in the year ended December 31, 2022 compared to the year ended December 31, 2021 and represented 37% of segment revenue for the year ended December 31, 2022 and 62% of segment revenue for the year ended December 31, 2021. The increase was due primarily to a $28.6 million increase in Listings revenue, as a result of 4% growth in U.S. QARSD for paying dealers to $5,842 at December 31, 2022 from $5,633 at December 31, 2021. The increase in U.S. QARSD was due primarily to signing on new dealers with higher average monthly recurring revenue and revenue expansion through product upgrades for existing dealers. The increase in U.S. Marketplace segment revenue was offset in part by a $9.7 million decrease in advertising revenue as a result of economic conditions and lower spend by our advertisers. Digital Wholesale segment revenue increased $681.8 million, or 217%, in the year ended December 31, 2022 compared to the year ended December 31, 2021 and represented 60% of segment revenue for the year ended December 31, 2022 and 33% of segment revenue for the year ended December 31, 2021. Wholesale revenue increased $42.5 million in the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in wholesale revenue was due primarily to a 21% increase in Transactions to 190,594 for the year ended December 31, 2022 from 157,062 for the year ended December 31, 2021. The increase in Transactions resulted in an increase in transaction fee revenue as well as an increase in transportation revenue, inspection revenue, and guarantee revenue. Fee increases also contributed to the increase in transportation revenue. Product revenue increased $639.3 million in the year ended December 31, 2022 compared to the year ended December 31, 2021, due primarily to an increase in proceeds received from the sale of vehicles through IMCO transactions, including vehicle sale price and transaction fees, as a result of the IMCO offering becoming available to approximately 93% of the U.S. population. The increase in product revenue was also due in part to an increase in proceeds received from the sale of vehicles acquired through arbitration, including vehicle sale price and transaction fees, as a result of increased arbitration claims due primarily to increased volume. 65 Segment Income (loss) from Operations [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","Change"],["","","2022","","","2021","","","Amount","","","%"],["","","(dollars in thousands)"],["Segment Income (Loss) from Operations:"],["U.S. Marketplace","","$","128,455","","","$","152,006","","","$","(23,551",")","","","(15",")%"],["Digital Wholesale","","","(11,834",")","","","6,526","","","","(18,360",")","","","(281",")"],["Other","","","(8,143",")","","","(10,264",")","","","2,121","","","","21"],["Total","","$","108,478","","","$","148,268","","","$","(39,790",")","","","(27",")%"],["Percentage of segment revenue:"],["U.S. Marketplace","","","21","%","","","26","%"],["Digital Wholesale","","","(1",")","","","2"],["Other","","","(18",")","","","(24",")"],["Total","","","7","%","","","16","%"]] [[/GREPCENT_TABLE]] U.S. Marketplace segment income from operations decreased $23.6 million, or 15%, in the year ended December 31, 2022 compared to the year ended December 31, 2021 and represented 21% of U.S. Marketplace segment revenue for the year ended December 31, 2022 and 26% of U.S. Marketplace segment revenue for the year ended December 31, 2021. The decrease was due to increases in revenue of $19.5 million, offset by increases in cost of revenue of $8.1 million and increases in operating expenses of $35.0 million. Digital Wholesale segment income (loss) from operations decreased $18.4 million, or 281%, in the year ended December 31, 2022 compared to the year ended December 31, 2021 and represented (1)% of Digital Wholesale segment revenue for the year ended December 31, 2022 and represented 2% of Digital Wholesale segment revenue for the year ended December 31, 2021. The decrease was due to increases in revenue of $681.8 million, offset by increases in cost of revenue of $694.5 million and increases in operating expenses of $5.7 million. Liquidity and Capital Resources Cash, Cash Equivalents, Short-term Investments, and Borrowing Capacity As of December 31, 2023, our principal sources of liquidity were cash and cash equivalents of $291.4 million and short-term investments of $20.7 million. As of December 31, 2022, our principal sources of liquidity were cash and cash equivalents of $469.5 million. As of December 31, 2023, our borrowing capacity under the 2022 Revolver was $390.4 million. Sources and Uses of Cash During the years ended December 31, 2023 and 2022, our cash flows from operating, investing, and financing activities, as reflected in the consolidated statements of cash flows, were as follows: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2023","","","2022"],["","","(in thousands)"],["Net cash provided by operating activities","","$","124,527","","","$","256,106"],["Net cash (used in) provided by investing activities","","","(61,564",")","","","72,730"],["Net cash used in financing activities","","","(253,644",")","","","(92,620",")"],["Impact of foreign currency on cash","","","475","","","","(364",")"],["Net (decrease) increase in cash, cash equivalents, and restricted cash","","$","(190,206",")","","$","235,852"]] [[/GREPCENT_TABLE]] Our operations have been financed primarily from operating activities. During the years ended December 31, 2023 and 2022, we generated cash from operating activities of $124.5 million and $256.1 million, respectively. We believe that our existing sources of liquidity, including access to the 2022 Revolver, will be sufficient to fund our operations for at least the next 12 months from the date of the filing of this Annual Report. 66 Our future capital requirements will depend on many factors, including our revenue; expenses associated with our sales and marketing activities and the support of our product, technology, and development efforts; expenses associated with our facilities build-out under our 1001 Boylston Street lease in excess of tenant allowance; payments received in advance from a third-party transaction processor; activity under the 2024 Share Repurchase Program; and our investments in international markets. In connection with the 1001 Boylston Street lease, we expect to spend approximately $69.8 million, net of tenant reimbursements. As of December 31, 2023, we have incurred $40.6 million in gross incurred expenses, of which $2.9 million was reimbursed as part of the tenant improvement allowance for the 1001 Boylston Street lease. Of the total incurred expenses, $40.3 million was capitalized, consisting of $39.8 million in capitalized incurred expenses recognized in property and equipment, net and $0.5 million in capitalized incurred expenses recognized in prepaid expenses, prepaid income taxes and other current assets on the consolidated balance sheets. As of December 31, 2023, we have signed $46.5 million in gross contract commitments which have not yet been incurred. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, macroeconomic effects and other risks detailed in the “Risk Factors” section of this Annual Report. On September 26, 2022, we entered into a Credit Agreement with PNC Bank, National Association, as administrative agent and collateral agent and an L/C Issuer (as defined in the Credit Agreement), and the other lenders, L/C Issuers and parties thereto from time to time, or the Credit Agreement. The Credit Agreement consists of the 2022 Revolver, which is a revolving credit facility that allows us to borrow up to $400.0 million, $50.0 million of which may be comprised of a letter of credit sub-facility. The borrowing capacity under the Credit Agreement may be increased in accordance with the terms and subject to the adjustments as set forth in the Credit Agreement. Specifically, the borrowing capacity may be increased by an amount up to the greater of $250.0 million or 100% of Four Quarter Consolidated EBITDA (as defined in the Credit Agreement) if certain criteria are met and subject to certain restrictions. Any such increase requires lender approval. Proceeds of any borrowings may be used for general corporate purposes. The 2022 Revolver is scheduled to mature on September 26, 2027. As of December 31, 2023, there were no borrowings and $9.6 million in letters of credit outstanding under the 2022 Revolver, which reduces the borrowing capacity under the 2022 Revolver to $390.4 million. As of December 31, 2022, there were no borrowings and no letters of credit outstanding under the 2022 Revolver. On December 8, 2022, we announced that our Board of Directors authorized the 2022 Share Repurchase Program pursuant to which we could, from time to time, purchase shares of our Class A common stock for an aggregate purchase price not to exceed $250.0 million. The 2022 Share Repurchase Program expired on December 31, 2023. The 2022 Share Repurchase Program did not obligate us to repurchase any minimum dollar amount or number of shares. All repurchased shares under the 2022 Share Repurchase Program were retired. We funded share repurchases under the 2022 Share Repurchase Program through cash on hand and cash generated from operations. During the year ended December 31, 2023, we repurchased and retired 11,076,755 shares for $204.1 million, exclusive of commissions and excise tax, at an average cost of $18.43 per share under the 2022 Share Repurchase Program. On November 7, 2023, we announced that our Board of Directors authorized the 2024 Share Repurchase Program pursuant to which we may, from time to time, purchase shares of our Class A common stock for an aggregate purchase price not to exceed $250.0 million. Share repurchases under the 2024 Share Repurchase Program may be made through a variety of methods, including but not limited to open market purchases, privately negotiated transactions, and transactions that may be effected pursuant to one or more plans under Rule 10b5-1 and/or Rule 10b-18 of the Exchange Act. The 2024 Share Repurchase Program does not obligate us to repurchase any minimum dollar amount or number of shares. The 2024 Share Repurchase Program has an effective date of January 1, 2024, and an expiration date of December 31, 2024, and prior to its expiration may be modified, suspended, or discontinued by our Board of Directors at any time without prior notice. All repurchased shares under the 2024 Share Repurchase Program will be retired. We expect to fund share repurchases under the 2024 Share Repurchase Program through cash on hand and cash generated from operations. To the extent that our operating income, existing cash, cash equivalents, short-term investments, and our borrowing capacity under the 2022 Revolver are insufficient to fund our future activities, we may need to raise additional funds through a public or private equity or debt financing. Additional funds may not be available on terms favorable to us, or at all. See “Risk Factors—Risks Related to Our Business and Industry—We may require additional capital to pursue our business objectives and respond to business opportunities, challenges, or unforeseen circumstances. If we are unable to generate sufficient cash flows or if capital is not available to us, our business, operating results, financial condition, and prospects could be adversely affected.” in Part I, Item 1A within this Annual Report. 67 Operating Activities Net cash provided by operating activities of $124.5 million during the year ended December 31, 2023 was due primarily to consolidated net income of $22.1 million, adjusted for $63.7 million of stock-based compensation expense, $48.5 million of depreciation and amortization, $11.8 million of amortization of deferred contract costs, and $0.5 million of amortization of deferred financing costs, offset in part by $37.9 million of deferred taxes. Net cash provided by operating activities was also attributable to a $15.2 million increase in lease obligations, a $11.0 million decrease in accounts receivable, a $9.1 million increase in deferred revenue, a $2.1 million increase in accounts payable, and a $2.0 million decrease in inventory. The increases in cash flow from operations were partially offset by an $18.4 million increase in deferred contract costs, a $3.4 million decrease in accrued expenses, accrued income taxes, and other liabilities, and a $1.5 million increase in prepaid expenses, prepaid income taxes, and other assets. Net cash provided by operating activities of $256.1 million during the year ended December 31, 2022 was due primarily to consolidated net income of $79.0 million, adjusted for $54.8 million of stock-based compensation expense, $45.3 million of depreciation and amortization, $11.1 million of amortization of deferred contract costs, and $1.8 million of provision for doubtful accounts, offset in part by $22.1 million of deferred taxes. Net cash provided by operating activities was also attributable to a $153.0 million decrease in accounts receivable and a $14.4 million decrease in inventory. The increases in cash flow from operations were partially offset by a $35.4 million decrease in accounts payable, a $25.1 million decrease in accrued expenses, accrued income taxes, and other liabilities, a $13.7 million increase in deferred contract costs, a $6.6 million increase in prepaid expenses, prepaid income taxes, and other assets, a $0.5 million decrease in lease obligations, and a $0.5 million decrease in deferred revenue. Investing Activities Net cash used in investing activities of $61.6 million during the year ended December 31, 2023 was due primarily to $24.6 million in purchases of property and equipment, $20.6 million of purchases of short-term investments, net of sales, and $16.6 million of capitalized website development costs. Net cash provided by investing activities of $72.7 million during the year ended December 31, 2022 was due to $90.0 million of maturities in certificates of deposit, offset in part by $11.3 million of capitalization of website development costs and $5.9 million of purchases of property and equipment. Financing Activities Net cash used in financing activities of $253.6 million during the year ended December 31, 2023 was due primarily to $208.5 million of payment for repurchase of our Class A common stock under the 2022 Share Repurchase Program, $25.0 million of payment for repurchase of redeemable noncontrolling interest, $15.6 million of payment of withholding taxes on net share settlements of restricted stock units, and $4.5 million of change in gross advance payments received from third-party transaction processor. Net cash used in financing activities of $92.6 million during the year ended December 31, 2022 was due primarily to a $40.3 million decrease in gross advance payments received from third-party transaction processor, $19.9 million of payment of tax distributions to redeemable noncontrolling interest holders, $16.0 million of payment of withholding taxes on net share settlements of restricted stock units, $14.4 million of payment for the repurchase of our Class A common stock under the 2022 Share Repurchase Program, and $2.6 million of payment of deferred financing costs, partially offset by $0.7 million of proceeds from the issuance of Class A common stock upon exercise of stock options. Contractual Obligations and Known Future Cash Requirements See Note 10 to our consolidated financial statements included elsewhere in this Annual Report for our contractual obligations and commitments. 68 Seasonality Across the retail automotive industry, consumer purchases are typically greatest in the first three quarters of each year, due in part to the introduction of new vehicle models from manufacturers and the seasonal nature of consumer spending. Additionally, the volume of wholesale vehicle sales can fluctuate from quarter to quarter driven by several factors, including the timing of used vehicles available for sale from selling customers, the seasonality of the retail market for used vehicles, and/or inventory challenges in the automotive industry, which affect the demand side of the wholesale industry. Macroeconomic conditions, such as slower growth or recession, higher interest rates, unemployment, consumer confidence in the economy, consumer debt levels, labor, disruptions, work stoppages, or strikes, the ongoing military conflict between Russia and Ukraine, the conflict in Israel and surrounding areas and the possible expansion of such conflict, foreign currency exchange rate fluctuations, and other matters that influence consumer spending and preferences, can also impact the volume of wholesale vehicle sales, as was evidenced by the global semiconductor chip shortage and other supply related shortages. The Digital Wholesale segment operating results have reflected the general seasonality of the wholesale vehicle sales market and macroeconomic conditions of the automotive industry. The U.S. Marketplace segment operating results have reflected the macroeconomic conditions of the automotive industry. However, to date, the U.S. Marketplace segment operating results have not been materially impacted by the general seasonality of the automotive industry. This could possibly change as our business and markets mature. As a result, revenue and cost of revenue related to volume will fluctuate accordingly on a quarterly basis. Typical seasonality trends may not be observed in periods where other external factors more significantly impact the wholesale industry. Off‑Balance Sheet Arrangements As of December 31, 2023 and 2022, we did not have any off-balance sheet arrangements, or material leases that are less than 12 months in duration, that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures, or capital resources. Critical Accounting Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Although we regularly assess these estimates, actual results could differ materially from these estimates. We base our estimates on historical experience and various other assumptions that we believe 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. Changes in estimates are recognized in the period in which they become known. Critical estimates relied upon in preparing the consolidated financial statements include the determination of sales allowance and variable consideration in our revenue recognition, allowance for doubtful accounts, the impairment of long-lived assets, the capitalization of product, technology, and development costs for website development, internal-use software, and hosting arrangements, the valuation of acquired assets and liabilities, the valuation and recoverability of intangible assets and goodwill, the valuation of redeemable noncontrolling interest, the recoverability of our net deferred tax assets and related valuation allowance, the valuation of inventory, and the valuation of equity and liability-classified compensation awards. Accordingly, we consider these to be our critical accounting estimates and believe that of our significant accounting policies, these involve the greatest degree of judgment and complexity. 69 Revenue Recognition – Sales Allowance and Variable Consideration Our accounting policy relating to revenue recognition reflects the impact of the adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers, or ASC 606, which is discussed further in the notes to our consolidated financial statements included elsewhere in this Annual Report. As prescribed by ASC 606, we recognize revenue based on a five-step approach. We derive our revenue from marketplace revenue, wholesale revenue, and product revenue. Marketplace revenue is included in the U.S. Marketplace segment and Other category of segment reporting. Wholesale revenue and product revenue are included in the Digital Wholesale segment. We generate marketplace revenue primarily from (i) dealer subscriptions to our Listings packages, RPM, digital advertising suite, Digital Retail, and Sell My Car - TDO, (ii) advertising revenue from auto manufacturers and other auto‑related brand advertisers, and (iii) revenue from partnerships with financing services companies. We generate wholesale revenue primarily from (x) transaction fees earned from Dealer-to-Dealer transactions, (y) transaction fees earned from the sale of vehicles to dealers that we acquire at other marketplaces, and (z) transaction fees earned from performing inspection and transportation services, inclusive of Dealer-to-Dealer transactions, other marketplace to dealer transactions, and IMCO transactions. We generate product revenue primarily from (A) aggregate proceeds received from the sale of vehicles that were acquired through IMCO transactions, and (B) proceeds received from the sale of vehicles that were acquired through arbitration. Critical accounting estimates associated with each of the three revenue sources are outlined below. Total consideration for marketplace revenue is stated within the contracts. There are no contractual cash refund rights, but credits may be issued to a customer at our sole discretion. Dealer customers do not have the right to take possession of our software. At the portfolio level, there is also variable consideration that needs to be included in the transaction price. Variable consideration consists of sales allowances, usage fees, and concessions that change the transaction price of the unsatisfied or partially unsatisfied performance obligation. We recognize that there are times when there is a customer satisfaction issue or other circumstances that will lead to a credit. Due to the known possibility of future credits, a monthly sales allowance review is performed to defer revenue at a portfolio level for such future adjustments in the period of incurrence. We establish sales allowances at the time of revenue recognition based on our history of adjustments and credits provided to our customers. In assessing the adequacy of the sales allowance, we evaluate our history of adjustments and credits made through the date of the issuance of the consolidated financial statements. Estimated sales adjustments, credits, and losses may vary from actual results which could lead to material adjustments to the consolidated financial statements. Advertising contracts state the transaction price within the agreement with payment generally being based on the number of clicks or impressions delivered on our websites. Total consideration is based on output and deemed variable consideration constrained by an agreed upon delivery schedule and is allocated to the period in which the service was rendered. Additionally, there are generally no contractual cash refund rights. Certain contracts do contain the right for credits in situations in which impressions are not displayed in compliance with contractual specifications. At an individual contract level, we may give a credit for a customer satisfaction issue or other circumstance. Due to the known possibility of future credits, a monthly review is performed to defer revenue at an individual contract level for such future adjustments in the period of incurrence. Although these credits have not been material and have not changed significantly over the historical period, estimated sales adjustments credits and losses may vary from actual results which could lead to material adjustments to the consolidated financial statements. Other marketplace revenue includes revenue from contracts for which the performance obligation is a series of distinct services with the same level of effort daily. For these contracts, primarily related to our partnerships with financing services companies, we estimate the value of the variable consideration in determining the transaction price and allocate it to the performance obligation. Revenue is estimated and recognized on a ratable basis over the contractual term. We reassess the estimate of variable consideration at each reporting period. 70 Within wholesale transactions, there are typically no contractual cash refund rights, but credits may be issued to a customer at our sole discretion and refunds may be required by law in the case of a vehicle defect. At the portfolio level, there is also variable consideration that needs to be included in the transaction price. Variable consideration consists of sales allowances and concessions that change the transaction price of the unsatisfied or partially unsatisfied performance obligation. We recognize that there are times when there is a customer satisfaction issue or other circumstance that will lead to a credit or arbitration. We establish sales allowances at the time of revenue recognition based on our history of adjustments and credits provided to our customers. In assessing the adequacy of the sales allowance, we evaluate our history of adjustments and credits made through the date of the issuance of the consolidated financial statements. Upon recognizing a sales transaction, we estimate the amount of transaction price that will be reversed in a subsequent period and record a reserve for returns and cancellations in other current assets, other current liabilities and accounts receivable in the consolidated balance sheets. Estimated sales adjustments, credits, and losses may vary from actual results which could lead to material adjustments to the consolidated financial statements. Within product transactions, there are typically no contractual cash refund rights, but credits may be issued to a customer at our sole discretion and refunds may be required by law in the case of a vehicle defect. At the portfolio level, there is also variable consideration that needs to be included in the transaction price. Variable consideration consists of sales allowances and concessions that change the transaction price of the unsatisfied or partially unsatisfied performance obligation. We recognize that there are times when there is a customer satisfaction issue or other circumstance that will lead to a credit or arbitration. We establish sales allowances at the time of revenue recognition based on our history of adjustments and credits provided to our customers. In assessing the adequacy of the sales allowance, we evaluate our history of adjustments and credits made through the date of the issuance of the consolidated financial statements. Upon recognizing a sales transaction, we estimate the amount of transaction price that will be reversed in a subsequent period and record a reserve for returns and cancellations in other current assets, other current liabilities and accounts receivable in the consolidated balance sheets. Estimated sales adjustments, credits, and losses may vary from actual results which could lead to material adjustments to the consolidated financial statements. Accounts Receivable – Allowance for Doubtful Accounts The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable and is based upon historical loss trends, the number of days that billings are past due, an evaluation of the potential risk of loss associated with specific accounts, current economic trends and conditions, and reasonable and supportable forecasts of economic conditions. If circumstances relating to specific customers change, or unanticipated changes occur in the general business environment, particularly as it affects auto dealers, our estimates of the recoverability of receivables could be further adjusted. Long‑Lived Assets – Impairment We evaluate the recoverability of long-lived assets, such as property and equipment and intangible assets, for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. During this review, we re‑evaluate the significant assumptions used in determining the original cost and estimated lives of long-lived assets. Although the assumptions may vary from asset to asset, they generally include operating results, changes in the use of the asset, cash flows, and other indicators of value. Management then determines whether the remaining useful life continues to be appropriate, or whether there has been an impairment of long‑lived assets based primarily upon whether expected future undiscounted cash flows are sufficient to support the assets’ recovery. Website Development and Internal-Use Software Costs – Capitalization Capitalized website development and capitalized internal-use software costs are amortized on a straight‑line basis over their estimated useful life of three years beginning with the time when the product is ready for intended use. We evaluate the useful lives of these assets when each asset is ready for its intended use, and at least annually thereafter to ensure three years remains appropriate. We also test for impairment at least annually and whenever events or changes in circumstances occur that could impact the recoverability of these assets. Impairment is evaluated as discussed in the “Long-Lived Assets - Impairment” section above. 71 Hosting Arrangements – Capitalization Our hosting arrangements consist of cloud-based hosting platforms. Capitalized implementation costs for hosting arrangements are amortized on a straight‑line basis over an estimated useful life of the term of the hosting arrangement, taking into consideration several other factors such as, but not limited to, options to extend the hosting arrangement or options to terminate the hosting arrangement, beginning with the time when the software is ready for intended use. We evaluate the useful lives of these assets when each asset is ready for its intended use, and at least annually thereafter to ensure the selected useful life remains appropriate. We also test for impairment at least annually and whenever events or changes in circumstances occur that could impact the recoverability of these assets. Impairment is evaluated as discussed in the “Long-Lived Assets - Impairment” section above. Business Combinations Acquired Assets and Liabilities – Valuation We measure all consideration transferred in a business combination at its acquisition-date fair value. Consideration transferred is determined by the acquisition-date fair value of assets transferred and liabilities assumed, including contingent consideration obligations, as applicable. We measure goodwill as the excess of the consideration transferred over the net of the acquisition-date amounts of assets acquired less liabilities assumed. We make significant assumptions and estimates in determining the fair value of the acquired assets and liabilities as of the acquisition date, especially the valuation of intangible assets and certain tax positions. Intangible Assets – Valuation and Recoverability Intangible assets are recognized at their estimated fair value at the date of acquisition. Fair value is determined based on inputs and assumptions such as discount rates, rates of return on assets, and long-term sales growth rates. We amortize intangible assets over their estimated useful lives on a straight-line basis. Useful lives are established based on analysis of all pertinent factors such as: the expected use of the asset, expected useful lives of related assets, provisions that may limit the useful life, historical experience with similar arrangements, effects of economic factors, demand, competition, obsolescence, and maintenance required to maintain the future cash flows. We evaluate the useful lives of these assets as of the acquisition date and at least annually thereafter to ensure the selected useful life remains appropriate. We monitor our long-lived assets for impairment indicators on an ongoing basis in accordance with GAAP, and test for impairment at least annually and whenever events or changes in circumstances occur that could impact the recoverability of these assets. Impairment is evaluated as discussed in the “Long-Lived Assets - Impairment” section above. Goodwill – Valuation and Recoverability Goodwill is recognized when consideration paid in a purchase acquisition exceeds the fair value of the net assets acquired. Goodwill is not amortized, but rather is tested for impairment annually or more frequently if facts and circumstances warrant a review. Conditions that could trigger a more frequent impairment assessment include, but are not limited to, a significant adverse change in certain agreements, significant underperformance relative to historical or projected future operating results, an economic downturn affecting automotive marketplaces, increased competition, a significant reduction in our stock price for a sustained period, or a reduction of our market capitalization relative to net book value. 72 We evaluate impairment annually on October 1 by comparing the estimated fair value of each reporting unit to its carrying value. For fiscal year 2023, we determined that we had three reporting units with goodwill: U.S. Marketplace, CarOffer, and U.K. Marketplace. We elected to bypass the optional qualitative test for impairment and proceed to Step 1, which is a quantitative impairment test. For the U.S. Marketplace and U.K. Marketplace reporting units, we estimate fair value using a market approach, based on market multiples derived from public companies that we identify as peers. As of October 1, 2023, we estimated forecasted revenue for fiscal year 2023, and estimated revenue market multiples using publicly available information for each of our reporting units. Developing these assumptions required the use of judgment and estimates. Actual results may differ from these forecasts. For the CarOffer reporting unit, we estimate fair value using an income approach, based on a discounted cash flow method. The assumptions used to estimate the fair value using a discounted cash flow method include revenue and EBITDA forecasts, the weighted average cost of capital and discount rate, debt-free net working capital forecasts, and long-term growth rate. For the years ended December 31, 2023, 2022, and 2021, we did not identify any impairment of our goodwill. Although no impairment was identified during the annual impairment test as of October 1, 2023, the excess of the fair value over the carrying value declined for the CarOffer reporting unit in the Digital Wholesale segment. If projected future operating results further decline, including as a result of economic conditions or operational challenges, we may need to record an impairment charge to reduce our goodwill at CarOffer which could be material and negatively affect our operations. Redeemable Noncontrolling Interest – Valuation In connection with our acquisition of a 51% interest in CarOffer on January 14, 2021, redeemable noncontrolling interest was recognized at fair value computed using the Least Square Monte Carlo Simulation approach. Significant inputs to the model included market price of risk, volatility, correlation, and risk-free rate. Subsequent to our acquisition of the 51% interest on January 14, 2021, the redeemable noncontrolling interest was measured at the greater of the amount that would be paid if settlement occurred as of the consolidated balance sheet date based on the contractually defined redemption value and its carrying amount adjusted for net (loss) income attributable to the noncontrolling interest and tax distributions to redeemable noncontrolling interest holders. On December 1, 2023, we completed the 2023 CarOffer Transaction for the 2023 Consideration. Following the 2023 CarOffer Transaction, CarOffer is a wholly-owned subsidiary and we entered into the 2023 CarOffer Operating Agreement pursuant to which, among other matters, the existing put and call rights were terminated. As a result of the 2023 CarOffer Transaction, there is no redeemable noncontrolling interest as of December 31, 2023, and there is no longer a related estimate. Income Taxes – Recoverability of Deferred Tax Assets and Related Valuation Allowance We are subject to federal and state income taxes in the U.S. and taxes in foreign jurisdictions in which we operate. Judgment is required in determining our worldwide income tax provision. In the ordinary course of a global business, there are many transactions and calculations where the ultimate outcome is uncertain. Although we believe our estimates are reasonable, there is no assurance that the final outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. Such differences could have a material impact on our income tax provision and net income in the period in which such determination is made. Significant judgment is also involved regarding the application of income tax laws and regulations to estimate the effective income tax rates. As a result, our actual annual effective income tax rates and related income tax liabilities may differ materially from our interim estimated effective tax rates and related income tax liabilities. Any resulting differences are recognized in the period they become known. We account for income taxes in accordance with the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. 73 This method requires 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. In performing this analysis, we consider future taxable income and ongoing prudent and feasible tax planning strategies to assess realizability. Actual results may differ from these forecasts. Valuation allowances are reassessed periodically to determine whether it is more likely than not that the tax benefits will be realized in the future and if any existing valuation allowance should be released. We account for uncertain tax positions by prescribing a more‑likely‑than‑not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We assess our income tax positions based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. The tax position is measured as the largest amount of benefit or expense that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority during examination. The ultimate resolution of these tax positions may be greater or less than the liabilities recognized. Inventory – Valuation Inventory is valued at the lower of cost or net realizable value. Cost is determined based on specific identification. In recording inventory at the lower of cost or net realizable value, we estimate potential future losses on inventory on hand based on historical losses and market trends. Estimated potential future losses on inventory may vary from actual results which could lead to material adjustments to the consolidated financial statements. Stock-Based Compensation – Valuation For restricted stock units, or RSUs, granted subject to market-based vesting conditions, the fair value is determined on the date of grant using the Monte Carlo simulation lattice model. The determination of the fair value using this model is affected by our stock price performance relative to the companies listed on the S&P 500, and a number of assumptions including volatility, correlation coefficient, risk-free interest rate, and expected dividends. RSUs previously granted subject to market-based vesting conditions vest upon achievement of specified levels of market conditions. During the year ended December 31, 2022, we modified our market-based performance awards to contain only service-based vesting conditions in line with our other RSU awards. As a result, there were no market-based RSUs outstanding as of December 31, 2023 and 2022. For stock options granted, the fair value is determined on the date of grant using the Black‑Scholes option‑pricing model. The determination of the fair value is affected by our stock price and a number of assumptions including expected dividend yield, expected volatility, risk-free interest rate, and expected term. For expected volatility, we use a blended volatility to combine the historical volatility of trading with the volatility for a peer group of companies as we do not have historical stock prices for a period that is at least equal to the expected term. Stock options granted generally have a term of ten years from the date of grant and generally vest over a four-year requisite service period. For liability-classified awards, the fair value was determined on the date of issuance using a Least Square Monte Carlo simulation model. Liability-classified awards are remeasured to fair value each period until settlement. Until March 31, 2022, the Least Square Monte Carlo simulation model was used for remeasurement. During the three months ended June 30, 2022, we refined our model for determining the fair value of liability-classified awards as a result of obtaining gross profit actuals through the trailing twelve-months ended June 30, 2022 measurement period for the first call option. Since March 31, 2022, the fair value has typically been determined using a Monte Carlo simulation model. During the year ended December 31, 2022, we determined not to exercise our call right to acquire up to an additional 25% of the fully diluted capitalization of CarOffer. The valuation of these liability-classified awards was previously derived from our 2024 call right and CarOffer’s 2024 put right. The determination of the fair value was affected by CarOffer’s equity value, EBITDA, and Excess Parent Capital (as defined in the Third Amended and Restated Limited Liability Company Agreement of CarOffer, dated as of November 23, 2021, included as Exhibit 10.27 to the Annual Report on Form 10-K for the year ended December 31, 2021, filed on February 25, 2022) that drove the exercise price of future call/put rights, as well as a number of assumptions including market price of risk, volatility, correlation, and risk-free interest rate. As a result of the EBITDA and Excess Parent Capital projections for CarOffer as of December 31, 2022, a Monte Carlo simulation model was not required as of December 31, 2022. As a result of the 2023 CarOffer Transaction, the liability-classified awards were accelerated and redeemed as of December 31, 2023. 74 Recently Issued Accounting Pronouncements Information concerning recently issued accounting pronouncements may be found in Note 2 to our consolidated financial statements included elsewhere in this Annual Report. 75