Executive Summary / Key Takeaways

• Cars.com (CARS) is transforming into an integrated automotive commerce platform, leveraging strategic acquisitions and technology to connect consumers, dealers, and OEMs across the vehicle lifecycle.
• Despite a slight dip in total revenue in Q1 2025 driven by macroeconomic pressures on dealer spending, the company demonstrated resilience through growth in OEM/National revenue and strong performance in its solutions portfolio (AccuTrade, Websites).
• Profitability remains a core strength, with Q1 2025 Adjusted EBITDA margin exceeding expectations due to disciplined cost management and efficient integration of recent acquisitions like DealerClub.
• Key growth initiatives, including cross-selling integrated solutions, enhancing the marketplace with data intelligence, and scaling the newly acquired DealerClub wholesale platform, are expected to drive year-over-year revenue growth in 2025, weighted towards the back half.
• While near-term macroeconomic and tariff-related uncertainty has led to the suspension of full-year revenue guidance, management reaffirmed its Adjusted EBITDA margin outlook, signaling confidence in operational execution and cost control.

The Evolution of Automotive Commerce: CARS's Platform Play

Cars.com Inc. is no longer solely a digital listing service; it is strategically evolving into a comprehensive, audience-driven technology platform designed to simplify and empower the automotive industry's pretail, retail, and post-sale activities. This transformation, branded as Cars Commerce, is built upon a foundation of data and machine learning, aiming to create a connected ecosystem that drives efficiency and profitability for its customers – primarily automotive dealers and manufacturers.

The company's history over the past few years is marked by deliberate acquisitions that have expanded its capabilities beyond its flagship Cars.com marketplace. The additions of Dealer Inspire (website and digital retail technology), D2C Media (strengthening its digital experience offerings, notably in Canada), and AccuTrade (essential trade-in and appraisal technology) have broadened its addressable market and created multiple avenues for growth. This strategic expansion culminated in the January 2025 acquisition of DealerClub, an emerging dealer-to-dealer wholesale auction platform. This latest move is pivotal, launching CARS into the wholesale market and positioning it to manage the entire vehicle lifecycle on a unified platform.

In a competitive landscape populated by players like CarGurus (CARG) focused heavily on listings and search, TrueCar (TRUE) emphasizing pricing transparency, and broader e-commerce giants like eBay (EBAY) with automotive verticals, CARS seeks differentiation through its integrated platform approach and deep first-party data insights. While competitors may excel in specific niches – CARG in used car listings and efficiency, TRUE in pricing tools, EBAY in global scale and aftermarket – CARS aims to provide a more holistic solution set. The company highlights its ability to deliver traffic that converts more effectively than other channels, its leadership in certain digital solutions like websites (D2C is the #1 provider in Canada), and the superior accuracy of its appraisal technology.

Technological Edge: Data, AI, and Integrated Solutions

At the heart of the Cars Commerce strategy is its differentiated technology stack, powered by data and machine learning. This isn't merely a buzzword; the company points to specific applications and quantifiable benefits:

• Inventory Intelligence Platform (IIP): Leveraging AI and machine learning alongside unparalleled first-party demand data, IIP provides dealers with predictive analytics on inventory performance, such as estimated time on lot and daily depreciation. This technology helps dealers make data-driven decisions on vehicle acquisition and, crucially, exit strategies, optimizing profit per vehicle. The company notes that IIP can identify, on average, over 200,000 cars on dealer lots that are over 90 days old, presenting a clear opportunity to manage aging inventory more effectively than competitors who might simply recommend price reductions. The "so what" for investors is clear: this technology aims to make CARS indispensable to dealer operations, improving customer retention and providing a basis for future pricing power as dealers recognize the tangible profit benefits.
• AccuTrade's Appraisal Technology: This core technology provides market-leading valuation algorithms and condition reports. Management states AccuTrade appraisals are 34% more accurate than competitors, offering significant economic value to dealers by enabling more precise and profitable trade-in acquisitions. This accuracy is a key differentiator against traditional, less data-driven appraisal methods and competing software.
• Integration Synergies: The platform's power is amplified through integration. The ability to push AccuTrade appraisals directly into the newly acquired DealerClub wholesale auction with a single click streamlines the dealer's workflow for vehicles not suited for retail. This integration leverages AccuTrade's accuracy within the wholesale process, a unique offering compared to standalone auction platforms. Furthermore, integrating solutions like AccuTrade and CreditIQ (online financing) into dealer websites helps dealers consolidate vendors and leverage native, data-connected tools.
• AI in Operations: Beyond core products, CARS is exploring AI applications to improve operational efficiency for dealers. Pilots replacing dealership lead handling with AI have shown promising results, with reported 20% lifts in appointments set and sales attributed to the platform. This directly addresses a key dealer pain point (lead quality and handling costs) and further demonstrates the value of the CARS audience and platform.

These technological advancements are central to CARS's strategy to move beyond being just a listing service to becoming an embedded technology partner for dealers, providing tools that directly impact their bottom line and operational efficiency.

Financial Performance Reflecting Strategy and Market Headwinds

CARS's recent financial performance provides insight into the execution of its platform strategy amidst a dynamic automotive market. For the three months ended March 31, 2025, total revenue was $179.0 million, a slight decrease of 1% compared to $180.2 million in the prior-year period.

Breaking down the revenue streams:

• Dealer revenue: The largest segment, decreased by 2% year-over-year to $159.1 million. Management attributed this primarily to macroeconomic trends impacting dealer customer profitability, which influenced marketplace and media revenue, although growth in solutions partially offset this pressure. Dealer customers stood at 19,250 as of March 31, 2025, a 1% decrease year-over-year but a sequential increase of 44 from December 31, 2024, indicating some stabilization. Monthly Average Revenue Per Dealer (ARPD) was $2,473, flat sequentially but down 1% year-over-year, reflecting changes in customer mix and some churn.
• OEM and National revenue: Showed strength, increasing by 6% year-over-year to $16.3 million. This growth was primarily driven by increased OEM spending aimed at raising consumer awareness as vehicle inventory levels continue to rise.
• Other revenue: Increased by 18% year-over-year to $3.6 million.

Operating expenses totaled $172.6 million in Q1 2025, up 3% from $167.4 million in Q1 2024. This increase was primarily due to higher general and administrative expenses (up 13%, largely from severance costs related to a targeted headcount reduction in March) and marketing and sales expenses (up 2%, due to higher compensation including stock-based compensation), partially offset by lower depreciation and amortization. Cost of revenue and operations also increased by 3% due to higher third-party costs related to product mix.

The increase in expenses outpaced the slight revenue decline, resulting in a decrease in operating income to $6.5 million in Q1 2025, down significantly from $12.7 million in Q1 2024. Net loss for the quarter was $2.0 million, compared to net income of $0.8 million in the prior-year period, primarily impacted by the severance costs and changes in contingent consideration fair value.

However, a key highlight was the Adjusted EBITDA performance. Adjusted EBITDA margin for Q1 2025 was 28.3%, exceeding the company's outlook. Management attributed this to continued cost discipline and lower-than-anticipated integration costs related to the DealerClub acquisition. Adjusted operating expenses were noted as being roughly flat year-over-year, reflecting underlying cost control efforts.

Liquidity remains robust. As of March 31, 2025, cash and cash equivalents stood at $31.4 million. Including the undrawn Revolving Loan capacity, total liquidity was $321.4 million. The company's debt structure includes $400.0 million of 6.38% Senior Unsecured Notes due 2028 and $60.0 million outstanding on its Revolving Loan. Leverage ratios remain healthy, with a Senior Secured Net Leverage Ratio of 0.1x and a Consolidated Interest Coverage Ratio of 6.6x as of March 31, 2025. Cash flow from operations was $29.5 million in Q1 2025, down from $33.5 million in Q1 2024, primarily due to the net loss and related adjustments, partially offset by working capital changes. Investing activities used $20.7 million, largely driven by the DealerClub acquisition, partially offset by proceeds from the RepairPal equity sale. Financing activities used $27.4 million, primarily for share repurchases ($21.5 million in Q1 2025, acquiring 1.6 million shares at an average price of $13.85) and debt repayments. The company is pacing ahead of its 2025 share repurchase target of $60 million to $70 million.

Outlook and Strategic Trajectory

Looking ahead, CARS's outlook is shaped by its confidence in the platform strategy and its responsiveness to external market dynamics. While the company suspended full-year revenue guidance due to increased near-term uncertainty, particularly regarding the timing of OEM media spending influenced by macroeconomic factors and potential tariffs, management still expects full-year revenue to be up year-over-year. This anticipated growth is expected to be back half-weighted, driven by the compounding effect of subscription-based revenue from growth initiatives.

Key drivers for this expected growth include:

• Product Adoption and Cross-Sell: Continued focus on increasing the penetration of solutions like AccuTrade and websites within the existing dealer base. Customers using multiple products demonstrate significantly higher engagement and value realization (double the leads), reinforcing the cross-sell opportunity.
• Repackaging and Value Delivery: Initiatives to repackage marketplace offerings and renegotiate legacy website agreements aim to align pricing with the enhanced value delivered by the integrated platform and drive ARPD expansion.
• DealerClub Integration and Scaling: Integrating DealerClub with AccuTrade and the Inventory Intelligence Platform is expected to create a compelling value proposition for dealers seeking efficient used vehicle acquisition and disposal channels, potentially opening up a significant transactional revenue stream over time. Early integration progress and pipeline growth are encouraging.
• OEM Engagement: Despite near-term timing uncertainty, OEM spending on the platform is expected to continue growing year-over-year, driven by the need to reach in-market shoppers as inventory increases.

On the profitability front, management reaffirmed its Adjusted EBITDA margin outlook for fiscal 2025, expecting it to be between 29% and 31%. This reflects confidence in the company's ability to maintain cost discipline and operational leverage, even with ongoing investments in growth initiatives and integration. The targeted headcount reduction in March 2025 is expected to contribute to cost optimization in subsequent quarters. For Q2 2025, Adjusted EBITDA margin is guided between 27% and 29%, roughly flat year-over-year at the midpoint, reflecting revenue mix and planned investments.

Risks to the Thesis

While the platform strategy presents significant opportunities, investors should be mindful of key risks:

• Macroeconomic Sensitivity: The automotive industry is inherently cyclical and sensitive to factors like interest rates, inflation, and consumer confidence. Recent tariff-related uncertainty highlights the potential for sudden shifts in OEM and dealer spending, impacting revenue timing and magnitude.
• Competition: The digital automotive marketplace remains highly competitive. While CARS emphasizes its platform differentiation, competitors continue to innovate, potentially pressuring pricing or market share.
• Integration and Adoption Risk: Successfully integrating acquired businesses like DealerClub and driving widespread dealer adoption of new technologies like AccuTrade and the Inventory Intelligence Platform takes time and resources. Failure to execute effectively could slow growth and impact profitability. Contingent consideration payments related to acquisitions also represent potential future cash outflows.
• Technology Dependence: The business relies heavily on its technology systems and the ability to keep pace with rapid technological advancements. Security breaches or failure to innovate could harm the brand and operations.
• Reliance on Relationships: Concentration of market acceptance with a limited number of OEMs and large dealer groups poses a risk if these relationships deteriorate or consolidation occurs.

Conclusion

Cars.com is navigating a complex automotive market by leaning into its transformation as an integrated technology platform. The Q1 2025 results, while showing slight top-line pressure from macro factors, underscore the resilience of its diversified revenue streams (particularly OEM and solutions) and the strength of its cost discipline, which delivered an EBITDA margin beat. The strategic acquisitions of AccuTrade, D2C, and most recently DealerClub are foundational to the Cars Commerce vision, enabling the company to offer a more comprehensive, data-driven solution set across the vehicle lifecycle than many competitors.

The investment thesis hinges on the successful execution of this platform strategy – driving adoption of integrated solutions, leveraging technology like the Inventory Intelligence Platform and AI to deliver quantifiable value to customers, and capitalizing on cross-sell opportunities. While near-term revenue visibility is clouded by external uncertainty, the reaffirmation of the full-year EBITDA margin outlook signals management's confidence in its operational levers. Investors should monitor the pace of solutions adoption, the integration and scaling of DealerClub, and the timing of OEM spending as key indicators of the platform's ability to deliver back-half weighted growth and expand profitability in a competitive and evolving industry.