UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2018~~2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-37869

Cars.com Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	81-3693660
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

300 S. Riverside Plaza, Suite 1000

Chicago, Illinois 60606

(Address of principal executive offices)

(312) 601-5000

Registrant’s telephone number, including area code


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

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock	CARS	New York Stock Exchange

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

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

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

Large accelerated filer	☐☒	Accelerated filer	☐

Non-accelerated filer	☒ ☐	Smaller reporting company	☐

Emerging growth company	☒		☐

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

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

As of October 31, ~~2018,~~2019, the registrant had ~~68,568,102~~66,762,203 shares of common stock, $0.01 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	2
Item 1.	Financial Statements (unaudited):	2
	Consolidated Balance Sheets	2
	Consolidated Statements of (Loss) Income	3
	Consolidated Statements of Stockholders’ Equity	4
	Consolidated Statements of Comprehensive (Loss) Income	6
	Consolidated ~~and Combined Balance Sheets~~Statements of Cash Flows	27
	~~Consolidated and Combined Statements of Income~~	3
	~~Consolidated and Combined Statements of Stockholders’ Equity~~	4
	~~Consolidated and Combined Statements of Cash Flows~~	5
	Notes to Unaudited Consolidated ~~and Combined~~ Financial Statements	68
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2829
Item 4.	Controls and Procedures	2829
PART II.	OTHER INFORMATION	2930
Item 1.	Legal Proceedings	2930
Item 1A.	Risk Factors	2930
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2930
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
Signatures		3132

PART I—~~FINANCI~~ALI—FINANCIAL INFORMATION

Item 1. Financial Statements.

Cars.com Inc.

Consolidated ~~and Combined~~ Balance Sheets

(In thousands, except per share data)

	September 30, 2018		December 31, 2017		September 30, 2019			December 31, 2018
	(unaudited)				(unaudited)
Assets
Assets:
Current assets:
Cash and cash equivalents	$	17,809	$	20,563	$	19,773		$	25,463
Accounts receivable, net		107,687		100,857		101,782			108,921
Prepaid expenses		11,662		11,408		7,592			9,264
Other current assets		9,558		9,811		425			10,289
Total current assets		146,716		142,639		129,572			153,937
Property and equipment, net		40,850		39,740		42,857			41,482
Goodwill		884,339		788,107		505,885			884,449
Intangible assets, net		1,533,442		1,529,500		1,354,777			1,510,410
Investments and other assets		10,451		11,053		26,788			10,271
Total assets	$	2,615,798	$	2,511,039	$	2,059,879		$	2,600,549
Liabilities and stockholders' equity
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable	$	8,040	$	6,581	$	6,280		$	11,631
Accrued compensation		10,889		14,185		14,588			16,821
Unfavorable contracts liability		25,185		25,200		—			18,885
Current portion of long-term debt		24,022		21,158		32,518			26,853
Other accrued liabilities		45,736		23,025		68,419			36,520
Total current liabilities		113,872		90,149		121,805			110,710
Noncurrent liabilities:
Unfavorable contracts liability		—		18,885
Long-term debt		678,426		557,194		630,913			665,306
Deferred tax liability		168,360		146,482		125,175			177,916
Other noncurrent liabilities		20,297		19,201		40,501			19,694
Total noncurrent liabilities		867,083		741,762		796,589			862,916
Total liabilities		980,955		831,911		918,394			973,626
Commitments and contingencies
Stockholders' equity:
Preferred Stock at par, $0.01 par value; 5,000 shares authorized; no shares issued and outstanding as of September 30, 2018 and December 31, 2017		—		—
Common Stock at par, $0.01 par value; 300,000 shares authorized; 68,926 and 71,628 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively		689		716
Preferred Stock at par, $0.01 par value; 5,000 shares authorized; 0 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively						—			—
Common Stock at par, $0.01 par value; 300,000 shares authorized; 66,678 and 68,262 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively						667			683
Additional paid-in capital		1,505,279		1,501,830		1,512,713			1,508,001
Retained earnings		128,875		176,582
(Accumulated deficit) retained earnings						(362,957	)		118,239
Accumulated other comprehensive loss						(8,938	)		—
Total stockholders' equity		1,634,843		1,679,128		1,141,485			1,626,923
Total liabilities and stockholders' equity	$	2,615,798	$	2,511,039	$	2,059,879		$	2,600,549

The accompanying notes are an integral part of the Consolidated ~~and Combined~~ Financial Statements.

Cars.com Inc.

Consolidated ~~and Combined~~ Statements of (Loss) Income

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Revenues:
Revenue:
Retail	$	151,627		$	118,825		$	430,828		$	346,780		$	146,681		$	151,627		$	420,129		$	430,828
Wholesale⁽¹⁾		17,685			41,074			66,953			122,917			5,409			17,685			34,366			66,953
Total revenues		169,312			159,899			497,781			469,697
Total revenue														152,090			169,312			454,495			497,781
Operating expenses:
Cost of revenues and operations		24,034			18,176			65,924			49,618
Cost of revenue and operations														25,089			23,808			74,987			64,293
Product and technology		15,918			18,422			56,202			56,861			14,923			15,616			48,125			51,215
Marketing and sales		56,083			50,733			181,645			160,246			50,789			55,825			164,872			180,168
General and administrative		14,345			9,180			45,609			34,364			13,414			15,131			59,265			53,704
Affiliate revenue share		4,097			2,121			11,193			6,837			5,158			4,097			9,788			11,193
Depreciation and amortization		26,504			21,893			77,154			66,343			28,970			26,504			86,761			77,154
Goodwill and intangible asset impairment														461,463			—			461,463			—
Total operating expenses		140,981			120,525			437,727			374,269			599,806			140,981			905,261			437,727
Operating income		28,331			39,374			60,054			95,428
Operating (loss) income														(447,716	)		28,331			(450,766	)		60,054
Nonoperating (expense) income:
Interest expense, net		(7,005	)		(5,431	)		(20,305	)		(7,160	)		(7,712	)		(7,005	)		(22,989	)		(20,305	)
Other income, net		65			64			76			199			1,402			65			1,530			76
Total nonoperating expense, net		(6,940	)		(5,367	)		(20,229	)		(6,961	)		(6,310	)		(6,940	)		(21,459	)		(20,229	)
Income before income taxes		21,391			34,007			39,825			88,467
Income tax expense		5,594			13,019			10,373			15,782
Net income	$	15,797		$	20,988		$	29,452		$	72,685
(Loss) income before income taxes														(454,026	)		21,391			(472,225	)		39,825
Income tax (benefit) expense														(27,869	)		5,594			(31,011	)		10,373
Net (loss) income													$	(426,157	)	$	15,797		$	(441,214	)	$	29,452
Weighted-average common shares outstanding:
Basic		69,652			71,699			70,900			71,693			66,769			69,652			67,043			70,900
Diluted		70,029			71,767			71,153			71,763			66,769			70,029			67,043			71,153
Earnings per share:
(Loss) earnings per share:
Basic	$	0.23		$	0.29		$	0.42		$	1.01		$	(6.38	)	$	0.23		$	(6.58	)	$	0.42
Diluted		0.23			0.29			0.41			1.01			(6.38	)		0.23			(6.58	)		0.41

The accompanying notes are an integral part of the Consolidated Financial Statements.

Cars.com Inc.

Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

	Preferred Stock				Common Stock						Additional Paid-In			(Accumulated Deficit) Retained			Accumulated Other Comprehensive			Stockholders'
	Shares		Amount		Shares			Amount			Capital			Earnings			Loss			Equity
Balance at December 31, 2018		—	$	—		68,262		$	683		$	1,508,001		$	118,239		$	—		$	1,626,923
Net loss		—		—		—			—			—			(9,031	)		—			(9,031	)
Other comprehensive loss, net		—		—		—			—			—			—			(7,279	)		(7,279	)
Repurchases of common stock		—		—		(881	)		(9	)		—			(19,991	)		—			(20,000	)
Shares issued in connection with stock-based compensation plans, net		—		—		62			1			(744	)		—			—			(743	)
Stock-based compensation		—		—		—			—			2,981			—			—			2,981
Transactions with TEGNA, net ⁽¹⁾		—		—		12			—			(181	)		—			—			(181	)
Balance at March 31, 2019		—	$	—		67,455		$	675		$	1,510,057		$	89,217		$	(7,279	)	$	1,592,670
Net loss		—		—		—			—			—			(6,026	)		—			(6,026	)
Other comprehensive loss, net		—		—		—			—			—			—			(1,292	)		(1,292	)
Repurchases of common stock		—		—		(869	)		(9	)		—			(19,991	)		—			(20,000	)
Shares issued in connection with stock-based compensation plans, net		—		—		84			1			447			—			—			448
Stock-based compensation		—		—		—			—			3,348			—			—			3,348
Transactions with TEGNA, net ⁽¹⁾		—		—		2			—			—			—			—			—
Balance at June 30, 2019		—	$	—		66,672		$	667		$	1,513,852		$	63,200		$	(8,571	)	$	1,569,148
Net loss		—		—		—			—			—			(426,157	)		—			(426,157	)
Other comprehensive loss, net		—		—		—			—			—			—			(367	)		(367	)
Repurchases of common stock		—		—		—			—			—			—			—			—
Shares issued in connection with stock-based compensation plans, net		—		—		6			—			(57	)		—			—			(57	)
Stock-based compensation		—		—		—			—			(1,071	)		—			—			(1,071	)
Transactions with TEGNA, net ⁽¹⁾		—		—		—			—			(11	)		—			—			(11	)
Balance at September 30, 2019		—	$	—		66,678		$	667		$	1,512,713		$	(362,957	)	$	(8,938	)	$	1,141,485

(1)

~~(1)~~

~~For information~~As a result of the Separation, certain stock-based awards previously granted by TEGNA to its employees were converted into stock of both TEGNA and Cars.com. The Company is responsible for any employee payroll taxes related to ~~related party transactions, see Note 12 (Related Party Transactions).~~awards settled in Cars.com common stock for which stock was withheld for payroll tax purposes.

The accompanying notes are an integral part of the Consolidated ~~and Combined~~ Financial Statements.

Cars.com Inc.

Consolidated ~~and Combined~~ Statements of Stockholders’ Equity (continued)

(In thousands)

(Unaudited)

	Preferred Stock				Common Stock						Additional
	Shares		Amount		Shares			Amount			Paid-in Capital			Retained Earnings			Stockholders' Equity			Preferred Stock				Common Stock						Additional Paid-In			Retained			Accumulated Other Comprehensive		Stockholders'
																				Shares		Amount		Shares			Amount			Capital			Earnings			Loss		Equity
Balance at December 31, 2017		—	$	—		71,628		$	716		$	1,501,830		$	176,582		$	1,679,128			—	$	—		71,628		$	716		$	1,501,830		$	176,582		$	—	$	1,679,128
Net income		—		—		—			—			—			29,452			29,452			—		—		—			—			—			929			—		929
Transactions with TEGNA, net ⁽¹⁾		—		—		200			2			(3,568	)		—			(3,566	)
Repurchases of common stock		—		—		(2,986	)		(30	)		—			(77,159	)		(77,189	)		—		—		—			—			—			—			—		—
Shares issued in connection with stock-based compensation plans, net		—		—		84			1			(478	)		—			(477	)		—		—		62			1			(618	)		—			—		(617	)
Stock-based compensation expense		—		—		—			—			7,495			—			7,495
Stock-based compensation																					—		—		—			—			1,600			—			—		1,600
Transactions with TEGNA, net ⁽¹⁾																					—		—		175			2			(2,685	)		—			—		(2,683	)
Balance at March 31, 2018																					—	$	—		71,865		$	719		$	1,500,127		$	177,511		$	—	$	1,678,357
Net income																					—		—		—			—			—			12,726			—		12,726
Repurchases of common stock																					—		—		(2,013	)		(20	)		—			(49,980	)		—		(50,000	)
Shares issued in connection with stock-based compensation plans, net																					—		—		21			—			142			—			—		142
Stock-based compensation																					—		—		—			—			2,876			—			—		2,876
Transactions with TEGNA, net ⁽¹⁾																					—		—		23			—			—			—			—		—
Balance at June 30, 2018																					—	$	—		69,896		$	699		$	1,503,145		$	140,257		$	—	$	1,644,101
Net income																					—		—		—			—			—			15,797			—		15,797
Other comprehensive loss, net																					—		—		—			—			—			—					—
Repurchases of common stock																					—		—		(973	)		(10	)		—			(27,179	)		—		(27,189	)
Shares issued in connection with stock-based compensation plans, net																					—		—		1			—			(2	)		—			—		(2	)
Stock-based compensation																					—		—		—			—			3,019			—			—		3,019
Transactions with TEGNA, net ⁽¹⁾																					—		—		2			—			(883	)		—			—		(883	)
Balance at September 30, 2018		—	$	—		68,926		$	689		$	1,505,279		$	128,875		$	1,634,843			—	$	—		68,926		$	689		$	1,505,279		$	128,875		$	—	$	1,634,843

(1)

~~(1)~~

The accompanying notes are an integral part of the Consolidated ~~and Combined~~ Financial Statements.

Cars.com Inc.

Consolidated ~~and Combined~~ Statements of ~~Cash Flows~~Comprehensive (Loss) Income

(In thousands)

(Unaudited)

Nine Months Ended September 30,

2018

2017

Cash flows from operating activities:

Net income

$
29,452

$
72,685

Adjustments to reconcile Net income to Net cash provided by operating
  activities:

Depreciation

9,195

7,941

Amortization of intangible assets

67,959

58,402

Amortization of unfavorable contracts liability

(18,900
)

(18,900
)
Stock-based compensation expense

7,495

1,493

Deferred income taxes

7,137

8,388

Provision for doubtful accounts

3,451

2,561

Amortization of debt issuance costs

971

463

Other, net

762

1,247

Changes in operating assets and liabilities, net of Acquisition:

Accounts receivable

1,119

2,665

Prepaid expenses

66

(238
)
Other current assets

330

(5,519
)
Other assets

602

616

Accounts payable

(2,397
)

(209
)
Accrued compensation

(3,363
)

(8,451
)
Other accrued liabilities

18,306

10,430

Other noncurrent liabilities

(1,104
)

3,652

Cash received from lessor for lease incentives

—

9,970

Net cash provided by operating activities

121,081

147,196

Cash flows from investing activities:

     Payment for Acquisition, net ⁽¹⁾

(157,153
)

—

     Purchase of property and equipment

(9,966
)

(27,631
)
Net cash used in investing activities

(167,119
)

(27,631
)
Cash flows from financing activities:

     Proceeds from issuance of long-term debt

195,000

675,000

     Payments of debt issuance costs and other fees

—

(6,208
)
     Payments of long-term debt

(71,875
)

(50,625
)
     Payments related to stock-based compensation plans, net

(477
)

—

     Repurchases of common stock

(76,681
)

—

     Cash distribution to TEGNA related to Separation

—

(650,000
)
     Transactions with TEGNA, net

(2,683
)

(69,200
)
Net cash provided by (used in) financing activities

43,284

(101,033
)
Net (decrease) increase in cash and cash equivalents

(2,754
)

18,532

Cash and cash equivalents at beginning of period

20,563

8,896

Cash and cash equivalents at end of period

$
17,809

$
27,428

Supplemental cash flow information:

Cash paid for income taxes, net of refunds

$
500

$
5,726

Cash paid for interest

19,472

6,826

~~(1)~~

~~For information related to the Acquisition, see Note 3 (Business Combination and Goodwill).~~

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Net (loss) income	$	(426,157	)	$	15,797	$	(441,214	)	$	29,452
Other comprehensive loss, net of tax:
Interest rate swap		(367	)		—		(8,938	)		—
Total other comprehensive loss		(367	)		—		(8,938	)		—
Comprehensive (loss) income	$	(426,524	)	$	15,797	$	(450,152	)	$	29,452

The accompanying notes are an integral part of the Consolidated ~~and Combined~~Financial Statements.

Cars.com Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net (loss) income	$	(441,214	)	$	29,452
Adjustments to reconcile Net (loss) income to Net cash provided by operating activities:
Depreciation		13,427			9,195
Amortization of intangible assets		73,334			67,959
Amortization of unfavorable contracts liability		(18,885	)		(18,900	)
Goodwill and intangible asset impairment		461,463			—
Stock-based compensation		5,258			7,495
Deferred income taxes		(52,741	)		7,137
Provision for doubtful accounts		3,844			3,451
Amortization of debt issuance costs		959			971
Other, net		411			762
Changes in operating assets and liabilities:
Accounts receivable		3,295			1,119
Prepaid expenses		1,672			66
Other current assets		9,992			330
Other assets		(16,517	)		602
Accounts payable		(5,363	)		(2,397	)
Accrued compensation		(2,233	)		(3,363	)
Other accrued liabilities		28,627			18,306
Other noncurrent liabilities		15,221			(1,104	)
Net cash provided by operating activities		80,550			121,081
Cash flows from investing activities:
Purchase of property and equipment		(15,409	)		(9,966	)
Payment for DI Acquisition, net		—			(157,153	)
Other, net		(599	)		—
Net cash used in investing activities		(16,008	)		(167,119	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		10,000			195,000
Payments of long-term debt		(39,688	)		(71,875	)
Stock-based compensation plans, net		(352	)		(477	)
Repurchases of common stock		(40,000	)		(76,681	)
Transactions with TEGNA, net		(192	)		(2,683	)
Net cash (used in) provided by financing activities		(70,232	)		43,284
Net decrease in cash and cash equivalents		(5,690	)		(2,754	)
Cash and cash equivalents at beginning of period		25,463			20,563
Cash and cash equivalents at end of period	$	19,773		$	17,809
Supplemental cash flow information:
Cash paid for income taxes, net of refunds	$	168		$	500
Cash paid for interest		22,413			19,472

The accompanying notes are an integral part of the Consolidated Financial Statements.

Cars.com Inc.

Notes to the Consolidated ~~and Combined~~ Financial Statements

(Unaudited)

NOTE 1. Description of Business, Company History and Summary of Significant Accounting Policies

Description of ~~Business and Company History~~. Business. Cars.com ~~(“the Company”~~Inc., (the “Company”) is a leading ~~two-sided~~ digital marketplace and solutions provider for the automotive ~~marketplace~~industry that ~~creates meaningful connections between consumers (individuals researching cars or looking~~connects car shoppers with sellers. Through a portfolio of brands including Cars.com, Dealer Inspire and DealerRater, in addition to ~~purchase~~Auto.com, PickupTrucks.com and NewCars.com, the Company empowers shoppers with the data, resources and digital tools needed to make informed buying decisions and seamlessly connect with automotive retailers. In a ~~car)~~rapidly changing market, the Company enables dealerships and ~~partners, dealer customers and automotive original equipment~~ manufacturers (“OEMs”)~~. While connecting advertising partners~~ with ~~in-market car shoppers~~innovative technical solutions and ~~providing~~ data-driven intelligence to better reach and influence ready-to-buy shoppers, increase inventory turn and gain market ~~share, the~~ share.

Company ~~empowers consumers with resources and information to assist them in making better informed buying decisions around The 4Ps of Automotive Marketing~~^TM: Product, Price, Place and Person. The Company has evolved into one of the largest digital automotive platforms, connecting tens of thousands of local dealers across the country with millions of consumers. Through trusted expert content, on-the-lot mobile features and intelligence, millions of new and used vehicle listings, a comprehensive set of pricing and research tools, and the largest database of consumer reviews in the industry, the Company believes Cars.com is transforming the car shopping experience.

History.In May 2017, the Company separated from its former parent company, TEGNA Inc. (“TEGNA”) by means of a spin-off of a newly formed company, Cars.com Inc., which now owns TEGNA’s former digital automotive marketplace business (the “Separation”). ~~The Company filed a Registration Statement on Form 10 relating to the Separation with the U.S. Securities and Exchange Commission (the “SEC”), which was declared effective on May 15, 2017.~~ On May 31, 2017, the Company made a $650.0 million cash transfer to TEGNA and TEGNA completed the Separation through a pro rata distribution to its stockholders of all of the outstanding shares of the Company’s common stock. Each holder of TEGNA common stock received one share of the Company’s common stock for every three shares of TEGNA common stock held on May 18, 2017, the record date for the distribution. TEGNA structured the distribution to be tax-free to its U.S. stockholders for U.S. federal income tax purposes. The Company’s common stock began trading “regular way” on the New York Stock Exchange on June 1, 2017.

In February 2018, the Company acquired all of the outstanding stock of Dealer Inspire Inc. ~~(“DI”)~~, an innovative technology leader providing progressive dealer websites, digital retailing and messaging platform products, and substantially all of the net assets of Launch Digital Marketing LLC, ~~(“LDM”~~a provider of digital marketing services, including paid, organic, social and creative services (collectively, the “DI Acquisition”). ~~For additional information, see Note 3 (Business Combination~~The post-DI Acquisition business related to Dealer Inspire, Inc. and ~~Goodwill)~~Launch Digital Marketing LLC is referred to collectively as “Dealer Inspire”.

Basis of Presentation. These accompanying unaudited interim Consolidated ~~and Combined~~ Financial Statements (“Consolidated Financial Statements”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the ~~SEC~~Securities and Exchange Commission (the “SEC”) for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These Consolidated ~~and Combined~~ Financial Statements should be read in conjunction with the audited Consolidated and Combined Financial Statements and the notes thereto for the year ended December 31, ~~2017,~~2018, which are included in the Company's Annual Report on Form 10-K dated ~~March 6, 2018~~February 28, 2019 (the “December 31, ~~2017 Consolidated and Combined~~2018 Financial Statements”).

The significant accounting policies used in preparing these Consolidated ~~and Combined~~ Financial Statements were applied on a basis consistent with those reflected in the December 31, ~~2017 Consolidated and Combined~~2018 Financial Statements. In the opinion of management, the Consolidated ~~and Combined~~ Financial Statements contain all adjustments (consisting of a normal, recurring nature) necessary to present fairly the Company's financial position, results of operations, cash flows and changes in stockholders' equity as of the dates and for the periods indicated. The unaudited results of operations for the three and nine months ended September 30, ~~2018~~2019 are not necessarily indicative of results that may be expected for the year ~~ended~~ending December 31, ~~2018.~~2019.

Use of Estimates. The preparation of the accompanying ~~unaudited interim~~ Consolidated ~~and Combined~~ Financial Statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the Consolidated ~~and Combined~~ Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates.

Principles of Consolidation. The accompanying ~~unaudited~~ Consolidated ~~and Combined~~ Financial Statements include the accounts of Cars.com Inc. and its 100% owned subsidiaries. All intercompany transactions and accounts are eliminated in consolidation. The accompanying unaudited Consolidated and Combined Financial Statements for the period prior to the Separation are derived from the historical accounting records of TEGNA and present its financial position, results of operations and cash flows as if the Company were a separate entity for the period prior to the Separation and include allocations of certain TEGNA corporate expenses, such as insurance and other general corporate overhead expenses. All significant intercompany transactions between either (i) the Company and TEGNA or (ii) the Company and TEGNA affiliates have been included within the Consolidated and Combined Financial Statements and are considered to be effectively settled through equity contributions or distributions at the time the transactions were recorded. The total net effect of these intercompany transactions is reflected in “Transactions with TEGNA, net” in the Consolidated and Combined Statements of Cash Flows as financing activities.

Cars.com Inc.

Notes to the Consolidated ~~and Combined~~ Financial Statements (continued)

(Unaudited)

Reclassifications. ~~Certain~~Historically, certain costs related to severance, transformation and other exit costs; costs associated with a stockholder activist campaign; transaction-related costs; and the write-off of long-lived assets were reflected in various operating expense line items in the Consolidated Statements of (Loss) Income. Beginning on January 1, 2019, these costs are reflected within General and administrative expenses. Therefore, certain prior year balances have been reclassified to conform to the current year ~~presentation. Cost~~presentation and are summarized in the table below (in thousands). There is no change to Operating (loss) income as a result of revenues and operations have been reclassified from the product support, technology and operations line item into a separate line item. Depreciation expense amounts have also been reclassified from the General and administrative line item into the amortization of intangible assets line item, which has been renamed Depreciation and amortization. There are no changes to total Operating expenses, Operating income or Net income.these reclassifications.

	Three Months Ended September 30, 2018
	As Reported		Adjustments			As Adjusted
Cost of revenue and operations	$	24,034	$	(226	)	$	23,808
Product and technology		15,918		(302	)		15,616
Marketing and sales		56,083		(258	)		55,825
General and administrative		14,345		786			15,131
Affiliate revenue share		4,097		—			4,097
Depreciation and amortization		26,504		—			26,504
Total operating expenses	$	140,981	$	—		$	140,981

	Nine Months Ended September 30, 2018
	As Reported		Adjustments			As Adjusted
Cost of revenue and operations	$	65,924	$	(1,631	)	$	64,293
Product and technology		56,202		(4,987	)		51,215
Marketing and sales		181,645		(1,477	)		180,168
General and administrative		45,609		8,095			53,704
Affiliate revenue share		11,193		—			11,193
Depreciation and amortization		77,154		—			77,154
Total operating expenses	$	437,727	$	—		$	437,727

NOTE 2. ~~Recent~~New Accounting Pronouncements

~~Revenue Recognition.~~ ~~The Financial~~Recently Issued Accounting ~~Standards Board (the “FASB”) amended the FASB Accounting Standards Codification (“ASC”) and created Topic 606,~~ ~~Revenue from Contracts with Customers~~ (“ASC 606”). Under ASC 606, revenue recognition occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. Pronouncements

Cloud Computing Arrangements.In addition, ASC 606 requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company’s primary source of revenue is the sale of online subscription advertising products and services, which will continue to be recognized ratably over the contract term as the service is provided to the customer. Effective January 1,August 2018, the Company adopted ASC 606 using the modified retrospective method. The adoption did not have a material impact on its Consolidated and Combined Financial Statements. For further information, see Note 10 (Revenues).

~~Financial Instruments – Equity Investments.~~ ~~In January 2016,~~ the FASB issued Accounting Standards Update (“ASU”) ~~No. 2016-01,~~ ~~Financial Instruments—Overall~~2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, ~~amending several elements surrounding~~aligning the ~~recognition and measurement of financial instruments and requiring equity investments (except those accounted~~requirements for ~~under~~capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the ~~equity method of accounting or those that result in consolidation) to be measured at fair value with changes in fair value recognized in net income. Effective~~requirements for capitalizing implementation costs for internal-use software. The new guidance is effective for the Company on January 1, ~~2018, the~~2020 and early adoption is permitted. The Company ~~adopted~~is currently evaluating this ~~ASU on a prospective basis. The adoption did not have a material~~new guidance and its impact on its Consolidated ~~and Combined~~ Financial Statements and related disclosures.

Financial Instruments – Credit Losses. In June 2016, the FASB issued ASU ~~No.~~ 2016-13, Financial Instruments—Credit Losses changing the way credit losses on accounts receivable are estimated. Under current U.S. GAAP, credit losses on trade accounts receivable are recognized once it is probable that such losses will occur. Under this new guidance, the Company will be required to estimate credit losses based on the expected amount of future collections which may result in earlier recognition of allowance for doubtful accounts. The new guidance is effective for the Company on January 1, 2020 and will be adopted using a modified retrospective approach. The Company is currently evaluating this new guidance and ~~does not expect it to have a material~~its impact on its Consolidated ~~and Combined~~ Financial Statements and related disclosures.

~~Stock-Based Compensation.~~ ~~In May 2017, the FASB issued ASU No. 2017-09,~~ ~~Compensation—Stock Compensation,~~ clarifying when changes to the terms or conditions of a stock-based payment award must be accounted for as modifications and allowing for certain changes to awards without accounting for them as modifications. Effective January 1, 2018, the Company adopted the ASU on a prospective basis. The adoption did not have a material impact on its Consolidated and Combined Financial Statements and related disclosures.

~~Definition of a Business.~~ ~~In January 2017, the FASB issued ASU 2017-01,~~ ~~Business Combinations~~, clarifying the definition of a business with the objective of adding guidance to assist companies with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. Effective January 1, 2018, the Company adopted this ASU on a prospective basis. The adoption did not have a material impact on its Consolidated and Combined Financial Statements and related disclosures.

~~Leases.~~ ~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases (Topic 842)~~ requiring lessees to recognize assets and liabilities on the Consolidated and Combined Balance Sheets for leases with lease terms of more than 12 months and to disclose additional quantitative and qualitative information about leasing arrangements. The new guidance is effective for the Company on January 1, 2019. The Company plans to utilize the package of practical expedients and to initially apply Topic 842 as of January 1, 2019 and recognize a cumulative-effect adjustment to the opening balance of retained earnings. Although the Company is currently evaluating the provisions of the ASU to determine its full impact on the Company’s Consolidated and Combined Financial Statements, the primary impact will be to record assets and liabilities for current operating leases, which are principally related to real estate.

~~Cloud Computing Arrangements.~~ ~~In August 2018, the FASB issued ASU 2018-15,~~ ~~Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract~~, aligning the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs for internal-use software. The new guidance is effective for the Company on January 1, 2020 and early adoption is permitted. The

~~Cars.com Inc.~~

~~Notes to the Consolidated and Combined Financial Statements (continued)~~

~~(Unaudited)~~

~~Company is currently evaluating this new guidance and does not expect it to have a material impact on its Consolidated and Combined Financial Statements and related disclosures.~~

~~NOTE 3. Business Combination and Goodwill~~

On February 21, 2018, the Company acquired all of the outstanding stock of DI, an innovative technology leader providing progressive dealer websites, digital retailing and messaging platform products, and substantially all of the net assets of LDM, a provider of digital marketing services, including paid, organic, social and creative services (collectively, the “Acquisition”). The Acquisition consists of proprietary solutions that are complementary extensions of the Company’s online marketplace platform and current suite of dealer solutions.

The Company expensed as incurred total acquisition costs of $4.9 million, of which $4.3 million was recorded during the nine months ended September 30, 2018. These costs were recorded in General and administrative in the Consolidated and Combined Statements of Income. In connection with the Acquisition, DI’s unvested equity awards were cash settled for a total of $5.7 million. The fair value of these awards was based on the price paid per common share to the owners of the acquired businesses and recognized immediately after the Acquisition as compensation expense in the Company’s Consolidated and Combined Statements of Income.

~~Purchase Price Allocation.~~ The fair values assigned to the tangible and intangible assets acquired and liabilities assumed were determined based on management’s estimates and assumptions, as well as other information compiled by management, including third party valuations that utilize customary valuation procedures and techniques, such as the income approach. These preliminary fair values are subject to change within the one-year measurement period. The Acquisition purchase price allocation is as follows (in thousands):

Acquisition-date
Fair Value

Cash consideration ⁽¹⁾

$
164,333

Contingent consideration ⁽²⁾

2,200

Cash settlement of DI's unvested equity awards ⁽³⁾

(5,700
)
Total consideration

$
160,833

Cash

$
1,480

Accounts receivable

11,400

Property and equipment

1,215

Other assets

320

Identified intangible assets ⁽⁴⁾

71,900

Total assets acquired

86,315

Accounts payable

(2,514
)
Deferred tax liability

(14,741
)
Other liabilities

(4,459
)
Total liabilities assumed

(21,714
)
Net identifiable assets

64,601

Goodwill

96,232

Total consideration

$
160,833

~~(1)~~

~~A reconciliation of cash consideration to Payment for Acquisition, net in the~~ ~~Consolidated and Combined Statements of Cash Flows is as follows (in thousands):~~

Cash consideration

$
164,333

Less: Cash settlement of DI's unvested equity awards ⁽³⁾

(5,700
)
Less: Cash acquired

(1,480
)
Payment for Acquisition, net

$
157,153

~~(2)~~

As ~~part~~ of the Acquisition, the Company may be required to pay up to an additional $15 million in cash consideration to the former owners of DI and LDM. The actual amount to be paid will be based on DI’s and LDM’s future performance

~~Cars.com Inc.~~

~~Notes to the Consolidated and Combined Financial Statements (continued)~~

~~(Unaudited)~~

related to certain revenue targets to be attained over a three-year performance period. The fair value was estimated utilizing the income approach valuation technique. The contingent consideration liability is recorded in Other noncurrent liabilities in the Consolidated and Combined Balance Sheets.

~~(3)~~

In ~~connection~~ with the Acquisition, DI’s unvested equity awards were cash settled. The fair value of these awards was based on the price paid per common share to the owners of the acquired businesses and recognized immediately after the Acquisition as compensation expense in the Company’s Consolidated and Combined Income Statements, as follows: $3.9 million in Product and technology, $1.0 million in Cost of revenues and operations, $0.5 million in Marketing and sales and $0.3 million in General and administrative.

~~(4)~~

~~Information~~ ~~regarding the identifiable intangible assets acquired is as follows:~~

Acquisition-Date
Fair Value
(in thousands)

Weighted-Average
Amortization Period
(in years)
Acquired software

$
39,500

4
Customer relationships

18,300

4
Trade names

14,100

10
Total

$
71,900

In addition to the total consideration of $160.8 million, the Company granted stock-based compensation awards, worth up to $25.5 million, to certain employees. These awards require continued employee service and are based on ~~DI’s and LDM’s future performance related to certain revenue targets to be attained over a three-year performance period. For further information, see Note 9 (Stock-Based Compensation).~~

~~Goodwill.~~ In connection with the Acquisition, the Company recorded goodwill in the amount of $96.2 million, which is primarily attributable to sales growth from existing and future technology, product offerings and customers and the value of the acquired assembled workforce. Of the total goodwill recorded in connection with the Acquisition, approximately $15.0 million is deductible for income tax purposes. The Company’s goodwill activity for the nine months ended September 30, 2018 is as follows (in thousands):

December 31, 2017

$
788,107

Additions

96,232

September 30, 2018

$
884,339

~~Pro forma Financial Information (unaudited).~~ The unaudited pro forma information presented below summarizes the combined revenues and net income of the Company and DI and LDM, as if the Acquisition had been completed on January 1, 2017 and gives effect to pro forma events that are factually supportable and directly attributable to the transaction. The unaudited pro forma results reflect adjustments for incremental intangible asset amortization based on the fair values of each identifiable intangible asset, interest expense on the borrowings under the revolving loan to fund the Acquisition, certain other compensation related costs including stock-based compensation and retention bonuses, and integration costs. Pro forma adjustments were tax-affected at the Company’s corporate blended statutory tax rate applicable during the respective periods presented.

This unaudited pro forma information is presented for informational purposes only and may not be indicative of the historical results of operations that would have been obtained if the Acquisition had taken place on January 1, 2017, nor the results that may be obtained in the future. The unaudited pro forma information does not reflect future synergies or other such costs or savings.

~~Selected unaudited pro forma information for the three months ended September 30, 2018 and 2017, respectively, is as follows (in thousands):~~

Three Months Ended September 30,

2018

2017

Revenues

$
169,312

$
171,025

Net income

16,540

17,342

Cars.com Inc.

Notes to the Consolidated ~~and Combined~~ Financial Statements (continued)

(Unaudited)

Recently Adopted Accounting Pronouncements

~~From~~

Leases. In February 2016, the ~~date~~FASB issued ASU 2016-02, Leases (ASU 2016-02) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under current U.S. GAAP. The new guidance requires a lessee to recognize a liability to make lease payments (the “lease liability”) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. The Company adopted ASU 2016-02 in the first quarter of 2019 utilizing the modified retrospective approach for leases existing at, or entered into after, the beginning of the ~~Acquisition,~~first quarter of 2019 and did not recast the comparative periods presented in the Consolidated Financial Statements upon adoption. The Company elected the ‘package of practical expedients’ and did not reassess its prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the short-term lease recognition exemption for all leases that qualify and did not recognize right-of-use assets or lease liabilities for those leases. The Company’s lease agreements are principally related to real estate. The adoption of ASU 2016-02 resulted in the recognition of operating lease assets of $18.2 million and $35.0 million in operating lease liabilities on its Consolidated Balance Sheets. The difference between the operating lease assets and the operating lease liabilities is primarily due to a lease incentive received in 2017 related to the 300 South Riverside Lease in Chicago, Illinois. There was no material impact to its Consolidated Statements of (Loss) Income and Consolidated Statements of Cash Flows. For further information, see Note 12 (Leases).

NOTE 3. Revenue

Revenue Summary. In the table below (in thousands), revenue is disaggregated by sales channel and major products and services. The Company only has 1 reportable segment; therefore, further disaggregation is not applicable at this time.

	Three Months Ended September 30,				Nine Months Ended September 30,
Sales channel	2019		2018		2019		2018
Direct	$	122,878	$	119,510	$	349,162	$	336,521
National advertising		20,161		28,107		59,752		82,155
Other		3,642		4,010		11,215		12,152
Retail		146,681		151,627		420,129		430,828
Wholesale		5,409		17,685		34,366		66,953
Total revenue	$	152,090	$	169,312	$	454,495	$	497,781

Major products and services
Subscription advertising and digital solutions	$	119,495	$	127,965	$	357,256	$	380,218
Display advertising		23,048		30,748		67,755		86,634
Pay per lead		6,720		7,933		21,267		22,968
Other		2,827		2,666		8,217		7,961
Total revenue	$	152,090	$	169,312	$	454,495	$	497,781

NOTE 4. Goodwill and Indefinite-lived Intangible Asset

The changes in the carrying amount of goodwill and indefinite-lived intangible asset are as follows (in thousands):

	December 31, 2018		Additions		Impairment			Other		September 30, 2019
Goodwill	$	884,449	$	—	$	(379,163	)	$	599	$	505,885
Indefinite-lived intangible asset		872,320		—		(82,300	)		—	$	790,020

Triggering Event and Impairment Assessment. The Company determined there was a triggering event, primarily caused by a sustained decrease in the Company's stock price after the completion of the strategic alternatives review process, and performed interim quantitative impairment tests as of September 1, 2019. The results of the goodwill and indefinite-lived intangible asset impairment tests indicated that the carrying values exceeded the estimated fair values and thus, the Company ~~included DI’s~~recorded an impairment of $379.2 million and ~~LDM’s~~$82.3 million related to its goodwill and indefinite-lived intangible asset, respectively.

Goodwill. Goodwill represents the excess of acquisition cost over the fair value of assets acquired, including identifiable intangible assets, net of liabilities assumed. As of September 30, 2019, the substantial majority of the Company’s goodwill is the result of

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

(Unaudited)

TEGNA’s 2014 acquisition of Cars.com and the remainder is the result the Company’s acquisition of DealerRater and the DI Acquisition.

Goodwill is tested for impairment on an annual basis as of November 1 or between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, such as in the quarter ended September 30, 2019. The level at which the Company tests goodwill for impairment requires the Company to determine whether the operations below the business segment level constitute a business for which discrete financial ~~results~~information is available and segment management regularly reviews the operating results. The Company has determined that it operates as a single reporting unit.

The process of estimating the fair value of goodwill is subjective and requires the Company to make estimates that may significantly impact the outcome of the analysis.

A qualitative assessment considers events and circumstances such as macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, as well as company specifications. If after performing this assessment, we conclude it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the Company performs a quantitative test.

Under a quantitative test, a goodwill impairment is identified by comparing the fair value of the reporting unit to the carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, goodwill is considered impaired and an impairment charge is recognized in an amount equal to the excess, not to exceed the carrying amount of goodwill.

The Company estimates the fair value of the reporting unit by utilizing an income approach which uses a discounted cash flow (“DCF”) analysis and the Company also considered a market-based valuation methodology using comparable public company trading values. Determining fair value requires the exercise of significant judgments, including the amount and timing of expected future cash flows, long-term growth rates, the discount rate and relevant comparable public company earnings multiples. The cash flows employed in the DCF analysis are based on the Company’s best estimate of future sales, earnings and cash flows after considering factors such as general market conditions and recent operating performance. The discount rate utilized in the DCF analysis is based on the reporting unit’s weighted average cost of capital, which takes into account the relative weights of each component of capital structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate to consider the risk inherent in future cash flows of the reporting unit.

Impairment assessment inherently involves management judgments regarding a number of assumptions described above. The reporting unit fair value also depends on the future strength of the U.S. economy. New and developing competition as well as technological change could also adversely affect future fair value estimates. Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of the recorded goodwill, differences in assumptions could have a material effect on the estimated fair values.

Indefinite-lived Intangible Asset. The Company’s indefinite-lived intangible asset relates to the Cars.com trade name and resulted from TEGNA’s 2014 acquisition of Cars.com. Intangible assets with indefinite lives are tested annually as of November 1, or more often if circumstances dictate, such as in the quarter ended September 30, 2019, for impairment and written down to fair value as required. The estimates of fair value are determined using the “relief from royalty” methodology, which is a variation of the income approach. The discount rate assumption is based on an assessment of the risk inherent in the projected future cash flows generated by the trade name intangible asset.

NOTE 5. Debt

As of September 30, 2019, the Company was in compliance with the covenants under its ~~Consolidated~~credit agreement.

Term Loan. As of September 30, 2019, the outstanding principal amount under the Term Loan was $396.6 million and ~~Combined Statements~~the interest rate in effect was 4.5%, including the impact of ~~Income for~~ the ~~three and~~interest rate swap discussed in Note 6 (Interest Rate Swap). During the nine months ended September 30, ~~2018. A summary of DI and LDM contributed revenues and net loss is as follows:~~ 2019, the Company made $19.7 million in mandatory quarterly Term Loan payments.

Three Months Ended
September 30, 2018 ⁽¹⁾

Nine Months Ended
September 30, 2018 ⁽²⁾

Revenues

$
15,800

$
35,999

Net loss

(1,983
)

(10,120
)

Revolving Loan. As of September 30, 2019, the outstanding borrowings under the Revolving Loan were $270.0 million and the interest rate in effect was 3.9%. During the nine months ended September 30, 2019, the Company made $10.0 million in voluntary Revolving Loan payments, net of borrowings. As of September 30, 2019, $180.0 million was available to borrow under the Revolving

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

(Unaudited)

Loan. The Company’s borrowings are limited by its total net leverage ratio, which is calculated in accordance with the credit agreement and was 3.4 to 1.0 as of September 30, 2019.

~~(1)~~

~~The net loss includes $4.1 million of~~ ~~incremental intangible asset amortization related to the Acquisition and $0.7 million in~~ ~~acquisition-related costs, both of which are on a pre-tax basis~~.

Fair Value. The Company’s debt is classified as Level 2 in the fair value hierarchy and the fair value is measured based on comparable trading prices, ratings, sectors, coupons and maturities of similar instruments. The carrying amount of the Company’s debt approximated the fair value as of September 30, 2019.

Subsequent Event. In October 2019, the Company entered into an amendment to its credit agreement to increase the total net leverage covenant during the remaining term of the credit agreement while preserving the favorable pricing structure from the original agreement. The amendment increased the Company’s maximum total net leverage ratio from 3.75x to 4.50x with incremental step downs through the maturities of the term loan and the revolving loan on May 31, 2022.

NOTE 6. Interest Rate Swap

The interest rate on borrowings under the Company’s Term Loan is floating and, therefore, subject to fluctuations. In order to manage the risk associated with changes in interest rates on its borrowing under the Term Loan, the Company entered into an interest rate swap (the “Swap”) effective December 31, 2018. Under the terms of the Swap, the Company is locked into a fixed rate of interest of 2.96% plus an applicable margin, as defined in the Company’s credit agreement, on a notional amount of $300 million. The Swap is designated as a cash flow hedge of interest rate risk. As of September 30, 2019, the fair value of the Swap was an unrealized loss of $11.9 million, of which $4.5 million and $7.4 million is recorded in Other accrued liabilities and Other noncurrent liabilities, respectively, on the Consolidated Balance Sheets. During the nine months ended September 30, 2019, $1.2 million was reclassified from Accumulated other comprehensive (loss) into Interest expense, net.

~~(2)~~

~~The net loss includes $9.9 million of incremental~~ ~~intangible asset amortization and~~ ~~$7.5 million of costs related to the Acquisition, primarily related to the cash settlement of DI’s unvested equity awards and~~ ~~acquisition-related costs,~~ ~~both of which are on a pre-tax basis.~~

NOTE 4.7. Unfavorable Contracts Liability

In connection with the October 2014 acquisition of Cars.com by TEGNA, the Company entered into affiliate agreements with the former owners of ~~Cars.com.~~Cars.com (Belo Corporation (“Belo”), The McClatchy Company (“McClatchy”), tronc, inc. (“tronc”), and the Washington Post). Under the affiliate agreements, affiliates have the exclusive right to sell and price Cars.com’s products ~~and services~~ in their local territories, paying Cars.com a wholesale rate for the Cars.com product. The Company charges the affiliates 60% of the corresponding Cars.com retail rate for products sold to affiliate dealers and recognizes revenue generated from these agreements as Wholesale ~~revenues~~revenue in the Consolidated ~~and Combined~~ Statements of (Loss) Income. The ~~unfavorable~~Unfavorable contracts liability was established as a result of these unfavorable affiliate agreements that the Company entered into as part of TEGNA’s acquisition of the Company in 2014. The Unfavorable contracts liability was being amortized on a straight-line basis over the five-year contract period.

Prior to the affiliate conversions discussed below, ~~over the annual contract period,~~ the Company recognized $25.2 million of Wholesale ~~revenues~~revenue with a corresponding reduction of the ~~unfavorable contracts liability. As of September 30, 2018 and December 31, 2017, the unfavorable~~Unfavorable contracts liability on an annual basis. As of December 31, 2018, the ~~Consolidated and Combined Balance Sheets~~Unfavorable contracts liability was ~~$25.2~~$18.9 million and ~~$44.1 million, respectively. Of the total unfavorable contracts liability balances, $25.2 million was~~is recorded in ~~current~~Current liabilities on the Consolidated ~~and Combined~~ Balance ~~Sheet~~Sheet. The Unfavorable contracts liability was fully amortized as of September 30, ~~2018 and December 31, 2017.~~

In January 2018, the Company announced it amended its affiliate agreement with The McClatchy Company (“McClatchy”) to convert McClatchy’s 22 affiliate markets into the Company’s direct sales channel in phases, on or before October 2018, prior to the original October 2019 affiliate agreement expiration date. As of October 1, 2018, the Company has completed the McClatchy affiliate market conversions.

In January 2018, the Company amended its affiliate agreement with tronc, Inc. (“tronc”) to convert tronc’s eight affiliate markets into the Company’s direct sales channel, effective February 1, 2018.

In July 2018, the Company amended its affiliate agreement with the Washington Post and agreed to convert the Washington, DC market into the Company’s direct sales channel, effective August 1, 2018, which was prior to the October 2019 expiration of the original agreement.2019.

The Company ~~now~~amended five of its affiliate agreements (Gannett, McClatchy, TEGNA, tronc, and the Washington Post) and as a result, has a direct relationship with ~~the~~these dealer customers and recognizes the revenue associated with converted ~~markets~~dealers as Retail ~~revenues,~~revenue, rather than Wholesale ~~revenues,~~revenue, in the Consolidated ~~and Combined~~ Statements of (Loss) Income. ~~In addition, as~~On October 1, 2019, the Belo affiliate agreement expired and the Company now directly serves all dealer customers.

As part of the ~~recent changes in the structure of~~amendments to the affiliate agreements, ~~the Company engaged~~ Gannett, McClatchy, TEGNA, tronc, and the Washington Post have agreed to perform certain marketing support and transition services through ~~December 31, 2019, March 31, 2020 and October 1, 2019, respectively.~~varying dates, the latest of which is June 29, 2020. The fees the Company pays associated with the amended affiliate agreements are recorded as Affiliate revenue share expense within Operating expenses in the Consolidated ~~and Combined~~ Statements of (Loss) Income.

The Company no longer records the amortization of the ~~unfavorable~~Unfavorable contracts liability associated with the converted markets to ~~revenues~~revenue as the Company ~~is recognizing~~now recognizes this direct revenue at retail rates. The amortization of the ~~unfavorable~~Unfavorable contracts liability is now recorded as a reduction of Affiliate revenue share expense within Operating expenses in the Consolidated ~~and Combined~~ Statements of (Loss) Income.

Therefore, during the nine months ended September 30, 2019, the Company recorded $17.5 million of unfavorable contracts liability amortization as a reduction to Affiliate revenue share expense, rather than Wholesale revenue, in the Consolidated Statements of

Cars.com Inc.

Notes to the Consolidated ~~and Combined~~ Financial Statements (continued)

(Unaudited)

Therefore, during the three and nine months ended September 30, 2018, the Company recorded $5.4 million and $12.9 million, respectively, as a reduction to Affiliate revenue share, rather than Wholesale revenues, in the Consolidated and Combined Statements of(Loss) Income. The reduction to Affiliate revenue share expense was ~~partially~~more than offset by the fees associated with the marketing and support and transition services.

The Company’s ~~unfavorable~~Unfavorable contracts liability activity for the nine months ended September 30, ~~2018~~2019 is as follows (in thousands):

Balance at December 31, 2017

$
44,085

Amortization into Wholesale revenues ⁽¹⁾

(5,992
)
Amortization into Affiliate revenue share ⁽²⁾

(12,908
)
Balance at September 30, 2018

$
25,185

Balance at December 31, 2018	$	18,885
Amortization into Wholesale revenue ⁽¹⁾		(1,358	)
Amortization into Affiliate revenue share expense ⁽²⁾		(17,527	)
Balance at September 30, 2019	$	—

(1)

~~(1)~~

Amount represents the amortization of the ~~unfavorable~~Unfavorable contracts liability related to the remaining affiliate ~~agreements~~agreement (Belo) into Wholesale ~~revenues~~revenue in the Consolidated ~~and Combined~~ Statements of (Loss) Income.

(2)

~~(2)~~

Amount represents the amortization of the ~~unfavorable~~Unfavorable contracts liability related to the converted Gannett, McClatchy, tronc and the Washington Post affiliate agreements into Affiliate revenue share ~~within Operating expenses~~expense in the Consolidated ~~and Combined~~ Statements of (Loss) Income.

~~NOTE 5. Debt~~

~~As of September 30, 2018, the Company is in compliance with the covenants under its various credit agreements.~~

~~Term Loan.~~ As of September 30, 2018, the outstanding principal amount under the term loan was $421.9 million and the interest rate in effect was 3.9%. During the nine months ended September 30, 2018, the Company made $16.9 million in quarterly term loan payments.

~~Revolving Loan.~~ As of September 30, 2018, the outstanding borrowings under the revolving loan was $285.0 million and the interest rate in effect was 3.8%. During the nine months ended September 30, 2018, the Company borrowed $165.0 million to fund the Acquisition and $30.0 million to fund share repurchases. The Company also made $55.0 million in voluntary revolving loan payments. As of September 30, 2018, the Company was permitted to borrow an additional $165.0 million under the revolving loan. The Company’s borrowings are limited by its net leverage ratio, which was 2.9 to 1.0 as of September 30, 2018.

~~Fair Value.~~ The Company’s debt is classified as Level 2 in the fair value hierarchy and the fair value is measured based on comparable trading prices, ratings, sectors, coupons and maturities of similar instruments. The carrying amount of the Company’s debt approximated the fair value as of September 30, 2018.

~~NOTE 6. Income Taxes~~

Prior to the Separation, Cars.com LLC was a multi-member LLC that was considered a partnership for U.S. income tax purposes. Multi-member LLCs are generally considered flow-through entities and therefore are not subject to federal, state or local income taxes. Effective with the Separation, the Company established a corporate legal entity structure that is subject to U.S. corporate income tax on a stand-alone basis post-Separation.

On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law. The new legislation contains several key tax provisions that impact the Company, including the reduction of the corporate income tax rate to 21% effective January 1, 2018. The Company continues to evaluate the impacts of the Tax Cuts and Jobs Act and will consider additional guidance from the U.S. Treasury Department, Internal Revenue Service or other standard-setting bodies. Further adjustments, if any, will be recorded by the Company during the measurement period in 2018 as permitted by SEC Staff Accounting Bulletin 118, ~~Income Tax Accounting Implications of the Tax Cuts and Jobs Act~~.

~~Cars.com Inc.~~

~~Notes to the Consolidated and Combined Financial Statements (continued)~~

~~(Unaudited)~~

~~A summary of income tax expense (dollars in thousands) and the effective tax rate for the three and nine months ended September 30, 2018 and 2017, respectively, is as follows:~~

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017

Income tax expense

$
5,594

$
13,019

$
10,373

$
15,782

Effective tax rate

26.2
%

38.3
%

26.0
%

17.8
%

Income tax expense was $5.6 million and $10.4 million for the three and nine months ended September 30, 2018, respectively, compared to $13.0 million and $15.8 million for the three and nine months ended September 30, 2017, respectively. The current period income tax expense reflects the financial activity for Cars.com and DMR Holdings, Inc. (“DealerRater”), the Company’s only subsidiary prior to the Acquisition, and the financial results of DI and LDM for the post-acquisition period of February 21, 2018 through September 30, 2018. The prior period income tax expense represents the financial activity of DealerRater and corporate income tax for the Company upon its Separation from TEGNA on June 1, 2017. The effective income tax rate, expressed by calculating the income tax expense as a percentage of income before income taxes, was 26.2% and 26.0% for the three and nine months ended September 30, 2018, respectively, and differed from the U.S. federal statutory rate primarily due to state income taxes, nondeductible transaction costs and the impact of the Tax Cuts and Jobs Act, partially offset by certain tax credits and excess tax benefits from stock-based compensation.

NOTE 7.8. Commitments and Contingencies

The Company and its subsidiaries are parties from time to time in legal and administrative proceedings involving matters incidental to its business. These matters, whether pending, threatened or unasserted, if decided adversely to the Company or settled, may result in liabilities material to its financial position, results of operations or cash flows. The Company records a liability when it believes that it is both probable that a loss will be incurred and the amount of loss can be reasonably estimated. The Company evaluates, at least quarterly, developments in its legal matters that could affect the amount of liability that has been previously accrued and makes adjustments as appropriate. Significant judgment is required to determine both the probability and the estimated amount.

NOTE 8.9. Stockholders’ Equity

In March 2018, the Company’s Board of Directors authorized a ~~share~~stock repurchase program to acquire up to $200 million of the Company’s common stock. The Company may repurchase ~~shares~~stock from time to time in open market transactions or through privately negotiated transactions in accordance with applicable federal securities laws. The timing and amounts of any purchases under the ~~share~~stock repurchase program will be based on market conditions and other factors including price. The repurchase program has a two-year duration, does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. The Company intends to fund the share repurchase program principally with cash from operations. During the nine months ended September 30, 2019 and 2018, the Company repurchased and subsequently retired 1.7 million shares for $40.0 million and 3.0 million shares for $77.2 ~~million.~~million, respectively.

NOTE 9.10. Stock-Based Compensation

Performance ~~Share~~Stock Units (“PSUs”). PSUs represent the right to receive unrestricted shares of the Company’s common stock at the time of vesting. The fair value of the PSUs is equal to the Company’s common stock price on the date of grant. During the nine months ended September 30, ~~2018,~~2019, the Company granted ~~780,000~~212,000 PSUs at a ~~weighted average~~weighted-average grant date fair value of ~~$27.41~~$23.99 per unit. ~~Of the total~~These PSUs ~~granted, 632,000 PSUs were granted to certain employees in connection with the Acquisition and~~ require continued employee service. The percentage of PSUs that shall vest will range from 0% to 150% of the number of PSUs granted based on DI’s and LDM’s future performance related to certain revenue targets over a three-year performance period. These PSUs are subject to graded vesting over three years. The remaining PSUs granted during the nine months ended September 30, 2018 require continued employee service. The percentage of these PSUs that shall vest will range from 0% to 200% of the number of PSUs granted based on the Company’s future performance related to certain revenue and adjusted earnings before interest, income taxes, depreciation and amortization targets over a ~~two-year~~three-year performance period. These PSUs are subject to ~~graded~~cliff vesting ~~over three years.~~at the end of the three-year performance period.

Restricted ~~Share~~Stock Units (“RSUs”). RSUs represent the right to receive unrestricted shares of the Company’s common stock at the time of vesting, subject to any restrictions as specified in the individual holder’s award agreement. ~~RSU’s~~RSUs are subject to graded vesting, generally ranging between one and four years and the fair value of the RSUs is equal to the Company’s common stock price on the

~~Cars.com Inc.~~

~~Notes to the Consolidated and Combined Financial Statements (continued)~~

~~(Unaudited)~~

date of grant. During the nine months ended September 30, ~~2018,~~2019, the Company granted ~~519,000~~572,000 RSUs at a weighted-average ~~grant-date~~grant date fair value of ~~$26.74~~$23.71 per unit.

~~Employee Stock Purchase Plan (“ESPP”).~~ During the nine months ended September 30, 2018, the Company issued 21,000 shares of the Company’s common stock in connection with the first ESPP offering period. In September 2018, the Company completed its second ESPP offering period and will issue 36,000 shares of the Company’s common stock during the fourth quarter of 2018.

~~NOTE 10. Revenues~~

The Company accounts for a customer arrangement when the Company and the customer have an approved contract that specifies the rights and obligations of each party and the payment terms, and the Company believes it is probable it will collect substantially all of the consideration to which it will be entitled in exchange for the services that will be provided to the customer. The Company allocates the contractual transaction price to each distinct performance obligation and recognizes revenue when it satisfies a performance obligation by providing a service to a customer. Revenue is generated through the Company’s direct sales force (Retail revenues) and affiliate sales channels (Wholesale revenues).

~~Online Subscription Advertising Products and Services Revenue.~~ The Company’s primary source of Retail and Wholesale revenues is through the sale of online subscription advertising products to dealer customers through varying levels of subscription packages. The Company’s subscription packages provide the dealer customer’s available new and used vehicle inventory to in-market shoppers on the Cars.com website. The subscription packages are generally a fixed price arrangement with a one-year contract term that is automatically renewed, typically on a month-to-month basis. The Company recognizes subscription package revenues ratably as the service is provided over the contract term. Online subscription advertising products and services revenue is recorded in Retail revenues and Wholesale revenues in the Consolidated and Combined Statements of Income.

The Company also offers its customers several add-on products to the subscription packages. Add-on products include premium advertising products that can be uniquely tailored to an individual dealer customer’s current needs. The Company does not sell add-on products separately from the subscription packages as the customer cannot benefit from add-on products on their own. Therefore, the subscription packages and add-on products are combined as a single performance obligation and the Company recognizes the related revenue ratably as the services are provided over the contract term.

As part of the acquisition of DI, the Company also provides services related to flexible, custom designed website platforms supporting highly personalized digital marketing campaigns, digital retailing and messaging platform products. The Company recognizes revenue related to these services ratably as the services are provided over the contract term. The related revenue is recorded in Retail revenues in the Consolidated and Combined Statements of Income.

The Company’s affiliates also sell online subscription advertising products to dealer customers and the Company earns Wholesale revenues through its affiliate agreements. Affiliates are assigned certain sales territories in which they sell the Company’s products. Under these agreements, the Company charges the affiliates 60% of the corresponding Cars.com retail rate for products sold to affiliate dealers. The Company recognizes Wholesale revenues ratably as the service is provided over the contract term. In situations where the Company’s direct sales force sells the Company’s products within an affiliate’s assigned territory, the Company pays the affiliate a revenue share which is classified as “Affiliate revenue share” in the Consolidated and Combined Statements of Income. Wholesale revenues also includes a portion of the amortization of the unfavorable contracts liability. For information related to the unfavorable contracts liability, see Note 4 (Unfavorable Contracts Liability).

~~Display Advertising Products and Services Revenue.~~ The Company also earns revenue through the sale of display advertising on the Company’s website to national advertisers, pursuant to transaction-based contracts, which are billed for impressions delivered or click-throughs on their advertisements. An impression is the display of an advertisement to an end-user on the website and is a measure of volume. A click-through occurs when an end-user clicks on an impression. The Company recognizes revenue as the impressions or click-throughs are delivered. If the impressions or click-throughs delivered are less than the amount invoiced to the customer, the difference is recorded as deferred revenue and recognized as revenue when earned. Display advertising products revenue is recorded in Retail revenues in the Consolidated and Combined Statements of Income.

As part of the acquisition of LDM, the Company also provides services related to customized digital marketing and customer acquisition services, including paid, organic, social and creative services. The Company recognizes revenue related to these services

~~Cars.com Inc.~~

~~Notes to the Consolidated and Combined Financial Statements (continued)~~

~~(Unaudited)~~

~~primarily at the point in time the service is provided. The related revenue is recorded in Retail revenues in the Consolidated and Combined Statements of Income.~~

~~Pay Per Lead Revenue.~~ The Company also sells certain leads, which are connections from consumers to dealer customers in the form of phone calls, emails and text messages, to dealer customers, OEMs and third-party resellers. The Company recognizes pay per lead revenue primarily on a per-lead basis at the point in time in which the lead has been delivered. Revenue related to pay per leads is recorded in Retail revenues and Wholesale revenues in the Consolidated and Combined Statements of Income.

~~Other Revenue.~~ Other revenue primarily includes revenues related to vehicle listing data sold to third-parties and peer-to-peer vehicle advertising. The Company recognizes Other revenue either ratably as the services are provided or at the point in time the services have been performed. Other revenue is recorded in Retail revenues in the Consolidated and Combined Statements of Income.

~~Revenue Summary~~. In the table below (in thousands), revenue is disaggregated by sales channel and major products and services. The Company only has one reportable segment; therefore, further disaggregation is not applicable at this time.

Three Months Ended September 30,

Nine Months Ended September 30,

Sales channel

2018

2017

2018

2017

Direct

$
119,510

$
82,504

$
336,521

$
249,412

National advertising

28,107

32,002

82,155

85,379

Other

4,010

4,319

12,152

11,989

Retail

151,627

118,825

430,828

346,780

Wholesale

17,685

41,074

66,953

122,917

Total revenues

$
169,312

$
159,899

$
497,781

$
469,697

Major products and services

Online subscription advertising

$
127,965

$
120,144

$
380,218

$
362,328

Display advertising

30,748

28,155

86,634

76,422

Pay per lead

7,933

9,141

22,968

23,952

Other

2,666

2,459

7,961

6,995

Total revenues

$
169,312

$
159,899

$
497,781

$
469,697

~~Practical Expedient and Exemption.~~ ~~The Company does not disclose~~ ~~the value of unsatisfied performance obligations for contracts with an original expected length of~~ ~~one~~ ~~year or less.~~

NOTE 11. (Loss) Earnings ~~per share~~Per Share

Basic (loss) earnings per share is calculated by dividing Net (loss) income by the weighted-average number of shares of common stock outstanding. Diluted (loss) earnings per share is similarly calculated, except that the calculation includes the dilutive effect of the

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

(Unaudited)

assumed issuance of shares under stock-based compensation plans, unless the inclusion of such shares would have an anti-dilutive impact. The computation of (Loss) earnings per share is as follows (in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,					Nine Months Ended September 30,
	2018		2017		2018		2017		2019			2018		2019			2018
Net income	$	15,797	$	20,988	$	29,452	$	72,685
Net (loss) income									$	(426,157	)	$	15,797	$	(441,214	)	$	29,452
Basic weighted-average common shares outstanding		69,652		71,699		70,900		71,693		66,769			69,652		67,043			70,900
Effect of dilutive stock-based compensation awards(1)		377		68		253		70		—			377		—			253
Diluted weighted-average common shares outstanding		70,029		71,767		71,153		71,763		66,769			70,029		67,043			71,153
Earnings per share, basic	$	0.23	$	0.29	$	0.42	$	1.01
Earnings per share, diluted		0.23		0.29		0.41		1.01
(Loss) earnings per share, basic									$	(6.38	)	$	0.23	$	(6.58	)	$	0.42
(Loss) earnings per share, diluted										(6.38	)		0.23		(6.58	)		0.41

(1)

If the Company had been in a net income position, 0.9 million and 0.8 million potential common shares would have been excluded from diluted weighted-average common shares outstanding for the three and nine months ended September 30, 2019, respectively, as their inclusion would have had an anti-dilutive effect.

NOTE 12. ~~Related Party Transactions~~Leases

~~As a result of the Separation, certain stock-based awards previously granted by TEGNA to its employees were converted into stock of both TEGNA and Cars.com.~~Leases. The Company is ~~responsible~~obligated as a lessee under certain non-cancelable operating leases for ~~any employee payroll taxes~~office space, and is also obligated to pay insurance, maintenance and other executory costs associated with the leases. As of September 30, 2019, the Company’s scheduled future minimum lease payments under operating leases having initial or remaining noncancelable lease terms of more than one year, were as follows (in thousands):

Remaining three months of 2019	$	1,255
2020		4,368
2021		4,014
2022		3,751
2023		3,850
Thereafter		35,117
Total minimum lease payments		52,355
Less: Imputed interest ⁽¹⁾		(18,155	)
Present value of the minimum lease payments		34,200
Less: Current maturities of lease obligations		(1,930	)
Long-term lease obligations	$	32,270

(1)

The Company’s lease agreements do not provide a readily determinable implicit rate nor is it available from the Company’s lessors. Therefore, in order to discount lease payments to present value, the Company has estimated its incremental borrowing rate based on information available at either the lease transition date (for those leases that commenced prior to January 1, 2019) or the lease commencement date (for those leases that commenced after January 1, 2019).

As of September 30, 2019, the Company’s operating lease assets, included in Investments and other assets, were $17.2 million and operating lease liabilities were $34.2 million, the current maturities of which is included in Other accrued liabilities and the long-term portion of which is included in Other noncurrent liabilities. The difference between the operating lease assets and the operating lease liabilities is primarily due to a lease incentive received in 2017 related to ~~awards settled~~the 300 South Riverside Lease in ~~Cars.com common stock~~Chicago, Illinois. Other information related to the Company’s operating leases for ~~which stock was withheld for payroll tax purposes. During~~ the three and nine months ended September 30, ~~2018, the~~2019 is as follows (in thousands, except percentage):

Income statement information:
	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
Operating lease cost	$	960		$	2,890
Short-term lease cost		298			1,018
Variable lease cost		(211	)		1,757
Total lease cost	$	1,047		$	5,665

Cars.com Inc.

Notes to the Consolidated ~~and Combined~~ Financial Statements (continued)

(Unaudited)

~~Company withheld $3.6 million, which is recorded as a reduction of Additional paid-in capital on the Consolidated and Combined Balance Sheets.~~

NOTE 13. Income Taxes

The ~~Company is party to~~effective income tax rate, expressed by calculating the income tax expense as a ~~commercial agreement with TEGNA, who~~percentage of Income before income tax, was ~~considered a related party through the Separation date of May 31, 2017. During~~6.1% and 6.6% for the three and nine months ended September 30, ~~2017, related party revenue generated with this agreement was zero~~2019, respectively. The effective tax rate differed from the statutory federal income tax rate of 21%, primarily due to the tax impact of the goodwill and ~~$3.4 million, respectively. Although TEGNA is no longer a related party, the commercial agreement with TEGNA is still effective after the Separation.~~intangible asset impairment.

Note About Forward-Looking Information

This ~~Quarterly Report on Form 10-Q~~report contains “forward-looking statements” within the meaning of the federal securities laws. All statements other than statements of historical facts are forward-looking statements. Forward-looking statements include information concerning our business strategies, strategic alternatives review process, plans and objectives, market potential, outlook, trends, future financial performance, planned operational and product improvements, potential strategic transactions, liquidity and other ~~matters.~~matters and involve known and unknown risks that are difficult to predict. As a result, our actual financial results, performance, achievements, strategic actions or prospects may differ materially from those expressed or implied by these forward-looking statements. These statements often include words such as “believe,” “expect,” “project,” “anticipate,” “intend,” “strategy,” “plan,” “estimate,” “target,” “seek,” “will,” “may,” “would,” “should,” “could,” “forecasts,” “mission,” “strive,” “more,” “goal” or similar expressions. Forward-looking statements are based on our current expectations, beliefs, strategies, estimates, projections and assumptions, based on our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we think are appropriate. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by the Company and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are expressed in good faith and we believe these judgments are reasonable. However, you should understand that these statements are not guarantees of strategic action, performance or results. Our actual results and strategic actions could differ materially from those expressed in the forward-looking statements. Given these uncertainties, forward-looking statements should not be relied on in making investment decisions. Comparisons of results between current and prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data. Whether or not any such forward-looking statement is in fact achieved will depend on future events, some of which are beyond our control.

Important factors that could cause actual results or events to differ materially from those anticipated include, among others:

~~Our business is subject to risks related to the larger automotive ecosystem, including consumer demand and other macroeconomic issues.~~

~~We participate in a highly competitive market, and pressure from existing and new companies may materially and adversely affect our business, results of operations and financial condition.~~

If we fail to maintain or increase our base of subscribing dealer customers that purchase listings on our sites or to increase our revenue from subscribing dealer customers, our business, results of operations and financial condition would be materially and adversely affected.

We compete with other consumer automotive websites and mobile applications and other digital content providers for share of automotive-related digital advertising spending and may be unable to maintain or grow our base of third-party advertising customers or increase our revenue from existing third-party advertisers.

•	Our business is subject to risks related to the larger automotive ecosystem, including consumer demand and other macroeconomic issues.

•	We participate in a highly competitive market, and pressure from existing and new competitors may materially and adversely affect our business, results of operations and financial condition.

•	If we fail to maintain or increase our base of subscribing dealers that purchase our solutions or to increase our revenue from subscribing dealers, our business, results of operations and financial condition would be materially and adversely affected.

•	We compete with other consumer automotive websites and mobile apps and other digital content providers for share of automotive-related digital advertising spend and may be unable to maintain or grow our base of advertising customers or increase our revenue from existing advertisers.

•	We may face difficulties in transitioning to a full-service solutions provider that helps automotive brands and dealers create enduring customer relationships.

•	We rely on third-party service providers for many aspects of our business, including automobile pricing and other data, and any failure to maintain these relationships could harm our business.

•	We rely on in-house content creation and development to drive traffic to the Cars.comsites and mobile ~~applications.~~apps.

We rely in part on Internet search engines and “mobile application download stores” to drive traffic to the Cars.com sites and mobile applications. If the Cars.com sites and mobile applications fail to appear prominently in these search results, traffic to the Cars.com sites and mobile applications would decline and our business would be materially and adversely affected.

~~The value of our assets or operations may be diminished if our information technology systems fail to perform adequately.~~

•

We rely in part on Internet search engines and ‘mobile app download stores’ to drive traffic to the Cars.com sites and mobile apps. If the Cars.com sites and mobile apps fail to appear prominently in these search results, traffic to the Cars.com sites and mobile apps would decline and our business would be materially and adversely affected.

•	The value of our assets or operations may be diminished if our information technology systems fail to perform adequately.

•	We rely on technology systems’ availability and ability to prevent unauthorized access. If our security and resiliency measures fail to prevent all incidents, it could result in damage to our reputation, ~~additional~~incur costs and create liabilities.

Our business depends on a strong Cars.com brand, and any failure to maintain, protect and enhance our brand could hurt our ability to retain or expand our base of consumers, dealer customers and advertisers, and our ability to increase the frequency with which consumers, dealer customers and advertisers use our services.

~~We cannot assure you that we will be able to continue to successfully develop and launch new products or grow our complementary product offerings.~~

~~Our business is dependent on keeping pace with advances in technology. If we are unable to keep pace with advances in technology, consumers may stop using our services and our revenues will decrease.~~

~~If we do not adapt to automated buying strategies quickly, our display advertising revenue could be adversely affected.~~

If our mobile applications do not continue to meet consumer demands or we are unable to successfully monetize our mobile advertising solutions, our business, results of operations and financial condition may be materially and adversely affected.

Dealer closures or consolidation among dealer customers or Original Equipment Manufacturers ("OEMs”) could reduce demand for, and the pricing of, our marketing solutions and advertising on our sites and mobile applications, thereby leading to decreased earnings.

•

Our business depends on a strong Cars.com brand, and any failure to maintain, protect and enhance our brand could hurt our ability to retain or expand our base of consumers, customers and advertisers, and our ability to increase the frequency with which consumers, dealers and advertisers use our services.

•	We cannot assure you that we will be able to continue to successfully develop and launch new products or grow our complementary product offerings.

•	Our business is dependent on keeping pace with advances in technology. If we are unable to keep pace with advances in technology, consumers may stop using our services and our revenue will decrease.

•	If we do not adapt to automated buying strategies quickly, our display advertising revenue could be adversely affected.

•	If our mobile apps do not continue to meet consumer demands or we are unable to successfully monetize our mobile advertising solutions, our business, results of operations and financial condition may be materially and adversely affected.

•	Dealer closures or consolidation among dealers or OEMs could reduce demand for, and the pricing of, our marketing solutions and advertising on our sites and mobile apps, thereby leading to decreased earnings.

•	If growth in the online and mobile automotive advertising market stagnates or declines, our business, results of operations and financial condition could be materially and adversely affected.

•

Uncertainty exists in the application of various laws and regulations to our business, including tax laws such as the Tax Cuts and Jobs Act. New laws or regulations applicable to our business, or the expansion or interpretation of existing laws and regulations to apply to our business, could subject us to licensing requirements, claims, judgments and remedies, including sales and use taxes, other monetary liabilities and limitations on our business practices, and could increase administrative costs.

•

~~Our~~Strategic acquisitions, investments and partnerships could pose various risks, increase our leverage, dilute existing stockholders and significantly impact our ability to ~~generate wholesale revenues depends, in part, on the performance of third parties who sell~~expand our ~~solutions pursuant to affiliate agreements.~~overall profitability.

~~Strategic acquisitions, investments and partnerships could pose various risks, increase our leverage, dilute existing~~ ~~stockholders~~ and significantly impact our ability to expand our overall profitability. In addition, acquisitions may divert management’s attention from the operation of our core business and we may be unable to successfully implement effective cost controls or achieve expected synergies.

~~The value of our existing intangible assets may become impaired, depending upon future operating results.~~

~~Adverse results from litigation or governmental investigations could impact our business practices and operating results.~~

Misappropriation or infringement of our intellectual property and proprietary rights, enforcement actions to protect our intellectual property and claims from third parties relating to intellectual property could materially and adversely affect our business, results of operations and financial condition.

~~If we expand into new geographic markets, we may be prevented from using our brands in such markets.~~

•	The value of our existing intangible assets may become impaired, depending upon future operating results.

•	Adverse results from litigation or governmental investigations could impact our business practices and operating results.

•

•	If we expand into new geographic markets, we may be prevented from using our brands in such markets.

•	Our ability to operate effectively could be impaired if we fail to attract and retain our key employees.

~~Seasonality may cause fluctuations in our revenue and operating results.~~

~~Our business could be negatively affected as a result of actions of activist stockholders, and such activism could impact the trading value of our common stock.~~

~~We have a limited history of operating as an independent company.~~

•	Seasonality may cause fluctuations in our revenue and operating results.

•

~~There~~Our business could be ~~significant liability if~~negatively affected as a result of actions of activist stockholders, and such activism could impact the ~~spin-off~~trading value of ~~Cars.com Inc. from TEGNA, Inc. (the “Separation”) is determined to be a taxable transaction.~~our common stock.

~~We may be unable to engage in certain corporate transactions after the Separation, because such transactions could jeopardize the intended tax-free status of the distribution.~~

~~We may not achieve some or all of the expected benefits of the Separation, and the Separation may materially and adversely affect our business.~~

•	Our historical and pro forma financial information for periods prior to the Separation from our former parent may not be a reliable indicator of our future results.

•

~~Fulfilling~~Our debt agreements contain restrictions that may limit our ~~obligations incidental to being a public company, including with respect to the requirements of and related rules under the Sarbanes-Oxley Act, will place significant demands on~~flexibility in operating our ~~management, administrative and operational resources, including accounting and information technology resources.~~business.

~~Our debt agreements contain restrictions that may limit our flexibility in operating our business.~~

•	Increases in interest rates could increase interest payable under our variable rate indebtedness.

~~We do not expect to pay any cash dividends for the foreseeable future.~~

~~Your percentage of ownership in Cars.com may be diluted in the future.~~

We are an “emerging growth company,” and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

Certain provisions of our certificate of incorporation, by-laws, tax matters agreement, separation and distribution agreement, employee matters agreement, transition services agreement, and Delaware law may discourage takeovers and limit our ability to use, acquire, or develop certain competing businesses.

•	Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 may adversely affect the market value of our current or future debt obligations, including our long-term debt instruments and our bank credit facilities.

•	We do not expect to pay any cash dividends for the foreseeable future.

•	Your percentage of ownership in the Company may be diluted in the future.

•

Our amended and restated certificate of incorporation designates the state courts of the State of Delaware, or, if no state court located in the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against us and our directors and officers.

For a detailed discussion of many of these risks and uncertainties, see ~~Part~~“Part I, Item ~~1A— “Risk Factors,”~~1A., Risk Factors” and “Part II, Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, ~~2017, as filed~~2018, our subsequent Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K and our other filings with the Securities and Exchange Commission (“SEC”), available on ~~March 6, 2018.~~our website at investor.cars.com or via EDGAR at www.sec.gov. All forward-looking statements ~~made~~contained in this ~~this Quarterly Report on Form 10-Q~~report are qualified by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties. The forward-looking statements contained ~~herein~~in this report are based only on information currently available to us and speak only as of the date of this ~~this Quarterly Report on Form 10-Q.~~report. We undertake no obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or

changes in future operating results over time

or otherwise. The forward-looking statements in this ~~Quarterly Report on Form 10-Q~~report are intended to be subject to the safe harbor protection provided by the ~~Federal~~federal securities laws.

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

The following discussion and analysis of our business, financial condition, results of operations and quantitative and qualitative disclosures should be read in conjunction with our Consolidated ~~and Combined~~ Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis also contains forward-looking statements and should ~~also~~ be read in conjunction with the disclosures and information contained in “Note About Forward-Looking Information” in this Quarterly Report on Form 10-Q. The financial information discussed below and included elsewhere in this Quarterly Report on Form 10-Q may not necessarily reflect what our financial condition, results of operations and cash flows ~~would have been had we been a stand-alone company during the applicable periods presented or what our financial condition, results of operations and cash flows~~ may be in the future.

References in this discussion and analysis to ~~“Cars.com,”~~ “we,” “us,” “our” and similar terms refer to Cars.com Inc. and its subsidiaries, collectively, unless the context indicates otherwise.

Business Overview

We are a leading ~~two-sided~~ digital marketplace and solutions provider for the automotive ~~marketplace~~industry that ~~creates meaningful connections between consumers (individuals researching cars or looking~~connects car shoppers with sellers. Through a portfolio of brands including Cars.com, Dealer Inspire and DealerRater, in addition to ~~purchase~~Auto.com, PickupTrucks.com and NewCars.com, we empower shoppers with the data, resources and digital tools needed to make informed buying decisions and seamlessly connect with automotive retailers. In a ~~car)~~rapidly changing market, we enable dealerships and ~~partners, dealer customers and automotive original equipment~~ manufacturers (“OEMs”)~~. While connecting advertising partners~~ with ~~in-market car shoppers~~innovative technical solutions and ~~providing~~ data-driven intelligence to better reach and influence ready-to-buy shoppers, increase inventory turn and gain market ~~share, we empower consumers with resources and information to assist them in making better- informed buying decisions around The 4Ps of Automotive Marketing~~^TM: Product, Price, Place and Person. We have evolved into one of the largest digital automotive platforms, connecting tens of thousands of local dealers across the country with millions of consumers. Through trusted expert content, on-the-lot mobile features and intelligence, millions of new and used vehicle listings, a comprehensive set of pricing and research tools, and the largest database of consumer reviews in the industry, we believe Cars.com is transforming the car shopping experience.share.

In May 2017, we separated from our former parent company, TEGNA Inc. (“TEGNA”) by means of a spin-off of a newly formed company, Cars.com Inc., which now owns TEGNA’s former digital automotive marketplace business (the “Separation”). We filed a Registration Statement on Form 10 relating to the Separation with the U.S. Securities and Exchange Commission (the “SEC”), which was declared effective on May 15, 2017. On May 31, 2017, we made a $650.0 million cash transfer to TEGNA and TEGNA completed the Separation through a pro rata distribution to its stockholders of all of the outstanding shares of our common stock. Each holder of TEGNA common stock received one share of our common stock for every three shares of TEGNA common stock held on May 18, 2017, the record date for the distribution. TEGNA structured the distribution to be tax-free to its U.S. stockholders for U.S. federal income tax purposes. Our common stock began trading “regular way” on the New York Stock Exchange on June 1, 2017.

In the time since we became an independent company, we have developed and commenced a new, ongoing multi-year business strategy to better support sustainable long-term growth and market leadership. We believe we are making strides to transform from a traditional marketplace to a full-service marketing and technology solutions provider that is well positioned to lead in the online automotive retail sector. In 2018 and 2019, we accomplished many product, technology, sales and go-to-market changes designed to underpin a strategy aimed at achieving sustainable market leadership during an ever-changing environment in the automobile and automotive-advertising sectors.

In conjunction with our digital solutions strategy, in February 2018 we acquired all of the outstanding stock of Dealer Inspire, Inc. ~~(“DI”)~~ and substantially all of the net assets of Launch Digital Marketing LLC ~~(“LDM”) (collectively, “the~~(the “DI Acquisition”). The post-DI Acquisition business related to Dealer Inspire, Inc. and Launch Digital Marketing LLC is referred to collectively as “Dealer Inspire”. The results of operations for the three and nine months ended September 30, 2018 includes Dealer Inspire’s financial results for the post-DI Acquisition period of February 21, 2018 through September 30, 2018.

Overview of Results

(in thousands, except percentages)	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue	$	152,090		$	169,312		$	454,495		$	497,781
Net (loss) income ⁽¹⁾		(426,157	)		15,797			(441,214	)		29,452
Retail revenue as % of total revenue		96	%		90	%		92	%		87	%
Wholesale revenue as % of total revenue		4	%		10	%		8	%		13	%

(1)	The net loss for the three and nine months ended September 30, 2019 is primarily attributed to the $431.3 million (net of tax of $30.2 million) goodwill and indefinite-lived intangible asset impairment. In addition, the net loss in each period was impacted by the following costs (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Severance, transformation and other exit costs	$	2,114	$	175	$	9,625	$	1,272
Costs associated with stockholder activist campaign		905		2,869		8,825		7,766
Transaction-related costs ⁽¹⁾		—		897		4,623		12,030
Total	$	3,019	$	3,941	$	23,073	$	21,068

(1)

Transaction-related costs are certain expense items resulting from actual or potential transactions such as business combinations, mergers, acquisitions, dispositions, spin-offs, financing transactions, and other strategic transactions, including, without limitation, (a) transaction-related bonuses and (b) expenses for advisors and representatives such as investment bankers, consultants, attorneys and accounting firms. Transaction-related costs may also include, without limitation, transition and integration costs such as retention bonuses and acquisition-related milestone payments to acquired employees, in addition to consulting, compensation and other incremental costs associated with integration projects.

2019 Highlights

Increases in Traffic.Traffic is critical to our business. Traffic to the Cars.com network of websites and mobile apps provides value to our advertisers in terms of audience, awareness, consideration and conversion. Traffic provides an indication of our consumer reach. Although our consumer reach does not directly result in revenue, we believe our ability to reach in-market car shoppers is attractive to our dealers and national advertisers. We have been diligently focused on growing our audience, the fundamental deliverable of any marketplace business.

In the third quarter of 2019, we had record organic Traffic growth. During this period, we achieved 27% growth in Traffic and 22% growth in Average Monthly Unique Visitors. Driven by our product innovations and investments in and efficiencies gained in search engine optimization, brand awareness and paid channels, we have experienced consistent year-over-year Traffic growth since January 2018, and in August we recorded the highest-trafficked month in our history. In addition, we have been taking share of unique visitors from the competition throughout 2019.

New OEM Agreement. During the third quarter of 2019, we were selected as a preferred website provider to General Motors (“GM”). This allows us to begin selling our website solutions to more than 4,100 GM dealers. This program is non-exclusive and provides GM dealers a choice in provider for the first time in 15 years. Currently in the dealer enrollment phase, we expect to launch and begin recognizing revenue from GM website customers in Q1 2020. This new agreement provides us with the opportunity to substantially increase our current website customer base, which was approximately 3,000 as of September 30, 2019.

Affiliate Conversions. As of October 1, we have successfully converted all affiliates to our direct control. We amended five of our affiliate agreements (Gannett, the McClatchy Company (“McClatchy”), TEGNA, tronc, Inc. (“tronc”), and the Washington Post). The Belo affiliate agreement expired on October 1, 2019. We now have a direct relationship with all dealer customers and recognize the revenue associated with converted dealers as Retail revenue, rather than Wholesale revenue, in the Consolidated Statements of (Loss) Income. For ~~additional~~ information seerelated to the Unfavorable contracts liability, see Note ~~3 (Business Combination and Goodwill)~~7 (Unfavorable Contracts Liability) to the accompanying Consolidated ~~and Combined~~ Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

~~Overview~~Credit Agreement Amendment. In October 2019, we entered into an amendment to our credit agreement to increase the total net leverage covenant during the remaining term of ~~Results~~the credit agreement while preserving the favorable pricing structure from the original agreement. The amendment increases our maximum total net leverage ratio from 3.75x to 4.50x with incremental step downs through maturity on May 31, 2022.

Three Months Ended September 30,

Nine Months Ended September 30,

In thousands (except percentages)

2018

2017

2018

2017

Revenues

$
169,312

$
159,899

$
497,781

$
469,697

Net income

15,797

20,988

29,452

72,685

Retail revenues as % of total revenues

90
%

74
%

87
%

74
%
Wholesale revenues as % of total revenues

10
%

26
%

13
%

26
%

~~2018 Highlights~~

~~Affiliate Conversions.~~ ~~During~~Completion of Strategic Alternatives Review. In August 2019, we announced the ~~nine months ended September 30, 2018, we amended our affiliate agreements with McClatchy, tronc and the Washington Post to convert several markets prior to the expiration dates~~conclusion of the ~~original affiliate agreements. In addition,~~strategic alternatives review process first announced on ~~October 1, 2018, we converted the remaining McClatchy markets~~January 16, 2019. The strategic alternatives review process was public, comprehensive and ~~currently serve 84% of our dealer customers through our direct sales force.~~deliberate, lasting ten months. After extensive negotiations and discussions, no actionable proposals for a sale were available to us. As a result, our board of ~~these early conversions, we successfully migrated over 3,200 dealer customers from~~directors unanimously concluded that the best interests of our ~~affiliate sales channel into our direct sales channel. We will continue~~stockholders are served by continuing to focus on ~~pursuing transactions~~the execution of our strategic plan and opportunities to ~~facilitate early conversions~~drive growth and stockholder returns as an independent public company. We remain open to all potential value-creating opportunities.

Technology Transformation. In February 2019, we announced a restructuring of the ~~remaining affiliate markets.~~product and technology teams (the “Technology Transformation”). This restructuring is primarily focused on shifting our technology spend towards innovation to improve our speed of product delivery, to enable integration across current and future systems, and to migrate our systems to the cloud. In connection with the Technology Transformation, we have aligned our product and technology teams with our long-term growth strategy to expand beyond listings to a digital solutions marketplace. As part of this process, we have streamlined the existing teams as we modernize our technology platform and invest in a more efficient cloud-based infrastructure focused on machine learning, product innovation and growth. Further, we expect to achieve cost efficiencies upon completion of the Technology Transformation.

Sales Transformation. In December 2018, we restructured the sales team (the “Sales Transformation”), with the primary goal of better serving our customers. We ~~now record~~reorganized the ~~revenues associated with converted markets~~sales force into teams designed to provide the full range of enhanced services to current customers and a more tailored structure to win new customers. These changes reflect the expansion of our business beyond car

listings to include value-added digital solutions such as ~~Retail revenues, rather than Wholesale revenues in~~innovations from Dealer Inspire and DealerRater. The Sales Transformation also reflects a realignment of territories following the ~~Consolidated and Combined Statements~~conversion of ~~Income. For additional information on~~the majority of the affiliate market conversions, see Note 4 (Unfavorable Contracts Liability) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.agreements.

•

~~Acquisition of DI and LDM.~~ In February 2018, we completed the acquisition of privately-held DI and LDM. DI is an innovative technology leader that has been rapidly increasing its market share by providing progressive dealer websites, digital retailing and messaging platform products. LDM is a provider of digital marketing services, including paid, organic, social and creative services. The Acquisition aligns with our strategy of integrating new capabilities and additional talent to accelerate organic growth, strengthen the retail experience, deepen dealer connections and improve clarity of attribution while generating additional revenues and cash flow and ultimately, enhancing stockholder value. Our results of operations for the nine months ended September 30, 2018 include DI and LDM financial results for the post-acquisition period of February 21, 2018 through September 30, 2018.

~~Share Repurchase Program.~~In March 2018, our Board of Directors authorized a share repurchase program to acquire up to $200 million of our common stock. We may repurchase shares from time to time in open market transactions or through privately negotiated transactions in accordance with applicable federal securities laws. We intend to fund the share repurchase program principally with cash from operations. During the nine months ended September 30, 2018, the Company repurchased and subsequently retired 3.0 million shares for $77.2 million.

Key Operating Metrics

We regularly review a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make operating and strategic decisions. ~~We also review other key metrics including: unique visitors, average revenue per dealer and dealer customer and consumer satisfaction statistics.~~

Information regarding Traffic and Average ~~Vehicle Listings~~Monthly Unique Visitors is as follows:

	Three Months Ended September 30,							Nine Months Ended September 30,							Three Months Ended September 30,							Nine Months Ended September 30,
	2018		2017		% Change			2018		2017		% Change			2019		2018		% Change			2019		2018		% Change
Traffic (Visits)		113,751,000		101,698,000		12	%		340,121,000		311,612,000		9	%		144,378,000		113,751,000		27	%		407,477,000		340,121,000		20	%
Average Vehicle Listings		4,655,000		4,869,000		(4	)%		4,785,000		4,956,000		(3	)%
Average Monthly Unique Visitors																23,080,000		18,926,000		22	%		22,349,000		19,095,000		17	%

Information regarding our Dealer Customers and Direct Monthly Average Revenue Per Dealer is as follows:


	September 30, 2019		September 30, 2018		% Change			June 30, 2019		% Change
Dealer Customers		18,635		20,407		(9	)%		18,891		(1	)%
Direct Monthly Average Revenue Per Dealer ⁽¹⁾	$	2,174	$	2,116		3	%	$	2,163		1	%

September 30, 2018

June 30, 2018

% Change

September 30, 2017

% Change

Direct

17,011

16,592

3
%

13,963

22
%

Affiliate

3,396

4,128

(18
)%

7,344

(54
)%

Total

20,407

20,720

(2
)%

21,307

(4
)%

(1)	Beginning in the first quarter of 2019, this key operating metric includes revenue from dealer websites and related digital solutions.

Traffic (Visits). Traffic ~~and our ability to generate traffic are key~~is critical to our business. ~~Tracking our traffic performance is a critical measure.~~ Traffic to the Cars.com network of websites and mobile apps provides value to our advertisers in terms of audience, awareness, consideration and conversion. In addition to tracking traffic volume and sources, we monitor activity on our properties, allowing us to innovate and refine our consumer-facing offerings. Traffic is ~~an internal metric representing~~defined as the number of visits to Cars.com desktop and mobile properties ~~(web browser~~(responsive sites and mobile apps)., using Adobe Analytics. Visits refers to the number of times visitors accessed Cars.com properties during the period, no matter how many visitors make up those visits. ~~We measure traffic using Adobe Analytics.~~ Traffic provides an indication of our consumer reach. Although our consumer reach does not directly result in revenue, we believe our ability to reach ~~diverse demographic audiences~~in-market car shoppers is attractive to our dealers and national advertisers.

The growth in Traffic ~~increases were primarily~~was driven by ~~an increase~~our product innovations and investments in and efficiencies gained in search engine optimization, ~~and planned strategic marketing investments aimed at consumer acquisition, engagement and~~ brand awareness ~~amongst auto shopping audiences~~and paid channels. ~~Mobile~~For the three and nine months ended September 30, 2019, mobile traffic accounted for 73% and 72% of total Traffic, respectively. For the three and nine months ended September 30, 2018, mobile traffic accounted for 68% and 66% of total Traffic, ~~for the three and nine months ended September 30, 2018,~~ respectively.

Average ~~monthly~~Monthly Unique Visitors (“UVs”). Growth in unique visitors ~~increased 10%~~ and ~~9% for~~consumer traffic to our network of websites and mobile apps increases the ~~three~~number of impressions, clicks, leads and ~~nine months ended September 30, 2018, respectively.~~other events we can monetize to generate revenue. We define UVs in a given month as the number of distinct visitors that engage with our platform during that month. Visitors are identified when a user first visits an individual Cars.com property on an individual device/browser combination, or installs one of our mobile apps on an individual device. If an individual accesses more than one of our web properties or apps or uses more than one device or browser, each of those unique property/browser/app/device combinations counts towards the number of UVs. We measure UVs using Adobe Analytics.

The growth in UVs was driven by our product innovations and investments in and efficiencies gained in search engine optimization, brand awareness and paid channels.

Dealer Customers. Our value to consumers tracks to our ability to showcase the inventory of our dealer and OEM customers. The larger the advertiser base, the more inventory and options that are available for consumers to review. Dealer Customers ~~represents the car~~represent dealerships using our products as of the end of each reporting period. Each physical or virtual dealership location is counted separately, whether it is a single-location proprietorship or part of a large consolidated dealer group. Multi-franchise dealerships at a single location are counted as one dealer. ~~Beginning~~ ~~June~~ ~~30, 2018, this key operating metric includes DI and LDM customers.~~

Total Dealer Customers declined 2%1% from June 30, ~~2018. Direct dealer~~2019. Dealer Customers decreased, primarily due to a decline in direct marketplace customers, ~~increased 419, resulting from dealer~~as well as the conversion of affiliate customers, ~~converted from affiliate markets,~~ partially offset by ~~higher cancellations~~growth in ~~previously converted affiliate markets and lower overall sales.~~digital solutions customers.

Total Dealer Customers declined 4%9% from September 30, ~~2017.~~2018. Dealer Customers decreased, primarily due to higher cancellations of marketplace customers, partially offset by growth in digital solutions customers.

Average Revenue Per Dealer (“ARPD”). We believe that our ability to grow ARPD is an indicator of the value proposition of our products. We define ARPD as Direct ~~dealer customers increased 3,048, resulting~~retail revenue during the period divided by the average number of direct Dealer Customers during the same period. Beginning the first quarter of 2019, this key operating metric includes revenue from dealer ~~customers~~websites and related digital solutions. ARPD prior to the first quarter of 2019 has not been recast to include Dealer Inspire as it would be impracticable to do so.

ARPD increased 1% from June 30, 2019, primarily driven by higher rates in converted affiliate markets.

ARPD increased 3% from ~~affiliate markets and~~September 30, 2018, primarily driven by the addition of ~~incremental customers~~dealer websites and related digital solutions, as 2018 ARPD did not include dealer websites and related digital solutions. ARPD excluding revenue from dealer websites and related digital solutions was $2,069, down 2% from the ~~Acquisition, partially offset by higher cancellations in previously converted affiliate markets and due to the sunsetting of a lower priced, legacy DealerRater baseline product.~~

~~Average Vehicle Listings.~~ Our value to consumers tracks to our ability to showcase the inventory of our dealer and OEM customers. The more vehicle listings that are available for consumers to review, the more traffic we attract and the higher the consumer engagement. Average Vehicle Listings represents the daily average of vehicles listed for sale on Cars.com properties. The daily average is calculated on a monthly basis and averaged for the reporting period.

Declines in Average Vehicle Listings for the three and nine months ended September 30, 2018 were due to fewer new car listings, primarily related to fewer dealer customers. For the three and nine months ended September 30, 2018, used car listings were flat and increased 3%, respectively.prior year.

Factors Affecting Our ~~Performance~~

Performance. Our ~~continued~~business is impacted by the ever-changing larger automotive environment, including consumer demand and other macroeconomic factors, and changes related to automotive digital advertising solutions. We have observed softness in new car sales in the United States and reduced dealer profitability, which has impacted OEMs’ and dealerships’ willingness to increase spend with automotive marketplaces like Cars.com. Our success will depend in part on our ability to ~~address and successfully manage challenges, both specific~~continue to transform our business toward a multi-faceted suite of digital solutions that complement our media offerings, and our continued integration of Dealer Inspire will be an important driver of our success. We are adapting our go-to-market sales and technology infrastructure, as described in the ~~digital advertising marketplace generally. In~~Sales and Technology Transformations discussions above, to support the ~~near term, we may experience compressed margins as a result~~execution of our transition from a wholly-owned subsidiary of TEGNA to an independent publicly traded company. Due to the transition, we have further developed our internal infrastructure and support functions through the recruiting and hiring of managers and employees required to strengthen our legal, treasury, finance, tax, investor relations and other similar functions. Similarly, we will incur ongoing public company costs, including those related to an independent board of directors, compliance with regulatory and stock exchange requirements and increased auditing and insurance fees. Further, the indebtedness we incurred in connection with the Separation from TEGNA in May 2017 and the Acquisition in February 2018, has reduced our free cash flow, which may limit our ability to make strategic acquisitions or other transactions that we believe to be in the best interestsstrategy. The foundation of our ~~stockholders or that might increase the value of our business. We expect to manage these incremental costs and the associated increased risk by focusing on improving our operating efficiency and~~ continued ~~growth in our business to drive operating margins and generate free cash flow. In addition, our business~~success is subject to risks related to the larger automotive ecosystem, including consumer demand and other macroeconomic factors. We have recently observed the beginning of a cyclical downturn in the United States auto market, which has impacted new car sales and thus OEMs’ and dealers’ spending. While our customers may weigh lower-priced and other options in the market, we believe that the value we deliver ~~will provide continuity as they evaluate their spend.~~to customers, and we believe that our large and growing audience of in-market, undecided car shoppers and innovative solutions deliver significant value to our customers.

Results of Operations

Three Months Ended September 30, ~~2018~~2019 Compared to Three Months Ended September 30, ~~2017~~2018

	Three Months Ended September 30,						Increase						Three Months Ended September 30,						Increase
In thousands (except percentages)	2018			2017			(Decrease)			% Change
Revenues:
(In thousands, except percentages)													2019			2018			(Decrease)			% Change
Revenue:
Direct	$	119,510		$	82,504		$	37,006			45	%	$	122,878		$	119,510		$	3,368			3	%
National advertising		28,107			32,002			(3,895	)		(12	)%		20,161			28,107			(7,946	)		(28	)%
Other		4,010			4,319			(309	)		(7	)%		3,642			4,010			(368	)		(9	)%
Retail		151,627			118,825			32,802			28	%		146,681			151,627			(4,946	)		(3	)%
Wholesale		17,685			41,074			(23,389	)		(57	)%		5,409			17,685			(12,276	)		(69	)%
Total revenues		169,312			159,899			9,413			6	%
Total revenue														152,090			169,312			(17,222	)		(10	)%
Operating expenses:
Cost of revenues and operations		24,034			18,176			5,858			32	%
Cost of revenue and operations														25,089			23,808			1,281			5	%
Product and technology		15,918			18,422			(2,504	)		(14	)%		14,923			15,616			(693	)		(4	)%
Marketing and sales		56,083			50,733			5,350			11	%		50,789			55,825			(5,036	)		(9	)%
General and administrative		14,345			9,180			5,165			56	%		13,414			15,131			(1,717	)		(11	)%
Affiliate revenue share		4,097			2,121			1,976			93	%		5,158			4,097			1,061			26	%
Depreciation and amortization		26,504			21,893			4,611			21	%		28,970			26,504			2,466			9	%
Goodwill and intangible asset impairment														461,463			—			461,463		***%
Total operating expenses		140,981			120,525			20,456			17	%		599,806			140,981			458,825		***%
Operating income		28,331			39,374			(11,043	)		(28	)%
Operating (loss) income														(447,716	)	��	28,331			(476,047	)	***%
Nonoperating (expense) income:
Interest expense, net		(7,005	)		(5,431	)		(1,574	)		29	%		(7,712	)		(7,005	)		(707	)		10	%
Other income, net		65			64			1			2	%		1,402			65			1,337		***%
Total nonoperating expense, net		(6,940	)		(5,367	)		(1,573	)		29	%		(6,310	)		(6,940	)		630			(9	)%
Income before income taxes		21,391			34,007			(12,616	)		(37	)%
Income tax expense		5,594			13,019			(7,425	)		(57	)%
Net income	$	15,797		$	20,988		$	(5,191	)		(25	)%
(Loss) income before income taxes														(454,026	)		21,391			(475,417	)	***%
Income tax (benefit) expense														(27,869	)		5,594			(33,463	)	***%
Net (loss) income													$	(426,157	)	$	15,797		$	(441,954	)	***%

*** Not meaningful

Retail ~~Revenues—~~Revenue—Direct.Direct ~~revenues primarily represent online subscription products~~revenue consists of marketplace and digital solutions sold to dealer ~~customers who purchase advertising packages to market their vehicle inventory and other aspects of their dealership.~~customers. Direct ~~revenues~~revenue is our largest revenue stream, representing 80.8% and 70.6% of total ~~revenues~~revenue for the three months ended September 30, ~~2018. The addition of DI’s~~2019 and ~~LDM’s business contributed $15.8~~2018, respectively. Direct revenue increased by $3.4 million, or 3%, compared to the ~~direct revenue increase. The~~prior year.

During 2018, we amended our affiliate agreements with McClatchy, tronc and the Washington Post to convert all of these affiliate markets prior to the expiration dates of the original affiliate agreements. During the three months ended September 30, 2019, we entered into agreements to convert the Gannett and TEGNA affiliate markets approximately one year in advance of the contracts’ expiration dates. During the three months ended September 30, 2019, the affiliate market conversions contributed ~~$25.6~~an incremental $14.2 million to ~~direct~~Direct revenue measured at the month of each of the conversions, while reducing ~~wholesale revenues $22.6~~Wholesale revenue by $9.6 million ~~($5.4~~(of which $0.5 million relates to the ~~unfavorable~~Unfavorable contracts liability amortization). Excluding the impact of the Acquisition and affiliate market conversions, direct revenues declined $4.4 million, primarily due to a 7% decline in dealer customers. Direct dealer customers decreased 2% from June 30, 2018. For information related to the affiliate market conversions, see Note 47 (Unfavorable Contracts Liability) to the accompanying Consolidated ~~and Combined~~ Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

Also included in Retail ~~Revenues—~~revenue is revenue from dealer websites and related digital solutions and digital marketing services, which together grew 25% year over year.

These increases were partially offset by a 7% decline in direct dealer customers and a 2% decline in ARPD, excluding dealer websites and related digital solutions, from September 30, 2018.

Retail Revenue—National Advertising. National advertising ~~revenues~~revenue consists of display advertising and other solutions sold to OEMs, advertising agencies and ~~OEMs, as well as leads sold to OEMs. Display ads are placed throughout the Cars.com website and apps.~~automotive adjacencies. National advertising ~~revenues represented~~revenue represents 13.3% and 16.6% of total ~~revenues~~revenue for the three months ended September 30, ~~2018.~~2019 and 2018, respectively. National advertising revenue declined ~~12%~~28%, as OEMs reduced their full year 2019 upfront commitments, reduced their advertising budgets and shifted their spending ~~on display ads mostly due~~ to ~~the cyclical nature of the auto industry.~~programmatic. Incremental sales to OEMs have been lower in volume and rate.

Wholesale ~~Revenues~~Revenue.Wholesale ~~revenues represent~~revenue represents the fees we charge for ~~online subscription products~~marketplace and digital solutions sold to dealers by affiliates. The fees represent approximately 60% of the retail value for the same online subscription products sold by our direct sales team. Wholesale ~~revenues represented~~revenue represents 3.6% and 10.4% of total ~~revenues~~revenue for the three months ended September 30, ~~2018.~~2019 and 2018, respectively. Wholesale ~~revenues~~revenue decreased $12.3 million primarily due to ~~the~~ affiliate market conversions from ~~wholesale revenues~~Wholesale revenue ($~~22.6~~9.6 million, which includes ~~$5.4~~$0.5 million of ~~unfavorable~~Unfavorable contracts liability amortization) to direct ~~revenues~~revenue ($~~25.6~~14.2 million). ~~In addition, excluding~~Excluding the affiliate market conversions, ~~wholesale revenues~~Wholesale revenue was impacted by a 7%17% decline in affiliate dealer customers. For information related to the affiliate market conversions, see Note 47 (Unfavorable Contracts Liability) to the accompanying Consolidated ~~and Combined~~ Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

Cost of ~~revenues~~revenue and operations. Cost of ~~revenues~~revenue and operations expense primarily ~~consist~~consists of expenses related to our pay-per-lead products, third-party costs for processing dealer vehicle inventory, product fulfillment, customer service and ~~related~~ compensation costs. Cost of ~~revenues~~revenue and operations expense represents ~~14.2%~~16.5% and ~~11.4%~~14.1% of total ~~revenues~~revenue for the three months ended September 30, 2019 and 2018, ~~and 2017,~~

respectively. ~~The addition~~Cost of ~~DI’s and LDM’s business contributed $6.5 million to the overall increase. Excluding the impact of the Acquisition, cost of revenues~~revenue and operations ~~decreased $0.7~~expense increased $1.3 million, ~~and 4%,~~ primarily due to ~~reduced compensation.~~growth in dealer websites and related digital solutions.

Product and technology.The product team creates and manages consumer and dealer-facing innovation, manages consumer user experience and includes the costs associated with our editorial and data strategy teams. The technology team develops and supports ~~the Cars.com~~our products and ~~website.~~websites. Product and technology ~~expenses include~~expense includes compensation costs, as well as license fees for vehicle specifications, search engine optimization, hardware/software maintenance, software licenses, data center and other infrastructure costs. Product and technology ~~expenses represent 9.4%~~expense represents 9.8% and ~~11.5%~~9.2% of total ~~revenues~~revenue for the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Product and technology ~~expenses~~expense decreased ~~14%,~~$0.7 million, primarily due to r~~educed~~lower compensation costs ~~associated with lower headcount, partially offset by~~related to the ~~addition of DI’s and LDM’s business.~~Technology Transformation.

Marketing and sales. Marketing and sales ~~expenses~~expense primarily ~~consist~~consists of traffic and lead acquisition costs (including search engine ~~management~~ and other online marketing), TV and ~~online~~digital display/video advertising and creative production, ~~of ad creative,~~ market research, trade events and compensation costs for the marketing, sales ~~support~~ and sales support teams. Marketing and sales expenses represent ~~33.1%~~33.4% and ~~31.7%~~33.0% of total ~~revenues~~revenue for the three months ended September 30, 2019 and 2018, ~~and 2017,~~ respectively. The addition of DI’s and LDM’s business contributed $4.2 million to the overall increase, as we expanded the salesforce to support our new product offerings. Excluding the impact of the Acquisition, marketingMarketing and sales ~~expenses increased $1.2~~expense decreased $5.0 million, ~~and 2%,~~ primarily due to planned strategic marketing investments aimed at consumer engagement, brand awareness amongst auto shopping audiences and search engine optimization, partially offset by cost efficiencies related to investments aimed at ~~consumer acquisition.~~lower personnel-related costs as a result of the Sales Transformation.

General and administrative. General and administrative ~~expenses~~expense primarily ~~consist~~consists of compensation costs for the executive, finance, legal, human resources, facilities and other administrative employees. In addition, general and administrative ~~expenses include~~expense includes office space rent, legal and accounting services, other professional services, transaction-related costs and costs related to the write-off and loss on ~~assets.~~assets, excluding the goodwill and intangible asset impairment discussed below. General and administrative ~~expenses represent 8.5%~~expense represents 8.8% and ~~5.7%~~8.9% of total ~~revenues~~revenue for the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. General and administrative ~~expenses increased $5.2~~

expense decreased $1.7 million and ~~56%, primarily due to $2.9 million in~~11% versus the prior year. During the three months ended September 30, 2019 and 2018, General and administrative expense included the following costs ~~related to consulting services incurred as part of our settlement agreement with our stockholder activist,~~(in thousands):

	Three Months Ended September 30,
	2019		2018
Severance, transformation and other exit costs	$	2,114	$	175
Costs associated with stockholder activist campaign		905		2,869
Transaction-related costs ⁽¹⁾		—		897
Total	$	3,019	$	3,941

(1)

Excluding these costs, general and administrative expense decreased $0.8 million ~~in incremental stock-based compensation~~ and 7% versus the ~~addition of DI’s and LDM’s business.~~prior year.

Affiliate revenue share. Affiliate revenue share ~~expenses primarily represent~~expense represents payments made to affiliates pursuant to our affiliate ~~agreements.~~agreements and amortization of the Unfavorable contracts liability related to converted markets. Affiliate revenue share ~~expenses~~expense increased ~~93%,~~$1.1 million, primarily due to ~~increase in costs associated with~~ the ~~early conversions~~additional markets converted during the last twelve months. A summary of ~~the McClatchy, tronc and Washington Post markets, partially offset by amortization of the unfavorable contracts liability which was previously recorded in wholesale revenues.~~ Affiliate revenue share expense is as follows (in thousands):

	Three Months Ended September 30,
	2019			2018
Affiliate revenue share expense, gross	$	11,017		$	9,484
Less: Amortization of the Unfavorable contracts liability		(5,859	)		(5,387	)
Affiliate revenue share expense, as reported	$	5,158		$	4,097

For information related to the ~~unfavorable~~Unfavorable contracts liability, see Note 47 (Unfavorable Contracts Liability) to the accompanying Consolidated ~~and Combined~~ Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

Depreciation and amortization. Depreciation and amortization expense increased ~~21%~~9%, primarily due to the ~~incremental amortization expense~~reduction of the useful lives of certain assets related to the ~~Acquisition.~~Technology Transformation.

~~Interest expense, net~~Goodwill and intangible asset impairment. ~~Interest expense increased due to interest associated with~~We determined there was a triggering event, primarily caused by a sustained decrease in our stock price after the ~~Credit Agreement principally utilized to fund~~completion of the ~~Separation~~strategic alternatives review process, and performed an interim quantitative impairment test as of September 1, 2019. The results of the ~~Acquisition.~~goodwill and indefinite-lived intangible asset impairment tests indicated that the carrying values exceeded the estimated fair values and thus, we recorded an impairment of $379.2 million and $82.3 million, respectively. For information related to ~~our term and revolving loans,~~the impairment, see Note ~~5 (Debt)~~4 (Goodwill and Indefinite-lived Intangible Asset) to the accompanying Consolidated ~~and Combined~~ Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

Interest expense, net. Interest expense, net increased, primarily due to additional interest expense associated with the interest rate swap. For information related to our interest rate swap, see Note 6 (Interest Rate Swap) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.

Income tax ~~expense.~~(benefit) expense. The effective income tax rate, expressed by calculating the income tax (benefit) expense as a percentage of Income before income ~~taxes,~~tax, was ~~26.2%~~6% for the three months ended September 30, ~~2018~~2019 and differed from the U.S. federal statutory rate of 21%, primarily due to ~~state income taxes, nondeductible transaction costs and~~ the ~~impact~~impairment of the Tax Cuts and Jobs Act, partially offset by certain tax credits and excess tax benefits from stock-based compensation. For information related to income taxes, see Note 6 (Income Taxes) to the Consolidated and Combined Financial Statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.goodwill.

Nine Months Ended September 30, ~~2018~~2019 Compared to Nine Months Ended September 30, ~~2017~~2018

	Nine Months Ended September 30,						Increase						Nine Months Ended September 30,						Increase
In thousands (except percentages)	2018			2017			(Decrease)			% Change
Revenues:
(In thousands, except percentages)													2019			2018			(Decrease)			% Change
Revenue:
Direct	$	336,521		$	249,412		$	87,109			35	%	$	349,162		$	336,521		$	12,641			4	%
National advertising		82,155			85,379			(3,224	)		(4	)%		59,752			82,155			(22,403	)		(27	)%
Other		12,152			11,989			163			1	%		11,215			12,152			(937	)		(8	)%
Retail		430,828			346,780			84,048			24	%		420,129			430,828			(10,699	)		(2	)%
Wholesale		66,953			122,917			(55,964	)		(46	)%		34,366			66,953			(32,587	)		(49	)%
Total revenues		497,781			469,697			28,084			6	%
Total revenue														454,495			497,781			(43,286	)		(9	)%
Operating expenses:
Cost of revenues and operations		65,924			49,618			16,306			33	%
Cost of revenue and operations														74,987			64,293			10,694			17	%
Product and technology		56,202			56,861			(659	)		(1	)%		48,125			51,215			(3,090	)		(6	)%
Marketing and sales		181,645			160,246			21,399			13	%		164,872			180,168			(15,296	)		(8	)%
General and administrative		45,609			34,364			11,245			33	%		59,265			53,704			5,561			10	%
Affiliate revenue share		11,193			6,837			4,356			64	%		9,788			11,193			(1,405	)		(13	)%
Depreciation and amortization		77,154			66,343			10,811			16	%		86,761			77,154			9,607			12	%
Goodwill and intangible asset impairment														461,463			—			461,463		***%
Total operating expenses		437,727			374,269			63,458			17	%		905,261			437,727			467,534		***%
Operating income		60,054			95,428			(35,374	)		(37	)%
Operating (loss) income														(450,766	)		60,054			(510,820	)	***%
Nonoperating (expense) income:
Interest expense, net		(20,305	)		(7,160	)		(13,145	)		184	%		(22,989	)		(20,305	)		(2,684	)		13	%
Other income, net		76			199			(123	)		(62	)%		1,530			76			1,454		***%
Total nonoperating expense, net		(20,229	)		(6,961	)		(13,268	)		191	%		(21,459	)		(20,229	)		(1,230	)		6	%
Income before income taxes		39,825			88,467			(48,642	)		(55	)%
Income tax expense		10,373			15,782			(5,409	)		(34	)%
Net income	$	29,452		$	72,685		$	(43,233	)		(59	)%
(Loss) income before income taxes														(472,225	)		39,825			(512,050	)	***%
Income tax (benefit) expense														(31,011	)		10,373			(41,384	)	***%
Net (loss) income													$	(441,214	)	$	29,452		$	(470,666	)	***%

*** Not meaningful

Retail ~~Revenues—~~Revenue—Direct.Direct ~~revenues~~revenue is our largest revenue stream, representing 76.8% and 67.6% of total ~~revenues~~revenue for the nine months ended September 30, ~~2018. The addition~~2019 and 2018, respectively. Direct revenue increased by $12.6 million, or 4%, compared to the prior year.

During 2018, we amended our affiliate agreements with McClatchy, tronc and the Washington Post to convert all of ~~DI’s and LDM’s business since~~these affiliate markets prior to the ~~date~~expiration dates of the ~~Acquisition contributed $36.0 million~~original affiliate agreements. During the nine months ended September 30, 2019, we entered into agreements to convert the ~~direct revenue increase. The~~Gannett and TEGNA affiliate markets, approximately one year in advance of the contracts’ expiration dates. During the nine months ended September 30, 2019, the affiliate market conversions contributed ~~$61.3~~an incremental $33.9 million to ~~direct~~Direct revenue measured at the month of each of the conversions, while reducing ~~wholesale revenues $54.5~~Wholesale revenue by $26.4 million ~~($12.9~~(of which $4.6 million relates to the ~~unfavorable~~Unfavorable contracts liability amortization). Excluding the impact of the Acquisition and affiliate market conversions, direct revenues declined $10.2 million, primarily due to a 7% decline in dealer customers. Direct dealer customers decreased 2% from June 30, 2018. For information related to the affiliate market conversions, see Note 47 (Unfavorable Contracts Liability) to the accompanying Consolidated ~~and Combined~~ Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

Also included in Retail ~~Revenues—National Advertising~~. ~~National advertising revenues represented 16.5% of total revenues~~revenue is dealer websites and related digital solutions and digital marketing services, which grew 56% year over year or 27% on a pro forma basis, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018.

These increases were partially offset by a 7% decline in direct dealer customers and a 2% decline in ARPD, excluding dealer websites and related digital solutions, from September 30, 2018.

Retail Revenue—National Advertising. National advertising revenue ~~decreased 4%, as OEMs reduced their spending on display ads mostly due to the cyclical nature of the auto industry.~~

~~Wholesale Revenues~~. ~~Wholesale revenues represented 13.5%~~represents 13.1% and 16.5% of total ~~revenues~~revenue for the nine months ended September 30, ~~2018.~~ 2019 and 2018, respectively. National advertising revenue declined 27%, as OEMs reduced their full year 2019 upfront commitments, reduced their advertising budgets and shifted their spending to programmatic. Incremental sales to OEMs have been lower in volume and rate.

Wholesale ~~revenues~~Revenue. Wholesale revenue represents 7.6% and 13.5% of total revenue for the nine months ended September 30, 2019 and 2018, respectively. Wholesale revenue decreased 49%, primarily due to affiliate market conversions from Wholesale revenue ($26.4 million, which includes $4.6 million of Unfavorable contracts liability amortization) to Direct revenue ($33.9 million). Excluding the affiliate market conversions, from wholesale revenues ($54.5 million, which includes $12.9 million of unfavorable contracts liability amortization) to direct revenues ($61.3 million). In addition, excluding the affiliate market conversions, wholesale revenuesWholesale revenue was impacted by a 7%17% decline in affiliate dealer customers. For information related to the affiliate market conversions, see Note 47 (Unfavorable Contracts Liability) to the accompanying Consolidated ~~and Combined~~ Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

Cost of ~~revenues~~revenue and operations. Cost of ~~revenues~~revenue and operations expense represents ~~13.2%~~16.5% and ~~10.6%~~12.9% of total ~~revenues~~revenue for the nine months ended September 30, 2019 and 2018, ~~and 2017,~~ respectively. ~~The addition~~Cost of ~~DI’s and LDM’s business contributed $16.5 million to the overall increase. Excluding the impact of the Acquisition, cost of revenues~~revenue and operations ~~was flat,~~expense increased $10.7 million, primarily due to ~~reduced compensation costs associated with lower headcount, offset by~~product mix and higher third-party costs, principally due to growth in dealer websites and related todigital solutions and new product ~~offerings.~~offerings and the full nine-month impact of Dealer Inspire.

Product and technology.Product and technology ~~expenses represent 11.3%~~expense represents 10.6% and ~~12.1%~~10.3% of total ~~revenues~~revenue for the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Product and technology ~~expenses~~expense decreased ~~1%,~~$3.1 million, primarily due to r~~educed~~lower compensation costs ~~associated with lower headcount and lower third-party costs,~~as a result of the Technology Transformation, partially offset by the ~~addition~~full nine-month impact of ~~DI’s and LDM’s business.~~Dealer Inspire.

Marketing and sales. Marketing and sales ~~expenses represent 36.5%~~expense represents 36.3% and ~~34.1%~~36.2% of total ~~revenues for the nine months ended~~ ~~September~~ 30, 2018 and 2017, respectively. The addition of DI’s and LDM’s business contributed $11.0 million to the overall increase, as we expanded our salesforce to support our new product offerings. Excluding the impact of the Acquisition, marketing and sales expenses increased $10.4 million and 6%, primarily due to planned strategic marketing investments aimed at consumer acquisition, consumer engagement, brand awareness amongst auto shopping audiences and search engine optimization. Sales compensation costs were flat despite serving an incremental 3,400 dealer customers from converted markets.

~~General and administrative~~. ~~General and administrative expenses represent 9.2% and 7.3% of total revenues~~ revenue for the nine months ended September 30, 2019 and 2018, respectively. Marketing and ~~2017,~~sales expense decreased $15.3 million, primarily due to lower personnel-related costs as a result of the Sales Transformation.

General and administrative. General and administrative expense represents 13.0% and 10.8% of total revenue for the nine months ended September 30, 2019 and 2018, respectively. General and administrative expenses increased ~~$11.2~~$5.6 million and ~~33%,~~10% versus the prior year. During the nine months ended September 30, 2019 and 2018, General and administrative expense included the following costs (in thousands):

	Nine Months Ended September 30,
	2019		2018
Severance, transformation and other exit costs	$	9,625	$	1,272
Costs associated with stockholder activist campaign		8,825		7,766
Transaction-related costs ⁽¹⁾		4,623		12,030
Total	$	23,073	$	21,068

(1)

Excluding these costs, general and administrative expense increased $3.6 million and 11% versus the prior year, primarily due to ~~$7.8 million in consulting services and other~~increased personnel-related costs ~~incurred as part of our settlement agreement~~consistent with our ~~stockholder activist, $5.0 million~~growth in costs related to the Acquisition, $3.1 million in incremental stock-based compensation, $2.8 million in incremental costs of being a public company and the addition of DI’s and LDM’s business since the date of the Acquisition. These increases were partially offset by $1.6 million in lower costs associated with the separation of certain employees and the prior year impacts of $5.0 million related to the Separation and $3.6 million related to the move to our ~~new corporate headquarters location.~~digital solutions business.

Affiliate revenue share.Affiliate revenue share ~~expenses increased 64%,~~expense decreased $1.4 million, primarily due to a $4.6 million increase in ~~costs associated with~~ the ~~early conversions~~benefit from the amortization of the ~~McClatchy, tronc and Washington Post~~Unfavorable contracts liability related to the converted affiliate markets, which is recorded as a reduction of Affiliate revenue share expense, rather than Wholesale revenue. This was partially offset by ~~amortization~~an increase in Affiliate revenue share expense primarily due to the additional markets converted during the last twelve months.

A summary of ~~the unfavorable contracts liability.~~ Affiliate revenue share expense is as follows (in thousands):

	Nine Months Ended September 30,
	2019			2018
Affiliate revenue share expense, gross	$	27,315		$	24,101
Less: Amortization of the Unfavorable contracts liability		(17,527	)		(12,908	)
Affiliate revenue share expense, as reported	$	9,788		$	11,193

Depreciation and amortization. Depreciation and amortization expense increased ~~16%~~12%, primarily due to the ~~incremental amortization expense~~reduction of the useful lives of certain assets related to the Technology Transformation and the full nine-month impact of the DI Acquisition.

~~Interest expense, net~~Goodwill and intangible asset impairment. ~~Interest expense increased due to interest associated with~~We determined there was a triggering event, primarily caused by a sustained decrease in our stock price after the ~~Credit Agreement principally utilized to fund~~completion of the ~~Separation~~strategic alternatives review process, and performed an interim quantitative impairment test as of September 1, 2019. The results of the ~~Acquisition.~~goodwill and indefinite-lived intangible asset impairment tests indicated that the carrying values exceeded the estimated fair values and thus we recorded an impairment of $379.2 million and $82.3 million, respectively. For information related to ~~our term and revolving loans,~~the impairment, see Note ~~5 (Debt)~~4 (Goodwill and Indefinite-lived Intangible Asset) to the accompanying Consolidated ~~and Combined~~ Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

Interest expense, net. Interest expense, net increased, primarily due to higher rates due to the interest rate swap and the full nine-month impact of interest related to the borrowing utilized to fund the DI Acquisition. For information related to our Term and Revolving Loans and interest rate swap, see Note 5 (Debt) and Note 6 (Interest Rate Swap), respectively, to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.

Income tax ~~expense.~~ ~~Effective with the Separation, we established a corporate legal entity structure that is subject to U.S. corporate income tax on a stand-alone basis post-Separation.~~ (benefit) expense. The effective income tax rate, expressed by calculating the income tax (benefit) expense as a percentage of Income before income ~~taxes,~~tax, was ~~26.0%~~7% for the nine months ended September 30, ~~2018~~2019 and differed from the U.S. federal statutory rate of 21%, primarily due to ~~state income taxes, nondeductible transaction costs and~~ the ~~impact~~impairment of the Tax Cuts and Jobs Act, partially offset by certain tax credits and excess tax benefits from stock-based compensation. We recorded $15.8 million of income tax expense for the same period 2017 related to DealerRater.com LLC and corporate income tax upon our Separation from TEGNA on June 1, 2017. For information related to income taxes, see Note 6 (Income Taxes) to the Consolidated and Combined Financial Statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.goodwill.

Liquidity and Capital Resources

Overview. Our primary sources of liquidity are cash flows from operations, available cash reserves and debt capacity available under our credit facilities. Our operations have generated positive operating cash flows in ~~2018~~2019 and ~~2017~~2018 which, along with our ~~term~~Term and ~~revolving loans~~Revolving Loans described below, provides adequate liquidity to meet our business needs, including those for investments and strategic acquisitions. In addition, we ~~could~~may raise additional funds through other public or private debt or equity financings. See Part II, Item 1A., “Risk Factors” of this Quarterly Report on Form 10-Q.As of September 30, ~~2018,~~2019, cash and cash equivalents were ~~$17.8~~$19.8 million.

Term Loan and Revolving Loan. As of September 30, ~~2018,~~2019, the outstanding principal amount under the ~~term loan~~Term Loan was ~~$421.9~~$396.6 million, with an interest rate of ~~3.9%~~4.5%, ~~and~~including the impact of the interest rate swap. The outstanding borrowings under the ~~revolving loan~~Revolving Loan were ~~$285.0~~$270.0 million, with an interest rate of ~~3.8%~~3.9%. During the nine months ended September 30, ~~2018,~~2019, we ~~borrowed $165.0~~made $19.7 million ~~under the revolving loan to fund the Acquisition~~in mandatory Term Loan payments and ~~$30.0 million to fund share repurchases. We also made $55.0~~$10.0 million in voluntary ~~revolving loan~~Revolving Loan payments, ~~and $16.9 million in quarterly term loan payments.~~net of borrowings. As of September 30, ~~2018, we were permitted~~2019, $180.0 million was available to borrow ~~an aggregate of $165.0 million~~ under the ~~revolving loan.~~Revolving Loan. Our borrowings are limited by our total net leverage ratio, which is calculated in accordance with our credit agreement, and was ~~2.9~~3.4 to 1.0 as of September 30, ~~2018.~~2019. In October 2019, we entered into an amendment to our credit agreement to increase the total net leverage covenant during the remaining term of the credit agreement while preserving the favorable pricing structure from the original agreement. The amendment increased our maximum total net leverage ratio from 3.75x to 4.50x with incremental step downs through the maturities of the term loan and the revolving loan on May 31, 2022.

Interest Rate Swap. The interest rate on borrowings under our Term Loan is floating and, therefore, subject to fluctuations. In order to manage the risk associated with changes in interest rates on our borrowing, we entered into an interest rate swap agreement (the “Swap”) effective December 31, 2018. Under the terms of the Swap, we are locked into a fixed rate of interest of 2.96% plus an applicable margin, as defined in our credit agreement, on a notional amount of $300 million. As of September 30, 2019, the fair value of the Swap was an unrealized loss of $11.9 million. The Swap is designated as a cash flow hedge of interest rate risk and recorded at fair value in Other liabilities on the Consolidated Balance Sheets. Any gains or losses on the Swap will be reported as a component of Accumulated other comprehensive (loss) income until reclassed to Interest expense, net in the same period the hedge transaction impacts earnings.

Share Repurchase Program. In March 2018, our Board of Directors authorized a share repurchase program to acquire up to $200 million of our common ~~stock.~~stock over a two year period. We may repurchase shares from time to time in open market transactions or through privately negotiated transactions in accordance with applicable federal securities laws. The timing and amounts of any purchases under the share repurchase program will be based on market conditions and other factors including price. The repurchase program ~~has a two-year duration,~~ does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. We ~~intend to fund the share repurchase program principally with cash from operations.~~ During the nine months ended September 30, 2019 and 2018, ~~the Company~~we repurchased and subsequently retired 1.7 million shares for $40.0 million and 3.0 million shares for $77.2 ~~million.~~million, respectively.

Cash Flows. Details of our cash flows are as follows (in thousands):

	Nine Months Ended September 30,									Nine Months Ended September 30,
	2018			2017			Change			2019			2018			Change
Net cash provided by (used in):
Operating activities	$	121,081		$	147,196		$	(26,115	)	$	80,550		$	121,081		$	(40,531	)
Investing activities		(167,119	)		(27,631	)		(139,488	)		(16,008	)		(167,119	)		151,111
Financing activities		43,284			(101,033	)		144,317			(70,232	)		43,284			(113,516	)
Net change in cash and cash equivalents	$	(2,754	)	$	18,532		$	(21,286	)	$	(5,690	)	$	(2,754	)	$	(2,936	)

Operating Activities. The decrease in cash provided by operating activities iswas primarily ~~due to higher interest payments related to our term and revolving loans, costs associated with the stockholder activist campaign, the cash settlement of DI’s unvested equity awards, costs~~ related to the ~~Acquisition and higher incremental costs~~reduction of ~~being a public company,~~net income, excluding the impact of non-cash items, partially offset by ~~other~~ changes in operating assets and ~~liabilities and lower cash tax payments. During~~liabilities. In addition, the net loss for the nine months ended September30, ~~2017, we also received $10.0 million in cash from~~2019 and the ~~lessor~~net income for ~~lease incentives related to~~ the ~~move to our new corporate headquarters location.~~nine months ended September 30, 2018 was impacted by the following costs (in thousands):

	Nine Months Ended September 30,
	2019		2018
Severance, transformation and other exit costs	$	9,625	$	1,272
Costs associated with stockholder activist campaign		8,825		7,766
Transaction-related costs ⁽¹⁾		4,623		12,030
Total	$	23,073	$	21,068

(1)

Investing Activities. The ~~increase~~decrease in cash used in investing activities is primarily due to the ~~Acquisition.~~ DI Acquisition in February 2018, partially offset by an increase in purchases of property and equipment.

Financing Activities. During the nine months ended September 30, 2019, cash used in financing activities is primarily related to $40.0 million in share repurchases and $29.7 million of loan repayments, net of borrowings, of which $10.0 million was voluntarily paid. During the nine months ended September 30, 2018, cash provided by financing activities is primarily due to net revolving loan borrowings of $140.0 million, principally related to the DI Acquisition in February 2018, partially offset by $77.2 million in share repurchases. For information related to ~~the Acquisition,~~our Term and Revolving Loans, see Note ~~3 (Business Combination and Goodwill)~~5 (Debt) to the accompanying Consolidated ~~and Combined~~ Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

~~Financing Activities.~~ ~~The increase in cash provided by financing activities is primarily driven by net revolving loan borrowings of $140.0 million to fund the Acquisition~~Commitments and share repurchases and $16.9 million in quarterly term loan payments. During the nine months ended September 30, 2017, cash used in financing activities was primarily driven by transactions with TEGNA. Prior to the Separation, TEGNA utilized a centralized approach to cash management and the financing of its operations. Under this approach, we provided funds to TEGNA and vice versa until the cash distribution to TEGNA at the time of the Separation. Thus, the net cash flow between TEGNA and us was presented as a financing activity. Contingencies. For information related to ~~our term~~commitments and ~~revolving loans,~~contingencies, see Note ~~5 (Debt)~~8 (Commitments and Contingencies) to the accompanying Consolidated ~~and Combined~~ Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

~~Commitments and Contingencies~~

For information related to commitments and contingencies, see Note 7 (Commitments and Contingencies) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

Off-Balance Sheet ~~Arrangements~~

Arrangements. We do not have any material off-balance sheet arrangements.

Critical Accounting ~~Policies~~

Policies. For information related to critical accounting policies, see “Critical Accounting Policies and Estimates” in Part II, Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” ~~in Part II, Item 7~~, of the Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 as filed with the SEC on ~~March 6, 2018~~February 28, 2019 and see Note ~~2 (Recent~~1 (Description of Business, Company History and Summary of Significant Accounting ~~Pronouncements)~~Polices) to the accompanying Consolidated ~~and Combined~~ Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q. During the nine months ended September 30, ~~2018,~~2019, there have been no changes to our critical accounting ~~policies, except for our revenue recognition policy, which reflects the adoption of the Financial Accounting Standards Oversight Board Accounting Standards Codification 606,~~ ~~Revenue from Contracts with Customers~~.

~~Revenue Recognition.~~ We account for a customer arrangement when we and the customer have an approved contract that specifies the rights and obligations of each party and the payment terms, and we believe it is probable we will collect substantially all of the consideration to which we will be entitled in exchange for the services that will be provided to the customer. We allocate the contractual transaction price to each distinct performance obligation and recognize revenue when it satisfies a performance obligation by providing a service to a customer. Revenue is generated through our direct sales force (Retail revenues) and affiliate sales channels (Wholesale revenues).policies.

~~Online Subscription Advertising Products and Services Revenue.~~ Our primary source of Retail and Wholesale revenues is through the sale of online subscription advertising products to dealer customers through varying levels of subscription packages. Our subscription packages provide the dealer customer’s available new and used vehicle inventory to in-market shoppers on the Cars.com website. The subscription packages are generally a fixed price arrangement with a one-year contract term that is automatically renewed, typically on a month-to month basis. We recognize subscription package revenues ratably as the service is provided over the contract term. Online subscription advertising products and services revenue is recorded in Retail revenues and Wholesale revenues in the Consolidated and Combined Statements of Income.

We also offer our customers several add-on products to the subscription packages. Add-on products include premium advertising products that can be uniquely tailored to an individual dealer customer’s current needs. We do not sell add-on products separately from the subscription packages as the customer cannot benefit from add-on products on their own. Therefore, the subscription packages and add-on products are combined as a single performance obligation and we recognize the related revenue ratably as the services are provided over the contract term.

As part of the acquisition of DI, we also provide services related to flexible, custom designed website platforms supporting highly personalized digital marketing campaigns, digital retailing and messaging platform products. We recognize revenue related to these services ratably as the service is provided over the contract term. The related revenue is recorded in Retail revenues in the Consolidated and Combined Statements of Income.

Our affiliates also sell online subscription advertising products to dealer customers and we earn wholesale revenues through our affiliate agreements. Affiliates are assigned certain sales territories in which they sell our products. Under these agreements, we charge the affiliates 60% of the corresponding Cars.com retail rate for products sold to affiliate dealers. We recognize wholesale revenue ratably as the service is provided over the contract term. In situations where our direct sales force sells our products within an affiliate’s assigned territory, we pay the affiliate a revenue share which is classified as “Affiliate revenue share” within Operating Expenses in the Consolidated and Combined Statements of Income. Wholesale revenues also includes the amortization of the unfavorable contracts liability. For information related to the unfavorable contracts liability, see Note 4 (Unfavorable Contracts Liability) to the accompanying Consolidated and Combined Financial Statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

~~Display Advertising Products and Services Revenue.~~ We also earn revenue through the sale of display advertising on our website to national advertisers, pursuant to transaction-based contracts, which are billed for impressions delivered or click-throughs on their advertisements. An impression is the display of an advertisement to an end-user on the website and is a measure of volume. A click-through occurs when an end-user clicks on an impression. We recognize revenue as the impressions or click-throughs are delivered. If the impressions or click-throughs delivered are less than the amount invoiced to the customer, the difference is recorded as deferred revenue and recognized as revenue when earned. Display advertising products revenue is recorded in Retail revenues in the Consolidated and Combined Statements of Income.

As part of the acquisition of LDM, we also provide services related to customized digital marketing and customer acquisition services, including paid, organic, social and creative services. We recognize revenue related to these services primarily at the point in time the service is provided. The related revenue is recorded in Retail revenues in the Consolidated and Combined Statements of Income.

~~Pay Per Lead Revenue.~~ We also sell leads, which are connections from consumers to dealer customers in the form of phone calls, emails and text messages, to dealer customers, OEMs and third-party resellers. We recognize pay per lead revenue primarily on a per-lead basis at the point in time in which the lead has been delivered. Revenue related to pay per leads is recorded in Retail revenues and Wholesale revenues in the Consolidated and Combined Statements of Income.

~~Other Revenue.~~ Other revenue primarily includes revenues related to vehicle listing data sold to third-parties and peer-to-peer vehicle advertising. We recognize other revenue either ratably as the services are provided or at the point in time the services have been performed. Other revenue is recorded in Retail revenues in the Consolidated and Combined Statements of Income.

Recent Accounting ~~Pronouncements~~

Pronouncements. For information related to recent accounting pronouncements, see Note 2 ~~(Recent~~(New Accounting Pronouncements) to the accompanying Consolidated ~~and Combined~~ Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures about market risk, see ~~Item 7A~~ “Quantitative and Qualitative Disclosures About Market Risk,” in Part II, Item 7A., of the Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, as filed with the Securities and Exchange Commission (“SEC”) on ~~March 6, 2018.~~February 28, 2019. Our exposures to market risk have not changed materially since December 31, ~~2017.~~2018.

Item 4. Controls and Procedures

Disclosure Controls and ~~Procedures~~

Procedures. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly ~~report~~Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the ~~SEC’s~~Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.~~To assist management, we have established an internal audit function to verify and monitor our internal controls and procedures.~~ ~~Our internal control system is supported by written policies and procedures, contains self-monitoring mechanisms and is audited by the internal audit function.~~

Changes in Internal Control Over Financial ~~Reporting~~

Reporting. During the period covered by this Quarterly ~~report~~Report on Form 10-Q, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in ~~Exchange Act~~ Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

For information relating to legal proceedings, see Note 78 (Commitments and Contingencies) to the accompanying Consolidated ~~and Combined~~ Financial Statements included in Part I, Item 11., “Financial Statements” of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

Our business and the ownership of our common stock are subject to a number of risks and uncertainties, including those described in Part I, Item 1A1A., “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 as filed with the Securities and Exchange Commission (“SEC”) on ~~March 6, 2018,~~February 28, 2019, which could materially affect our business, financial condition, results of operations and future results. ~~There~~Other than as set forth below, there have been no material changes from the risk factors described in our Annual Report on Form 10-K.

We may not effectively integrate the new markets obtained from the conversion of our affiliate agreements. If we are unable to integrate new markets obtained from the conversion of our affiliate agreements successfully or if we realize a deterioration of the business prospects of or underperformance in these markets, we may not realize our projected return on investment and our business and results of operations may be adversely affected. Integrating these markets may be more difficult than we anticipate and the expansion of our business and operations, in terms of geography or magnitude, could strain our administrative and/or operational resources.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~Sales of Unregistered Securities by Issuer~~

None.

~~Purchases of Equity Securities by Issuer~~

~~Our stock repurchase activity for the three months ended September 30, 2018 was as follows:~~

Period

Total Number
of Shares
Purchased ⁽¹⁾

Average
Price Paid
per Share ⁽¹⁾

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽²⁾

Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ⁽³⁾
(in thousands)

July 1 through July 31, 2018

192,574

$
30.06

192,574

$
144,211

August 1 through August 31, 2018

310,131

27.31

310,131

135,741

September 1 through September 30, 2018

489,339

26.43

489,339

122,810

Total

992,044

992,044

~~(1)~~

The total number of shares purchased and subsequently retired and the average price paid per share reflects shares purchased pursuant to the share repurchase program. Our stock repurchases may occur through open market purchases or pursuant to a Rule 10b5-1 trading plan.

~~(2)~~

In March 2018, the Company’s Board of Directors authorized a share repurchase program to acquire up to $200 million of the Company’s common stock. The Company may repurchase shares from time to time in open market transactions or through privately negotiated transactions in accordance with applicable federal securities laws. The timing and amounts of any purchases under the share repurchase program will be based on market conditions and other factors including price. The repurchase program has a two-year duration, does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. The Company intends to fund the share repurchase program ~~principally~~ ~~with cash from operations.~~

~~(3)~~

~~The amounts presented represent the remaining total Board of Directors authorized value to be spent after each month's repurchases.~~

~~Ite~~mItem 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~None~~None.

Item 6. Exhibits

Exhibit Index

Exhibit Number		Description
~~3.2~~31.1*		~~Amended and Restated Bylaws of Cars.com Inc. (incorporated by reference to Exhibit 3.2 to the Company’s current Report on Form 8-K filed with the SEC on October 22, 2018, File No. 001-37869).~~
31.1*		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as ~~Adopted Pursuant~~adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as ~~Adopted Pursuant~~adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as ~~Adopted Pursuant~~adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as ~~Adopted Pursuant~~adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance ~~Document.~~Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		XBRL Taxonomy Extension Schema Document.

Exhibit Number		Description
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.
104		The cover page from this Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL (included with Exhibit 101 attachments)

*	Filed herewith.

~~SIGNATURES~~SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Cars.com Inc.

Date: November ~~7, 2018~~6, 2019	By:	/s/ T. Alex Vetter
		T. Alex Vetter
		President and Chief Executive Officer

Date: November ~~7, 2018~~6, 2019	By:	/s/ Becky A. Sheehan
		Becky A. Sheehan
		Chief Financial Officer

3132


	Acquisition-date Fair Value
Cash consideration ⁽¹⁾	$	164,333
Contingent consideration ⁽²⁾		2,200
Cash settlement of DI's unvested equity awards ⁽³⁾		(5,700	)
Total consideration	$	160,833

Cash	$	1,480
Accounts receivable		11,400
Property and equipment		1,215
Other assets		320
Identified intangible assets ⁽⁴⁾		71,900
Total assets acquired		86,315
Accounts payable		(2,514	)
Deferred tax liability		(14,741	)
Other liabilities		(4,459	)
Total liabilities assumed		(21,714	)
Net identifiable assets		64,601
Goodwill		96,232
Total consideration	$	160,833

Cash consideration	$	164,333
Less: Cash settlement of DI's unvested equity awards ⁽³⁾		(5,700	)
Less: Cash acquired		(1,480	)
Payment for Acquisition, net	$	157,153

	Acquisition-Date Fair Value (in thousands)		Weighted-Average Amortization Period (in years)
Acquired software	$	39,500	4
Customer relationships		18,300	4
Trade names		14,100	10
Total	$	71,900

Balance at December 31, 2017	$	44,085
Amortization into Wholesale revenues ⁽¹⁾		(5,992	)
Amortization into Affiliate revenue share ⁽²⁾		(12,908	)
Balance at September 30, 2018	$	25,185

	September 30, 2018		June 30, 2018		% Change			September 30, 2017		% Change
Direct		17,011		16,592		3	%		13,963		22	%
Affiliate		3,396		4,128		(18	)%		7,344		(54	)%
Total		20,407		20,720		(2	)%		21,307		(4	)%

Period	Total Number of Shares Purchased ⁽¹⁾		Average Price Paid per Share ⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽²⁾		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ⁽³⁾ (in thousands)
July 1 through July 31, 2018		192,574	$	30.06		192,574	$	144,211
August 1 through August 31, 2018		310,131		27.31		310,131		135,741
September 1 through September 30, 2018		489,339		26.43		489,339		122,810
Total		992,044				992,044

Other information:

Cash paid for operating leases for the nine months ended September 30, 2019

Weighted-average remaining lease term (in months) as of September 30, 2019

Weighted-average discount rate as of September 30, 2019