Cars (CARS) Risk Analysis

AI technologies are rapidly evolving and increasingly being adopted by consumers, automotive manufacturers, dealers, our competitors, technology platforms and third-party service providers. These technologies may significantly change how consumers search for, evaluate and purchase vehicles, how automotive advertising is delivered and measured and how digital marketplaces operate. AI-powered search engines, digital assistants and other platforms may enable consumers to obtain vehicle information, pricing comparisons, dealer information, recommendations and purchasing guidance without visiting third-party marketplaces or websites. If consumers increasingly rely on AI technologies that provide answers directly-rather than directing traffic to our websites or mobile applications-traffic to our platforms, lead volumes, advertising inventory and subscription value to dealers and OEMs could decline, which could materially adversely affect our revenue. In addition, competitors, OEMs, dealers or other third parties may use AI to replicate, enhance or replace functionality currently provided by our platforms, including vehicle listings, pricing analysis, editorial content, lead generation tools and valuation products. If we are unable to develop, deploy or integrate AI-enabled features at a pace that meets customer expectations, or if our AI-enabled solutions are perceived as less effective or less reliable than those of competitors, our competitive position, customer retention and growth prospects could be harmed. AI systems may produce inaccurate, misleading or otherwise flawed outputs. If AI-generated outputs are relied upon by consumers, dealers or OEMs and are perceived as unreliable or inconsistent with consumer and customer expectations, our reputation, brand value and customer relationships could be harmed. The development and deployment of AI technologies also involve significant costs and risks. Implementing AI-enabled solutions may require substantial investment in data infrastructure, computing resources, third-party technologies and specialized personnel, and such investments may not result in improved products, operational efficiencies or increased revenue. The legal and regulatory environment governing AI is rapidly evolving. Laws, including recently-enacted state laws, proposed laws and recent Executive Orders addressing regulation and policies related to AI may create inconsistent compliance obligations, which may be costly, challenging and difficult to resolve. Existing laws and regulations relating to data privacy, intellectual property, consumer protection, advertising practices and algorithmic decision-making are also increasingly being interpreted or applied in new ways to AI-enabled products. Compliance with such requirements could increase our costs, limit our ability to use data effectively or require changes to our products or business practices, or, if we fail to comply, it could expose us to fines, penalties and litigation. If we are unable to effectively manage the operational, competitive, regulatory and reputational risks associated with AI, our business, financial condition and results of operations could be materially and adversely affected.

We depend, in part, on Internet search engines to drive traffic to the Company's sites. For example, when a consumer searches for the make and model of a specific automobile or a generic phrase, such as "used cars for sale near me," using an Internet search engine, we rely on a high organic search ranking of the Cars.com site in these search results to drive consumer traffic. However, our ability to maintain these high search result rankings is not fully within our control. For example, our competitors' search engine optimization efforts may result in their websites receiving a higher search result page ranking than us, or Internet search engines could revise their methodologies with or without knowledge in a way that would adversely affect our search result rankings. The Company's sites have experienced both positive and negative fluctuations in search result rankings in the past, and it is anticipated that similar fluctuations will occur in the future. Internet search engines or other platforms, including AI-powered search and answer engines, may provide vehicle information directly to consumers without referring them to our platforms. Additionally, new technologies could affect how search results are ranked, or whether our search results appear at all, despite our search optimization efforts. Consumer transition to such new technologies could adversely affect our search results or traffic to our mobile applications. If Internet search engines or mobile application download stores modify their search algorithms, or if new developments in technology continue to evolve, such as generative AI, in each case, in ways that negatively impact traffic to the Company's sites or Cars.com mobile applications, or if the search engine or mobile application store optimization efforts of our competitors are more successful than our own efforts, overall growth in our consumer base could slow or the consumer base could decline. In addition, if search engines or app stores prioritize their own products or those of our competitors, or if AI-driven assistants become a primary navigation tool for consumers, traffic and conversion on our platforms could decline.

Competition to capture share of the total digital automotive advertising spend has increased and may continue to increase due to the attractive projected growth of digital automotive advertising spend, low barriers to entry in the online automotive marketplace and related digital automotive advertising markets. We may face significant challenges in convincing our advertising customers, including national customers and OEMs, to expand their advertising on our sites and mobile applications in the face of growing competition, which could hurt our ability to grow our third-party advertising revenue. For example, there are a limited number of OEMs, most of which already advertise on our sites. To grow our advertising revenue from these OEMs, we may need to capture a greater portion of such OEMs' digital advertising budgets. In addition, if we experience a significant decrease in advertising spending by OEMs or other national customers for any reason, our revenue will decrease and our business, results of operations or financial condition may be materially and adversely affected.

Substantially all of our revenue is generated from subscription products offered to automotive dealers and other customers in or adjacent to the automotive industry. Our business may be negatively affected during times of low automobile sales, low dealer inventory due to production shortages or delays and high unemployment. A number of economic and market conditions drive changes in automobile sales, including disruptions in the new automobile supply chain, consumer demand for new vehicle models, the availability and prices of new and used automobiles, unemployment and inflation levels, availability of affordable financing, fluctuations in the cost of fuel, consumer confidence and other factors affecting demand for vehicles, government shutdowns, political unrest or uncertainty, the occurrence of contagious disease or illness, barriers to trade, new OEM entrants into markets and other global economic conditions. Decreases in consumer demand could adversely affect the market for automobile purchases and, as a result, reduce the number of consumers using our platform. Consumer purchases of new and used automobiles generally decline during economic downturns and other periods in which disposable income is adversely affected. Purchases of new and used automobiles may continue to be, affected by negative trends in the economy, including an economic recession or downturn, increases in the cost of energy and gasoline, the availability and cost of credit, reductions in business and consumer confidence, stock market volatility, rising interest rates, inflation, health or similar issues, such as pandemic or epidemic and increased unemployment. In addition, the imposition of new tariffs, quotas, duties, or other restrictions or limitations could increase prices for vehicles imported into the United States and adversely impact demand for such vehicles. Further, if OEMs continue to transition to e-commerce and direct-to-consumer sales models to grow their market penetration, consumer demand for our platform could be materially adversely affected with consumers shifting from our platform to an OEM-based platform. In addition, a decrease in market demand caused by longer vehicle ownership, self-driving technology, ride sharing, transportation networks and other fundamental changes in transportation could impact the demand for new and used automobiles. Disruptions in the new vehicle market can have delayed and prolonged effects on the used vehicle market, adversely affecting used vehicle availability, pricing and dealer inventory levels for several years following the initial disruption. More recently, instability in electric vehicle manufacturing-including production delays, shifting OEM strategies and vehicle program cancellations-has created additional uncertainty for dealers and has contributed to inventory issues. A reduction in the number of automobiles purchased by consumers could adversely affect automobile dealers and car manufacturers and consequently lead to reduced spending on our digital marketing services and solution offerings. Further, OEM production shortages, supply chain disruptions and inventory shortfalls could adversely impact automobile dealers and also reduce spending on our digital marketing services and solution offerings. Though our current customer bases, revenue sources and operations are substantially limited to the United States and Canada, our business may be negatively affected by challenges in the global automotive ecosystem and other macroeconomic issues. To the extent a weakened economy impacts our customers' ability or willingness to pay for our services or our vendors' ability to provide services to us, our operations, liquidity and financial condition could be negatively impacted. As a result, in order to respond to changes in our revenue, we may be required to implement expense-reduction measures or amend our debt instruments in the future, which could further adversely impact our operations, liquidity and financial condition.

We operate in a regulatory climate in which there is uncertainty as to the applicability of various laws and regulations related to our business. Our business could be significantly affected by different interpretations or applications of existing laws or regulations, future laws or regulations, including changes to the corporate tax rate or actions or rulings by judicial or regulatory authorities. Our operations may be subject to adoption, expansion or interpretation of various laws and regulations, and compliance with these laws and regulations may be challenging and could even require us to obtain licenses at an undeterminable and possibly significant expense. Similarly, state tax authorities could take aggressive positions as to whether certain of our products are subject to sales and use taxes, leading to increased tax exposure. These additional expenditures may materially and adversely affect our future results of operations,whether directly through increasing future overhead or indirectly by forcing us to pass on these additional costs to our customers, making our solutions less competitive. There can be no assurances that future laws or regulations or interpretations or expansions of existing laws or regulations will not impose requirements on Internet commerce that could substantially impair the growth of e-commerce and adversely affect our business, results of operations or financial condition. The adoption of additional laws or regulations may decrease the efficacy of our offerings, restrict our present business practices, require us to implement costly compliance procedures or expose us and/or our customers to potential liability. We may be considered to "operate" or "do business" in states where our customers conduct their businesses, resulting in possible regulatory action. If any state licensing laws were determined to be applicable to us and if we are required to be licensed and are unable to do so or are otherwise unable to comply with laws or regulations, we could be subject to fines or other penalties or be compelled to discontinue operations in those states. If any state's regulatory requirements impose state-specific requirements on us or include us within an industry-specific regulatory scheme, we may be required to modify our marketing programs in that state in a manner that may undermine such program's attractiveness to consumers or customers. Alternatively, if we determine that the licensing and related requirements are overly burdensome, we may elect to terminate operations in that state. All states comprehensively regulate vehicle sales and lease transactions and include strict licensure requirements for dealers (and, in some states, brokers) and vehicle advertising. We believe that most of these laws and regulations specifically apply only to traditional vehicle purchase and lease transactions, not Internet-based lead referral programs like ours. If we determine that the licensing or other regulatory requirements in a state are applicable to us or to a particular marketing services program, we may elect to obtain the required licenses and comply with applicable regulatory requirements. However, if licensing or other regulatory requirements are overly burdensome, we may elect to terminate operations or particular marketing services programs in that state or elect to not introduce particular marketing services programs in that state. As we introduce new services, we may incur additional costs associated with additional licensing regulations and regulatory requirements.

Our business relies on the collection, use and analysis of third-party data, including large amounts of inventory, vehicle and consumer information, and integrations with third-party systems, such as inventory management systems, customer relationship management systems and dealer management systems, for the benefit of our car buying consumers and customers. We use information about automobiles, inventory, ownership history and pricing from third parties, including OEMs, dealers and others, in various aspects of our business. We also partner with social media platforms, such as Facebook and Instagram, to leverage our valuable audience data to serve native advertisements and display real-time inventory for both dealers and OEMs to in-market car shoppers. Third party service providers may develop, acquire or integrate products or services that compete directly with our solutions or reduce the need for customers to use our platforms. If the third parties bundle competing functionality into their core offerings, restrict access to APIs or integrations, are unable or unwilling to provide data or services, modify licensing terms, increase pricing, restrict our use of data, experience difficulty meeting our requirements or standards, or revoke or fail to renew our licenses or partnerships, we could have difficulty operating key aspects of our business. In addition, if these third-party service providers were to cease operations, temporarily or permanently, face financial distress or other business disruption or increase their fees, or if our relationship with these providers were to deteriorate, we could suffer increased costs and delays in our ability to provide our products to consumers and customers until a comparable provider is identified or until we develop replacement technology or operations. We rely on third-party services to track and calculate certain of our key metrics, including unique visitors and traffic, and any errors or interruptions in the services or data they provide or any failure to maintain these relationships could harm our business. Certain of our key metrics, such as the number of our unique visitors and our traffic, are measured with third-party tools. While these numbers are based on what we believe to be reasonable calculations for the applicable periods of measurement, measurement methodologies exhibit a level of accuracy risk because of a variety of factors. For example, we have discovered that portions of our traffic have been attributable to non-human traffic. Because this non-human traffic generally exhibits detectable anomalous patterns, our reported traffic metrics for impacted periods reflects an adjustment to remove non-human traffic. We expect to continue to make similar adjustments in the future if we determine that our traffic metrics are materially impacted by invalid traffic. There are also inherent challenges in measuring usage across our large consumer base. For example, because these metrics are based on consumers with unique cookies, an individual who accesses our website from multiple devices with different cookies may be counted as multiple unique visitors, and multiple individuals who access our website from a shared device with a single cookie may be counted as a single unique visitor. In addition, although we use technology designed to block low quality traffic, we may not be able to prevent all such traffic, and such technology may have the effect of blocking some valid traffic. Further, consumers may have the ability to change privacy settings and opt-out of certain features and/or website tracking, which could reduce the quality of data we receive. For these and other reasons, our traffic and unique visitor metrics may not accurately reflect the number of people actually using our platform. Our measures of traffic and other key metrics may differ from estimates published by third parties (other than those whose data we use to calculate our key metrics) or from similar metrics of our competitors. We continually seek to improve our ability to measure these key metrics, and regularly review our processes to assess potential improvements to their accuracy. However, the improvement of our tools and methodologies could cause inconsistency between current data and previously reported data. Additionally, as both the industry in which we operate and our business continue to evolve, so too might the metrics by which we evaluate our business. We may revise or cease reporting metrics if we determine such metrics are no longer accurate or appropriate measures of our performance. If our audience, customers and stockholders do not perceive our metrics to be accurate representations, or if we discover material inaccuracies in our metrics, our reputation may be harmed.