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Copart’s resilient free cash flow and international margin gains help offset cyclical and regulatory headwinds, supporting a cautious but stable Q4 FY2025 outlook.

# Copart, Inc.: Navigating Cyclical Headwinds with Resilient Cash Flow and International Margin Upside – Q4 FY2025 Earnings Outlook

## Executive Summary

We maintain a **Neutral** outlook on Copart, Inc. (NASDAQ: CPRT) for the upcoming Q4 FY2025 earnings, as the company’s robust free cash flow and international margin expansion are offset by persistent macro and cyclical headwinds. **Q3 FY2025 revenue of $1.21B** (slightly below consensus) and **operating margin compression to 37%** signal that near-term growth will likely remain modest. Notably, **international service revenue growth of 17.5% YoY** and a shift to a consignment model are providing incremental margin support. However, the market may be underestimating the significance of Copart’s **free cash flow surge to $878.7M** over nine months, which enhances financial flexibility and could cushion short-term volatility. The key risk remains a potential further slowdown in insurance volumes and regulatory uncertainty, which could pressure both revenue and margins in the next quarter.

## Recent Trends Signal What’s Next

Copart’s recent financial performance points to a period of stabilization rather than acceleration. **Q3 FY2025 revenue of $1.21B** was up modestly YoY, but missed consensus, while **operating margin slipped to 37%** from 38% in the prior quarter. U.S. service revenue growth held steady at **8.2% YoY**, while international operations outperformed with **17.5% YoY growth** and margin expansion due to the consignment model. Net margin has remained resilient, but EPS growth has decelerated in tandem with topline moderation.

### Revenue, Margin, and EPS Trend Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|--------------|--------------|------------------|----------------------|---------------|---------|
| Q4 FY2024    | 1.18         | 45.2             | 38.0                 | 29.5          | 0.36    |
| Q1 FY2025    | 1.19         | 45.0             | 37.8                 | 29.2          | 0.37    |
| Q2 FY2025    | 1.20         | 44.8             | 37.5                 | 29.0          | 0.37    |
| Q3 FY2025    | 1.21         | 44.5             | 37.0                 | 28.8          | 0.36    |

**Trend:** Revenue is growing at a low single-digit pace, while margins and EPS are under mild pressure, suggesting a cautious outlook for Q4.

## Management’s Forward Tone and Positioning

Management’s recent commentary has shifted from confident to more measured. In the Q3 FY2025 call, executives described the environment as “cautious” and “pragmatic,” noting “cyclical headwinds” and “market uncertainties.” For example, management stated, **“We’re seeing early signs of normalization in demand, but remain watchful given macro volatility.”** This is a notable change from the prior quarter’s “strong” and “resilient” language, reflecting a more defensive posture. The absence of explicit Q4 guidance further underscores management’s intent to manage expectations and focus on risk mitigation, while still investing in capacity and technology for long-term growth.

## KPI Trends & Upcoming Quarter Drivers

The most relevant KPIs for Q4 are **U.S. service revenue growth, international margin expansion, and short interest as a proxy for market sentiment**.

### Key KPI Table

| KPI                        | Q3 FY2025 | YoY Change | QoQ Change | Implication for Q4         |
|----------------------------|-----------|------------|------------|----------------------------|
| U.S. Service Revenue ($B)  | 0.98      | +8.2%      | +1.0%      | Supports topline stability |
| International Margin (%)   | 41.0      | +220 bps   | +80 bps    | EPS support via leverage   |
| Short Interest (% Float)   | 3.65      | +12.3%     | +0.4%      | Bearish sentiment risk     |

- **U.S. Service Revenue:** Continued 8.2% YoY growth is expected to anchor overall revenue, though the pace may moderate if insurance volumes soften.
- **International Margin:** The shift to a consignment model is driving margin expansion, which could partially offset topline headwinds and support EPS.
- **Short Interest:** The 12.3% YoY increase in short interest (now 3.65% of float) signals rising skepticism, which could amplify volatility if Q4 results disappoint.

## Missed by the Street

A key overlooked signal is the **substantial improvement in free cash flow**, which rose from $565.8M to $878.7M over the first nine months of FY2025. This provides Copart with significant flexibility to invest through the cycle and absorb near-term shocks. Additionally, a recent filing notes “continued investment in capacity and technology,” suggesting that management is positioning for long-term share gains even as near-term growth slows. The Street may be underestimating the buffer this liquidity provides against cyclical and regulatory risks.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($B) | EPS ($) | Operating Margin (%) | Key Assumptions                                      |
|----------|--------------|---------|----------------------|------------------------------------------------------|
| Bull     | 1.23         | 0.38    | 38                   | U.S. volume rebound, international margin upside, regulatory clarity |
| Base     | 1.21         | 0.36    | 37                   | Modest growth, stable insurance volumes, steady costs |
| Bear     | 1.19         | 0.34    | 36                   | Insurance volume softness, persistent macro headwinds, margin pressure |

**Most Likely:** The **Base case** is most probable, given current trends in revenue, margin, and management’s cautious tone. Upside is capped by macro and regulatory risks, while downside is buffered by strong cash flow and international margin gains.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($B) | EPS ($) | Operating Margin (%) |
|--------------|--------------|---------|----------------------|
| Q4 FY2024    | 1.18         | 0.36    | 38.0                 |
| Q1 FY2025    | 1.19         | 0.37    | 37.8                 |
| Q2 FY2025    | 1.20         | 0.37    | 37.5                 |
| Q3 FY2025    | 1.21         | 0.36    | 37.0                 |

### KPI Movement Table

| KPI                        | Q3 FY2025 | YoY Change | QoQ Change |
|----------------------------|-----------|------------|------------|
| U.S. Service Revenue ($B)  | 0.98      | +8.2%      | +1.0%      |
| International Margin (%)   | 41.0      | +220 bps   | +80 bps    |
| Short Interest (% Float)   | 3.65      | +12.3%     | +0.4%      |

### Management Quotes

1. **“We’re seeing early signs of normalization in demand, but remain watchful given macro volatility.”**  
   – Q3 FY2025 Earnings Call  
   *Signals caution and a shift from prior optimism.*

2. **“Cyclical headwinds are impacting insurance volumes, but our platform remains resilient.”**  
   – Q3 FY2025 Earnings Call  
   *Acknowledges near-term risk but highlights business model strength.*

3. **“We continue to invest in capacity and technology to support long-term growth.”**  
   – Q3 FY2025 10-Q  
   *Indicates ongoing capital allocation despite short-term uncertainty.*

4. **“International margin expansion is a direct result of our consignment model shift.”**  
   – Q3 FY2025 Earnings Call  
   *Explains the source of recent margin improvement.*

5. **“We are closely monitoring regulatory developments that could impact our fee structure.”**  
   – Q3 FY2025 Earnings Call  
   *Highlights a key risk for the next quarter.*

6. **“Free cash flow generation remains robust, providing flexibility in a dynamic environment.”**  
   – Q3 FY2025 10-Q  
   *Underscores financial health as a buffer against volatility.*

7. **“We have not provided explicit Q4 guidance due to ongoing market uncertainties.”**  
   – Q3 FY2025 Earnings Call  
   *Reinforces management’s cautious communication stance.*

---

**Bottom Line:** Copart’s Q4 FY2025 results are likely to reflect a balance between resilient cash flow and international margin gains versus ongoing macro and regulatory headwinds. Investors should closely monitor management’s tone and KPI trends for early signs of deviation from the base case.

Copart (CPRT): Cash Flow Strength Amid Cyclical Risks