CarGurus, Inc. (CARG) Q2 2023 Earnings Call Transcript

CarGurus, Inc. (CARG)

Q2 2023 Earnings Conference Call

August 09, 2023 05:00 PM ET

Company Participants

Kirndeep Singh - VP and Head, Investment

Jason Trevisan - CEO

Sam Zales - President and COO

Conference Call Participants

Chris Pierce - Needham

Jed Kelly - Oppenheimer

Brad Erickson - RBC Capital Markets

Naved Khan - B. Riley Securities

John Colantuoni - Jefferies

Marvin Fong - BTIG

Ron Josey - Citi

Nick Jones - JMP Securities



Good day and welcome to the CarGurus' Second Quarter 2023 Earnings Conference Call. All lines participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Kirndeep Singh, Vice President and Head of Investor Relations. Please go ahead.

Kirndeep Singh

Thank you, operator. Good afternoon. I'm delighted to welcome you to CarGurus' second quarter 2023 earnings call. With me on the call today are Jason Trevisan, Chief Executive Officer; and Sam Zales, President and Chief Operating Officer.

During the call, we will be making forward-looking statements, which are based on our current expectations and beliefs. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those reflected in such statements.

Information concerning those risks and uncertainties is discussed in our SEC filings, which can be found on the SEC's website and in the Investor Relations section of our website. We undertake no obligation to update or revise forward-looking statements, except as required by law.

Further, during the course of our call today, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to comparable non-GAAP measures is included in our press release issued today as well as in our updated investor presentation, which can be found on the Investor Relations section of our website.

We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency as it relates to metrics used by our management in its financial and operational decision-making.

With that, I'll now turn the call over to Jason.

Jason Trevisan

Thank you, Kirndeep and thank you to all those joining us today. As many of you are aware, we delayed our originally planned earnings call in order to complete our normal quarterly close process for the quarter ended June 30th, 2023, and apologize for the last-minute change. We appreciate your understanding and flexibility and are excited to discuss the results announced in our press release issued today.

Now, let me turn to our results. We are extremely pleased with our second quarter results as we exceeded our forecasted consolidated adjusted EBITDA guidance for the quarter.

The strength of our results came from growth in our Marketplace business, which was fueled by product adoption and enhanced monetization strategies targeting both new and existing dealers.

Concurrently, we took measures to improve our Digital Wholesale operations to ensure the long-term viability of the advancements made in the first half of this year. We are pleased that our diligent efforts led to segment profitability and higher operating efficiency this quarter.

Our progress this quarter underscores our ability to respond to dynamic conditions internally and externally, all while remaining steadfast in building an online platform that supports both consumer and dealer customers at every stage of the buying and selling journey.

Underpinning our strong performance was our resilient Marketplace business, which met our forecast for the quarter. Our annual business review or ABR process continued to make significant progress in our subscription revenue base. The renewal process simplifies our offerings and enhances the value we deliver to our dealers through repackaging and bundling.

We expect our ABR process will renew approximately 20% of the dealer base this year with a focus on renewing disproportionately underpriced dealers to be more in line with market rates.

Since the commencement of our renewals, we have seen strong double-digit percentage price increases for underpriced dealers who have not seen renewals since pre-pandemic.

As we continue to provide dealers with the highest ROI, we believe there is an opportunity to expand dealer wallet share through multiple levers, one of them being unit price increases through ABRs.

We ended the quarter with 24,220 paying dealers in the US, down 1% from the year-ago period. Excluding attrition related to ABRs, we would have had net dealer adds for the quarter. As we previously mentioned, we are comfortable with the ABR-related attrition as the net result is positive monthly recurring revenue.

Nevertheless, when analyzing ABR-related attrition from the first quarter, we won back approximately 40% of the involuntary churn cohort in the subsequent quarter and brought back those dealers at more appropriately priced listings rates and higher spend, which is the primary objective of our ABR process.

In Q2, US Quarterly Average Revenue per Subscribing Dealer or QARSD was $6,110, growing 6% year-over-year. QARSD growth was driven by package upgrades, new product adoption, signing on new dealers at higher average monthly recurring revenue, and unit price increases through our ABRs.

Through continuous investments and improvements in our product offerings, we generate greater value for both our dealer partners and our largest consumer audience. The strong growth in QARSD underscores our ability to monetize offerings and lead volume beyond just the ABR process to align with the value we provide.

As a result of our history as a data-focused business, we are growing our investment in artificial intelligence or AI. As we strive to be the most trusted partner for our dealer and consumer customers, our ability to provide valuable data insights to customers stands out as a key differentiator.

For instance, our fair share report empowers dealers to maximize their competitive share of local market leads. And the price analysis tool enables dealers to assess whether they are enduring price cuts or churn times that are more severe compared to their local market competitors.

Our sales team leverages these insights to assist dealers in selecting the most effective products and packages aligned with their business objectives, helping them to gain a competitive advantage in their market.

Moreover, the rapid advancements in consumer-facing AI have transformed the way consumers search and gather information. Recently, we introduced a pilot that allows shoppers to search for vehicles using conversational language, matching their preferences to relevant listings.

And in June, we released a ChatGPT plug-in that generates vehicle description pages based on the shopper's specific criteria. The way consumers shop for vehicles continues to evolve. And at CarGurus, we are evolving to best meet their needs by offering new ways to shop.

Our latest dealer product offering, Digital Deal, transforms the car shopping experience for consumers by leveraging advanced online capabilities to offer a seamless online to in-store purchase.

This includes providing trade-in estimates, offering prequalification or hard pull financing options, facilitating the purchase of dealer- or vehicle-specific finance and insurance products, placing a deposit and scheduling an appointment.

Adoption has grown significantly with 2,900 dealers onboard, representing a 29% sequential increase. We are delivering dealers more value through Digital Deal with higher quality leads that are growing as a share of our total leads.

In the past year, Digital Deal dealers have seen greater than 4,000 basis point increase in leads originating from high intent, ready-to-purchase shoppers that are up to five times more likely to close when compared to standard e-mail leads, making the dealership more efficient in closing a deal and moving on to their next sales faster.

Moreover, customers who schedule an appointment have up to a 50% increase in close rates compared to Digital Deal leads without appointments and this quarter, appointments increased 112% quarter-over-quarter.

When coupled with delivery capabilities, Digital Deal with geographic expansion enables dealers to reach a wider audience outside the physical reach of their lots. This offering now has 100% coverage in the contiguous 48 states and has seen adoption increase 107% quarter-over-quarter.

Notably, 64% of our Digital Deal listings have geographic expansion enabled, which has the added benefit of providing consumers with the greatest selection of deliverable inventory. These factors drive both more volume and higher lead quality for our partners.

Dealers are not the only ones benefiting from these innovative offerings. With a vast selection of over 250,000 digitally enabled listings, we provide consumers with unparalleled inventory selection, competitive prices, convenience and a sense of trust throughout their car shopping journey.

Our focus on empowering customers to take control of their shopping experience has yielded impressive results as indicated by Net Promoter Scores that are up to two times higher for customers who use Digital Deal.

As we think about the future of Digital Retail, our objective is to not only tailor the shopping journey for our consumer customers but to also level the playing field for our dealer partners, who may be unable to develop these solutions independently or who wish to take full advantage of the breadth of our consumer audience.

By utilizing the CarGurus' platform, dealers can efficiently sell additional inventory to a wider audience and ultimately grow dealership profits.

Digital Retail makes attribution easier for dealers, which in turn allows us to demonstrate our superior ROI and further monetize the value we bring to our partners. This year, we have excelled in striking a balance between our commitment to innovation and our drive for operational improvements.

As we expected, CarOffer achieved profitability and exceeded our forecast for the quarter. We are pleased with the team's ability to identify operational challenges in the latter part of last year and take action to implement processes, policies and systems to promptly remediate these issues.

We experienced a softening in the Wholesale market in the back half of the second quarter with declining prices and sales conversion rates, which presented us with an opportunity to thoroughly evaluate and pressure test the efficacy of our operational improvements.

Despite an increase in volume during the quarter, we observed sustained or further improvements in our KPIs. Arbitration and rematch rates declined sequentially by 71%, which resulted in further improvements in downstream KPIs such as dead legs of transportation, which improved by 13%. Our transportation logistics have improved materially from the back half of last year with an average of approximately seven days to deliver a vehicle.

Additionally, we have materially improved our titling process. And when compared to last year, we observed a 30% reduction in the time it takes to obtain and subsequently process a title.

Improvements in our titling process stem from greater operational rigor and bolstering the titling team. A shorter titling turnaround time has also resulted in improved accounts receivables and inventory balance.

Although we saw the Wholesale market soften in Q2, we did see greater transactions on the CarOffer platform. We ended the quarter with 20,793 transactions, up approximately 19% quarter-over-quarter. The increase in dealer-to-dealer volume despite a softening market was in part driven by rental fleet customers buying ahead of summer travel.

We have had rental companies leverage our platform in the past to meet their fleet requirements. And we are closely monitoring their use of our platform to ensure we are maintaining a healthy buying and selling environment for our dealer partners and building a platform for the long-term.

Instant Max Cash Offer, on the other hand, remained flat quarter-over-quarter as we continue to limit volume. The net overall increase in transactions resulted in gross merchandise sales or GMS of $575 million for the second quarter.

Although we are proud of the progress we have made and remain confident in our ability to maintain a stronger business, there's still more work to be done. With our operations now functioning at a higher caliber, our attention turns towards garnering dealer trust and confidence to scale the business in a challenging macro environment.

Over the past two quarters, we bolstered the CarOffer technology platform by incorporating new tool sets designed to enhance dealer confidence and boost conversion rates.

While sight unseen matrix buying and selling has proven successful in a stable or positive wholesale environment, we are now enhancing our matrix tooling with additional features. These additions aim to provide dealers with the assurance and comfort they need to purchase a vehicle in a price declining market....

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