CarGurus, Inc. (CARG) Earnings Call Transcript & Summary

Sure. And for everyone's benefit, AARSD is an acronym. It is average annual revenue per subscribing dealer. So it's how the dealer pays us a year. And as Ron said, the 3 key drivers -- that there are 3 key drivers, and the largest 1 over the past few years is the volume of leads that we deliver to dealers has been growing. So if we deliver them more leads, we can charge them more money. Lead dispersion is one of the more nuanced elements of our business, but it's an important one, and I think it's one that's becoming more into focus for folks. And that's the fact that last year, we grew our total lead volume 14% to dealers. However, there were some dealers that saw 80% lead volume growth and there were some dealers that saw 0% lead volume growth. So leads get dispersed across on our platform, across dealers. And in some respects, because we are a freemium model that sorts by deal rating, we're going to have leads that go to free dealers, we're not going to monetize those. We're going to have leads that go to low paying independent dealers. And then we're going to have leads that go to higher-paying franchise dealers. And we cannot necessarily influence that in a terribly meaningful way because we want to give the information to the consumer and let the consumers choose.

Meaning the best car for the best -- for the user?

From the best dealer for that user.

Right.

That said, we have started to introduce elements to our platform that allow dealers who want to get more by paying more to do so. So we have 1 element, which are -- a very limited 3 on desktop, 1 on mobile, number of featured slots. They're labeled feature. They have the deal rating that they would always have. They can't influence that, but it allows a good and great deal -- fair, good and great deals to be placed at the top. We also have a product that allows the dealer to pay for the top slot. And so if it's a great deal and they're paying for the top slot, they're going to get more leads. We've introduced a product which is called Delivery. That allows the dealer to show their inventory to a wider radius of consumers if they're able to deliver the car to that consumer and have a 7-day return policy. So we have started to do some things which allow dealers to pay more to get more while still maintaining the integrity of the deal rating. The other thing that we can try to leverage is the fact that dealers who do pay us, we have more information on them, and we're able to better judge the quality of the user experience with that dealer. And the notion of a quality score for dealers is something that we've been exploring for quite some time, which could give benefit to dealers who treat their customers better and who offer more on our platform via different ways to connect with consumers than a free dealer would. What we need to be careful is we have to maintain the integrity of the user experience. And so we are looking for opportunities to widen the value delta between a paying dealer and a free dealer while maintaining that consumer integrity. And so as we grow leads 14% last year, we can do our best to be able to capture all of that 14% value growth by having those leads go to paying dealers and dealers who might be willing to pay more to get more.

And without sacrificing the consumer experience?

Without sacrificing the consumer experience.

This is a key. So that's something to watch for. And then on the product side, I think it's always fascinating when you think about the entire ratio or how many of your dealers are adopting more than 1 product, and I think they've got to 30% last year. You highlighted Delivery. So the core listings product, I'm assuming, is number one. And then you've launched in the past few years, retargeting SEM Plus. Dealer Display has been around maybe the longest, and then you have Delivery. Can you help us understand how you balance those? Maybe of the 30% of dealers that do both, do they -- is Delivery the one that they do both of or...

So the one that we've had in market for several years is a display product, which allows dealers to advertise on our site. So it's a brand boost to the user experience when they're on our site. And so when we started reporting this attach rate, probably 5 or 6 quarters ago, that was 95-plus percent of the attached examples. Since then, and it was, I think, 24% attach rate. About 5 quarters ago, we launched amplify, which is a retargeting product. So that allows dealers to market to consumers who have been on our site but are now elsewhere on the web. We have information on that consumer, and we know that they're looking for a type of car that that dealer has in that dealer's geography, and so it's very targeted, and that drives the user directly to the dealer's website. We -- so we launched that, and we launched Delivery about 5 quarters ago. And both of those products have grown quite rapidly. I mean -- and so that has -- it's on the backs of those 2 that we've gone from 24% to 30% attach while the denominator of total paying dealers has been growing as well. We think both of those products have ample runway for further penetration, and they obviously have different AOSs associated with them. But the way we think about an overall customer relationship is our listings product, obviously, helps them acquire customers and build a brand on our platform to our audience. Our dealer and delivery is an ancillary sort of feature to our listings product as is featured, as its featured priority, and so there are a number of things around that listings product. Our digital marketing products allow dealers to take our audience and go get it elsewhere across the web to generate more leads directly to their site, generate traffic to their site. We're going to continue to introduce those. They spend about $11 billion on digital marketing products, dealers do in the U.S., they only spend about $3 billion on marketplaces. So in digital marketing, we're going after a much bigger TAM than we are just in listings. And then the third bucket is dealer software. And so once a dealer has acquired a prospect or brought them into their business, they then need to convert them, they need to nurture them, they need to merchandise their vehicles better, they need to price their vehicles better. There's -- they need to run their dealership. There's a number of things they probably spend $5 billion to $8 billion in just software to run their dealership, and we view ourselves in a really prime spot to work our way through that value chain from simply acquiring people from our marketplace into acquiring them elsewhere and then converting them and selling more cars.

Of the -- I think that's fascinating. So of the Delivery, really, 5 quarters ago, really took off, it sounds like. And maybe the growth there comes from just more dealers who are able to use Delivery would sign up for that. Digital marketing products, I think you're still launching newer ones. So you talked about amplify, the display, social is coming on here...

Social launched a couple of weeks ago. Yes, so our digital marketing is this middle bucket that I talked about. As Ron just said, focus was our first, which is our on-site display product. Amplify is the retargeting product I mentioned, and then we're launching -- we launched social earlier this year. And those 3 are getting wrapped into something we're calling RPM, which is a pretty comprehensive digital marketing platform that allows dealers to buy it at different tiers, all of which leverage our data on the consumer.

And SEM Plus was even mentioned.

And SEM Plus was even mentioned because the pricing of that is quite different, so it's not sort of core to RPM, but we also have a product that helps dealers that manages through tools, their search budgets as well.

Got it. I want to get to questions in a second here, but I do want to sort of touch a few things that I think are important. Let's see, important because we just get a ton of questions on them. So the comment or the objective or the goal, the strategy change this year around OEM advertising. Can you talk about just the impact to that? Maybe describe it a little bit more and your strategy behind taking out some display ads on the listing site.

Sure. And the only thing I'd edit there is I don't think it's a strategy change, it's just a continuance of what we've been doing. So the short way to think about this, the simple way to think about this is, the more ads you have on a website, the less the consumer is likely to deeply engage in the website and convert to a lead to a dealer. They get distracted by ads. And so our competitors have a much more ad-intensive experience than we do. We have always had a very streamlined, clean user experience because our ultimate goal is to generate leads for dealers. And so we make decisions through tests all the time that say we will sacrifice real-time advertising revenue from the OEMs in exchange for generating more leads to dealers because, ultimately, we get paid for leads, we get paid for driving business to the dealers. It's a subscription business, we like it more. So the guidance that Ron is talking about is we said that our advertising business, which is, again, is our -- the OEMs for GM advertising on our site is going to be roughly flat '19 to '20 because we are continuing to make a series of decisions that prioritize leads over ad revenue.

And the experience there is you just wouldn't get lower ad loads, should improve user experience, shows more listings.

Lower ad loads definitively drive more leads to dealers.

And because you're seeing more listings?

You're seeing more listings, you're distracted less, you have a better overall experience.

Okay. And then -- so with that, let me open up to questions. I have more, but if there are any questions in the audience, we'd love to hear them.

Can you talk about how you take inbound lead sources, organic versus paid versus direct ads? And expand on your marketing dollars?

Sure.

Maybe repeat the question?

Sure. So the question was talk about our sources of audience and traffic and the trends there. And then also the impact of those trends on marketing and cost of customer acquisition on our P&L. Correct? Okay. So we don't typically give discrete percentage breakdown by channel. We have given some information in our investor deck on our site that breaks down our traffic acquisition in a chart that shows that we have about 15 primary sources of traffic. Over time, those sources have -- they've proliferated, and we have reduced concentration in almost every one of them. So we've become less dependent on any one of them. We often get asked about Google organic traffic, and we have given data that said about now, call it, 2.5 years ago, about 25% of our traffic was from that. And about 9 months or so ago, that was down to 15%. So our -- the percent of traffic coming from organic is coming down, and the largest growth area is in what we call owned channels. And owned channels are app, e-mail and branded search, so ones that we can control and more and that are much less expensive, more efficient. So the net impact of all of that, coupled with improving conversion rates on our site, improving efficiency in our algorithmic traffic acquisitions, and we've seen pretty meaningful leverage in our sales and marketing line, and we've always talked about our ability to achieve our long-term margin target is predicated on gaining leverage from the sales and marketing element of our P&L, which we've done by several points each year for the past few years.

Great. Any other questions? All right. I'll keep going as we -- before we close here.

Go for it.

So -- goodness. We haven't even talked about international or the Autolist acquisition, but let me go towards the new offerings around peer-to-peer and financing.

Okay.

Because I think those are things that we just always get questions and I think they're more nascent overall. And so quickly, what needs to happen for peer-to-peer to get to start being a material contributor to revenue? Are you there now that it's fully digital and now it's raising awareness? Or talk to us about peer-to-peer.

I don't think we're there yet from a P&L impact. But we did hit a big milestone at the end of last year by being able to offer a fully digital transaction, which is important because the alternative, as I said before, and craigslist is a very -- typically, is a very kludgy process that involves a lot of money and has risk and fraud elements to it. The value prop in peer-to-peer and our ability to monetize it is largely driven, not just by affecting the transaction, but by being able to attach warranties and roadside assistance and consumer financing and insurance to it. And you need to both grow the volume and also work in those attached elements. And so it's a complex problem. Our digital transaction is only in certain circumstances in certain states. So to get to ubiquity, we still have some work to do.

Makes sense. And quickly on financing, as we get into overtime.

On consumer financing. So the value prop we have there, the product we have there is we will prequalify a consumer for auto financing before they go into the dealer. So when they go into the dealer, they can go in and say, "I was prequalified for this loan, on this car." And they are much more likely to convert. And the dealer is able to make more money because they are including financing on it. The dealers made whole in that scenario, we get paid by the lender, and it's now available on the vast majority of our cars. It is a -- dealers love it because of the higher propensity to convert. Lenders love it because it allows them to break out from the fray of other lenders. We like it because it's a high-margin revenue stream, and it is a really important step toward more complete digital retailing. And more complete digital retailing is us being able to offer the ability for someone to buy a car completely online from a dealer, and that allows the dealer to compete with the virtual dealers who are growing and have built really good consumer experiences and are making the dealers feel as if their geographic -- historical geographic advantage is less advantaged.

That's great. Well, with that, Jason, we'll leave it there. Thank you very much.

Thank you. Thanks, Ron. I appreciate it.