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

Greetings, and welcome to the CarGurus, Inc. Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scot Fredo, Senior Vice President of Financial Planning and Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to CarGurus Investor update call. We'll be discussing CarGurus entering into an agreement to acquire a majority stake in CarOffer, as announced in our press release this morning before market opened and included in the deal announcement presentation posted on our Investor Relations website earlier today. With me on the call today are Langley Steinert, CarGuru's Founder and Chief Executive Officer; Jason Trevisan, Chief Financial Officer and President, International; and Sam Zales, President and Chief Operating Officer. During the call, we will make statements regarding our business that may be considered forward-looking within applicable securities laws, including statements concerning our expectations for future financial and operational performance, our business, growth and international strategies, the potential impact of the proposed transaction with CarOffer on our business, our plans to integrate and operate CarOffer, the potential growth and efficiency of CarOffer and the synergies between our businesses and other statements regarding our plans, prospects and expectations. These statements are not promises or guarantees and are subject to risks and uncertainties that could cause them to differ materially from actual results. Information concerning the risks affecting our company is available in the investor presentation regarding the proposed transaction with CarOffer offer that can be found on the Investor Relations section of our website as well as our most recent reports on Forms 10-K and 10-Q, which, along with other SEC filings, can be found on the SEC's website and in the Investor Relations section of our website. We undertake no obligation to update forward-looking statements, except as required by law. With that, I'll turn it over to Sam.

Thank you very much, Scot. And thank you to all of you joining us on today's call. I'm thrilled to announce our agreement to acquire a controlling stake in CarOffer, which we intend to close in January 2021 after a period of regulatory review and satisfaction of other closing conditions. Since our inception, we've aspired to be a partner to the dealers, helping them grow their businesses in data-driven ROI efficient ways. To date that has included delivering them the largest audience of in-market shoppers at an attractive ROI, arming them with tools to optimally price and merchandise their vehicles and most recently, giving them features like area boost and consumer financing that help them advance digital transaction capabilities on our platform. As the automotive industry continues to move further online and historical geographic barriers to car shopping weaken, it has become even more important for dealers to not just sell their vehicles well, but to stock the right inventory in the first place. In recent years, wholesale vehicle sales have been shifting online and those trends have accelerated as a result of COVID. The traditional in-person physical auction model is being supplanted with online transactions that are easier, faster and reduced geographic constraints. Just as dealers are able to sell a wider consumer audience with online and delivery capabilities, the same is true for dealers' abilities to source vehicles online from a wider audience. Acquiring the right inventory at the right price has historically been both a challenge for dealers, but also a competitive advantage for those who do it well. What better way to sell cars and trucks that destock the makes and models that people want to buy. This is where we see an opportunity to better serve our dealers. We believe CarOffer addresses dealer sourcing needs in a truly innovative way. CarOffer complements our retail platform with a wholesale instant trade platform, known as the buying matrix. The buying matrix enables any dealer to buy and sell vehicles' wholesale by aggregating buyer interest and matching them with seller interest from thousands of dealers across the country without the burden of timed auctions. The combination of CarOffer solution with our platform will be the -- will be significant for 3 reasons: First, we have the largest listings dealer network in the country with roughly 24,000 subscribed dealers. As we expand the network of dealers using CarOffer, we expect the platform to only get more valuable as there will be more market participants to provide inventory on the sell-side and liquidity on the buy side. Second, retail data is exceptionally valuable to have in a wholesale transaction. CarGurus' instant market value data will help dealers intelligently price vehicles on CarOffer. And third, CarOffer's live wholesale market data will provide real-time insights and actual offers on CarGurus dealers' inventory. We believe these advantages will make the combined CarGurus and CarOffer platform, the most complete solution for dealers to buy and sell vehicles at both retail and wholesale. With that, I'll turn it over to Jason to provide a little more detail on the company and review the nature of the transaction.

Thank you very much, Sam. Having spoken about our vision for CarOffer, and how we expect it will fit into the combined CarGurus CarOffer ecosystem. We would also like to share some context that illustrates how impressive CarOffer is on a stand-alone basis, traction. The pace at which the company has gained scale and adoption, both in terms of transaction value and dealer rooftops is nothing short of impressive. We're not disclosing financials now, but we are sharing gross transaction volume, which eclipsed $350 million in Q3 of this year. To put this in further context, CarOffer signed its first rooftop in August of 2019. And as of the end of November has grown to more than 2,000 installed rooftops. This rapid traction is particularly exciting as there is still an incredible amount of room for further growth. We estimate the North American automotive wholesale total addressable revenue opportunity to be between $7 billion and $8 billion annually. Ease of use. We are so excited with the ease of use of their platform. The instant buying and selling experience through CarOffer's buying matrix is differentiated from traditional auctions and the dealers can buy or sell inventory at any time using limit orders. No more waiting for a live auction or monitoring an online wholesale listing to see if their bid was accepted. What furthers our excitement is that participating dealers have given glowing feedback in this regard. Data and analytics, similar to our own roots, we admire how data-driven, innovative and scalable CarOffer's technology platform is. Buying matrix can even provide predictive inventory suggestions based upon dealers' desired parameters. The system can automatically find and bid on inventory based on specific attributes like price, year and mileage, to name a few, freeing up time and overhead for the dealer. Much like CarGurus, CarOffer uses advanced analytics to create a superior product. And finally, the team. We are incredibly impressed by the leadership, culture and team. Founder and CEO, Bruce Thompson, has grown several successful automotive software businesses. And at CarOffer, he and the management team have created a culture that is data-driven, transparent, innovative, customer-centric and they move quickly. On behalf of all of CarGurus, I want to extend a warm welcome to our future colleagues at CarOffer. Although the leadership team at CarOffer will continue to run the business independently, we are so excited to begin supporting each other's businesses after the deal is closed. Close out, I'd like to discuss just a couple of high-level details on the transaction. The acquisition announced today is for a 51% interest in the company at a $275 million enterprise valuation. For the purchase of this initial controlling interest, the consideration will be comprised of half stock and half balance sheet cash. We did not issue any debt for this acquisition. As part of this transaction, we have the option to buy the remaining equity in the company in stages of future dates in 2022 and 2024 at predetermined multiples. Full transaction details can be found in the definitive transaction agreements included with our current report on Form 8-K filed with the SEC today for this deal and summarized in the presentation posted on our Investor Relations website this morning. Thank you again for joining us. We would now like to open the line for Q&A.

[Operator Instructions] Our first questions come from the line of Tom White with D.A. Davidson.

Congratulations on the deal. Sounds like an interesting one. Maybe hoping you could just give a bit more color on what was it specifically about this company's technology or their business that kind of really attractive to you guys? It seems to me there are maybe a handful of other kind of start-ups or technology companies that are kind of trying to disrupt the wholesale kind of supply chain for pre-owned vehicles. So maybe just a bit more color on why these guys kind of rose to the top. And then just a quick follow-up. Is there a sourcing inventory directly from consumers element to this? I think at one point, it sort of sounded to me like maybe that might have been something that was interesting to you. Maybe that's part of the future road map. Any color you could give you there would be great.

Sure. Thanks, Tom. It's Jason. Thanks for the question. Yes, a number of things that drove us to get so excited about CarOffer. And Sam and I mentioned some of them in the script there. But first, I would say, we've known them for a while, and we have watched Bruce and team basically do what they said they were going to do. And in fact, even exceed their own expectations in terms of building a product that dealers want and gaining scale and adoption very, very quickly. So we had a relationship. We like the sector for the reasons that Sam outlined in particular, which is that we see a convergence of retail and wholesale, driven by digital adoption of both as well as the use of data for making decisions on both sides of that. And then finally, the sort of breakdown of geographic barriers that have existed in auto industry historically that have made it more of a regional business. This starts to open it up into more of a national business, and we think when you apply data and analytics to that breakdown of geography, you start to find some pockets of value in the industry that we can help unlock. In terms of your question that there are a number of startups trying to build solutions in digital wholesale agree that -- sorry, I hear there's an echo. So I'm going to swap speaker here, one second. We do agree. There's a number -- I mean, there's obviously entrenched players and then there's a number of companies trying to establish themselves in a digital way and many of them are growing. So digital is taking share from traditional at a really rapid clip. What makes CarOffer different and more exciting in our view, is the efficiency of the model. And they're able to achieve that efficiency because of technology and data. And so it takes a traditional auction model and moves it to more of a market-based efficient bidding system. And then they have pulled together all of the back end, which also makes the transaction seamless for both the buyer and seller. On the consumer sourcing piece, it's -- our first and -- first focus is on helping them continue to grow, and that's really in a dealer-to-dealer model. We do know that there is interest among consumers to try to find new ways to sell cars, and we offer our P2P solution for that. So that might be something in the future, but that's not a first focus for us.

Our next questions come from the line of Ron Josey with JMP Securities.

Congrats on the acquisition. Just can you provide a little more insight on -- and I'm hearing feedback too, hopefully, you can hear me. But just insight on the integration with your dealers and CarOffer's dealers, how it might work? And I think you just said, it's more of a dealer-to-dealer offering now, but how does this impact? Does it all your peer-to-peer business and how you're thinking about that?

Ron, it's Sam Zales. I'm going to use direct here instead of a speaker. I hope you can hear me okay. We can't really speak to the specific plans for integration. I think you can look at the CarOffer business with 2,800 enrolled dealer clients right now. And I think that there is a tremendous overlap for our dealers to utilize this platform to both source and acquire inventories and sell it as well. This instant trade platform that we've mentioned is just a tremendous opportunity to overlap with what our dealer is saying. Today, we're doing so much for our dealer community to allow them to sell and retail. Now this is the opportunity every customer has said to us, our biggest challenge is sourcing inventory? How do I price it to market? How do I ensure that I get the best opportunity to both buy and sell inventory in the marketplace? So certainly, for our medium and large franchise dealers and the independent community, this is traction that CarOffer has gotten, it's going to be remarkably helpful to our business overlap with the connection of our retail platform now as a wholesale platform. So I couldn't be more excited about that. I think Jason just answered the question about consumer. Yes, certainly, there's a long-term play to say that with our 38 million visitors at the site, many of whom are looking to sell their vehicles, consumer to consumer, as you know, our peer-to-peer offering that we've got, this brings a whole new dimension to allow that consumer to look at a live offer from a dealer to think about a transaction that can happen more quickly, consumer to dealers. So we think that is a great next step for our business, but we're not getting ahead of ourselves. There's a tremendous overlap for our dealers immediately to say I can take advantage not just of the CarGurus' platform for selling retail, now I can source and sell vehicles through this CarOffer platform.

That's great. And just a quick follow-up. Just -- and I should know this, but this is a subscription business, I presume, so dealers sign up for the service and the transport of the vehicles, that's something that CarOffer helps to organize?

I sorry, going to off speaker phone. Thanks, Ron. Yes, let me be explicit. This is not a subscription platform. I think this is one of the key differentiators for a CarOffer versus other platforms that are out there in the marketplace. It's a transaction fee model. And if you've seen the price points in the marketplace, the price point for our CarOffer is competitively advantaged at $275 for both buy and sell. This is what makes this platform so not just what Jason talked about, so competitively advantaged in its data and technology infrastructure. But there is no subscription fee. So for a customer, it is purely a success fee, if you will, like selling or buying fee that's below market. Typically, at the price points CarOffer is selling at, a very advantaged price point. And we think that's another reason this rapid adoption has happened with the customer base in just the last 12 months or so that the company has been in transaction mode.

Our next questions come from the line of Dan Kurnos with the Benchmark Company.

Sam or Jason, just can you talk about the dealer overlap and kind of maybe to the extent you're willing to talk about the makeup of their existing rooftops. And I know you're not giving out financials, but is there any way to how -- at least directionally, how we should think about as this thing scales over the next 3 years? The impact to margins relative to your long-term targets?

Dan, let me start with the dealer overlap, and I don't think -- I can turn it to Jason, but I don't think we're talking about predictability of future margins, but I think we're so excited about latching this incredible platform to our core business. The overlap is significant. And I guess, I'd say that the biggest segment connection between what CarOffer's 2,800 enrolled customer rooftops is against our platform is the medium and large segment of the market. I think it's a platform that could work for the small independents. But I think as we look at the overlap. The success the CarOffer has had is both the franchise and independent medium and large customer base. There is so much leverage for a dealer to be able to say, I need 5 of these vehicles by make, model and trim. And I can get that all from one platform. It might be a larger purchase or sale of aged inventory. And as we -- you've known our business, Dan, over time, that that side of the market in the medium and large independent and franchise dealer base is what really drives success for our scale of our model. So if that gives you some predictability to where we're focused, that certainly is a great overlap between the 2 businesses, and we're excited about that as we go forward.

And I can speak -- it's Jason. I can speak a little bit. So you were not sharing financials now and need to clear HSR and regulatory first. But I would reiterate just how rapidly they've grown. I mean the launch in August of 2019 to the transaction volume in Q3 this year gives you a sense for how quickly they've come out of the gate with a ton of momentum going forward. They have a very capital-efficient model. And frankly, that's one of the things that has been so impressive and appealing to us because it's similar to how we started. So there are many cultural parallels, including capital efficiency, which is important to us. As a post-close, we will disclose more details, obviously, in part because it is a transaction-based revenue model. They are growing so rapidly, and they do have a different P&L structure than we do, but it's one that's very efficient, which is appealing.

Our next questions come from the line of Jed Kelly with Oppenheimer.

Just looking at the presentation, it's -- what's about $70 million, $71 million of cash on hand in January. Is that right?

No. That's -- we have marketable securities. And you're talking about...

No. I take cash -- I'm sorry, the cash to fund the transaction.

Roughly. That's roughly, right.

All right. That's great. And then just -- if you think about it, I guess, like the wholesale model for dealers has always been pretty profitable. I mean, how does this impact your relationship with dealers? Do you think there'll be -- how do you think the dealer community will view this acquisition from the wholesaler perspective?

Thanks, Jed. I think this is a complementary offering that will be, we believe, will be widely positively received. I think we've pioneered in the industry to create what we think is the highest return on investment retail platform to allow dealers to sell to consumers. Whatever the dealer says in the market is I constantly need a new source of acquiring inventory. It's the biggest pain point to every dealer we speak to. As you know today, that offering and the solution they provide that's provided in the industry is an in-person auction model in many cases, which is a local regional experience and send your team to the local or regional auction. As that moves to a digital platform, we think this instant trade platform is so important to the market because it's automated. It's predictive. It doesn't require a trade manager to sit and watch and look for vehicles showing up, it allows that transaction to happen with certainty, and we think that's going to be tremendously valuable. As I said, the digital arena allows it to be nationwide. We think geographic dispersion is so important to the success of the wholesale industry because now, a dealer who's got a soft top wrangler, but it's sitting in on a lot in Chicago or here in the Northeast. It's going to be much more valuable at this time of year in the southern part of the market. Likewise, an all-wheel-drive vehicle in the southern part of the market is much more valuable right now up in the northern market. So geographic ability to come nationwide is going to be critically important. And finally, as I mentioned before, low transaction fees, this is a win-win opportunity for dealers, and we think the synergies are tremendous.

Great. That's helpful. And then I guess -- and I'm hearing an echo too, but its kind has been shown as the Internet's evolved over the last 20 years, investors are preferring more vertically integrated models. So I mean if we're looking 2, 3 years out, I mean, how do you see leveraging this transaction to make CarGurus more vertically integrated? And then one more question. On the $7 billion to $8 billion that Jason referenced, is that the volume? And what's the revenue opportunity on that?

I can take that. Thanks, Jed. It's Jason. So on the first part of your question, we want to be the platform. We think we can be the platform where dealers go to buy and sell cars. And again, as we've talked about because of a handful of reasons, we see that -- we believe that retail and wholesale are converging. And so if in one platform, a dealer can see full information around retail pricing at market level and wholesale pricing at the market level, the biggest data set and that is going to give them the most information, the most intelligence to decide what to sell and where. So I don't know if that's -- I don't think of that as vertical integration, I think of that as giving a much broader solution and a more intelligent solution to dealers and really be the -- help them with -- help them develop further their intelligence on inventory stocking and maximizing margin and revenue. In terms of the TAM, yes, the $7 billion to $8 billion is a revenue opportunity in the market. There's 11 million to 12 million cars sold in wholesale a year. And so the transaction volume is in the dozens of billions of dollars.

Our next questions come from the line of Nick Jones with Citi.

Great. I guess, first, so does CarOffer have inspectors? How are the cars, I guess, being reviewed before they're posted on the platform for auction or within the market?

Yes, Nick, it's Jason. They partner with a variety of inspection providers. So they have a condition -- standardized condition report. So the buyer and seller are aligned on the same page with the condition of the car. They also have very robust arbitration policies and so forth. So there's -- what we've heard from dealers is that there's high confidence in the purchase of the car.

Got it. And then I guess, I think some other -- some of the maybe the larger still private companies growing are also getting into offering financing for smaller dealers for inventory? Is that something CarOffer is doing today? Or is that an option in the future?

I'm sorry, between speaker and your piece, I missed the core of the question. Can you ask it one more time? Sorry.

So I think some of the larger -- some of the larger private companies trying to disrupt this space are offering funding for inventory to smaller dealers. Is CarOffer are doing that today at all? And is that an option in the future?

Got it. Yes, they do offer financing for dealers for planned financing is an important piece of the wholesale business, and they have relationships with most of the key providers.

Our next questions come from the line of Naved Khan with Truist Securities.

Yes. A couple of questions on this. So Jason, you mentioned that CarOffer uses a variety of inspection providers to reinstate the condition of the vehicles. Is that partly on the cost side of the equation for them or is that a cause that is gone by the sellers or the buyers of the cars? And then with respect to international, if I think of the 2 markets that you're in, Canada and the U.K. is there an opportunity to basically deploy this platform in those markets as well?

Naved, it's Jason. I got the second part on deploying international. But again, I'm just going to stay on the earpiece now. I missed the first question. Can you ask one more time, sorry?

Yes. So you mentioned that CarOffer uses a variety of inspection providers to the condition of the vehicles. Is there the cost as part of that is that something that's borne by the dealerships or whoever is selling the vehicles? Or is it part of the CarOffer's cost structure?

The inspection is borne by the dealer. And so it's rolled into the buyer and seller fee. And as I think it was Sam who was mentioning earlier, we believe that the total fees that dealers experience on CarOffer are extremely competitive relative to fully rolled in, including inspection, transportation, et cetera. Extremely competitive to alternatives in the market.

And then international?

Sorry. Yes. On international, yes, I mean, just state the obvious, the wholesale market exists in every market. And so there are entrenched incumbents there in Canada and the U.K. We think that the same evolution is happening going from physical to digital in those markets. Maybe it's a little bit behind here. But the platform that CarOffer has built, again, is very efficient and very sophisticated. And so -- whereas if you picture a wholesale provider that still had physical auctions to bring that to another country would be difficult, but the intelligence of the buying matrix and applying that to a different market is certainly a lighter lift. And I wouldn't say that it's easy, but it's certainly a potential. We are not talking details, but I think the runway in North America is so significant right now that, that's going to be our primary focus for the foreseeable future.

Our next questions come from the line of Marvin Fong with BTIG.

Most of my questions have been asked, but just on the mix, the $350 million of volume, is there any -- is it pretty representative of wholesale overall? Or does it skew in any particular way? Perhaps for example, older cars versus newer cars, something along those lines? And then just a broader question. This appears to me to be one of your largest deals in recent years, much larger than Autolist and in heads. Just wondering if there's anything to read there about your appetite for M&A? And how you're thinking about deploying M&A to improve growth going forward?

Thanks, Marvin. On mix, I would say, yes, it's representative of the wholesale market, but it does probably skew to slightly more valuable retail-ready frontline cars. It works for cars at all price points. But the -- where some platforms might have an average unit value of, say, $5,000 CarOffer SKUs much higher than that. In terms of -- reading into this and our overall M&A strategy? Yes. First thing I'd say is, yes, it's definitively bigger than anything we've done thus far. Second thing I'd say is we're really excited about how the structure of the deal aligns us with them and it incents all of us to help that platform grow as quickly as possible. And we have long said that M&A is a critical component to our strategy. It can help us scale in areas where we have existing traction, and then it can help us accelerate in areas where we're still building out. This is an area where it helps us accelerate in wholesale. And -- but we think that the touchpoints between wholesale and retail and listings, as we've talked about, are many and are important and are the future of automotive technology for dealers. So we're going to continue to have an appetite for M&A, and it's going to -- I would suspect range from small tuck-ins as well as much bigger opportunities like this.

Our next questions come from the line of Doug Arthur with Huber Research.

Almost all of my questions have been answered. One of the criteria you've listed for acquisitions has been both talent and technology, and you've sort of touched on the uniqueness of the technology. I'm wondering if you can elaborate on anything unique that they could bring to the CarGurus platform that you -- capability, you didn't have it, you might be able to scale through the system. Realizing it's a different focus.

Yes, Doug, it's Langley. I think what attracted and Jason talked about this earlier, what attracted us to the company is their -- is in fact, their technology. I mean, I think there's some macro trends around physical auctions going online, which is quite obvious. But within even the online auctions, we thought these guys are highly differentiated because it's more of a predictive platform in the sense that you don't have to actively monitor an auction. And so it's consistent with our company, it's leveraging technologies to help dealers be more efficient. So we're just really excited about the technology and how it's scaled and how it is really differentiated. I don't know if that answers your question, but...

Our next questions are from Brad Erickson of Needham & Company.

I have 2. First, so you just mentioned CarOffer, I think, works with around 7% of dealers out there. So today, I guess the gross transaction volume, though implies still well below 1% in terms of total volume. So I guess the question is, what's the gating factor to gaining more share at those dealers? And I guess more specifically, just how do you get a look at more inventory? That's the first one. And then the second one is maybe, Sam, can you just explain the second bullet point of why you're doing this deal a little bit more where you talk about the retail data being valuable? And not sure if you're meaning that you're using CarGurus' inventory data more or CarOffer's, but either way, does this help you with attribution on your core listings product in any way? Is that what you're implying there? Just a clarification.

Yes. Thank you, Brad, for the questions. I couldn't be more excited about the scale and speed to market the CarOffer has achieved in the last -- since August of '19 to think that they've moved that quickly through the market in that period of time is tremendous. I guess I'd look at that and say, it's a message that the toolset they're providing, the technology they're providing is truly differentiated. I think the opportunity that you're mentioning to get to our scale, and we're at the largest base of subscribed dealers in the marketplace, is the opportunity we have, and we can't talk much about that, but you can imagine putting our sales team into the opportunity to key up the ability for dealers to have the best wholesale, digital wholesale product in the market in front of them is a tremendous opportunity for us. So how do we scale, it's putting the 2 sales operations together and keying up an opportunity for dealers who are using our retail platform to say, now I've got a buying and selling platform wholesale that I'm really excited about. So that's number one. Number two is what we mentioned about the pricing capability is what our instant market value capability does for the CarOffer business. You can think of how valuable it is for a dealer to say, okay, I'm looking at what I'm buying or selling for dealer to dealer, how do I compare that nationwide to retail pricing. So I know where margins are, know how to merchandise my vehicles. I know that I might have a piece of aged inventory, but there's an automated did sitting there from another buyer across the market that I know will help me achieve the best margin for our business possible. So the opportunity to see pricing of vehicles by make model trim nationwide for a dealer, the retail price point versus the wholesale price point, we think, is a remarkable synergy between our 2 businesses and is what every dealer is looking for to understand where do I put a piece of aged inventory? How can I sell it at the best price possible? Or how do I buy at the best price possible to then sell at retail. And we think that combination of their tech platform with our data is truly unique in the marketplace and will be a differentiating factor for dealers.

There are no further questions at this time. I would like to turn the call back over to Langley Steinert for any closing comments.

Yes. First off, I'd like to echo Jason's message welcoming the CarOffer folks to our family. We're really excited about the technology that they possess and the ability to apply this technology to a really large addressable market. Sam mentioned our commitment to helping dealer's source inventory. Sourcing inventory really is -- certainly, in these times, a dealer's biggest pain point. So we're really excited about the opportunity. I want to thank everyone for calling in this morning, and take care.

Thank you. That does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.