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

Good morning, everyone. It's the fourth day of the 24th Annual Needham Growth Conference. I'm Chris Pierce in the Needham research department, joined by Jason Trevisan, CEO of CarGurus. Jason, thanks for taking the time, and Happy New Year.

Thank you, Chris. Same to you. Hello, everyone.

I thought we'd kind of jump right into it, and we can start with CarOffer. The acquisition, that kind of was the story of 2021 for you guys, I think, most investors ask about. And then from there, we can kind of talk about some used car seasonality. We'll jump back to the base business and then kind of move over to 2022 and maybe the digital retailing end-to-end opportunity.

Terrific.

So just why don't you kind of take the floor and just kind of broadly give us an overview of CarOffer and kind of how it's different from what's out there, and then we'll kind of narrow it down with some questions. [Operator Instructions]

Terrific. Thanks again, Chris. So yes, CarOffer. We are so excited about CarOffer, both because of how it's performing in its own right, but also the potential that it gives as we start to combine our platform. So CarOffer is a digital wholesale trading platform. So the dealer-to-dealer wholesale arena is about a $10-plus billion market that has historically been served by physical auctions. In recent years, there has been a push, for obvious reasons, to move those auctions online and make it more efficient. But what CarOffer does is it's disrupting that industry similar to how CarGurus disrupted the listings industry. CarOffer has an instant trade platform that allows dealers to transact automatically using rules-based strategies instead of using a more traditional auction -- a timed auction process. So it creates both a buying and a selling experience that is far more efficient, far less time-intensive, and we think results -- and we think our customers are seeing results in a better outcome. So the Matrix allows -- we call that the Matrix. The trade platform is called the Matrix, and it allows dealers to input information of what types of cars they're interested in buying and what their pricing tolerance is or what their limit orders are. And so it works more like, honestly, a stock market than it does a traditional vehicle auction. And it provides a limit order platform for buyers sort of real-time ongoing liquidity for sellers without having to put cars up for auction, without having to attend auctions and bid on those cars. So it works 24/7, and it allows us to effectively put offers on every car and sitting on the lots of dealers who joined the platform. So it's highly efficient, which we think is borne out by its financials. It is less people-intensive, less time-intensive, and as a result, it's a profitable business unlike a lot of the other platforms that are trying to scale and burning quite a bit. And then when you talk to dealers who use it, they say, "This has changed our -- how we buy cars. I mean this is a far more efficient, far more effective and automated platform."

And just kind of 2 questions to kind of follow along with that. There is kind of a 2-part question, I guess. If I think about looking at if you're paying dealers on the platform to subscription dealers and then I think about how it used to look for, I guess, how should investors think about an upper bound for dealers you could spend up on this platform? And then dealers -- I guess is there a common denominator for dealers that aren't a good candidate for CarOffer that you're finding? Like not necessarily that you're finding, but just talk about the overall CarGurus-paying dealers and then CarOffer dealer kind at this point in time.

Sure. So right now, there are -- in Q3, there are about 7,000 enrolled dealers on the CarOffer platform. We have mid-20,000s paying dealers on our platform but many more who have listed inventory on our platform. I don't know of a dealer who doesn't participate in the wholesale arena. And so I would think that in the long run, every dealer is a good candidate for a more efficient wholesale platform. Today, the average price of a unit that trades on CarOffer is above $20,000. And there's a couple of reasons why that band is where it is. One is that's where CarOffer focused initially. They focused on franchise dealers who tend to have higher-price-point cars. Another is because they're buying these [ cars site ] unseen. And so while we have a robust inspection process, it tends to lend itself more to higher-quality cars. And then the third reason is that these cars -- one of the great things that CarOffer is doing and that we're doing at CarGurus as well is really trying to break down geographic barriers. And so the average car on the CarOffer platform is traveling hundreds of miles, and there's a transportation expense associated with that obviously. And so when you have a higher transportation expense, that is more feasible when you have a higher-price-point car. So given all of that, today, the platform is more catered to dealers who deal in that $20,000 on average or more type car. And therefore, a lot of your, what we call, emerging independents or small indie dealers who tend to trade in lower-price-point cars wouldn't see as much liquidity on this market. But we are -- through our partnership with CarOffer, we're giving them a lot of dealers as warm leads and as hot leads every month. And so in last quarter, 1/3 of the dealers that went on to the CarOffer platform that joined the CarOffer platform came from us. And so we are now starting to round out the dealer base on CarOffer to include a more sort of complete mix of franchise in Indy, and that will include a wider swath of car prices. But -- and we're doing a number of other things to link the 2 platforms together, which I'd love to talk about if it's of interest. But I would say, longer term, as we get wider breadth of cars, there's no reason that every dealer shouldn't find this to be a more efficient wholesale platform.

Got you. So it's not usage or preference constraint, just kind of the way the platform developed over time?

Exactly. Yes.

And then I guess, what about -- you have talked in the past about constraints about signing dealers up. You can only move so fast. Just kind of talk about the process to get dealers signed up. Kind of what iterations you're putting in place to kind of get people through the funnel and kind of get them on the platform and transact in?

Sure. And just to keep it in perspective, the business -- the CarOffer business is really less than 2 years old in terms of when they started onboarding dealers. And so in that time, again, as of Q3 to have 7,000 enrolled dealers is pretty impressive. So they're onboarding them quickly all things considered. And now word-of-mouth and dealer endorsements is a significant driver because we're getting most of the large groups on, and that's having a positive influence through 20 groups and through just general word-of-mouth. We are asking those dealers to change their behavior. And so while -- when we sign up a dealer and we explain this to them, number one, is it's a new concept, right? They're used to sending someone to a physical auction or maybe they're used to having somebody partake in digital auctions. But we're asking them to buy -- to complete a matrix and buy [ cars site ] unseen. We're asking for their bank account information. And we're asking them to spend several hours with our trade advisers to set up their matrix. It does take some upfront work in order to be more efficient from that point forward. And so that behavior change does require some education. It requires some time, and it requires a level of trust. And we think with each passing month, as we have more dealers on it and more really satisfied dealers -- and dealers who are using this are incredibly enthusiastic and passionate about how it's changed their businesses. We think those become smaller changes that the dealer needs to do.

Is there a commonality between what excites dealers? Like is it, hey, it's been my first couple of weeks. And I've sold cars, I've bought cars. Is it both directions? I mean I know right now, we've been trying to buy cars. So it might be any -- but I'm just kind of curious what like -- across the swath of the feedback, like what kind of is resonating the most?

It depends. It really -- we're seeing both. I mean for any given trade, you need a buyer and a seller. And so we couldn't sort of, by definition, have more of one kind than another. Some come on. And you're right, every dealer is clamoring to get inventory now. And so a lot I think are -- a lot of dealers who are joining are initially intrigued by the idea of it being an additional source of inventory for them. But we're having just as many sellers as we are buyers. So it's mixed. We are, through our account management, encouraging dealers to do both. And so while we have a lot of dealers who are doing both, we do have some who have principally bought and some who have principally sold, and we're trying to get them to use the full suite. We're starting now to tread into this discussion and sort of getting into a little bit of where Instant Max Cash Offer can play into this as well. And so Instant Max Cash Offer is something that we launched in the summer of last year, and it really leverages the power of the CarOffer dealer network of dealers who are looking to buy cars and our tens of millions of consumers who come to our site every month, many of whom are looking to sell a car. And so we launched that in August. It's grown very, very fast because the 2 things that we brought together were powerful and we've created a great experience. But what it's done for dealers who are looking to buy inventory is it's for the first time giving them access to add value to consumer cars. If most of you who've driven by a dealer in the last 6 months, I'm sure have seen the signs out front. I saw one yesterday that said, "We will buy any car for cash." And historically, dealers have had trade-ins as an avenue to do that and then those signs. And this is giving them an automated, scalable way to procure fresh consumer trades that they can't get anywhere else. And so that's been a real big tailwind to getting dealers on the platform because they can't get that anywhere else.

Do the dealers know when they take retail car that they purchased? Or do they know it came from other dealership? And how do you -- I guess is there a certain button you kind of like -- I guess that's the question. Do people know where the supply of the car came from?

They do. Yes, they do. So a dealer knows if it's from another dealer or if it's from a consumer.

Okay. And you've talked about landing dealers. Can you just kind of run through that? Kind of one of the questions I had in the sense of if the -- I'm a consumer. I want to sell a Volkswagen Passat. I've put it on the site, and the dealer -- I mean [ lucky ] California so I might buy the car within a 100-mile radius but here, but someone 200 miles away might also have a bid in the car. But if the car goes somewhere to a "landing dealer" first, and that landing dealer has a right of first refusal? How does that kind of work?

Sure. Correct. And just I'll back up briefly for one moment to just make sure that everyone understands the model. So when you as the consumer come to sell your Volkswagen Passat and you enter your license, plate and information on our site, the offer that we show you is the highest offer from our network of dealers who have said they're interested in buying a Volkswagen Passat. So it's going to be the highest offer from hundreds or maybe thousands of dealers. That in and of itself is a really differentiated value proposition for the consumer because you have the assurance that you're getting the highest offer from hundreds of dealers. You're not getting one offer from one dealer that might be lower offer than you could otherwise get. So...

And how are you kind of conveying that to the seller, just so the seller's aware that that's kind of -- what they're actually getting when they see this offer?

Yes. It's a good question because it's actually a difficult concept to explain to a consumer, to be honest. I spent 45 seconds at the start of this call talking about the instant trade platform, and so it takes some explaining. And we're working on marketing messaging, and we're working on on-site education to make sure that the consumers understand what it is. And we're getting better at it. But you've hit on something that is something we're working on, which is making sure the consumer understands it's the best offer. The mortgage industry has gone through this with some of the mortgage lead gen sites, where they've explained that when you -- when many banks compete for your business, you're going to end up in a better place. So we're not the first to do this concept. We are the first to do it with cars. So we have some work to do there. So the -- so you're right. So let's say the highest bidding dealer is 300 miles away. That's the offer that will be shown to the consumer. We'll go pick up the car from the consumer, wire the consumer the money, and then we bring that car to a local landed dealer. The transportation for that is relatively inexpensive because it's close. That landed dealer is a CarOffer customer, and they're familiar with the landed dealer program. And what happens is they receive this car, and they have a period of time during which they have a right of first refusal on accepting that car at the bid that the winning dealer placed or they can pass it through into the winning dealer. And dealers love this, again, because they're clamoring to get cars, and now cars are just showing up on their lot and they have right of first refusal. And so needless to say, some dealers hit that bid and keep the car, and other dealers decide to pass it on. And it's really kind of a win-win for the dealer -- for the landed dealer because it's like a free auction.

Got you. So if the auction closes on, say, Tuesday, 5 p.m., the car might show up at the landed dealer Wednesday. The buyer is 300 miles away, the auction, technically, wouldn't close for them until like another 24-hour cycle even though...

Exactly.

Okay.

Yes. The winning bid dealer has simply entered into their matrix, what they -- how many Passats they'd like to buy a month and what they're willing to buy. They don't know that they're winning bid has temporarily won your Passat.

All they know is they have a bid out there at x price. And then they're not like, "Oh, I might get this car, but someone else might." No. It's just, "Hey, you've got this car." Perfect. That makes sense.

Yes. Yes, exactly. And so typically, a dealer will say, I would like to get 5 Passats a month on these parameters and at these prices. And by the 20th of the month, they may have received 3 of them. And we're doing our best to fulfill that all 5 of those orders through Instant Max Cash Offer and through other dealers, but we may not. And on this particular example, that Passat might be the fourth or the landed dealer may keep it, in which case, we have to try and find the fourth and fifth somewhere else in our network.

Got you. Perfect. Okay. Why don't we kind of move over towards the base business? And like you talked about, I'd love to kind of touch on how intertwined to CarOffer. We can -- let's kind of start out -- you've got these 25,000 dealer, 24,000 dealers on platform, U.S. dealers. What -- I guess just walk me through a standard kind of relationship with the dealer, kind of what it looks like. Is it a monthly contract and then they pay like -- then it leads on a certain per month basis or like -- like how many leads per month? Like how does it kind of -- how has this kind of matured, I guess?

Sure. Well, how has it matured? So I mean our -- the basis of our relationship with dealers for our listings product is based on the size of the dealer, the geography that they're in, the amount of inventory that they have. We set a -- and the features that they would like to purchase within our suite of features and products. And it's then a fixed subscription business. So based on those parameters, if they're coming on to our platform, we will say, okay, for -- given all that, it's $2,000 a month. And that is then a fixed recurring monthly fee. And the leads on any given month may increase or decrease modestly, and they can decide to grow in their package or add on other products. And obviously, the pricing would change with that. But if not, they would stay at $2,000 a month.

Okay. I got you. And then if I look back in 2019, there were 28,000 dealers on the platform. Is this something -- like is there -- I think you guys might have had a premium product at that point in time? But is there an upper bound? I guess, if I think back to this business, can CarOffer help this business kind of grow? Or can this business grow back to -- I guess, how should I think about the upper bound of U.S.-paying dealers?

Sure. Yes, so COVID did take a lot of -- COVID and then the inventory supply constraints did take many dealers out of marketing channels that they were using before, including ourselves. We fully believe that in normal inventory times that what we said sort of pre-COVID still holds, which is we think we can be at 30,000 dealers -- 30,000-paying dealers. We do still have -- to be very clear, we do still have a freemium program. So we bring as much inventory on to our site as we can from dealers who are paying us but also from dealers who are not. We used to have a freemium program that gave unlimited leads to free dealers, and that's evolved over time. So now those leads are capped for free dealers. But we think that having a freemium program is paramount to our value proposition to consumers, which is showing them the most inventory, giving them the most information on those cars and then including into market value and dealer ratings and then sorting that in a way that is most helpful to the consumer. So all of that still holds. We have a number of add-on products in the digital marketing arena, in data and analytics. We have different package levels called Enhanced and Featured and Featured Priority. We have a product called Area Boost. So there's a number of ways that consumers -- that dealers can grow with us. CarOffer, though, brings a whole new dimension to it. So to give you just a couple of examples. One is that now when a dealer who's on our listings platform goes into their pricing tool, we offer a pricing tool to all of our dealers that allows them to, for every car listed, they can change the price of the car and see if that will bring it from a good deal to a great deal, for instance. And dealers love this tool. It's very valuable to them because it looks -- it helps them understand the pricing for different cars in their region. Now for every unit of inventory in that pricing tool, they have a standing wholesale offer for that car. So they can look at a car and say, "I've listed it for $15,500 retail. If I move it to $15,200, it's going to be deemed a great deal. And now I have this offer that's right here, they'll pick it up tomorrow for $15,100." So it gives them so much more information on liquidity in the market that bridges retail to wholesale, which historically they've not had before. Another way we're bridging the products is now when dealers who are using the CarOffer platform are building their matrix and saying, they used to say, "I'm willing to pay 2% above the wholesale book value for your Volkswagen Passat. Well, now they have the retail values as well." So now they can say, "I'm willing to pay 8% below the CarGurus instant market value for any Volkswagen Passat." And it gives them a lot more confidence and intelligence to know that they're going to have 8% margin baked into that unit rather than guessing how much margin they'll have if they use the wholesale book value.

Got you. So kind of what I -- so the way to -- I guess the cars dealer metric that you guys use, that can increase by sending more leads to dealers, ancillary products like RouteOne or Area Boost. And it seems like you're expressing confidence that you have 30,000 dealers is something that you're still confident in and kind of big picture?

Yes. So there's an added dimension -- there's a few dimensions: sending more leads; having them increase their packaging on our listing product; adding in other products; bundling with CarOffer; and then there is like-for-like unit price increases, which we could decide to do; and then the final one is digital retail, which I think you're going to get to shortly.

Yes. Yes. So let's talk about digital retail then. I've seen the recent marketing campaign to build brand awareness. Is it kind of -- how should we think about iterations on that going forward as you kind of move from more of a, hey, we can buy your car to, hey, you can also buy a car from us and we can kind of take it end to end, and we can even do 95% of the transaction online and show up with the dealer and just do the test drive. Like how should we think about -- how do you get the word out about this product that's launching in, I'm assuming, 2022 at some point?

Sure. So brand evolution is certainly an element of how we educate the consumers and dealers for that matter. But right now, a lot of it is through introducing features on the platform and just watching the adoption grow. So we think about digital retail as marching down a spectrum. And the -- at one end of the spectrum is our legacy, which is we simply connect the consumer and the dealer. That's a lead model. At the other end of the spectrum is end-to-end purchase of the car online. We have introduced a number of features that are currently in pilot. Some are more rolled out generally that are moving us down that path so that consumers and dealers can do more of the transaction online. So some examples of that are a couple of products that we've had for a while now. One is consumer financing so a consumer can get prequalified for a loan. That saves them time at the dealership. We also have Area Boost. So now consumers can see cars listed from dealers who are 400 miles away, but those dealers have the ability to deliver the car, and they've incorporated into the price the delivery fee. We have others that have come out recently that allow a consumer to get an estimate on a trade-in from the dealer, that allow the dealer to cross-sell other F&I products to the consumer that they have and to get effectively what's called a near penny-perfect deal on that car so that the economics are all understood by the dealer and the consumer. They can then set up an appointment at the dealership, put down a down payment on the car on our site and then walk into the dealership and complete the purchase. And those leads that, that dealer gets that have the penny-perfect deal that have the deposit are closing at much, much higher rates as you would expect than a lead. In addition, the benefit to the consumer is rather than spending on average about 3.5 hours in the dealership, they're spending about an hour in the dealership. So the NPS of consumers that are going through this is significantly higher. The close rate is significantly higher. So the consumer is happier, the dealer is happier, and we're seeing adoption of these things grow both as we extend our pilots as well as we see consumers use this more and more. One aspect that I forgot to mention, too, is it's -- we're also moving from that prequalification consumer financing, which is called a soft pull into a hard pull so that the consumer actually completes the loan on our site before they're walking into the dealership.

Got you. Okay. And if I think -- should we see like -- I guess we have seen metered rollout Instant Max Cash Offer state by state. Is that kind of sort of the similar game plan as this kind of launch? Is that kind of how you're thinking about it, just to kind of demo and test it and iterate on it?

Yes. Did you say metered rollout? Is that what you said?

Metered. Yes, state-by-state.

Yes. Yes, we're going to continue to do that. I mean we want to make sure that this is a great experience for the consumer and for the landed dealer. And there are logistics involved. And this is a big deal for most consumers who are selling a car and are getting wired thousands of dollars. So if the experience isn't a positive one, there's a lot riding on it for the consumer, and we need to make sure it's a great experience. So we're looking very closely at NPS. We're talking very closely with our landed dealers to make sure that as we expand, we don't do so in a way that degrades the experience in any way.

Got you. So that's for Instant Max Cash Offer and for the end-to-end product? Okay. Kind of...

I was speaking mostly about Instant Cash Offer, but yes, it would apply for both.

Okay. Okay. And then the news of today -- or the news of yesterday, what was your first kind of thought when you saw the CarBravo news from General Motors? And what was your second derivative thought? Kind of take it any way you want to go.

Sure. I mean I think it's -- we don't spend a lot of time sort of commenting or opining on what others are doing. But I would say it's a natural progression, in our minds, for a world where consumers want to do more online. And I think the OEMs are doing everything they can, understandably, to help their dealers move more cars, sell more cars. And consumers want choice and options. And so it's -- I would say I'm not surprised by it. I think it's a supporting data point to the car-buying process, moving more online. And we continue to feel, though, that consumers want choice and they want selection, and they want complete information. And so we have the largest inventory of cars of any marketplace. We have the largest installed base of dealers, paying and free, and we give the most information on the cars. And so I often think about it as what advice would I give my parents. I mean if my parents are looking for a car, I would say, "You probably want to go to where there's the most selection because you'll end up getting higher odds that you'll find the car you want, and you'll get it at the price you want." So we feel -- continue to feel good about our position, but we think it's great that more offerings are coming online.

And then just on -- when you talk to your dealers, when you talk to your dealer partners of late, I'm just kind of curious what they're saying, if anything, about demand seasonality. We've seen some third-party data around softness from the holidays, but who knows what that -- certain dealers. I'm just kind of curious what you're hearing from dealers and the excitement about the tax refund season, excitement about consumers with more dollars in their pocket, excitement about new cars finally coming online. Kind of how does all that flow into what you think about what the used car market might look like in 2022?

So we issued an industry review and '22 outlook that is published on our dealer center block. And in that and in our -- I think in our last earnings call as well, we did comment that we think we'll see flatline sort of car sales to end '21 and that, that will likely continue in '22 and that the inventory constraints are likely to continue through '22. There's always seasonality in the -- versus cyclicality. There's always seasonality in the auto industry, and Q4 tends to be a lighter period. I think those seasonality trends could be disrupted because of the pricing and the supply constraints. We haven't commented on that, though.

I got you. Understood. Okay. And just one from the audience. You kind of touched on it, and I know it's one that you kind of said something about more to do, but CarGurus Instant Max Cash Offer versus the other digital players or like a CarMax trying to move digital, you've got, like you said, the highest inventory. You're showing them the best bid from 20,000 dealers. Like what are some -- I guess what are some feedback you get from customers where they're getting the message? Or what are some iterations you can make to kind of try to make sure that they are getting the message?

Consumers?

Yes, from consumers.

Yes. I mean we're -- given the magnitude of this launch and how big this opportunity is, we've done a lot of research and we continue to do a lot of research. I mean I think it's -- we're effectively 5 months or 6 months into this launch, and it's growing very, very fast. So we want to make sure we're iterating quickly. Again, it's messaging in a variety of ways. I mentioned before brand, also site real estate. But there's also a communication cadence that occurs with consumers that are going down this path that is e-mail-based, text, phone-based as well. And part of the process is, for instance, when you're selling a car, you need to upload documents. And consumers don't sell -- the average consumer doesn't sell a car often. And so they need help in understanding what documents need to be uploaded and how the sale process goes. So there's a variety of ways that we're educating consumers on this, and we're testing different ones. But again, it is a new idea to think that I could have multiple dealers bidding on my car. That's never existed for most consumers. So it's -- we're breaking ground in a way, and that's requiring some education.

Got you. That makes sense. And last question for me. Just I know we talked a lot about a couple of different facets of the business. What's something you could talk about just as far as international dealers, international relationships, just something investors could be excited about there because maybe just as far as investor education. I know I personally could learn a lot more about it.

Sure. Yes. No, we're very excited about international. We are taking several new features that we've built initially for the U.S. and rolling them out in Canada and in the U.K. They largely are around helping dealers' enhancements to how they -- we report and filter lead details to them. We've added home delivery badges to all of the Area Boost listings so that buyers can discover more cars and make sure they understand that this would be a delivery versus a local. We've added a new inventory badge so that it shows what -- shows the consumer which cars are new to the site that they -- that were not there before. And those are just a few. We've added some digital marketing products. We've added more data analytics. And so our playbook that has worked quite well here and in sort of the core listings is being rolled out there to success through growth and margin improvement. And now we have a lot of these features that we talked about that start to touch on digital retail, start to touch on trade-ins that we're bringing to those markets as well. So we continue to be excited. Those are, we think, markets that are ripe for more competition, and we think we're the clear #2. And consumers are clearly flocking to it as our business.

I appreciate it. That's all I had. Thanks for the time this morning, and we appreciate it as always.

Terrific. Thanks so much, Chris. Thanks, everyone. Have a great day.