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

Sure. So as a quick refresher, we began acquiring the business about 3 years ago. We own 51% of it until this past December, we acquired the balance of it and own it outright. During that 51% period, existing management, founding management had day-to-day operational control. The earn-out incentives for them were an EBITDA multiple. So they were very focused on driving near-term EBITDA. We -- and last point to make is, in the first couple of years where we were partners with them, the market, the wholesale market was rising dramatically. Prices were rising, volume was rising. And in their model, which is an instant trade model and lends itself well to rapid scaling, they grew extraordinarily fast and they were the platform of choice for rental fleets who needed to buy and sell, but buy extraordinary amounts of cars. And so as a result, they experienced really tremendous growth in that -- as a pretty early-stage company. Through that period and trying to keep up with the growth there were operational disciplines that were hidden by the growth. And so for the last few quarters, you've heard us talking about how we need to focus on the operations. And so that means we need to make sure that inspections are run through our partners, are run extremely well. Transportation is done in a predictable, profitable way. Title and registration and payments flow smoothly. And that all rolls up to very manageable arbitration rates or percent of deals that don't go through. So that's the operational piece, and that's the first of 3 areas where we've been focused and the longest running area where we've been focused. Upon taking over full control, we have really doubled down in 2 other areas. The first is the product. So the product in the past couple of years had been expanded in a number of ways that would prompt transactions because the goal was to generate as much volume as possible for real-time EBITDA. And what we found, though, is that a lot of those product formulations that drove a transaction did not always drive near-term or longer-term customer success. And so we are looking at the portfolio of products that they have and focusing on the ones that not only drive a transaction, but a successful transaction that has both buyer and seller happy and satisfied long after it's done. So that's an investment in product and investment in technology. The third area is in go-to-market. Again, it's, I think, an incentive story. The incentive structure, the commission structure the profile of person in that group was focused on just trying to get transactions, transactions on any given day rather than being consultative and partnering with the customer to try to set up an instant trade matrix and buying strategy that would work for them longer term. So we have reoriented that group to be much more consultative, to be much more sophisticated in how they're helping dealers set up their buying strategies. And we're in the midst right now of restructuring that group. So we had to part ways with a number of people that were not the right profile and shift books of business. And now we're getting the right accounts with the right type of people and investing in that growth.

Got it. I think you mentioned last quarter that you're going to be in this optimization mode for a few quarters before you get back to profitable growth.

Yes, we said a few quarters to get to profitable growth.

And in a way, are you suggesting that you get to like a breakeven or a positive EBITDA number before you step on growth? Or can you get to a positive EBITDA even at these levels of volumes that are transacting to the platform?

So we're focused on unit economics right now. At these current volume levels, no, we would not see profitability at these volume levels. We don't need to see consolidated CarOffer profitability before we start reinvesting in the growth. We just need to see positive unit economics to be willing to invest in something that's more predictable and repeatable.

Got it. That's clear. Just on CarOffer, the ability to cross-sell CarOffer with the marketplace subscriptions, is this an exciting opportunity. What is your near-term strategy for driving that cross-platform adoption? And then how do you view that opportunity long term itself?

Yes. This is where we get really excited and where I think we're starting to push more successfully. So one of the earliest examples of bringing wholesale and retail together is in-sourcing from consumers. And so through our product that allows dealers to buy cars from consumers on our site, they're using the CarOffer matrix to set that pricing. And so that was an early and obvious example. A couple of other examples use data that, for instance, allow dealers using CarOffer to set their prices based on our retail instant market value pricing. Historically, they've always bought cars in wholesale using wholesale book values. They can still do that or some of the more sophisticated ones are saying, "I want to use wholesale book value and CarGurus' retail value to get to an even smarter pricing strategy." The final example I'll give is in our retail pricing -- in one of our retail pricing tools, where dealers can see all the cars that they are trying to sell at retail, all of the prices for those cars. They're now seeing the standing wholesale offers right next to that. So they have the option to say, I've had this car for 60 days. I've dropped the price 3 times it's not moving. I'm not getting interest on it. I have a wholesale offer at $500 below retail, I should just do that. And so they're seeing all that information together now. When we talk about how we're getting more engaged with our dealer partners in our CarGurus' Marketplace platform, a lot of it is through data and what we're calling dealer data insights. Dealer data insights are as they sound, pulled from data on our 2 platforms, wholesale and retail and are helping dealers operate their dealerships better. So one example is called Next Best Deal Rating. That tells a dealer for all their inventory that they've listed with us, what is the lowest amount of price drop they would need to do for each unit to move up a deal rating from a good deal to a great deal or a fair deal to good deal. The reason that's valuable is because sometimes that change can be only $10, which is nothing and they will get significantly more lead volume and move that car much faster if it's rated as a better deal. So that's one example. Another example is we're taking our retail consumer demand information, mapping that against the supply in their region and saying these are the 5 makes, models, years that are -- fit the following criteria. They're in high demand, low supply, and you have success at selling those types of cars. If you source these 5 types of cars, here is your estimated turn time for each of them, 7 days, 8 days, 10 days. If you were to source these other 10 types of cars, the average turn time would be 38 days. So we're giving them not just information, but we're actually giving them actionable decision criteria for them to then say, "Yes, I'd like to source these cars because I'm trying to accelerate turn time."

Got it. Got it. That's helpful. Just wanted to check if any questions in the audience on CarOffer or other areas. No. So on Sell My Car, Top Dealer Offer, what are your key initial learnings since you've rolled that out? What's been the feedback from the dealers? What kind of fine-tuning have you had to do to that product since the roll out? Anything you can share in. And any kind of quantification around contribution to QARSD since that rollout has happened.

Sure. So again, just to level set, consumer will get 2 offers. If you list your -- if you enter your car's information on our site. Offer one is if you take it to a dealer, a local dealer, that dealer will pay you $20,000. Option two is a white glove service where a partner of ours will come to your home, inspect your car in your driveway, pick it up, take it away, wire you the money that day, and that may be for $19,000. So in most cases, the consumer will get more money, more value for their car if they take it to a dealer. Top Dealer Offer is something that we introduced that is a subscription model. So it is part of Marketplace and is, therefore, an element of QARSD where they say, "I would like to buy 100 leads of local consumers looking to sell their car, and I will make an offer on those cars and they can bring it into my dealership." It is -- we've now rolled it out nationally. It's a pretty new product. And the dealer reception has been -- well, first of all, the consumer reception is great because consumers now get two choices. In doing so, it really kind of validates that these are fair offers because these are the top 2 offers that they would get and the value is almost always greater if they bring it to a dealer. So they're opting for that much more than, frankly, we anticipated. From the dealer side, dealers have been very happy with it, but the biggest learning is that dealers need to be ready for it. And so we have a high -- we have a lot of consumers on our site and a lot of consumers who are looking to buy a CarOffer need to sell a car. And so we can generate and are generating a lot of volume to a dealer. But if a dealer starts getting 200 leads a month for people to sell their car and they weren't ready for it with the workflow and the intake and following up with the consumers, then they, A, get overwhelmed and B, don't convert as well as they'd like. So we have some dealers who are further along in it. We're more ready for it, are converting extremely well. And are -- couldn't be happier. They just -- they want more and more leads. We have other dealers that are not as ready for it. So we have to be more selective. This is not going to be sold to thousands of dealers. I don't think. I think this will be sold to hundreds of dealers that we know are very high-quality dealers around the country and are prepared to handle really high volumes of buying cars from consumers.

Got it. Got it. That's clear. Just quickly on the competitive landscape before we go into capital allocation. How do you view your competitive positioning today versus like 3, 4 years ago. I mean, we've seen your competitors take like different approaches. And I'm talking U.S. only I know we touched upon international. You've seen it come from your competitors going to like media and more other forms of advertising. So curious like how do you view your position because we've seen good QARSD growth as well as better stability in the dealer count? Why do you think you're able to drive that? What do dealers value more in terms of return they're getting on CarGurus versus some of your peers?

So we continue to gain share. We continue to gain share of wallet, share of dealers, share of market, share of consumer time. And I think it comes down to ROI, number one. We have more volume, more value at better prices. And so just dealers are smart. They're cutting economic deals all day. And so I think they're going to be drawn to ROI. So that's number one. I think number two is that -- are these dealer data insights. I mean these are -- dealers are not short on data, they get flooded with data, but they're short on opportunities to have that synthesized and to inform what they should do differently in order to outsmart their competitors. And so, we're doing that across sourcing, pricing merchandising, marketing, selling, keeping in touch with their consumers, giving them more information on the leads that they're getting. We're now showing them if a consumer is a particularly hot lead because they've been to that -- they've looked at that car 6 times in the last week. So we're using data that is helping them just get more efficient, more productive, ultimately more profitable. And I think dealers are starting to recognize that there's a lot of value we're adding outside of the leads. And that I don't think was something that they necessarily were expecting from a marketplace because that's something they haven't really gotten for the past 20 years, but we're leading the charge on that. And I think in marketplace models, it tends to be a gravitational pull to the one that has the most liquidity and the most activity and the most value. And when you couple that with innovation, we feel really good about our ability to keep growing.

That's clear. Quickly on capital allocation. Could you run through what your priorities are, maybe use rank order between share buyback, inorganic or just investment within the business as well as inorganic M&A opportunities.

Yes. So we are investing a lot in the business in ways that are not always obvious, but innovations that are allowing us to expand the ways in which transactions occur on our site. Innovations around dealer data insights, innovations around new products like digital deal, investing in, as I mentioned before, building out and improving the product to CarOffer. So we're investing what I think is in pretty meaningful ways that's driving innovation across a number of fronts that goes back to what I just said, I think, is outpacing our competitors. So I would say that's number one. Number two is the share buyback. And so we've authorized the $250 million share buyback this year in Q1. I think we bought $81 million worth -- and that's on the heels of last year, buying a couple of hundred million dollars' worth because we think our shares are such good value right now. And then the third is we're always looking at M&A. It's -- we've acquired 3 businesses over the last 8 years at the company. And we think that, in particular, as we use data to be having discussions across a broader set of the dealer workflow, that introduces opportunities for us to bring more technology and more software into those different areas. So whether that's technology into helping them convert their leads better. So sales AI is one example. Technology to help them source cars from other channels through their own website or their service lane or whatever the case may be. merchandising, pricing, inventory. There are a lot of small companies out there that have high-quality products, but have a hard time breaking through. And if you couple that with our 25,000 relationships -- paying relationships already and the data that is prompting those discussions, we think it can be a natural there.

Got it. Got it. No, that's clear. Any final questions from the audience? No. Maybe one last question from my end. Have there been any structural changes in behavior either from the dealers or the OEMs on how they're allocating advertising spend, just coming out of the pandemic? Do you think that they're looking to engage more with some of the more sophisticated platforms versus how they were doing traditionally? Just curious like how those discussions have changed since the pandemic.

Speaking more from the perspective of dealers than OEMs, I would say that I've heard more than a few sophisticated dealer groups recently say, we've had this period where we didn't have to market and consumers just would pay almost anything for a car. And now inventory is starting to build up again, consumers are much more discerning. And if my competitor starts to spend more, then I probably need to spend more. And so I do think we're seeing more of a return to pre-pandemic trends that are pointing to a more pre-pandemic behavior. The spend levels are not there yet, but I think they're headed back there.

But the approach is the same as it was pre-pandemic?

I think so. Yes.

Okay. Great. I think we're on time here. So thanks, Jason.

Thank you.

Once again thanks everyone.

Thank you very much.