CarGurus, Inc. ($CARG)

Thanks, everyone, for joining. My name is Rajat Gupta, member of the Automotive Equity Research team at JPMorgan. Very pleased to have with us today, CEO of CarGurus, Jason Trevisan. I'll go through like a few quick questions with Jason. We'll keep opening it up to the audience in between? Or you could also just send your questions through the online portal, and I'll ask anonymously. So with that, Jason, thank you for being here.

Thanks for having me.

We'll get right into it here. So start with like a softball. Maybe just start with some of your new product rollouts. Can you walk us through some of the new and existing products? You've rolled out a ton over the last few months, quarters? What are you most excited about? Let's just start there.

Sure. So we have described the -- through our customer lenses, the dealer workflow, we serve both the auto dealers as well as car shopping consumers. On the auto dealer side, we've defined four pillars of workflow areas that they have. And we've historically operated in one, which is marketing, but there are three others that are very important to dealers. One is inventory another is converting the leads to sales and another is marketing competitive intelligence or data associated with that. So we, over the past few years, have been preparing for expansion and introduced a number of free products in each of those pillars. And we've now started to turn that activity that we've had there into monetizable products. And inventories where we're most excited we're furthest along. It's probably the biggest category of those. In inventory represents a dealers' ability to stock, figure out what types of cars they should stock, source, where they can get those cars, appraisal, how much they should pay for those cars, pricing, how much they should charge for those cars and then merchandising, how well they merchandise and market them. So end of last year, we introduced PriceVantage. It's a pricing software solution in that category. We've announced recently that we have several hundred or many hundreds of paying customers there. We said that, that and another product in the marketing category that helps customers market their new cars. Together those products were going to go from starting or launching in Q4 to north of $10 million combined in revenue this year. So they're starting 0 to 1, but they're growing very fast. So I would say we're very excited about inventory category, and we're excited about the others, but they're earlier. On the consumer side, I would say we're very excited at just how AI is transforming the whole consumer shopping experience. And so historically, it was a consumer comes in, they need to know what type of car make-model trim they want, they would use drop-down filters and do what is now considered a fairly manual search. Now AI is helping them determine in a conversational way and in one that travels with them over time and remembers them and has memory and personalization, helping them determine which make model trim they should want based on what they're looking for. We then have AI that's helping with sort and personalization throughout the shopping process. And then lastly, when they get into the dealership, we have a product called dealership mode that uses AI that helps them navigate that whole experience, which historically has been really clunky and one that they don't enjoy. That's helping them understand what other cars at that dealer they should consider or what their financing options are that they should consider. And really helping them make sense of that through an AI companion. So we've accelerated how quickly and how frequently we're introducing new products on both the consumer and dealer side, and that has really helped drive engagement from our customers as well as maintain the double-digit growth that we have.

Understood. That's a helpful rundown. Just quickly shifting gears to AI. Has there been any consideration for partnering with LLMs. And how do you think this could improve your competitive position in the market? Where do you think you are? Where do you think you could go with some of these partnerships eventually, if at all?

Yes. So specifically, the partnerships, we, in a measurable way, are doing exceptionally well. As measured by visibility in the organic results of LLM search results as well as in traffic generated from the organic search results of LLM and auto, we're #1 in both. We were the first to introduce an app in the Chat GPT app ecosystem. And we're talking with both and working with both Chat GPT and Google on their paid models as those start to emerge. So we are positioned very well in all things, LLM search related. It's a journey, not an end process. And so we're going to continue to work at it. It still represents a very small percent of our traffic, like low, low double-digit percent of our traffic. But it's growing quickly, and we want to make sure that we stay at the front of that, just like we say -- have stayed at the front of Google and anything that's happened with search over time and mobile and apps, and it's a new channel, and we are determined to be the winner in it.

And could you break down how investment headcount is currently allocated across these key cost buckets and just how the integration of AI and automation, could you just reshape this over the next several years?

We have talked about our biggest areas of incremental investment this year being product and engineering, #1 and go-to-market, number two. And then international is an area where there's just a lot of momentum for us. And so we're, I would say, keeping our foot on the gas there. But in terms of the first two products and engineering, we have accelerated the -- as I said before, the pace and volume with which we're introducing new products, and we want to maintain that accelerated pace. And so we are investing in the ability to build products and get them into the market faster, build better products, build more differentiated products and continue that pace because we do not take our leadership position for granted, number one. And number two, we're moving into new categories. We're not just adding on a feature or a product in an existing category, like marketing. And so moving into these new areas takes investment. We're going from a standing start in some of these. And so that takes people, that takes technology and we're committed to them because we see that these categories represent a more than doubling of the TAM that we have in our current product set, and we're going to be aggressive in going after it. On the go-to-market side, it sort of follows suit, which is these are new products. They are sometimes sold to a different person at the dealership. They do require some behavior change at the dealership. They do require dealers thinking about us differently than their marketing partner or lead provider. And so we need to educate them more extensively than we have in the past. We need to onboard them, and we need to change their behaviors in some cases. And so we have to invest in that. We are getting material and growing efficiency gains from AI. And those two things, efficiency gains and growing investment to keep an accelerated pace are both happening at the same time right now. So a lot of the efficiency gains that we're getting, which we're seeing through higher, faster, more frequent code releases, more PRs per developer, more lines of code written more use of code creation and code assistance. I mean all the metrics that we're looking at, we're seeing is more productive. But -- and we're also seeing token use drives and token expense rise. And so we're in the very early stages of that. So we're seeing both more efficiency, more productivity but it's not translating into we need fewer people or we're going to spend less money. We're in this period where we're looking to accelerate with new technology. And so we're going to lean into that from an investment standpoint. Outside of engineering, we have stood up an AI architect or an AI solutions team that's made up of AI architects that are building agents for all the functions across our company. And that is leading to some areas where we're already seeing dramatic efficiency gains. Most other areas, we're seeing early signs of efficiency gains, most of which were parlaying into productivity, but eventually, that can lead to efficiency. And so as I describe it, our headcount forecast for 2028 is lower today than it was 3 months ago. But we do not have plans to reduce our headcount in the near term because of the productivity gains we're seeing from AI.

Got it. That seems like a good sweet spot. Maybe you can build Agentic platform for the CFO role at some point.

That would be good.

Any other broad strategic organizational structural changes you foresee?

I mean if you go back a couple of years, we reoriented to our customers much more a couple of years ago. And so we restructured our product and engineering teams to mimic the workflow and the life cycle of our customers. That, coupled with a strong focus, again, for the last couple of years on speed. And we are just running far more tests getting far more signals much faster, and that's helped lead to faster product introduction. The other thing that we've been doing for the past few years, which is now paying a lot of fruit in addition to the AI efficiencies that I talked about, our investments in platform. And so it is much easier for developers to work in our platform now. It's much more modularized, it's much more bite sized. They can run better tests, safer tests, better QA, faster QA than they ever could before. So those have been two key structural changes historically. Going forward, what we're working on is how do we structure the org in a way that aligns incentives and speed with, say, on the dealer side, a multi-pillar environment. So we need to and are building products that help dealers with -- I'll just take this one example I've been using marketing and inventory. In some cases, that's a different person at the dealership. We hope that's a different wallet. There's a different onboarding process. One is marketing technology, one is software. It's a different product at the end of the day. There's different security needed for both. And so we have to figure out how we can do both of those well and efficiently in a way that is tied together because they do mutually reinforce each other. We gave a lot of data points on our -- in our script that showed the dealers that are using PriceVantage and embracing it are seeing immediately faster turn times, more VDP views, they're seeing better performance in our marketplace and getting better ROI out of it. So we need to lean into the benefits of those two things being on the same platform, but also recognize that delivering them is different, and we don't want to create a heavily matrixed organization. We don't want to create more touch points than we have to, but we also want to enjoy the benefits of the distinctions of them because it does double our TAM. It does help us tap into other wallets. So we're thinking a lot about org structure for an expanding product suite.

Understood. That makes a lot of sense. Going to the 2026 comments and guidance, are you able to break down the drivers of the 10% to 13% revenue growth in guidance across QARSD dealer growth? How should we think about that breakup? And then maybe you can touch on individual items in more detail.

We don't break it down more than that. And in fact, there's a few reasons that we don't, but one is that we incentivize our team to net MRR growth, Monthly Recurring Revenue growth. And sometimes that comes in the form of more rooftops and sometimes that comes in the form of expansion of existing. Typically, when you look at our QARSD growth rate, which is the -- QARSD is a quarterly average revenue per customer. So what they spend with us and the rooftop growth rate and you add those two together, you typically get roughly our revenue growth rate. The bulk of our growth for the past handful of years has been QARSD growth. And -- but we've been growing rooftops as well, even in tougher market environments. When it's harder to grow rooftops, we still grow faster than our competitors. So we continue to gain share. I think you can expect that the bulk of our revenue growth will continue to come from QARSD. It's not that maverick of a supposition. And within QARSD, what gives us confidence and comfort is that there are several drivers, most of which have long runways ahead of them. So our drivers of QARSD growth historically have been we've upsold to higher packages, and we do that by adding in new features and value to higher packages. We have added on products. We have a growing product suite, so it's easier to add on products when you have more products to choose from. And I'll come back and give a little more detail on each of these. Lead quality and quantity, again, that's got significant runway. And then lastly is unit pricing, which we've been very measured on, very steady and, I would say, not aggressive on unit pricing increases. So if you look at each of those, and I'll give some examples, upselling to higher package shares, we just introduced something called shopper signals. That is a very rapidly adopted, widely adopted tool that gives dealers a robust 360 on each consumer that we're sending them. When dealers use that and tap into that content, they convert much better. We offer that to only premium tier packages for free. And any dealer that uses that who's spending the same with us that they sent before using it is getting materially more value out of our platform because they're converting better. That's a strong incentive for dealers to upsell the higher packages. Add-on products, we've talked about PriceVantage, so that can help them move into the inventory category. Even if we stay in just marketing, we've introduced new car exposure. So franchise dealers who, frankly, right now, are having a hard time selling new cars, for a variety of reasons. Prices are up, affordability is challenged, gas prices are high, interest rates haven't come down. And so them being able to more aggressively market new cars is very compelling to them. So we're always introducing new products, and we're getting smarter, back to the AI and go-to-market point, we're getting smarter at which products are -- which customers are ripe for which products. So we're being much more solution sale oriented with that. And then lead quality and quantity, of all of the users who come to our site, only a low single-digit percentage of those users convert to a lead. Today, we know that also a low double-digit percent of those users click on a link to the dealer's website, click on map and directions, and now we're seeing a growing number of consumers who are opening dealership mode in the CarGurus app on the dealer's lot, and we know that 80% of those people never submitted a lead. So we now have multiple channels that we're sending consumers to dealers for and dealers are, frankly, really paying us for only traditional leads. But all of those are growing the lead quantity. As we add in things like shopper signals, it's growing the lead quality and that adds up to the number of cars we're helping them sell. At the end of the day, we want to help dealers sell more cars, and so if we can do that through a variety of channels and increasingly prove the strong role we played in that, then that is a natural rising tide for something like QARSD.

You mentioned earlier you touched -- you just mentioned like doubling the TAM or something about it. So how should we think about just the upside to QARSD over time? Any way to like just contextualize that how many cars does the dealer need to sell to make up for their cost? I mean, where are we in that equation today to think about just how much -- how long can this rise continue.

I'll take it from the angle of top-down rather than bottoms up, just dealer segments there's a lot of different types of dealers out there. But from a top-down perspective, so the doubling TAM comment is dealers today in the U.S. only, we operate in the U.K. and Canada, as most of you know. Dealers today spend about $3.5 billion on marketplaces. That's in the context of spending about north of $20 billion in marketing. So they're spending only 15-or-so percent of their total marketing budget on marketplaces. And marketplaces tend to be the best ROI of any of their marketing channels. So I think there's room to grow for marketplaces within their overall marketing spend. We, CarGurus are about 27%, maybe 30% of their total marketplace spend. We're the largest audience, were the best ROI or the highest volume of leads. And by different measures, we capture about half, 50% of consumers' mind share and time spent on marketplaces. So that to me says we have headroom just to capture our commensurate share of marketplace spend and marketplaces have had room to capture more of marketing spend because of the relative ROI -- its strong relative ROI compared to billboards and Facebook and banner ads and other things that they're doing. The doubling the TAM comment is then when you start to think about these three other pillars, inventory conversion and data. Today, they spend over $4 billion -- $4.5 billion in those categories. We have less than 1% of market share or wallet share in those categories. But I think in each of those, we have a prime position and a right to win to enter each of them because today, we're already giving two dealers free products in each of those, and we've started to monetize inventory. And so that represents a bigger opportunity set than what we have in marketplace today. And so top down, I think Marketplace has a runway for growth. Marketplace category is a run rate for growth. And then we're only just getting started in the other pillars.

No that's very helpful. And maybe just touching on international a little bit. Obviously, the QARSD differences are pretty stark. What's -- how should we think about the ramp there over time? And what's your vision to ramp that up?

Our vision is for the foreseeable future to continue running the playbook that's working so well for us. So in each of those markets, there's a large incumbent in each of those markets, we're the fast growing #2, who in Canada, we believe we're a viable challenger to the market leader. And we've had many groups and some of the largest groups in the country, say that they're transitioning exclusively to us. So we think there's a tipping point happening in Canada. We continue to grow our lead volume. We're always focusing on lead quality and now we're introducing more products there. We just introduced Sell My Car in Canada. We're taking a lot of the learnings and innovation that we've done for the U.S. and started to introduce that in Canada. And in the U.K., it's a similar story, but earlier stage. We are the further #2 in that market, but we also continue to gain share there in terms of traffic and paying dealers and wallet share and so forth. And we think that in those markets where there has been just a single dominant provider, bringing in a transparent, ROI-friendly unbiased consumer experience is extremely welcome to the industry. We proved that that's the case in the U.S., and we're proving it in those markets as well.

Understood. Before I just touch on a few more points, I just want to see if there were any questions in the audience. I don't see any in the portal as well. Okay. I'll just go on. From a dealer, I mean, obviously, a lot of good detail on QARSD. From a dealer perspective, we've seen some pressure on profitability recently on the used car side and some on the new car side. Are you seeing any sense of caution from the dealers maybe more near-term question on how they're managing their spend.

We have seen some. The trends, as I touched on earlier, consumer affordability is a challenge right now for a variety of reasons. New car prices remain really high. And so a lot of new car buyers are being pushed into used car just for affordability purposes. Used cars also have been a tough spot for dealers to get their hands on to source. There's a few factors for that. And so if you look at -- so used car in the used car segment, used car inventory is down a little bit and demand is high. And so they have an easy time selling what few used cars they have. Margins are also down a little bit. which is an interesting dynamic that you wouldn't expect necessarily from that. And so when dealers have had an easy time selling cars, they are less inclined to want to invest much more aggressively in marketing, for instance. And so these things are finite. I mean, they change and they evolve over time. Inventory will be easier to get more off-lease more cars are coming off lease. So that might help. Affordability could change, gas prices could change a number of things can change. It's a very dynamic industry. Pricing can change. We help them change pricing. And so we're focused, what gives us confidence is that we're focused on optimizing for dealers to run a great dealership. And they can do that and protect their margins and turn a lot more volume, even when being more transparent with the consumer, which we help them to do as well.

Got it. And just last point on just '26 guidance. Maybe help us like break down the 150 to 250 EBITDA margin compression. I mean you talked a lot about continuing to invest, but also seeing a lot of efficiency. How should we think about -- are you able to like double-click on where that compression is coming from? Which specific areas? And is this just like a onetime reset that we should think about from a margin perspective? .

Yes. The double click is what I mentioned earlier. So it's product and engineering. Number one, go to market. Number two, to onboard and educate customers. And then number three, keep the momentum in international. And yes, to your second question, I would think of it as a onetime push in investment that is to maintain this elevated frequency and velocity of product introduction and not a structural reset in any way.

Understood. Okay. Going back to just some of the -- the supply/demand dynamics that you mentioned, which is hurting dealers right now, but there is a lot of used car supply expected to come to the market, especially from the off-lease side later this year. And presumably, dealers we'll get a look at a lot more inventory from these maturities. Are you doing anything different from a company perspective to position dealers for that? Or you just think these tools will ultimately take care of that -- or I'm just trying to think like, is there anything you're doing geared towards that supply recovery that we're going to see from off-lease over the next, I think, 2, 3 years combined?

Yes. We don't -- yes, but maybe for a different reason. We don't try to build things for a moment in time as you would think. But everything in the inventory vertical is going to help with everything that you just described. I mean if you think about the five areas that I talked about in inventory, it's telling them which cars they should have on their lot. And it's not based on what cars are selling in wholesale in the past. It's based on what the supply dynamics in their region will look like in 60 days or in 30 days or in 90 days. and based on how effective they've been at selling X, Y, Z types of cars over time or even more recently. So as those off-lease cars come in, we are telling them which ones they should be more aggressive, more or less aggressive on which ones they should stock, how their inventory mix compares to what it should look like in 60 days, if they want to achieve their goals of turn time or margin per unit or volume or whatever the case may be. How much they should pay for those cars, where that is price advantage has that aspect in it embedded. But as we build out more appraisal capabilities, it will tell them how much they should pay for each specific car. Merch pricing is telling them what they should charge for those. And again, it tells them, if you want to turn the car in fewer days, 5 fewer days, 10 fewer days here is where you should price it. If not, if you want to maximize the margin and depending on what your holding cost per day is, I mean they can set their goals and our software then executes on the right set of actions in order to optimize to that goal. And then same with merchandising and then all of our marketing products help them then optimize their odds of marketing that car most effectively.

But you're not necessarily assuming some sort of cyclical upside from a market perspective to your business this year necessarily right? Is there any of that -- because in the past, when we're coming off of '23, off of the inventory shortage. There was this massive uptick in new car inventory across the dealership ecosystem and that benefited marketplaces. We saw that with new cars, but this is the first time we're going to see that with the used cars. So next 2, 3 years. But is that something that you're preparing for as like some sort of cyclical upside to your numbers? Is it embedded in your guidance?

Well, our guidance for this year was based on everything that we knew and believed would happen when we set the guidance, and we haven't updated that. So I would say, yes, to the extent of what we believe would be the case then. A lot of the trends that I just talked about have like amplified a bit in the last few months since guidance. And so as a result, you've heard us talk about Sell My Car is now one of the more interesting products in our portfolio for dealers, and we wouldn't have anticipated that. And so what makes us really excited though is that as we grow our portfolio of products, we start to have products that are more or less compelling no matter what the dynamics in the market are. And it becomes a much more stable and universally appreciated platform.

I mean, given like the space of -- you've seen some efficiency gains, you the space of product rollout really get better. dealerships tend to have a lot of inefficiency in many other areas, many other systems. Are there one or two areas you could point to where it's like an easy adjacent or not easy, but just an adjacent opportunity that your platform can expand into going forward?

At times, we think that expanding into four pillars is too ambitious. So we don't have thoughts of turning that into five or six. I think keying off of some of the word choice in that question. I mean conversion is a key area where we see night and day between dealers who are good at it and dealers who are not good at it. And an example I'll give is we have a team called Dealer Performance Partners. They work with dealers on using our platform to the highest extent possible, making sure that our system is integrated with the right other systems in the dealership and executing best practices on lead handling or customer communication or lead conversion, a variety of things. It is very common for that group to work with a dealer over a couple of days and double their conversion rate, double their conversion rate. So dealer that goes through that spends the same amount on marketing and sells twice as many cars. That's game-changing for the dealer and shows the sort of latent value in our platform. And that's a natural extension for us because these are the customers that have come from us. And so shopper signals is a step in that direction. Digital is a step in that direction. So think about a consumer that comes through digital deal, Consumer A connects to a dealer via an e-mail, that's it. Consumer B on our platform puts down a deposit, sets up an appointment, get to trade and value, gets financing and buys three other products online from that dealership on our platform. They interacted with our Discover, so they exchanged a variety of information about themselves to help them navigate to the best car possible. That turns into a shopper signal. That consumer walks into the dealership. The salesperson looks at that. they walk in and they say, "Hey, Rajat, I've got all your information here, your deposit, et cetera, et cetera. I know this about you. I know this is what you're looking for. And this is why you landed on that Blue Subaru Outback. Congratulations". Let's get this closed. That conversion rate is multiples of what it would be otherwise and that's all content that came from us.

Understood. That's helpful. One last one before we run out of time, just capital allocation. You obviously have a very strong free cash flow profile provides the optionality on M&A buyback. Clearly, you've been a big -- you bought back a lot of stock. But -- are there some areas you'd be willing to consider on the M&A side? Just given the focus on data intelligence, any core competencies or data modes that you like to in-source.

M&A targets or in-sourcing data modes? What was -- can you say the second piece again?

Yes. M&A targets in a way to like just get more of that some of the...

I mean I think look, our -- on the dealer side, our strategy of moving into those three new areas to have four areas total, we think is ambitious and robust. And so anything that can help us in that move faster in that or more intelligently in that is interesting to us. And the good news is that there are a lot of technology and data companies serving auto dealers in those areas. And so -- and many of whom we're currently partners with and have wonderful relationships with. And so those are all possible areas for M&A. The consumer side is, of course, an area for M&A, but it's less obvious that it could be integrated as well. And so M&A is always something that we've looked at. We've always said, first, we invest in our business. Second, we consider M&A and look at it aggressively. And third, if we have excess capital and think the share is a good investment, share price of good investment, then we'll do that. And so I think we're going to keep that hierarchy. And we hope that we can conduct M&A for acceleration or to get us into areas that we otherwise wouldn't get into. Clearly, AI is creating the ability to build organic software faster. But there are definitely companies out there that have proprietary data that's interesting. There are companies out there that have done things through integration and building capabilities that would take a long time or that have garnered dealer trust that would help us to accelerate by buying.

Understood. Any other questions from the audience? You have a minute left. No. It looks like we should end it there. So thanks, Jason, for joining this. And thanks, everyone, for joining.

Thank you very much.