CarGurus, Inc. (NASDAQ:CARG) Q4 2023 Earnings Call Transcript

CarGurus, Inc. (NASDAQ:CARG) Q4 2023 Earnings Call Transcript February 26, 2024

CarGurus, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the CarGurus' Fourth Quarter and Full Year 2023 Earnings Results Conference At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Kirndeep Singh, head of investor relations. Thank you, Kirndeep. You may begin.

Kirndeep Singh: Thank you, operator. Good afternoon. I'm delighted to welcome you to CarGurus' fourth quarter and full year 2023 earnings call. With me on the call today are Jason Trevisan, Chief Executive Officer; Sam Zales, President and Chief Operating Officer and Elisa Palazzo, Chief Financial Officer. During the call, we will be making forward-looking statements, which are based on our current expectations and beliefs. These statements are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in such statements. Information concerning those risks and uncertainties is discussed in our SEC filings, which can be found on the SEC's website and in the Investor Relations section of our website.

We undertake no obligation to update or revise forward-looking statements, except as required by law. Further, during the course of our call today, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to comparable non-GAAP measures is included in our press release issued today, as well as in our updated investor presentation, which can be found on the Investor Relations section of our website. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency as it relates to metrics used by our management in its financial and operational decision-making. With that, I'll now turn the call over to Jason.

Jason Trevisan: Thank you, Kirndeep, and thank you to all those joining us today. As I shared at the beginning of last year, the theme of 2023 was monetization across our platform, and I'm pleased to report that we delivered outstanding results. Throughout the year, we expanded our product offering to enrich our value proposition and meet dealers' and consumers' evolving needs. This further strengthened our partnership with dealers and drove accelerating revenue growth in our foundational listings business. While smaller in size, the international operations also contributed to the strength of our results. Revenue growth accelerated in Canada, and we achieved profitability in the UK, marking a significant milestone for CarGurus, achieving profitability in every market.

In December, we completed the acquisition of CarOffer, which will allow us to accelerate the connectivity between our retail and wholesale product offerings. This acquisition, coupled with our digital retail efforts, has expanded and diversified the range of monetizable transaction activities that holistically serve our dealer partners. Collectively, we believe that the expansion of product offerings, ongoing innovation, and data-driven insights fortify our ability to attract new dealer customers, increase the wallet share of the existing customer base, and progress toward our ultimate vision of an end-to-end transaction-enabled platform. As a result of our tremendous progress, I'm pleased to share that we ended the year exceeding our forecasted EBITDA guidance for the fourth quarter.

In 2023, the marketplace business significantly outperformed our expectations, exiting the year with approximately 10% revenue growth and meaningfully contributing to our EBITDA beat. In a challenging environment for our customers, characterized by weak consumer demand, lack of affordability, and heightened expenses linked to floor plan financing, our foundational listings business exhibited remarkable resiliency, pricing power, and growth acceleration. In fact, we ended the year growing U.S. QARSD approximately 12% year-over-year to $6,532. This is our strongest year-over-year growth on record since introducing QARSD as a KPI, excluding pandemic-related concessions, and marks the 13th consecutive quarter of increase. In the fourth quarter, the largest drivers of QARSD growth came from adding on new dealers at market rates, package upgrades, and price increases.

We also experienced robust adoption of add-on products and multi-product attach rates increased by 36% year-over-year as dealers continue to look for additional channels to attract high-intent, ready-to-purchase shoppers to their inventory. By providing dealers with greater value in our product offerings and simultaneously growing leads per paying dealer year-over-year, in Q4 we experienced the strongest MRR acquisition in 10 quarters. Evaluating the marketplace strategy for 2024, our approach consists of two key aspects. As we highlighted on the last earnings call, our number one priority is optimizing all drivers of QARSD. This commitment includes adding new dealers at market rates, expansion of existing dealer wallet share through listings, upgrades, product innovation, and adoption, and lead quantity and quality.

This commitment will allow us to deepen the value we provide our dealers and drive increased monetization. Secondly, our renewal strategy involves evaluating dealers and executing renewals to align terms with the ROI we provide, simultaneously exploring new product cross-sell and up-sell opportunities as we enhance the value proposition of our premium packages. For underpriced dealers that fall below market rates, we will conduct ABRs leveraging their proven success in 2023 as dealers recognize the ROI of our platform. Throughout 2023 and carrying forward into 2024, we have invested in our QARSD lever of product innovation aimed at fostering enhanced value creation and strengthening dealer engagement throughout our platform. This commitment to innovation involves leveraging the power of artificial intelligence and data insights to elevate our platform and introducing new products to further enhance the ROI for our customers.

Our strategic emphasis on AI centers around three key areas: internal platform efficiencies, elevating the consumer experience and delivering actionable insights for our dealers. In relation to the first two key areas, our latest development is a listings content generator. This tool produces an easily digestible list of vehicle features and streamlines the consumer experience by making it easier to locate keywords and features of relevance during the vehicle shopping journey. As for greater data insights, we continue to focus on our dealer data insights initiative. Last October, we released next best deal rating powerful report that helps dealers understand the least amount of price reduction needed to achieve the next best deal rating on CarGurus.

Since launching in October, we have already signed up over 10% of our dealers for daily or weekly reports to support their price analysis to improve VDP views and inventory turn times. In under three months, over 100,000 price adjustments were made as a result of the insights provided by Next Best Deal Ratings. We've also developed yet another powerful tool that recommends inventory based on a dealer's turn time objectives. This early access tool allows each dealer to set a specific turn time goal, and we utilize the CarGurus Listings scale to analyze turn time trends at a detailed level in local and adjacent markets. Additionally, we will leverage CarGurus site data to examine consumer trends we're seeing changes in preferences as we look ahead.

By combining consumer and inventory data, we generate personalized reports for dealers, predicting vehicles that align with their turn time objectives. Our aim is for dealers to integrate these insights into their wholesale strategies, optimizing operations and achieving their goals while fostering synergies with our car offer wholesale business. As we develop an end-to-end transaction-enabled platform, we're a leading provider of real-time retail and wholesale insights, empowering dealers decision-making and helping them run a smarter business. As we merge retail with wholesale from a product development perspective, we are able to offer dealers even more ways to access consumer inventory and give consumers even more choice in how they sell their vehicles.

Sell My Car presents consumers with two types of offers, a 100% online offer as well as offers from local dealers known as top dealer offers. Since launching top dealer offers, we have seen conversion rates more than double as consumers value the ability to choose how they sell their vehicle. The primary focus during this early access phase is to guarantee an outstanding customer experience while also catering to the needs of our dealer partners. While we have achieved remarkably high seller Net Promoter Scores, we aim to uphold the quality of the offering as it expands. To achieve this, we are testing with select dealers and intake tool designed to establish trust between consumers and dealers while providing us with a valuable feedback loop of real-time insights for each transaction.

The goal is to further scale top dealer offers in 2024 and has an added benefit top dealer offers is powered by CarOffer's offers Matrix technology, creating inherent synergies by introducing Cargurus dealers to the CarOffer wholesale platform. In 2021, we chose to acquire a stake in CarOffer's offer as it stood as a unique offering, enabling dealers to efficiently buy and sell wholesale inventory programmatically. This decision was driven by our vision to build a distinctive end-to-end wholesale to retail transaction-enabled platform that is unavailable elsewhere. Our enthusiasm for this opportunity is greater than ever since accelerating the acquisition and appointing Zach Hallowell as CEO. Our platform is ideal for large players who continue to find programmatic buying to be an efficient and effective way to source and sell inventory.

In 2024, our primary focus lies in refining the product capabilities, advancing the CarOffer's offer technology through predictive analytics and incorporating CarGuru's consumer and retail data to further differentiate our platform. Despite the tremendous advancements in CarOffer's offers operational efficiency over the past year, particularly in mechanical inspections title transfers and transportation, we will look to enhance our capabilities even further to optimize the dealer experience and drive cost efficiencies. We plan to use the next few quarters to drive our strategic and operational initiatives, while applying financial discipline to strengthen our business, and it may take several quarters before the business returns to profitable growth.

Similar to advancing our digital wholesale capabilities, we have also been investing strategically in building our digital retail platform, where our products allow dealers to serve a broad array of consumers with varying degrees of readiness to purchase their cars. Since beginning our journey, we have developed two product offerings. The first is Digital Deal. As of year-end, we had 4,667 dealers on Digital Deal, growing approximately 200% year-over-year and nearly doubling our digitally enabled vehicle listings to approximately 400,000. Component of the accelerated sequential growth is the unique bundling and packaging opportunities we have created with the two highest listing tiers. As of October, dealers upgrading to the Feature Plus or Featured Priority Plus listing tiers receive Digital Deal included in their package.

Another product that has performed well from a bundling and packaging standpoint is Digital Deal with geographic expansion. Since bundling Digital Deal and geographic expansion, we have seen an approximately 30% increase in adoption year-over-year. With more digitally enabled listings available than any other online retailer, we are providing consumers with a convenient, self-selective purchasing journey, all while providing trust transparency and the best pricing from the largest selection of inventory among major online automotive marketplaces in the U.S. As consumers look to do more of the shopping journey at home, we are seeing digitally enabled leads continue to increase as a percentage of a dealer's overall leads. Digital Deal leads now account for 20% of a dealer's e-mail leads or 30% for top-performing dealers and are up to 5x more likely to close than traditional e-mail leads.

An online automotive marketplace platform with a large selection of car listings.

Our second offering in digital retail further advances our digitally native transaction capabilities and is formerly known as CG Buy Online. This pilot is an asset-light end-to-end solution that empowers dealers to sell cars to out-of-market shoppers entirely on lock and boost online sales by providing dealers with the marketing, technology and logistics needed to support these transactions. We are currently live with a small subset of dealers, our goal in 2024 is to collaborate closely with pilot dealers, further validating the product market fit and developing an outstanding experience for both consumers and dealers alike. Through our digital retail initiatives, we aim to equip dealerships with a broad range of tools and capabilities, enabling them to effectively compete and streamline vehicle sales to digitally savvy or out-of-market shoppers.

In a landscape where consumers increasingly opt for online channels in their CarOffer's buying and selling journey, it's essential to convey to shoppers that our platform is specifically designed to meet their needs giving them the flexibility to handle as much or as little as they prefer online. As we progress further down the sales funnel and guide consumers toward completing transactions entirely online, a task that requires a considerable amount of trust when sharing sensitive personal information, it becomes crucial to amplify our brand awareness. In pursuit of this objective, we kicked off an extension of our 2023 campaign called Your Car, Your Way in January, spotlighting the gratifying experience of everything falling into place just as desired.

As we persist in our efforts to drive direct and own channel traffic, we placed a strong emphasis on enhancing brand awareness. Notably, CarGurus ended 2023 as the #1 automotive app in terms of downloads on both iOS and Android with an average rating of 4.8 stars. This achievement represents a significant milestone for us. considering that our app plays a crucial role as a source of organic traffic that converts at a higher rate than traditional leads. Our app accounted for a quarter of leads in 2023, growing from only 10% in 2023. As we drive more organic traffic and amplify our brand, we are building a platform that creates consumer loyalty. In 2023, our accomplishments strengthened our market and product leadership, reaccelerated revenue growth and drove significant progress toward our vision of being the only end-to-end automotive transaction-enabled platform, where dealers can source, market and sell and consumers can shop, finance, buy and sell vehicles.

Looking ahead to 2024, we expect to further build on this momentum. We're very excited about our areas of opportunity, including capturing more value in the Marketplace business, integrating and expanding CarOffer's offer while increasing our share of the growing digital wholesale market and continuing to invest in innovative growth initiatives such as digital retail. Through it all, we plan to offer our dealer customers even greater insights and value by linking the wholesale and retail process together in one seamless platform. While we will continue to invest in our business, we do so by maintaining financial discipline and prioritizing operational excellence and efficient capital allocation. We believe this will allow us to enhance our profitability and create shareholder value as we continue to expand in both existing and new growth opportunities.

We're very pleased with our 2023 accomplishments and financial results. We look forward to accelerating our momentum in 2024. Now let me turn it over to Elisa to discuss our financial results.

Elisa Palazzo: Thank you, Jason, and good afternoon, everyone. Before I dive into the fourth quarter results, I would like to express my excitement about joining CarGurus. Our Marketplace business is a unique asset with the largest network of dealers and the broadest selection of inventory in the U.S., unrivaled product innovation and ROI leadership. It represents an enviable foundation to build a digital platform that captures the full life cycle of a vehicle transaction. I'm joining the company at a pivotal moment in its growth journey as our highly profitable listings business reaccelerates and we continue to enhance and integrate existing and new transaction capabilities and product features. We are in the early innings of building our vision and unlocking what we believe to be the full potential of our franchise.

I will now turn to our results. As our business mix has changed substantially versus last year, in my commentary, I will highlight both year-over-year and sequential trends. We experienced exceptional momentum in our Marketplace business, which continued to accelerate and achieve the fastest year-over-year revenue growth rate in nearly three years. While we continue to gain leverage in our cost base and expanded our non-GAAP margins across all our business segments and geographies. As the CarOffer transaction closed, and we now have full control of the assets, we plan to focus on achieving operational efficiencies and maintaining financial discipline as we look to return the business to profitability. While we expect this process to take several quarters, we are encouraged by the operational progress to date.

Total fourth quarter revenue was $223 million. down 22% year-over-year, driven by lower wholesale and product revenue and up 2% sequentially as we continue to expand our monthly recurring revenue base. Marketplace revenue was $182 million for the fourth quarter, up approximately 10% year-over-year and 2% sequentially, driven by the largest quarterly expansion in MRR in 10 quarters as well as stable advertising revenues. Consolidated QARSD grew 12% year-over-year, driven primarily by the addition of new active dealers at current market rates, and existing dealers migrating to higher subscription tiers. In the fourth quarter, our listings business added approximately $17 million year-over-year in revenue. nearly twice as much as the average quarterly expansion we achieved in nearly three years.

Wholesale revenue was $22 million for the fourth quarter. down 7% year-over-year and up 1% sequentially, driven by a modest increase in dealer-to-dealer transaction volume. In the fourth quarter, we continued to prioritize operational improvements. While overall market conditions remain needed as wholesale prices are on a path to normalization, but remain elevated. Lastly, product revenue was $19 million for the fourth quarter, down 81% year-over-year and down 5% sequentially. The reflecting our decision to continue limiting transaction volume and lower ASPs as well as meaningfully reduced arbitration revenue. Instant Max Cash Offer, our consumer-to-dealer product, generated $16 million in revenue in the fourth quarter, down 78% year-over-year and 12% sequentially as the growing number of dealers continue to opt in for a highly profitable subscription-based product, top dealer offers.

I will now discuss our expenses and profitability on a non-GAAP basis. Fourth quarter consolidated non-GAAP gross margin was 78% compared to 50% in the prior year quarter and 77% in the third quarter. The meaningful expansion in non-GAAP gross margin was due to the shift in revenue mix towards our high-margin Marketplace business, which represented 82% of our revenue in the fourth quarter, up from 58% in the prior year and 81% in the third quarter. Within the individual business segments, Marketplace non-GAAP gross margin expanded 155 basis points year-over-year and approximately 55 basis points sequentially, driven by favorable product mix. Our digital wholesale non-GAAP gross margin was up 130 basis points sequentially, driven by the early operational improvements I referenced earlier, as well as onetime entire period favorable items.

Fourth quarter non-GAAP operating expenses were relatively flat year-over-year and fell 5% sequentially and to $119 million, predominantly driven by lower sales and marketing spend, which was down 3% year-over-year and 7% sequentially. The sequential decrease in sales and marketing expense reflects our typical fourth quarter cadence as well as our decision to limit marketing investment for Instant Max Cash Offer in 2023. Our fourth quarter non-GAAP product, technology and development expenses grew 3% year-over-year but were down 3% sequentially to $29 million. as we slowed our pace of hiring in the fourth quarter. As a result of sequentially lower non-GAAP operating expenses, we generated consolidated adjusted EBITDA of $61 million in the fourth quarter, up 120% year-over-year and 26% sequentially.

Consolidated adjusted EBITDA margin was 27% and expanded approximately 1,800 basis points year-over-year and was up approximately 500 basis points sequentially. Fourth quarter margin year-over-year expansion was primarily driven by favorable segment mix as well as improved wholesale margins and some one-off items. Marketplace adjusted EBITDA grew 27% year-over-year and 21% sequentially to approximately $62 million. Digital wholesale adjusted EBITDA loss was approximately $1 million in the fourth quarter, including approximately $2 million in prior period and one-off favorability. Excluding these items, Digital wholesale adjusted EBITDA would have been approximately flat sequentially. Non-GAAP diluted earnings per share attributable to common shareholders was $0.35 and for the fourth quarter, reflecting the increase in adjusted EBITDA as well as the reduction in shares outstanding.

I will now discuss a few GAAP metrics that include onetime items related to the purchase of the remaining stake in CarOffer in the fourth quarter. We incurred total GAAP operating expenses of $190 million, up 77% year-over-year, which includes approximately $50 million of share-based compensation incurred in connection with redeeming the remaining units of CarOffer. Fourth quarter GAAP operating loss was $22 million, down $52 million compared to operating income of $30 million in the prior year period. Fourth quarter GAAP consolidated net loss was $23 million, down $46 million year-over-year. We ended the fourth quarter with $312 million in cash, cash equivalents and short-term investments, a decrease of $135 million from the end of the third quarter.

The lower cash balance was primarily driven by the $75 million cash consideration paid for the CarOffer acquisition in December, as well as share repurchases in the fourth quarter. During the fourth quarter, we repurchased 4.8 million shares for an aggregate purchase price of $100 million. Since the beginning of our buyback program in December 2022, we repurchased $223 million in shares, equivalent to approximately 10% of our outstanding capital as of December 2022. In November 2023, we announced that our Board authorized an additional $250 million share repurchase program expiring in December 2024. I will close my prepared remarks with our outlook for the first quarter. We expect our first quarter consolidated revenue to be in the range of $201 million to $221 million.

We expect the momentum in our Marketplace business to continue in the first quarter with quarterly revenue expected to be in the range of $182 million to $187 million, up between 9% and 12% year-over-year. Moving to EBITDA. We expect our first quarter non-GAAP consolidated adjusted EBITDA to be in the range of $41 million to $49 million, with wholesale transaction volumes sequentially lower in the first quarter. On a non-GAAP basis, we expect operating expenses to increase sequentially in the first quarter, primarily driven by marketing spends as we launched our new brand campaign, Your Car, Your Way. In addition, we typically ramp back up our marketing spend by several million dollars in the first quarter after a seasonal reduction in the fourth quarter.

Going forward, for the rest of 2024, we expect quarterly marketing costs and operating expenses to remain roughly in line with the first quarter but to progressively decline as a percentage of revenue as we continue to grow our business throughout the year. Finally, we expect non-GAAP earnings per share to be in the range of $0.24 to $0.29. With that, I would like to open the call for Q&A.

Operator: [Operator Instructions] Our first question comes from the line of Marvin Fong with BTIG. Please proceed with your question.

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