Thanks everyone for joining. My name is Rajat Gupta, member of the Automotive Equity Research Team at JPMorgan . Very pleased to have with us, Jason Trevisan, CEO of CarGurus. The format will be a just a simple fireside Q&A, and we will open it up to the audience for any Q&A in between as well. So with that, thanks, Jason.
Thank you. Thanks for having me.
So yeah, let's just dive in quickly. You know, you reported first quarter earnings, you know, pretty recently, two weeks ago. If you could just quickly hit on some of the key highlights from first quarter. What do you think, you know, came in better than what you expected? You know, where do you still see some choppiness? And then we could, you know, just double-click into a few of those items.
Sure, thanks. Excuse me. So we were really pleased in the quarter with the continued momentum of our marketplace business. It's our largest business. It's a subscription-based marketplace model. We're the largest in terms of, consumer audience, time spent. We're the largest in terms of dealers and inventory, and information, and, that's really starting to generate a lot of momentum that is leading to accelerated growth in that piece of our business. So, we were pleased with the further acceleration of it. We have a metric that looks at how much dealers spend with us per quarter. It's called QARSD, Quarterly Average Revenue per Subscribing Dealer . That continued to grow, and I think was the highest year-over-year growth that it's been in several years. And that's a testament to the, the depth of the relationship that we're building with dealers.
Historically, we were their largest lead provider, and that has a lot of value to it. But increasingly, we're moving to become much more of a partner to them, not only driving leads, which has a lot of value, but also driving insights and data that are helping them make decisions around pricing and merchandising and inventory and sourcing. And so that's leading to better monetization. But also, we gave a couple data points, one of which is that 30% of new dealers that we sign were on 12-month contracts, annual contracts, and that's not typical in the industry. Industry is typically monthly, but that's evidence that dealers are considering us as much deeper, longer-term partners as well. We were pleased with the OpEx efficiency of our business as well.
And so all in all, we thought it was a great quarter.
Got it. Got it. I think there was an interesting comment on the call, you know, you know, around QARSD growth. You know, obviously, very good result in the first quarter, like, recent trends have been very strong. I think you'd mentioned that, you know, you see those kind of growth rates or trends, you know, sustainable, you know, with the first quarter level. So if you could just help us dive into, if you can just dive into QARSD and, you know, maybe rank order, you know, the drivers of QARSD, you know, and maybe what's changed, you know, over the last couple of years, amongst those drivers as well, would be helpful.
Sure. So we have a handful of drivers to QARSD, and in the last few quarters, we've tended to rank them in terms of the power that they've had or the effect that they've had. The first is simply bringing on new dealers at market rates. We began our business, and our strategy was to offer very low pricing and low rates in order to gain volume and grow our business. And so we're still working out of some of that. So on average, our pricing is lower than our competitors, and so when we sign up a new dealer at market rates, that's helping to raise QARSD. The second is, we've become much more successful at selling dealers on higher package tiers.
So we have four, really four, different levels of packaging, and we've done a good job recently of adding more value into the higher packages. That value can be certain features, like some of the data insights that I mentioned. It can be more branding opportunities. It's a variety of things. But dealers are starting to see that value add outside of simply the leads, and as a result, they're signing up for those higher packages. We have cross-sold additional products. So one strategy is to bundle into higher tiers, another strategy is to charge à la carte, and we've done that with products recently that some help dealers market their cars better, others help dealers source cars that they buy with cash from consumers. So those take a few different forms.
We can always deliver more leads and higher quality leads, and dealers will pay for that. And so that's a lever that we had really nice lead growth this past quarter. And then the last one is just simply unit pricing, and that's something that, as I said before, we started from a low base. We have recently gotten more proactive and disciplined in what we charge dealers for even just our simple leads. And there's headroom because our competitors keep raising prices, and we still have space between us and our competitors.
Got it. Got it, and, are there any metrics you can share in terms of, you know, what's the pricing difference between, like, your largest tier versus second-largest tier? Like, how meaningful are those differences in pricing today?
I mean, so CarMax, AutoNation, I mean, they're large dealer groups that have hundreds of rooftops, and so when those are treated as a single customer, they can get to be sizable. But the auto industry, the dealer industry, rather, is very fragmented. So our average dealer is paying us $6,700 a quarter. So they're paying us, on average, $2,300-$2,200 a month. We have some small, independent, single rooftops that are paying us less than $1,000 a month, and then we have larger groups that are paying us much, much more than that. Within the different package tiers, you know, you could see a 40%-50% price increase from one tier to the next.
Got it. Got it. That's helpful. So, you do feel like a double-digit growth rate is a reasonable assumption? Or were you more referring to, like, the absolute, you know, the dollar amounts, you know, in terms of QARSD, you know, on the call?
Yeah, so we haven't guided to specific QARSD growth rates. We have been accelerating that over the last several quarters, and what we have said is that all five of those drivers, which I mentioned, don't have caps to them. I think you could argue that unit pricing is the one that may have a cap to it. There's still headroom there, for sure. The others are just based on our ability to execute and introduce new features and new value.
Got it. In terms of, like, just the environment, in terms of pushing some of these, you know, price increases and subscription changes and higher tiering, how easy is it to do that today versus, say, 2023, when you had really started to, you know, roll them out? You know, how has the environment changed, you know, do you think it's better or worse, and do you think it's gonna get even better going forward?
I think it's better now than it was a year ago. In a subscription business, in our subscription business, we have often looked for macro factors that are highly correlative to our ability to book new business, and to be honest, there's not been a lot of tight correlation. A couple of the factors, though, that have impacted it, typically, if there's more inventory, that tends to help our business. Dealers have more cars they have to sell. And if that inventory has slower turn times at the dealer, that helps our business because dealers feel the need and the desire to market more aggressively to move those cars. Outside of that, there are dozens of other factors: consumer demand, interest rates, and a lot of times those can play both sides and I think have a neutralizing effect.
But in general, there's more inventory now than there was a year ago, both new and used. Turn times at dealers are longer today than they were a year ago. Yes, interest rates are higher, which is a dampening effect for consumer demand, but it's also, it creates urgency at the dealer because their floor plan financing expenses are so much higher. So, we view all those as, you know, puts and takes, and we're proud of the growth in bookings that we're generating. I think perhaps partly fueled by the macro, but I think are more fueled by these non-lead value adds that we're driving.
Got it. Got it. And just putting, you know, the price increases and the QARSD comments, you know, in context of, you know, just the dealer count, you know, how, how do you manage that? You know, is it, are you looking at it in a more holistic fashion in terms of, you know, just a contribution to the company? You know, like, how confident do you feel you can continue to get both QARSD... drive QARSD increases at these levels, as well as, you know, start to, you know, increase your dealer count again? How do you manage that journey?
We manage it today by optimizing for MRR. So, as a result, we have, like I said, had more discipline on pricing, and we know we have churned off dealers who are not willing to pay something close to market pricing. So if we wanted to maximize for rooftop, I am highly confident we could lower pricing, and we could go get a lot more rooftops. We grew rooftops about 100 last quarter. We have about 25,000 paying dealers in the U.S. There's somewhere between 40,000 and 45,000 dealers. We have over 30,000 dealers when you include those that are in our freemium level. And when you look at where we were pre-pandemic, we were getting closer to that 30.
So, if you look at those data points and then recognize that we've added a lot more products, a lot more insights, frankly, just a lot more value across a number of dimensions to dealers, we think we appeal to a larger set of dealer segments. The key difference is we're not willing to, you know, quote, "give away our product" as, as, at prices as low as we were before. So we still believe we can clear 30,000 dealers. We don't see a reason why we couldn't. But at the same time, we're not gonna do it by, by dropping price.
Got it. Got it. You know, I, I do wanna touch on, like, some of the products, you know, the newer products as well, but just quickly, you know, talking about the international business, you know, that's, that's been, like, a, a nice trend, you know, over the last few quarters, you know, some, some meaningful increases, you know, in, in profit contribution. You know, when, when can we see or is that, are those businesses, you know, getting close to an inflection point, you know, in terms of profitability? You know, how do you view your position today, and, you know, how should we, we think about, you know, incremental profit contribution, you know, over the next couple of years, you know, you know, to the overall marketplace business?
So yeah, both U.K. and Canada are our two international markets. They are both profitable independently. As a unit, that business unit is nicely profitable and, you know, catching up to the margins in our core business. They're growing faster than our core business. They're growing mid-20s, and they're adding rooftops, and they're growing QARSD. So I would say they're really cranking nicely right now. Every market's different. In Canada, what's particularly exciting is that our lead levels now, our audience levels and our lead levels, are now rivaling the primary competitor in that market, which is not—that's—we've just achieved that... and that's allowing dealer groups to not view us as a complement to the incumbent, but as a replacement option to the incumbent.
And so we're starting to hear more and more dealers say, "I'm now moving exclusively to you." That's huge. That I think is an inflection point moment. The other thing I would say is we've been so innovative in the U.S. in introducing a lot of these products and features, and we've gotten better at quickly adapting for the market and introducing in the market, in these international markets, similar products. And so sometimes we may take a more partner approach if we don't have the ability to build as robust a product in an international market. But we're now, just like we have in the U.S., pushing into financing, pushing into transactions, pushing into digital retail in those markets, and all of those are very high margin, very accretive additions to our core business. That's Canada.
UK reached profitability last year and is doing very well since. And I think the bigger story in the UK is the competitive dynamics have gotten much, much better. That market got very crowded for a number of years, different models. You had virtual dealers come in, you had the OEM, automotive OEMs doing joint ventures coming in, and it was creating a lot of confusion, a lot of spend in the market, and many of those have pulled back in the last year. And so it's cleared the way, really, for us to, I think, grow faster, have more mind share of dealers and consumers, and just have more success in our profitable model.
Got it. Got it. That's clear. Just, before we go into more questions, I wanted to check if there's any question in the audience. There's one in the back there.
Just a really quick one. Would you be able to remind us of the impact on your business as the used car lot becomes more kind of EV-centric, whether it be from a dealer's propensity to sign up to kind of higher tiers or whether it's dwell times on the site? Any observations at all would be helpful.
You said more EV-centric?
Yes.
Yeah. It's not a huge impact if there are more EVs on dealers' lots. We are ascribing our Instant Market Value to EV cars in a slightly different way to adapt for some of the differences between that and internal combustion cars. But there's not a huge difference. If EV cars are piling up on dealers' lots and they're taking longer to turn than or to sell, that will push dealers to want to market more with partners like us. Some of the OEMs have used EV as an opportunity to try to sell direct, and that's had, I think, a small dent in the new car market 'cause that they're selling new cars only, but not as meaningful an impact as many feared it would.
And number two, the bulk of activity, rather, on our site is for used cars, where the OEMs... So there's new car, there's certified pre-owned, which is a small segment in between, and then there's used. And dealers have principally been focused on new car. They've done a little bit around incentives for CPO, but they've done really nothing for used.
Any other questions? Great. So, you know, moving to CarOffer, you've been very clear in communicating, you know, Zach's strategy, you know, around on fine-tuning, you know, the functionalities, the ease of use, you know, the sales structures, you know, to set up the business for long-term growth. Can you give us an update on where we are across all these different aspects? You know, how much longer is the transition going to take, you know, before you can go after growth again?
Sure. So, as a quick refresher, we began acquiring the business about three years ago. We owned 51% of it until this past December, where 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. And, 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.
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. So, as a result, they experienced really tremendous growth in that as a pretty early-stage company. Through that period, in trying to keep up with the growth, there were operational disciplines that, you know, were hidden by the growth. So for the last few quarters, you've heard us talking about how we need to focus on the operations. 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.
That all rolls up to very manageable arbitration rates or percent of deals that don't go through. That's the operational piece, and that's the first of three 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 two other areas. The first is the product. 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, was that a lot of those product formulations that drove a transaction did not always drive near-term or longer-term customer success.
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. 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, in that group was focused on just trying to get transactions, transactions on any given day, rather than being consultative and partnering with a 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, you know, 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 gonna be in this optimization mode for a few quarters before you get back to profitable growth? That's-
Yeah, we said a few quarters to get to profitable growth.
And in a way, are you suggesting that you get to, like, a break-even or a positive EBITDA number before you step on growth, or can you get to positive EBITDA even at these levels of volumes that are transacting through the platform?
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, you know, 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, you know, the ability to cross-sell CarOffer, you know, with the marketplace subscriptions is an exciting opportunity. You know, what is your near-term strategy for driving that cross-platform adoption, and then how do you view that opportunity long term itself?
Yeah, and this is where we get really excited and, and where I think we're starting to, 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 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 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 3x . 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 two platforms, wholesale and retail, and are helping dealers operate their dealerships better. 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 Good Deal to Great Deal or 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 five makes, models, years that 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 five types of cars, here is your estimated turn time for each of them, seven days, eight 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, that's helpful. Just wanted to check if any questions in the audience, you know, on CarOffer or other areas? No. So, on Sell My Car, Top Dealer Offer, you know, what are your key initial learnings, you know, since you've rolled that out? You know, what's been the feedback from the dealers? You know, what kind of fine-tuning have you had to do to that product, you know, since the rollout? You know, anything you can share and any kind of, you know, quantification around contribution to QARSD, you know, since that rollout has happened.
Sure. So again, just to level set, a consumer will get two offers 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, and 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 it 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." We've now rolled it out nationally. It's a pretty new product. 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 two 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 lot of consumers on our site, and a lot of consumers who are looking to buy a car often 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, who are 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 gonna 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, and before we go into capital allocation, you know, how do you view your competitive positioning today, you know, versus, like, three-four years ago? I mean, we've seen your competitors take, like, different approaches. I'm talking U.S. only. I know, I know we touched upon international. You know, you know, we've seen some of your competitors go into, like, media and, you know, more other forms of advertising. Curious, like, how do you view your position? Because we've seen good QARSD growth, as well as, better stability on the dealer count. You know, why do you think you're able to drive that? You know, 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. 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 six 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, 'cause 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.
... Got it. No, that's, that's clear. You know, quickly on capital allocation, could you run through what your priorities are? Maybe, you know, rank order, you know, between, you know, share buyback, you know, inorganic, or just investment within the business, as well as, you know, 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 at 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 a $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 $200 million 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 three businesses over the last eight years at the company, and we think that, in particular, as we use data to, you know, be having discussions across a broader set of the dealer workflow, that introduces opportunities for us to bring more technology, 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 could be a natural there.
Got it. Got it. No, that's, that's clear. Any final questions from the audience? No? Maybe, maybe one, one last question from, from my end. You know, have there been any, you know, structural changes in behavior, you know, either from the dealers, or the OEMs, on how they're allocating advertising spend? You know, just, you know, coming out of the pandemic, you know, do you think, like, they're looking to engage more with, you know, some of the more sophisticated platforms versus, you know, how they were doing traditionally? Just curious, like, how those discussions, you know, 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 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.
Okay.
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, ultimately?
I think so, yeah.
Okay, great. I think we're on time here, so thanks, Jason.
Thank you.