Time to start here. I'm Ralph Schackart, internet analyst at William Blair. I'm sure I know most of you by now. Thank you so much for attending our annual conference. Today we're very excited to have Jason Trevisan, CEO of CarGurus, here. Worked with Jason pre-IPO, during the IPO, and I've covered them since the IPO. My compliance officer is standing here, which always makes me super excited, so please check our website for all disclosures. You good with that, Mike? All right, I pass. All right, cool. So since this is a generalist conference, what I'd like to do is have the CEO sort of start out, sort of riff on the business a little bit. I think it works particularly well here, just because CarGurus has sort of evolved and changed from a core listings business.
During the IPO, the pandemic obviously created some opportunities and some challenges. So maybe as a launching point, Jason, we'll sort of start there, and feel free to sort of expand on that, and then we could jump in from there. Sound good?
Sounds good. Happy to. So, as Ralph said, we began life as our business trying to disrupt the automotive marketplace industry, and we refer to that as our core listings business today. And so this is, you know, 10 years ago, roughly, and what our founders identified was that the platforms at the time were not very conducive to serving the consumer. The consumer, in shopping for a car, had information asymmetry. They did not necessarily understand the history or the details about a car or a dealer, or certainly with used cars, whether it was well-priced or not. And so, the opportunity they saw was to create a differentiated business model, and one that was much more technology-oriented than the incumbents.
The differentiated business model was to offer a freemium platform that showcased all of the inventory from any dealer that wanted to list, whether they paid or not, to give more information on those cars and on those dealers, and ultimately, a moniker which says, "This is a great deal, a good deal, a fair deal, or an overpriced deal," based on, at the time, really advanced pricing algorithms that still aren't replicated today. And then to give information like price drops on the car and dealer ratings and so forth, and just give a lot more information to the consumer. So that, plus a technology orientation versus the incumbents that were more media, traditional media companies turned internet businesses, we emerged into the largest marketplace in the country that we are today.
So we have the most dealers, the most inventory, the most users, the most time spent. So in a two-sided marketplace, that's a valuable position to be the largest. We've since expanded on that. As Ralph said, we've really broadened the portfolio to reorient, to take more of a customer lens. And so if you think about a marketplace, it helped consumers shop, and it helped dealers market their cars, and that was about it. We've since expanded it to now be much more of a complete end-to-end platform that supports transactions. And so what that means for the consumer is that consumers can now certainly research and shop on our site, and they still have access to the most inventory, but they can also get financed. They can get pre-qualified or fully qualified for a loan.
They can buy a car on our platform or do many elements of the purchase, and then ultimately go into the dealership or do the full purchase on our site, and they can sell a car on our site. They can sell it by having a concierge service come to their home and pick it up and wire them the money, or they can get the highest bid from a local dealer and sell their car to them. From the dealer's perspective, we used to just help them market cars. Now, we've expanded that to a much broader set of the workflow of dealers. So if you think about what dealers need to do, they need to source cars, get them on their lot in order to sell them. So we help them source cars in a variety of ways. We help them price intelligently those cars.
We help them merchandise the cars in a way that will move them faster. We still help them market on our listing site, and it's still the largest audience. And we also help them complete the sale of the car and complete the financing and so forth. So, we have emerged into not only now the largest marketplace that helps dealers sell cars quickly and in a value-oriented way, but also a much more strategic platform from soup to nuts that helps from all the way from the buy transaction to the sell transaction.
Maybe, sort of start with the macro, get into recent trends, and then kind of work from there. But maybe just a quick update on the macro. I mean, pre-COVID, you know, it was a very competitive market. Your listing business would help your, your auto dealership sort of sell cars. During COVID, there was an inventory glut, obviously, and we're coming out of that tunnel now. So just kind of walk us through the evolution, kind of where we came out of and where we are today on the macro front.
So, during the onset of COVID, a lot of dealers needed to shut down, literally close their physical stores, and they let go of a lot of their sales teams. And at the same time, or shortly thereafter, demand from consumers for cars really skyrocketed as they moved out of cities and were home more and needed cars more. So demand significantly rose. That drove up pricing dramatically. So used car pricing went up about 60% over mid-2020 to end of 2021. Since that time, and sorry, I should also mention, new car production fell off a cliff. And so a lot of those dynamics that I just mentioned were for used cars, and because new car inventory went very, very low.
Since that time, used car pricing has come back down a little bit, has stabilized. It's still probably up 25% from pre-COVID. Inventory has used car inventory has started to rise a bit. New car has been much more volatile. New car inventory went down to probably 20% of what it was pre-COVID. That has very recently started to rise pretty significantly. So what you're seeing now, while consumer demand has actually waned. So what you're seeing now is inventory for both new and used is rising. The number of cars sitting on dealers' lots is rising. Prices, consumer demand and pricing have normalized a bit, but as dealers have more cars on their lots and floorplan financing rates are much higher, it's much more expensive for them to have cars sitting there unsold.
So now, in our marketplace business, their dealers are coming out of this period where they didn't have to market anything. They're coming back to partners like us and saying, "We'd like your help to help us move cars faster and get access to more audience." So from a macro perspective, our marketplace is in a much healthier macro environment than it has been in the last few years.
And then just in terms of, you touched on the business evolving, but when you started as a pure listings business, obviously a competitive market, you know, there's maybe some unrecognized value that you add by the dealerships. You know, I don't necessarily know if it's friction, but there's an element of that historically. Now that you're a broader platform, with the acquisition of CarOffer, maybe kind of speak to how you broaden the platform out and how it sort of maybe puts you in a different partnership with your OEM customers.
Sure, with our dealer customers.
I'm sorry, yeah.
Yeah, yeah. So, no, that's right. So we have always been, I believe, a leader from a technology standpoint and from an innovation standpoint. What we have done with this evolution to, as I said, more of the dealer-customer mindset, thinking about their workflow. The first thing we've done is, as Ralph mentioned, we acquired a business called CarOffer. CarOffer is a digital wholesale platform, so that helps dealers acquire used vehicles from other dealers and from consumers. So in the workflow of a dealer, we now have CarOffer and other products and, insight tools that help dealers source cars more intelligently and just get access to those cars. We help them price their cars.
So we're now giving them, we call them Dealer Data Insights, but we're giving them insights that say, based on competitive dynamics, regional consumer demand dynamics, wholesale pricing trends, here are different ways that you can cut your pricing strategies in order to reach the, the efficient frontier of the optimal price to move the car at the, the speed at which you'd like. We're giving them AI-based tools that help them merchandise the cars better on our platform.
So we are saying to them, "Not only here are the types of cars that you should source to move them faster, based on what we see all the way from wholesale to retail, but also, here's how you should merchandise the car based on the options and features that are most compelling to consumers over the last 60 days." Our listings platform is not only just a listings platform, but we also are giving them tools that help them understand what is their market share relative to competitors, how quickly are they raising or dropping prices, relative to competitors. So we're giving them a lot of intelligence around the actual marketing of it. And then now we're giving them tools and products that are helping them get that much closer to a sale.
So we have something called Digital Deal, which is a product that dealers can subscribe to, that allows consumers on our site to put down a deposit, set up an appointment, get fully funded for a loan, get a trade-in value, do everything they need to do, and simply walk into the dealership, close the sale, finish the paperwork. We also have a program called CarGurus Buy Online, which allows dealers to sell cars in their entirety through our platform to consumers. It's an early-stage program. It's in pilot right now, or in beta right now. But that takes the dealer all the way to the sale.
So our conversation with dealers have evolved from, "List your cars on our site, and you'll get 300 leads this month," to, "Here's how we can help you run a dealership that will move the cars faster with more margin in each unit through the predictive analytics we're applying all the way from sourcing to selling.
Then, as that conversation is evolving or broadening out, you know, have you seen more of a partnership approach with the services you're providing? And maybe kind of walk through, if you don't mind, the sales cycle. Is it more of a partnership now, or are they looking at sort of a broader portfolio, but, you know, maybe kind of your go-to-market on the sales approach would be helpful as well.
It's much more of a partner-oriented discussion. Our sales model is predominantly an inside sales and account management model. We have, you know, a couple dozen field reps out visiting dealerships frequently. Our inside reps will occasionally visit, but it's mostly phone and video-based. But it tends to be a shorter sales cycle, you know, sub 90 days. The conversation, though, is very different than it used to be. We used to sell this lead product or listings product, and then we may not engage with our customers much, and those leads would flow directly into their CRM, and so they wouldn't have as much interaction with our products.
Today, we're having conversations, like some of the examples I've given, to advise them on pricing strategies, to advise them where they haven't merchandised cars properly, and they could, in fact, get more leads per unit or a faster turn time on something. A good example of this is, we have a Dealer Dashboard, and we had some dealers that would never really go into it because, again, it would feed into their CRM. We've introduced some of these pricing intelligence tools, and we have one in particular that is being used now by several thousand dealers. And 30% of those dealers have said to us, "I would like you to email this to all my store general managers every day."...
I'm telling them they need to look at this when they wake up and come into the store to figure out what price changes they should do that day. And the balance are asking for it weekly. So the tenor of the conversation and the depth of the engagement is really night and day from where it was.
Yeah.
Sorry, one other-
Yeah, of course.
A data point we gave in our last earnings call is that almost 1/3 of the new dealers that we've signed up have joined us with an annual contract. And we come from an industry that is monthly contracts, and I think that's a sign that it's a mindset shift, that they are recognizing us as more of a partner that is not going to be, you know, hand-to-mouth or come and go, but instead is someone that they're really embedding themselves with.
So you touched on recent earnings. Maybe kind of switch to more near term, but maybe talk about some of the more recent trends you're seeing in the business, maybe from last earnings call or kind of where we're sitting today. And then, walk us through your guidance commentary and sort of the considerations that are embedded in that as well.
Sure. I mean, I think that the two biggest trends. Dealers are now coming out of this period where they enjoyed very historically high margins. They didn't have to market that much. Consumer demand was significantly high, and they're sort of coming back down to earth. And a lot of them have a theme of back to basics. Like, we just have to get back to basics of how to sell, you know, how to build a relationship with consumers and how to sell cars to consumers. And the new dimension is that a lot of them, if not the vast majority of them, are an online to in-store sale, whereas it used to be some people would walk in. You don't really have walk-ins anymore.
And so, you know, I think two of the bigger trends that I've alluded to so far in this talk already, number one is the use of data. And so the sourcing element of a dealership used to be something that was done in the back of the dealership, and it would be done on gut instincts. And now they're using tools like ours to say, "Of all the different places that I can source a car from, I need to use as much predictive intelligence as I can to know exactly which types of cars to source and how much to pay for them." And we're giving them examples to say, "These two types of make, model, trim, option packages will turn in 11 days, and these three will turn in 31 days." And so they're leveraging that a lot more.
So the use of data in all the different aspects, number one. Number two is much more of the transactions being done online. And while still a very small percent of total car sales are done fully online and delivered to the house, nobody ever steps foot in a dealership, the vast majority begin that process online and then walk into a dealership. And so, as we're adding these elements, it's mutually beneficial. The consumers love it, because instead of spending five hours in a dealership, they may spend one hour in a dealership. The dealers love it, because those people that then come into the store are 5, 7x more likely to actually complete the sale. They're a near sale rather than a warm lead. And it's just much more efficient. It saves everybody time.
Those are the two key trends. You want me to go to guidance, or do you have a follow up?
Yeah, just maybe on guidance, sort of what's embedded there and sort of maybe the interplay between QARSD and other growth levers.
Yeah, so a key measure for us is a KPI called QARSD, quarterly average revenue per subscribing dealer. So it's, it's how much our average paying dealer pays us in a quarter. If, you know, if you multiply that times the average installed base of dealers, you get a proxy for our subscription revenue, which is the bulk of our revenue. So from a guidance perspective, we've said that this quarter will be between 11% and 13% year-over-year growth, so we've accelerated that business to double-digit growth and have guided to that for the second quarter. We've also said that operating expenses in Q2 will remain flat, roughly flat as a percent of revenue. And then we expect to see some leverage in the back half of the year.
And then on digital wholesale, in particular, that's the business we acquired called CarOffer. We finalized our acquisition of that in just December, so a handful of months back. We're in the process of rebuilding that business and reorganizing that business from a go-to-market and a product perspective. The last leadership had a certain incentive structure that had them very near term oriented, and we're trying to build a business and unit economics that we know can scale, that has proven that in the past, and we need to get it back to that. So we've said that volume in Q2 will be sequentially down in the wholesale business. From a QARSD perspective, there, where I believe last quarter growth was, I think, 14% year-over-year.
We've got a number of drivers there that continue to exist for us, so upselling dealers to higher package tiers, that has been also accelerating because we're packing more and more of these Dealer Data insights into the higher level packages, cross-selling them other products. We are bringing on new dealers to this more complete package at much higher QARSD levels than some of our legacy dealers. And then we do still have unit pricing that we can pull on, because we still are below our competitors from a unit pricing standpoint. And then lastly, growing lead volume and lead quantity, lead quality rather. We look ultimately at how many cars we help our dealers sell, and if we are continuing to drive that higher, we know we're adding more value.
And so those are all QARSD levels, levers, and they all have significant runway still.
And on the most recent quarter, I think it was one of the, you know, not necessarily a breakout quarter in the sense that you know, something really changed, but just seemed like a lot of macro factors are coming together, more positive. Your pricing differently, and your go-to-market, it seems to be really starting to kinda come together as well. But maybe kind of double-click on what was really driving the strong dealer count growth, the traffic growth, and some of the trends that you're seeing more recently that have really started to turn really positive for you.
So dealer, dealer count or rooftops did grow last quarter by a little over 100. We have always said we optimize to monthly recurring revenue, not to rooftop. In an environment that honestly, COVID sort of froze a lot of things in our industry for, like, a couple years, 2-3 years. The return to normalcy only began a year and a half or so ago. As that occurred, we did get, I think, some new religion to say, "We no longer need to employ a low-cost strategy to gain market share. Like, we know we're delivering value, and we're going to try to recognize that value." We got more aggressive starting in 2023 on unit pricing.
Again, we have headroom compared to our competitors. And that... And we held the line, and we got rid of, you know, a number of dealers that were not willing to come up with us. The vast majority did come up with us 'cause they see the value that we deliver. But that was one dynamic in dealer count that has affected us for the past 18, you know, 6 quarters, 18 months. Meanwhile, though, as we've expanded this product suite, we're appealing to more and more segments of dealers. And so, we continue to believe that we—we right now have just under 25,000 paying dealers in the U.S., and we continue to believe that we can reach 30,000. We have 30,000, over 30,000 on our platform.
We have a freemium segment, though, but we have, you know, active engagement with north of 30,000 already, and there's about 40,000-45,000 in the U.S., depending on how you measure it. So, dealer count is something that, especially with a broadening product suite, we think there is runway in. We also think there's runway in share of wallet. We right now have about 25% share of wallet of what dealers spend on listings, marketplaces, and we have a much higher share of consumer time spent, and of consumer mind share, and higher consumer NPS, and so forth. And so, we think that's headroom as well.
And then maybe kind of turn to the CarOffer business. You acquired it, you know, during COVID. Obviously, it was growing fairly significantly. And then when that growth sort of came down, you've had to make some changes there and sort of address some of those operational challenges that I think you're mostly through. But maybe sort of walk through what were some of those challenges, and maybe more importantly, where are we today, and then how is that business positioned to grow again?
Yep. So, again, just as a quick refresher, CarOffer is a digital wholesale platform. What makes it unique from other digital wholesale auction platforms is that it is not auction, it's an instant trade platform. And so a dealer will say, "I'm interested in buying 10 cars this month that fit these criteria. Go out on your network and tell me if any of those exist at the price I'm willing to pay, or if they become available at the price I'm willing to pay," and then the platform will consummate that transaction. Versus the selling dealer saying, "I'm ready to sell this car. Who wants to bid in this 3-minute auction?" It was founded in 2019, effectively, in its model. And when COVID began, two things happened that were extraordinarily big tailwinds to that business.
The first is that wholesale unit prices started to rise quickly. As I said before, they rose about 60%. Used car prices rose about 60%. In a price-rising environment, an instant trade platform is highly effective because dealers just want to try to get any car they can, because by the time they recondition it and sell it, it's worth more to them, so it's a very, frothy time. The second thing that happened is that rental fleets, Hertz, Enterprise, et cetera, had defleeted, and because travel had stopped. As travel came back, they needed to refleet in very significant ways, and historically, the way they fleet up is they buy new cars. They had lost their ability to buy new cars, and new cars weren't really being produced.
So the rental fleets stormed into the wholesale market, and the most scalable, effective, efficient way for them to buy used cars at scale was on the CarOffer platform. So those two dynamics created unbelievable growth and profitability, which I think is a testament to the asset-light model that it is and its potential for margin. As prices came down and the rental fleets moved out, and I think CarOffer, still in early business, you know, growth was hiding some operational ills, and the water receded, you started to see some rocks. And so the first phase that we did was to really improve the operations. So that's working with our partners on transportation, and inspection, and arbitration, and tax title, and title transfer. So we've made extraordinary progress there.
Upon taking over full control in December, we identified two areas that needed more work than that we've been focused on lately. So the first is on go-to-market. So historically, in the earn-out structure, again, I think the team was very focused on near-term transactions and not as focused on this partner orientation that we now have with dealers at CarGurus, and really building long-term relationships, using data to build trust and predictability, and becoming a thought partner to them. So our go-to-market organization is being restructured right now, and the second is in the product and technology. And that is largely, think of that as...
in price, volatile periods when you, which is most times when you can't predict the future exactly well, what data can we provide, and how can we ensure that that instant trade matrix is as robust and bulletproof as possible to give dealers as much confidence as they can to transact in an instant trade environment?
About five minutes. I'll pause for a second, see if there's any questions. If not, I'll have a couple more. Sir?
The price is kind of below or at least recently below the other competitors. How do you balance the desire to close that gap to your business with the risk that you kind of grow the value?
So, on marketplace you're talking about, right? Yeah, yeah. We have, I think, taken a slow and steady, methodical approach to it, and it's balancing it, not just by any means taking unit price, but by doing that while continuing to wrap around it, this technology and insights and other value-added elements. Dealers are professional negotiators, and they operate their businesses oftentimes in a monthly financial mindset, and so changes to cost structure with a partner to them can be disruptive. And so we know that we have to be thoughtful about how we go about doing that. And one of the things that has...
I don't know if I'd say it's been a challenge, but it's different for the industry, is the industry is used to saying, "I am, I am comfortable paying X for a lead." What they're not as used to thinking about or saying is, "Wow, you're giving me these five tools across these things that I do that are helping me run a smarter business and source smarter and price smarter, and merchandise smarter." They've never had to put a value on that 'cause they've never had those things. And so the art of what we're trying to do now is to help them see that value. We need to articulate that value better so that they evolve with us in their mindset to how to value the things that we deliver to them.
We have shown that with, with a process that we called our annual business reviews, we went to our lowest priced customers that were just getting well below market pricing, and frankly, they weren't adopting a lot of these other features and tools. And we said to them, "No longer is the free lunch over, your price is going to increase. It may double, it may more than double." And that's a tough message to deliver. It's an even tougher one to hear. The majority of them went along with that, and of those who said, "I'm sorry, I just can't, and I'm going to leave you," over half of them came back within six months. And I think that's a testament to in, in the low segments, we can get more extreme. In the higher segments, it just is not a way to invest in our customers. Yep.
Looks like we have about two minutes left. Anything, Jason, we didn't cover today that you think be helpful for investors as they sort of track the progress of the business, going forward? Anything they should focus on?
It's a bit of a reiteration, but I think this notion of helping a dealer go all the way from predicting which cars to source and then helping them sell those cars with the mindset of we're trying to help you grow the actual gross profit of your dealership, is something that they've never had a partner that's offered that to them before. Similarly, with consumers, there's never been a place where they can see the breadth and selection from tens of thousands of dealers, have unbiased and transparent information on all those cars and all those dealers, and now have the functionality to be able to move partway down or all the way down the transaction, is a user experience that they've never had before.
And so, we really think that that's a pretty profound transformation in terms of the depth of relationship we have with each of them. It's not going to happen overnight, that everyone embraces all of those elements, excuse me, but with things like our annual contracts and the, our ability to upsell, customers and keep a high rate of QARSD growth, I think is evidence of all that. And frankly, I, you know, I think that therefore, the metrics are less about rooftops or uniques or things like that, but it's more about the depth of the relationship and how many cars we're helping to transact.
Great. Almost out of time here, but thank you for your interest in CarGurus today. Jason, thank you for coming again to our conference. Really appreciate it. And our breakout session will be in Richardson, which is on the second floor. Thank you.