Anyways. All right. A couple more sessions here in the afternoon. Hopefully, everybody got their cookie break. Very important at like 2:33 P.M. I highly recommend it. Very pleased to be joined by the CFO of CarGurus, Elisa Palazzo. Did I get that right?
Absolutely.
Excellent. Thank you for being here. We appreciate it.
Pleasure to be here. Thanks for having us.
Cool. I'm Brad, obviously, cover internet here at RBC, and said that like nine times today. So, I think to start, we'll kind of go through maybe just a couple of minutes on the quarter and sort of start from there. And I think you guys have been public for obviously a long time, but I think some people are coming back to the story for the first time in a little while. And so I think lots to revisit there. But let's start with the quarter, just a minute or two on kind of the latest, and then we'll go from there.
We had a very strong quarter. We are very pleased with the combination of top-line growth, which accelerated for the seventh quarter in a row, and we do double-digit for now four quarters in a row, and the expansion in margin, part of which is seasonal. Our marketplace business grew about 15% year-over-year. We are planning the same rate of growth at midpoint of the guidance for the fourth quarter. Our international business grew 23%. Our OEM advertising business returned to double-digit growth for the first time in several quarters, driven by the normalization in OEM inventory, which essentially drove demand for advertising. The OpEx were flat. The combination of the 15% top-line growth and the OpEx flat drove EBITDA margin up more than 30% year-over-year to a profitability of approximately 34%, which is seasonal.
Typically, in the third and fourth quarter, we have higher margins, which kind of come back in the first quarter. That is a little bit driven by the marketing spend, which we tapered down in the second half of the year, and in particular in the fourth quarter around the holiday season. We're very disciplined about ROI, and so we don't see compelling reasons to spend, and so we typically take down our median advertising spend there, and then we ramp it back up in Q1, and it's a mix of brands as well as media spend for the first quarter of the year. In terms of products, we saw very strong, continued very strong adoption of our Digital Deal, which is more than doubled year-over-year to +150% to 8,500 dealers. So approximately a 1/3 o f our dealer base.
We are very optimistic about the Digital Deal product. Top Dealer Offer is also one of our nascent products that we have just launched less than a year ago. We penetrated the market with 500 dealers. It was up 30% quarter- on- quarter on a sequential basis. Our international business, as I said, is growing very nicely. It has also reached levels of profitability that are close to the core U.S. domestic business. We are seeing compelling opportunities there to invest more in order to drive long-term growth and capture market share in the international markets.
Got it. That's great.
This is marketplace digital wholesale, different story. There we are focused, as we've mentioned several times in our public earnings call, on unit economics optimization rather than volume maximization. And so there, despite a step down, a sequential decline in the volumes, we've seen profitability both on a dollar basis and on a percentage basis go up. And we've also guided for Q4 sequential volume decline, partially driven by seasonality, but we anticipate margins to improve again sequentially.
Got it. Okay. And then maybe just to follow up on the market, that's a great overview. You mentioned inventory levels have helped that OEM part of the spend. So maybe set that aside. I think that's pretty straightforward. On the broader inventory levels of the market, how would you say that's. I think it's a tailwind for the business right now, marketplace-wise. But how do we think about that in terms of the cycle, and what are dealers feeling right now that's contributing to that spend? So things out of your control, so to speak.
Perfect. So thanks for the question, which we get a lot. So the first part of my answer is we are not a cyclical business. Marketplace, auto marketplace is structurally growing. And our growth in particular has been idiosyncratic in the sense that we've both gained wallet share, and we continue to gain market share vis-à-vis competition. In terms of macro factor, that is a question that we get a lot. It's very hard to extrapolate specific variables that really can explain our growth. I would say days on lot is probably one of the very few macro variables that is correlated positively with our bookings. And so as the level of used inventory remains stable or normalized a little bit more, that should be a positive tailwind for the business. The interest rates should also be a positive in terms of consumer demand.
And so that will make dealers more prone to spend more in advertising because they know that there is an audience out there. And so if the affordability of vehicles improves because the interest rates go down, that should also be a tailwind, a positive factor for our business. The OEM advertising, that is a bit more. The double-digit growth, that is more explainable with macro trends because we are seeing OEM inventory continuing to normalize also going into 2025. And that has absolutely and unequivocally driven the demand going into.
Got it. Okay. And then just some of the affordability stuff, days of sale. When you think of—you added, I think the most dealers have done in a while, right, in the quarter. What was behind that?
I would say that is more related, in our view, in our belief, related to ROI and the fact that we are providing more value to our dealers constantly in the form of lead quantity, lead quality, but also a whole host of value-added products and services that are not necessarily related to leads, but that really drive the ROI for our dealers, and so I will give you an example. We have value-added products and services, so Top Dealer Offers or Digital Deal. This is some of the examples. Or the Dealer Data Insight, DDI. This is a new initiative for us, so we have this report. It's called Next Best Deal Rating. That tells the dealer, if you lower the price of this specific unit by an X amount of dollars, you will achieve a better rating, and it will boost visibility on our platform.
Yeah, year to date, we saw 1.7 million actions taken on the basis of this signal and this input that we provide to dealers. When dealers act on that signal, on average, they increase the turn time by 40%. So that is a very compelling, very valuable, and powerful way of delivering value to our dealers. Creates stickiness, creates engagement in our platform, and in the long term, really improves the quality and the genesis of our growth and the engagement that we have with dealers, making us a partner in the long term with our customers.
Got it, and so if we look at just the growth algorithm between dealer ads and QARSD, quarterly average revenue per spending dealer.
Subscribing dealer.
Dang it. So close. All right. We'll get that right someday. Basically, you're our guru. That has been the growth, right, this year. Dealers have grown a little bit, but off of a kind of a, whatever, stable base, we'll call it, over the last few years. I know you've got annual business reviews, right, and then you've got the add-on products and maybe some other pricing going on. Start with the annual business reviews. Why has that been in such a cycle over the last year, and does that continue, or is that just kind of like a one-time step up? What should we think about over the next few years in the model around just the annual business review? And maybe just talk about what it is too, by the way, because I think.
It's a great question. The ABRs, annual business reviews, essentially were more prevalent in 2023, so in the last couple of years, not in 2024. We saw that a significant portion of our dealer base was meaningfully underpriced compared to the market. And so we proactively reached out and we repriced according to market levels. That, as I said, was a driver in 2023 in particular. But in 2024, it's only a minor, a smaller driver of our growth. The composition of our growth is very different. The first, and I will rank the drivers and the factors for you. The first one is new dealers joining at market rates. The second one is dealers migrating up tier and so subscribing to higher levels of subscription tiers. The third one is the adoption of value-added products and services. The last one is ABRs and like-for-like price increase.
Got it. Okay. And then, so when they're just moving plans, can you give us any sense of an average delta there? What are we talking about?
So we see a meaningful upsell and an increase in the QARSD or in the quarterly average revenue per dealer. I think it's approximately 60% as we go up tier. So that is a meaningful driver of growth. What we have said recently is that the top two premium tiers are not the majority of our subscribing dealer base. So we have some significant room there to go up and for dealers to move up.
Got it. Okay. And what precipitates a move like that? And are dealers doing this intra-year, or is this on the annual business review cycle, or what's the timing look like?
So it really depends on the duration of their contract with us. But at any given time, they can move up tier. We typically bundle new products and new services into the tiers, and so dealers spend more with us. What we've shared is more than 50% of the dealers who've been with us for the last two years or longer have actually increased their level of spend with us. That is symptomatic of the fact that they are seeing more very strong and compelling ROI. And the ROI comes, again, as I said, is leads, number of leads, leads quantity, leads quality, and all the whole host of value-added products and services that sometimes we bundle. Sometimes we actually monetize à la carte. So I'll give you an example. Top Dealer Offer is a service that we offer. It's lead-based, and it's a sourcing service.
We allow dealers to acquire cars directly from consumers without any intermediary and without any dealership. We sell that on a basis of a package of leads for $2,000 a month. If a dealer subscribes to Top Dealer Offers , they almost go up 100%, double their quarterly spend with us because it's $6,000 on a quarterly basis vis-à-vis the QARSD of approximately $7,000 at the moment. That is an idea of how value-added products and services, when we monetize them à la carte, they can actually be a very powerful driver of that.
Gotcha. And that can be totally incremental in many cases for an existing customer.
Absolutely. That is a pocket of demand that is adjacent and is latent and addresses a completely different need. It's not the need to sell a car. It's actually the need to source a car. And we've seen that need is a real true pain point for the dealers. We estimate that the number of cars that are currently sourced directly from consumers is less than 10%, and it's growing very fast. It's a very compelling way of acquiring inventory because it's typically better quality. It's better priced. There is no transportation fee in the case of Top Dealer Offers because the consumer drives the car into the dealership. And on top of that, and so you can verify the quality. On top of that, the dealer gets a lead for a potential buyer.
So it is a win-win for both the consumer who gets a better price and doesn't pay for transportation fees and for the dealer for all these reasons that I mentioned.
Yeah. Got it, and then talk about what the iconic Digital Deal has obviously been kind of the biggest one. What has been kind of the secret sauce behind that and maybe just any help with how much uplift that gives to QARSD?
Digital Deal is a product that initially we monetized à la carte. However, we have bundled in the most recent quarters. We are seeing very strong in-market demand. The adoption has been very strong. We currently have approximately 30% of our dealers subscribing to this product. It is a subscription-based product. It's a 1/3 of our dealer base. It's gone up more than 100%, + 150%. What the product does is allows consumers to pre-configure and complete almost the entirety of the transaction online, including paying a deposit, getting their credit checked, and booking an appointment at the dealership. Then the only thing they need to do is actually the handoff from online to offline, going to the dealership, get the keys, sign a couple of papers, and get the car.
That, again, is a product that is very compelling both for the consumer. 70% of the consumers are digitally inclined, and so they want to do more online. They want to complete more of the transaction online. But also for the dealers, if you think about this, they can keep entirely the unit economics. They can keep their relationship with the consumer, but at the same time, increase the efficiency of the salesforce because the salesperson doesn't need to sell in-store in dealership. They can very quickly sign a couple of papers and then sell off to the consumer. On average, the consumer spends four hours in dealership when they buy a car. This is a much faster, much more efficient, and compelling way of buying a car, both for the consumer, but also for the dealer.
Yeah. Got it. And then one of the questions I think we get on CarGurus a lot is just around attribution. And historically, the business was a prepaid ad business, right? Which those are hard sometimes to move down the funnel and understand what the full value is that you guys are delivering. And I get it with some of these downfunnel efforts, right? Top Dealer Offer, you're hand-delivering demand to the dealers. You sort of closed the loop on that. What are maybe some of the areas, or are there other areas where you think you can sort of more fully close the loop on attribution and understanding kind of the full value that you're giving to dealers?
Not that they, and I'm not suggesting they're not perceiving value, but I think the view has always been, correct me if I'm wrong, is that you're underpaid for the value you're delivering. How do you close that gap?
I would say a couple of things. Digital Deal specifically, which we just discussed. Leads close up to three times as high as a non-qualified lead. The attribution is absolutely not a problem because we basically have full visibility into booking an appointment, putting down a deposit, and what happens in dealership. That is a way of addressing it. The second consideration is the app. The app channel has actually grown, is a little bit less than a third of our leads at the moment. It has very high engagement. With the app, we can also track with the geolocation whether the consumer has walked into the dealer. The other consideration, and this is a little bit more generic and related to CarGurus, typically CarGurus is three times as likely to be visited as the last stop before the purchase decision is made.
So the intent of our leads is very, very high. And consumers spend on our side typically almost more than 50% more time compared to the second next competitor to us. So that is also a data point that allows us to understand how high is the intent of our car dealer.
Are there any other, I don't know, third-party software relationships you guys have where you could ever tap into things like inventory, dealer management, that type of thing? And any other, I don't know, when you guys sit around thinking of ways to, again, more fully extract the value that you're already delivering, is there anything else out there that you could do along those lines?
Yeah. So we have engaged with several third parties, most recently with a company called Clarivoy. They are able to track the traffic and the attribution. We rank and we score very, very high there compared to competition. That has been an interesting data set for us to look at and a very compelling one. We need these data points and these data sets to remain independent. The reason why we can't do the attribution ourselves. Our share of voice is typically about 50%. Our attribution is also ranked and scored very well within third party.
That's very generous of you to say you can't grade your own homework in digital ads. That's not always the case. I'll tell you. All right. So traffic. We haven't really talked about traffic, and we don't talk about traffic anymore. It's funny. What was it back in? I think it was 2019 where the great SEO algorithm change of 2019 that affected so many people's business, and CarGurus got a little caught up in that. How much of this QARSD growth do you attribute to lead growth? And just philosophically, how do you guys think about spending to acquire, get traffic, obviously, that turns into lead growth? I understand you have all these other products and drivers going on, but just at a high level, how do you guys think about your aggression towards pursuing lead growth and traffic growth?
So we are migrating while lead remains our core business, part of our DNA. We are also enriching the product with other products and services to make sure that we become a more wholesome platform, and we migrate away from the pure, strict lead-generation listings. In terms of leads, we track not only lead quantity, but also lead quality. And we've been able to drive significant operating leverage in the last couple of years by leveraging AI in order to enhance and improve the efficiency of our traffic acquisition channels. AI has been one of the tools we've been using, and also the conversion of this traffic into leads. We've also explored and optimized our traffic mix across a number of channels. So for example, we are exploring and we are focusing on affiliates. Smaller channels are very promising. Video is also another thing that we are focused on.
So we are optimizing. We have a very strong marketing team that has allowed us to really optimize the spend in marketing. App is another one. I just spoke about that. The conversion rate and the engagement and the levels of self-registration on the app are very, very high, almost twice as high as our mainstream website or desktop or mobile products. So app is also a big component of the traffic optimization. And so in general, we've been able to drive efficiency and effectiveness out of our marketplace.
That's great. What would you say on the GenAI front? Because obviously, we do a lot of channel checks, and we do hear from a fair number of advertisers and agencies that SEO has gotten hit especially hard with the box at the top of Google Search. You guys have SEO. How have you found that evolution to be developing?
So we have migrated away over time very sadly away from SEO. So it's a very small part of our traffic. Today, I believe it's single digit at the moment. So that is no longer an exposure that we have, but we are continuously and constantly enhancing our traffic acquisition, leveraging AI, and we have been able to drive significantly.
Got it. Any social versus search mix shift you can talk about, or not really seeing anything meaningful?
Social is part of our mix, but it's not something that we're currently growing necessarily. We are more focused on our own channels, and we've been able to optimize those.
Got it. Okay. Let's talk CarOffer. We have a little bit left here, and we haven't talked to CarOffer.
Pleasure.
Where are we in the baseball game of that business coming back? And I say sometimes I feel like it's the second inning. Sometimes I feel like it should be the sixth inning, but where would you say?
So remember, we acquired 50% of the business a few years ago, but we only acquired full control of the asset in December of 2023. So it's been less than 12 months. And we've really gained full control. It's only been a few months. Now, what we said is we have a plan to return the business to profitable, first to break even and then to profitable growth. It's taking longer than anticipated, but we are making progress on it. And the focus there is really on optimizing the unit economics, maximizing volume. And as I just said, volumes are declining. Some of that is seasonal. However, margins and profits are getting better. So we feel we are making progress. In terms of the areas of focus, we've said three are the main areas. One is go-to-market. The other one is product-market fit. And the third one is operations.
We recently hired a senior operations leader. We've seen already the improvement in transportation margins, which were not optimized before. So that has enabled our margins to improve. Go-to-market, this is a very different market from the initial acquisition. It's a market that is more focused on account management, on retention, and engaging with the dealers. And so the go-to-market motion has changed in order to adapt to what is the need of the business today. And the third one is go to a product market fit. We are really hard at work to ensure that the customer experience is satisfactory, that we improve the retention across the funnel, and we have promoter score. We have lowered the arbitration rate. So all of these are components that are making progress, if you will. And over time, there have been very many quarters of OpEx reduction. Now we are kind of stable.
However, we are still driving efficiencies out of the fixed costs. We are redeploying those in a very disciplined and savvy way into product-market fit, enhancing operations and go-to-market. So we feel while it's taking longer than anticipated, we've already made progress on that.
Got it. Okay. And I feel like in some ways, correct me if I'm wrong, you guys are kind of throttling any would-be improvement because you're working on sort of getting that operational rigor back, I think is the term Sam likes to use. What would allow you to sort of turn things back on, and how quickly could you turn things back on?
So we want the customer experience to be satisfactory. We are looking for unit economics to be in the right place before starting the growth again. We could maximize volumes today by signing large deals that are not as compelling on a unit basis. That is not our focus. We are actually much more focused on having unit economics that are compelling and scalable in the future, and then look for growth aggressively once we feel we are in the right spot. So it's going to take some time for us to get there.
Got it. And I think part of this is marketplace liquidity, right? It's chicken and the egg, and you have to have supply, and you have to have demand on the wholesale marketplace. When you're bringing on new dealers, are you getting a look at all of their volume initially or 5% of it? How does a new customer ramp? And just to try and get a sense of how quickly volume can enter into the marketplace.
Liquidity at the moment is not the constraint of the platform. Think about CarOffer almost like a trading platform. We just match demand and supply. And so we don't need to have our own inventory. And in fact, we don't. It's third-party inventory that enters the system both on the buying side, and then we match that, sorry, on the selling side. And then we match that with buyers, provided that there is an overlap in the conditions. Liquidity is not the particular concern for the time being. It's truly the product-market fit and the unit economics.
Got it. Okay. I was going back to, and I know a few years ago wasn't representative, right? But when the rental car companies were coming in and crazy bidding on the buy side, right? And suddenly you had dealers selling above retail in some cases. What needs to happen to sort of rebuild that type of activity? Not the irrational bidding so much. It's just the volume.
I would say is, again, the product needs to be in the right spot. And also going out in the market and regaining market share, building confidence and trust with the dealer base. And then it's going to be a word of mouth, and it's going to be a flywheel. It's going to take some time, but that is essentially what we're executing and planning.
Got it. Okay. Last couple of minutes here, financial question. Just very high gross margin business. I think that's pretty straightforward, and then you guys have been really disciplined on the OpEx side. I imagine you've got a lot of new products. You've got CarOffer improving. There are always going to be opportunities to spend on marketing and go-to-market and all that stuff over the next few years. Philosophically, how will you manage that relative to wanting to continue to show a little leverage? Which of those is maybe a bit more powerful force?
Great question. Our focus and our priority is sustainable growth in the long term. We are very satisfied by the combination of double-digit online growth and the current level of margins, which you need to look on an annual basis. Remember, there is seasonality. The second half of the year, the margins are always higher. Looking on a yearly basis, on an annual basis, the current level of profitability should be sustainable into 2024. However, we will remain opportunistic should we see compelling investment opportunities. Now, in terms of investing and growth, we have always, and it's a priority and it's non-negotiable, a level of investment in innovation that is currently embedded in our margins. We can always step that up. We have a lot of cash on the balance sheet. We generate a lot of cash.
So that is something that we always can take up if we see compelling ROI opportunities for investment. And that is our priority. We need to plant the seeds and to lay the foundation for sustainable and durable growth in the future. It's not a margin maximization.
Are those more product? Are we talking maybe more product-type investments or possible M&A?
So we look at three buckets of investment. The one is internal growth for product. So innovation for product. Efficiencies and platform and leveraging AI is another area of potential investment. International is another area of investment. And of course, always, always, always new products. So that's internal. External, we always look at M&A opportunities. It's something that we consider. We need to find the right fit. That is not easy. And the third bucket of capital allocation is returning capital to our shareholders.
Thank you.
As you know, we have announced a $200 million. We have refreshed our annual buyback program with a $200 million program. We have reset the terms of this program. Point of this program going into 2025. $200 million has been approximately the average of the buyback amount for the last couple of years, so that is how we thought about that, and we believe it's still a compelling use of our capital.
Is the level of free cash flow generally a good indicator for the level of capital return? Is that fair to say?
I would say there is a good correlation, and our model is predictable, and this is a recurring revenue model. So we have a very good line of sight into revenue and into cash flow generation going into 2025, and so that has also informed our decision.
Got it. Got it. Cool. Elisa, thank you very much for being here. We appreciate it. We're out of time, unfortunately.
Thank you.