Earnings Call: Q2 2021

Aug 5, 2021

Good day, and welcome to CarGurus Second Quarter 2021 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Kieranjit Singh, Vice President and Head of Investor Relations. Please go ahead. Thank you, operator. Good afternoon. I'm delighted to be welcoming you to CarGurus' 2nd quarter 2021 earnings call for the first We will be discussing the results announced in our press release issued today after the market closed and posted on our Investor Relations website. With me on the call today are Jason Trevisan, Chief Executive Officer Scott Freddo, Chief Financial Officer and Sam Bill, President and Chief Operating Officer. During the call, we will make statements regarding our business that may be considered forward looking within applicable securities laws, Including statements concerning our outlook for the Q3 2021, management's expectations for our future financial and operational performance and innovation our business strategies and growth strategies our expectations for our CarOffra acquisition The value proposition of our product offerings our growth investment performance and profitability in international markets the potential impact of the COVID-nineteen pandemic and other macro level industry issues on our business and financial results and other statements regarding our plans, prospects and expectations. These statements are not promises or guarantees and are subject to risks and uncertainties, which which could cause them to differ materially from actual results. Information concerning those risks is available in our earnings press release after market close today and in our most recent reports on Forms 10 ks and 10 Q, which along with our Other SEC filings can be found on the SEC's website and in the Investor Relations section of our website. We undertake no obligation to update forward looking statements, except as required by law. Further, during the course of today's call, we will refer to certain non GAAP financial measures. A reconciliation of GAAP to non GAAP measures is included in our press release issued today. Our updated investor presentation can be found on the Investor Relations section of our website. With that, I'll now turn it over to Jason. Thank you, Kierandeep, and thank you, everyone, for joining us this afternoon. Before I begin, I'd like to officially welcome Kieran Deep as our new Head of Investor Relations. She joined us in May, and we are excited to have her join our CarGurus team. At CarGurus, our vision has evolved beyond being the most trusted and transparent marketplace to being the single best platform for consumers and dealers to buy and sell vehicles. We're well positioned to do this by adding digital retail and digital wholesale end to end transaction capabilities to our industry leading listings marketplace. The power of a transaction enabled marketplace allows consumers to confidently shop, finance, buy and sell from the comfort of their homes I'm thrilled to report CarGurus delivered outstanding results for the Q2 2021. Our core listings business demonstrated durability and resiliency Despite industry wide macroeconomic headwinds, while growth accelerated in digital wholesale with our car offer platform. The semiconductor's chip shortage has impacted new and used vehicle inventory globally and is expected to continue to do so in the near term. Nevertheless, our business exceeded our expectations and had the most profitable quarter to date. We are pleased to see improved margins from our foundational core business. Car offers tremendous growth and non GAAP profitability, increased dealer adoption of our digital retail capabilities, And last week, we launched CarGurus' instant max cash offer. As we continue to expand our product portfolio, We believe we are well positioned to capitalize on these offerings and provide our dealers and consumers with end to end solutions to meet their evolving needs. Now, I'll walk through our results beginning with our foundational core listings business. Our U. S. Listings business demonstrated remarkable resiliency Despite industry wide headwinds, we remain incredibly efficient in our marketing spend, which helped drive improved margins both year over year and sequentially. While the chip shortage caused us to pause our normal renewal rate increases and also resulted in a decline in paying dealers, overall, we're pleased with the durability of the core business and are thrilled to have achieved our marketplace subscription and revenue plans this quarter. As we mentioned last quarter, we remain focused on attracting lower funnel, high intend shoppers to our site who are more informed and ready to purchase. CarGurus' upcoming 2021 buyer insights report Revealed CarGurus is 3 times more likely than other major U. S. Automotive marketplaces to be the final auto shopping site visited by consumers before purchase, further solidifying the value proposition we provide to dealers. As we continue to drive lower funnel traffic to our site, We have seen an increase in leads to paying dealers year over year of 7%. Our ability to provide more leads, while the number of Average monthly unique visitors and sessions are down year over year demonstrates the quality of our traffic and improved efficiency in our consumer acquisition strategies. As we focus on high intent consumers and providing more targeted and relevant consumer content, we believe we are generating higher quality leads for our dealer base. We also continue to realize durable efficiencies by spending judiciously, in line with our strategy to monetize leads via growing paying dealers and increasing quarterly average revenue per subscribing dealer or CarSid. In Q2, we spent marginally less on marketing compared to last quarter, driven primarily by a reduction in our APA spend. While we plan to remain prudent in our consumer marketing spend going forward, We anticipate that we will need to invest more in marketing as inventory constraints ease in the coming quarters. As the number one traffic U. S. Automotive marketplace for Q2 2021 according to Comscore, CarGurus is an integral part of the dealer ecosystem and remains their preferred listings platform. Even while dealers materially pulled back marketing and advertising spend in aggregate, we saw a minimal net dealer decline of 421 During renewals despite our growing lead volume. Even so, we saw improved CarSid both quarter over quarter and year over year. Parsid was $5,550 for Q2, representing a 2% increase quarter over quarter, primarily attributable to revenue expansion within our existing dealer base, including same product rate increases as well as upgrades to our premium listings product even during a period of challenged inventory. Turning to our international markets, we are thrilled to report that we delivered on our commitment of reaching profitability in Canada and expect to continue to grow top line revenue and remain profitable in that market. The momentum from our international business in Q1 propelled our Q2 growth. Our achievements in Q2 were primarily the result of improved unit economics amidst rapid lead growth and increased Our traffic acquisition strategies akin to our U. S. Business. As we grow our presence as a household listings name internationally, We continue to capture greater consumer mind share. Average international monthly sessions were up 3% year over year. Like in the U. S, We are focused on bringing high intent shoppers to our site to provide higher quality leads to our dealer base. We grew total international leads by 12% quarter over quarter And leads to paying dealers grew 21% during the same period. We continue to provide enhanced value to paying dealers by improving both the quality and quantity of our leads, while capping leads for those utilizing the premium package. This approach has incentivized dealers to join our paid platform, with some modest churn in the UK quarter over quarter. We saw strong car seat growth as a result of revenue expansion from international paying dealers after having provided dealers in the UK discounts in the month of February due to extended lockdown, as well as improved adoption for listing add on products. International Car Cig was up 34% quarter over quarter. Even during an ongoing global chip shortage, the international markets exceeded our expectations in Q2. We remain excited about the opportunities in both Canada and the UK and about providing our international dealers and consumers with transparent, efficient and competitive solutions. Our profitability in Canada validates our hypothesis that our model can be successful in other markets, and we look forward to growing and investing in our international business further. CarGurus is the market leader in the U. S. Listings business. And as the macro environment normalizes, we look forward to our core business, Both in the U. S. And internationally, meaningfully reaccelerating as we seek to resume renewals, upsell additional products And capture an even larger percentage of dealers' share of wallet. Moving on to our wholesale business, we could not be more thrilled with the rapid growth and adoption CarOffer's instant trade platform allows dealers to transact automatically and at any time using rules based strategies rather than time consuming auction to create a buying and selling experience that is unlike any other dealer to dealer wholesale marketplace today. The matrix enables dealers to buy and sell using limit orders, saving them the time and expense of physically going to an auction. In addition, CarOffer's flat fee pricing structure can save dealers 100 of dollars per unit in auction fees, especially for more expensive frontline ready units. With efficiency at its core, every Car Offer transaction is supported by robust back end operations, including a thorough inspection process, Reliable and timely transportation and seamless payment processing. Having completed our acquisition only 2 quarters ago, We are still in the early stages of leveraging the power of the combined car offer and CarGurus platforms, creating a more efficient and transparent solution for vehicles is evidenced by CarOffers' rapid growth and adoption. We are incredibly impressed to see a business that has been operated for less than 2 years Achieved strong top and bottom line growth. In Q2, car offers momentum drove sequential month over month revenue and transaction growth. As the business continues to scale, we are investing heavily in hiring dealer sales and training and implementation teams to onboard and support dealers to gain the most leverage The increase in demand is further validated by the 210% quarter over quarter growth in revenue And the approximately 50% increase in enrolled rooftops quarter over quarter. At the end of Q2, we had approximately 5,500 enrolled rooftops. We also reported the Q2 aggregate sale price of all vehicles sold by dealers on the CarOffer platform, also known as gross merchandise sales Approximately $1,000,000,000 a material increase of 2.89 percent quarter over quarter. Similarly, we saw transaction volume Approximately 3 times quarter over quarter as well as heightened adoption for ancillary products as dealers continue to look for solutions to source inventory and drive profit. We do anticipate these trends will stabilize as the semiconductor chip shortage is expected to normalize later this year. We are beginning to see early signs of this with number of transactions in July modestly declining month over month. The The true potential of CarOffer is unlocked when you combine the instant trade technology with CarGurus' vast networks of dealers and consumers to create a truly differentiated offering. As we tap into our collective power to provide consumers and dealers with enhanced capabilities and product offerings, we recently announced the launch of CarGurus' Instant Max Cash Beginning in select markets, consumers in Florida, Massachusetts and Texas can sell their vehicles to our participating dealers 100% online. We are harnessing the car offer buying matrix technology and our combined network of dealers with their standing by orders for vehicles to instantly present consumers with the Highest offer available from thousands of dealerships. Match vehicles are conveniently picked up via a white glove concierge service, inspected and delivered to the dealer's lot, helping save both time and money. This new offering disrupts the way consumers and dealers think about vehicle trade ins and sales. CarGurus' Instant Max cash offer is an efficient inventory acquisition channel that will give dealers nationwide access to a previously unattainable source of inventory, allowing them to compete with online retailers. Meanwhile, consumers can sell confidently online by receiving the highest instant offer online sales option with CarGurus Instant Max Cash Offer, the industry's newest solution to an outdated, inefficient and opaque process. Here's what our happy customer, Erica from Florida had to say about the experience. I am just over the moon excited about the process. I'm very thankful. I would do it again if I have a vehicle again to sell in the future. CarGurus is the only company that I will contact. You guys were amazing. Collectively, with CarGurus instant max cash offer and our retail wholesale pricing tool, we believe we are uniquely positioned to capture a considerable Dealers and the largest consumer audience can transact instantly and at scale using our instant trade and pre bid technology. Our differentiated capabilities allow dealerships to remain competitive and thrive as the landscape for car buying evolves. COVID-nineteen dramatically accelerated the adoption of digitally initiated transactions by consumers interested in completing more elements of car shopping online. We believe these new offerings, along with our digital retail toolkit, level the playing field for dealerships and will help them not only gain access to a new source of inventory, But also gain a competitive position amidst this new digitally initiated environment. So now let's discuss digital retail. The COVID-nineteen pandemic shifted the paradigm for vehicle purchases and accelerated both consumer desire and dealer adoption of digitally initiated retail capabilities. With more than 60% of consumers interested in completing some element of the car buying process online, we have expanded our toolkit to enhance the car buying process for consumers, while providing dealers with resources to best capture this growing subset of the consumer audience. We are pleased with the growth and adoption Our digital retail capabilities to date, Area Boost has seen considerable adoption with 78% of U. S. Households And up to 60,000 vehicles available for delivery in many major metropolitan areas. This equates to a vast selection of vehicles available For delivery nationwide that we believe favorably measures up to other platform offerings. Additionally, we continue to see meaningful dealer uptake of consumer finance capabilities as they look to capture more pre qualified leads. Pre qualified financing leads are 60% more likely to result in a purchase And closed faster upon engaging with the dealer. With growing adoption for both Area Boost and consumer financing, combined revenue increased 47% year over year. Charles Smith, General Sales Manager at Mack Hake Auto Group recently said, CarGurus' pre qualified leads move through the sales process quicker than consumers who aren't pre qualified. They've mentally taken ownership already. They come in more committed to close and finalize their transaction. It's by far an easier sales process. In April this year, we announced early access for latest offering, CG Convert. CG Convert allows car shoppers to start their purchase from a CarGurus vehicle detail page and get to a near penny perfect Personalized deal on the vehicle they are interested in purchasing. Shoppers can then schedule an appointment on our site with the dealership to finalize their purchase quickly and transparently. We are pleased to see a continued increase in dealer adoption for CG Convert. Consumers utilizing CG Convert are 3 times more likely to apply finance in advance as a part of their digital checkout, improving the overall quality of down funnel pre qualified leads provided to dealers. Moreover, of the CarGurus shoppers that completed their personalized deal online in June, 46% chose to have their vehicle delivered, further bolstering our ability to monetize our digital retail capabilities. This is just the start for digital retail. Consumer and dealer demand for digitally initiated solutions, we view this as a sizable market opportunity. We believe we are best positioned to capture significant market share with our unmatched selection of inventory and competitive purchase and trade in pricing. Couple that with a vast consumer audience Empowered by freedom of choice, convenience and trust, and we believe we have a platform that is poised for success as a transactional marketplace. We expect 2021 will mark the transformation of the digital retail opportunity for dealers who are unable to provide these solutions to consumers on their own And or wish to acquire more shoppers through our platform. We look forward to releasing more of our digitally initiated offerings later this year as Quarter from the global chip shortage and depleted auto inventory. We are pleased with the efficiency and resiliency of our core business and that the momentum of Car Offer offset these headwinds and exceeded our expectations. Now more than ever, we feel that CarGurus is becoming a fully integrated transaction enabled marketplace for consumers and dealers. As we continue to build out our capabilities, we believe our consumer and dealer audiences, unrivaled ROI and unparalleled digital wholesale As we complete another quarter of remote work because of the COVID-nineteen pandemic, We are hopeful at the prospect of reuniting our team together once again. We are keenly aware of the difficulty experienced by everyone in the last year and a half. I am beyond grateful for the team we have at CarGurus and CarOffer for their relentless dedication and commitment. We've hit many milestones We began working remotely and these achievements would not have been possible without our incredible employees globally who embody our core values day in and day out. With that, I'll turn it over to Scott to discuss our financial results. Thank you, Jason. I will provide a detailed overview of our 2nd quarter performance, followed by our guidance for the Q3 of 2021. Before discussing the details of the quarter, I would like to highlight that all year over year values are compared to as reported Q2 twenty twenty numbers, which include COVID-nineteen induced billing discounts given last year of approximately $47,000,000 Our Q2 2020 press release has an adjusted pro form a reconciliation of those discounts Added back for comparison purposes. Total second quarter 2021 revenue was $217,700,000 up 130% year over year and nearly $26,000,000 ahead of the high end of our most recent guidance range. Our marketplace subscription revenue grew 80% versus the year ago period to 144,200,000 This was in line with our expectations for the quarter based on the inventory issues affecting the industry and our dealer customers. Other revenue in the Q2 grew 3 97 percent year over year to 73,500,000 This is where we demonstrated outsized performance driven by Car Offer that significantly exceeded our forecast for the business. Our guidance included an estimate that Car Offer would roughly double from Q1's $18,500,000 pro form a revenue, But as you can see in our investor presentation and as reported in our 10 Q, the revenue for the quarter was 57 point $3,000,000 a 2 10 percent increase from Q1. That's a remarkable result from the CarOffer team as well as the efforts from the CarGurus team that is helping accelerate growth while demand for inventory solutions remains a priority for most dealers. Our U. S. Business generated $134,100,000 in marketplace subscription revenue in the 2nd quarter And our international business generated $10,200,000 in marketplace subscription revenue. The U. S. Accounted for 95% of total revenue in the 2nd quarter. U. S. Revenue increased 130% versus the year ago period to 206.6 $1,000,000 and our international revenue increased 124 percent year over year to $11,200,000 The increase in U. S. Revenue is largely attributable to increased revenue in the quarter from CarOffer. Additionally, the year over year growth in both U. S. And international revenue is also in part due to the fee reductions we provided our paying dealers in Q2 2020 in response to the challenges the COVID-nineteen pandemic created for our dealers. Turning to paying dealer counts, we ended Q2 with 30,727 total paying dealers, representing a decrease of 486 dealers from Q1 and an increase of 469 versus the year ago period. In the U. S, we finished the quarter with 23,950 paying dealers, which is a decrease of 421 dealers from the end of the Q1. The decrease in paying dealer count is primarily due to the macroeconomic conditions related to the semiconductor chip shortage, which caused dealers to pull back on their marketing spend as they remained inventory constrained. It's worth noting that in Q2, dealer retention was in line with Q1 when we grew paying dealer counts. The primary driver Behind declining counts from the end of Q1 is that we saw fewer new dealers join the CarGurus platform as a paying dealer, while inventory remains constrained. In our international business, we finished the 2nd quarter with 6,777 international paying dealers, a decrease of 65 from the end of the Q1. Our international business saw a strong dealer adoption in Canada with modest dealer churn in the UK. We continue to monitor the chip issue and inventory shortage closely and expect that inventory levels are likely to return to more normal levels later this year. In July, we saw U. S. And international paying dealers remain relatively stable with Q2 ending counts and we are encouraged by this recent trend. In the 2nd quarter, U. S. Car SID was 5,550 representing a 2% increase compared to the prior quarter and an 82% increase compared to the year ago period. The quarter over quarter growth in Tarceid was primarily driven by revenue expansion among existing franchise dealers, including dealers that upgraded to our premium listings products featured or featured priority. International Car SID was $14.91 representing a 34% increase compared to the prior quarter and a 132% increase compared to the year ago period. I will discuss our expenses and profitability on a non GAAP basis, which backs out our stock based compensation expense, amortization of acquired intangible assets, restructuring expenses, acquisition related expenses and net income attributable to redeemable non controlling interest. 2nd quarter non GAAP gross margin was 77%, down roughly 900 basis points compared to the previous quarter at 13.83 basis points versus the year ago quarter. Change in non GAAP gross margin quarter over quarter was due to 2 primary factors. First, Car Offer accounted for a larger percentage of our business this quarter and second, gross margin for Car Offer is and will be lower than gross margin for our core listings business. Nonetheless, our car offer gross margin roughly doubled quarter over quarter to 32% on a non GAAP basis and our core business gross margin remained flat. The gross margin contraction from the prior year is primarily attributable to the addition of the Car Ruffer Total 2nd quarter non GAAP operating expenses were $98,600,000 up 61% year over year. Non GAAP sales and marketing expense increased 85% year over year to $62,600,000 and represented 29% of revenue, down from 36% of revenue in the year ago period. The increase in sales and marketing is a result of increased consumer marketing spend, which was minimized in the prior year due to cost savings efforts implemented in the Q2 of 2020 in response to the COVID-nineteen pandemic. In comparison to the prior quarter, we remained incredibly efficient in our traffic acquisition strategies, resulting in savings quarter over quarter, primarily driven by the reduction in our marketing spend. Our 2nd quarter non GAAP product, Technology and development expenses grew 35% versus the year ago period to 21,400,000 The investments we are making into our technology team supports several initiatives, including our core listings marketplace business, both domestic and international as well as car offer and digital retail. We continue to allocate resources as needed to manage near term business needs We generated non GAAP operating income of $68,900,000 representing a margin of 32% and roughly $29,000,000 ahead of the high end of our guidance range. Non GAAP diluted earnings per share attributable to common Stockholders was $0.41 for the 2nd quarter, dollars 0.16 above the high end of our guidance range. On a GAAP basis, we generated 1st quarter gross margin of 77% and incurred total operating The increase in operating expenses was primarily driven by an increase in our expenses compared to the prior year's cost monetization efforts in response to the COVID-nineteen pandemic. 2nd quarter GAAP operating income increased 3 42 percent year over year to 38,500,000 2nd quarter GAAP net income attributable to common shareholders totaled $28,100,000 Geographically, 2nd quarter U. S. GAAP operating income was $40,200,000 up 162% year over year. We had a GAAP operating loss of $1,700,000 in our international business compared to a $6,600,000 loss in the year ago quarter. We ended the 2nd quarter with $269,600,000 in cash and investments, an increase of $28,900,000 from the end of the quarter. The increase in our cash balance was driven primarily by our 2nd quarter profitability. We generated $37,500,000 in cash from operations And the 2nd quarter and $32,900,000 of non GAAP free cash flow, which includes capital expenditures and capitalized website development costs of $1,100,000 I'll close my prepared remarks with our outlook for the Q3 of 2021. We expect our 3rd quarter revenue to be in the range of $210,000,000 to $216,000,000 non GAAP operating income in the range of 53,000,000 to $57,000,000 and non GAAP earnings per share in the range of $0.30 to $0.32 After such a large beat of our Q2 guidance, I want to And on why our Q3 revenue guidance is not increasing quarter over quarter. First, the inventory constraints continue to create a Challenging environment for dealers in the near term and we ended Q2 with net paying dealer declines, which in a subscription business That's the run rate lower for Q3 lower than Q2. 2nd, with anticipated seasonal slowdowns in car shopping in the second half of the year, Our core listings business as well as the Carver Wholesale business may be directly impacted. As I mentioned earlier, we are encouraged recent trends of paying dealer counts in July and as inventory returns to anticipated normal levels over the near term, We believe we will eventually see net positive paying dealer count additions each quarter like we saw in Q1. One final comment as you adjust your models. I would like to point out that transactions from our recently announced CarGurus instant max cash offer will be accounted for on a gross basis, meaning we would include the gross value of the vehicle in the transaction as well as the transaction fees. This has the potential to meaningfully impact revenue numbers in upcoming quarters. But since this product just launched in 3 states, These transactions are excluded from our Q3 guidance figures and could result in upside if we see significant Consumer and dealer adoption in our initial limited market release. With that, I will echo Jason's sentiment that we are incredibly excited for the future and growing the business as a fully integrated transaction enabled marketplace for consumers and dealers. Now, I'll turn it back over to the operator and We will now begin the question and answer session. And the first question comes from Dan Kurnos with The Benchmark Company. Please go ahead. Great. Thanks. Good evening. Obviously, nice quarter, guys. Unfair question, Jason, I guess, just out of the box, InstaMax, just help us think about sort of road map, what you're looking for, timing, Kind of how you set the buy box relative to what is on the car offer platform margins, just anything that just Helps us think about the way that you are setting this up. And then obviously being consumer facing, you guys, Again, maybe a little early to ask this, but just in terms of the way that you guys look at kind of marketing spend in your historical I acknowledge sort of lower unaided brand awareness. This obviously brings a whole new leg to the stool for you guys. You've been excellent at customer acquisition. Does this end up driving incremental marketing efficiencies? You put some more money behind this depending on how the pilot goes? Just help us think through The way that you get this program into the marketplace and maybe some of the follow on effects it could have on sort of the quarter, the core business. Sure. Thanks, Dan. Jason here. There was a lot in that, so I'll try and parse some of it out. So on the Yes. On the Instant Cash Max offer, we've launched it in 3 states, and we We'll expand beyond that in the near term, but we're excited about the very early traction that we're seeing in those three states. It is seamless. I mean, it's a concierge service to the consumer and They get the offer immediately and upload their docs and we schedule the pickup. And so It's very easy for them. You mentioned a buy button in your question. I mean, this is sort of the opposite, the sell button, I guess, but it is as Close to a sell button as there is out there. This absolutely can drive marketing. I mean, And by that, I mean, we do plan to market this service, and we do believe that this gives People another reason to come to us. And so by that token, from a broader perspective, It could also drive marketing efficiency because we now have more solutions to market to consumers, more reasons to come to our site. And hopefully, when we help someone sell a car, that we then are a national partner for them to go buy a car, To help them buy a car. So, we think it's big in its own right. And, we think that it It fits really nicely as a complement to how we help consumers find a car they want to buy. And as you heard from our remarks, We're going down the path of helping them actually buy. So, we view ourselves as working toward This transaction model that allows them to sell with a click of a button and buy with a click of a button. That's helpful. And just to be clear, I mean, since you guys have owned it for a whopping, what, 6 months now or whatever it is, Just on car offer and thinking about it, I think, Scott, thanks for the color on the 3Q guide. Just, I mean, should we be modeling that as sort of Similar seasonality, I know it's early, or might there be puts and takes depending on Let's assume there's a normalized environment. Just trying to think going forward, how we should think about how car offer would flow throughout the year? Yes, I'll give some feedback and Sam can jump in if he wants to. So what I'd say is, As they were at maturity, which they're not, they've been in hypergrowth mode, especially the past 6 months, really 9 months, I would say that sort of normal seasonality would kick in the second half of the year. And since it's not a subscription business, one 100% transactional. That's something that you could see a second half softening versus first half. I think there's Yes, these aren't normal times and also an evolution of the company. There's still strong adoption going on. But I think it's a mix of Dealer adoption and also throughput on a per dealer basis. So we're looking at that, trying to get our arms around it with that team. So these aren't normal times in the evolution of the company. They're still early. But under normal The business was more mature, I'd say, yes, we see typical softness in second half of the year. Got it. Super helpful. Thanks guys. Of course. You're welcome. The next question comes from Ralph Schackart with William Blair. Please go ahead. Good afternoon. Thanks for taking the question. Jason, in the prepared remarks, you talked about the business reaching an inflection point with some of the products and services today. And then on the call, you talked about, I think, adding some more services or products. Maybe kind of just frame the opportunity going forward. What would some of those products and services be perhaps if I think about sort of as a consumer going to dealership, do you have tax, title, plates, etcetera? So just Trying to understand if you're one day trying to be sort of a one stop shop either for White Label for a dealership and or as a consumer to do all the Transaction on your website or your marketplace, would sort of love your thoughts on that. Sure. Hey, Ralph, good to hear from you. Thank you. Yes, we intend I mean, when we talk about digital retail, it's us empowering And empowering and enabling dealers to sell their inventory online through us. And so all the aspects of the transaction that you just mentioned a few, tax, title, There's the transaction itself, there's the other F and I products, there's trade in, all of the steps that you can think of, We would enable the dealer to do those at their inventory on our site and we would be The group that is helping the dealer complete all of those steps on our platform seamlessly to the And so, that is when people talk about the buy button, that is the buy button. That's what we're working toward. And when we have that and a great example is trade in With car offers as the backbone is a perfect example of how we think we're going to have A competitive edge with our digital retail offering because we're going to give the consumer, We believe more choice in the form of more inventory for more dealers rather than single Dealer inventory. We're going to give them likely more choice of financing and other options across dealers. With that choice typically comes better pricing. And we're also going to give them the convenience and sort of Optionality to complete it fully online or to go into the dealer, if they do want to go into the dealer. And then a layer of trust As well with the consumer handling that we are planning to and have started to build out, So they can have sort of all the benefits of selection and choice and then a single point of trust to come to, which would be us. So, and again, trade in, the example I used on trade in works When you're selling it to the dealer from whom you're buying and that has certain advantages. If it's not a seamless transaction like that where you're doing a trade in, then We do have other options in P2P and some cash max offer as well. We've said it in these remarks, but we really do intend to have and believe we will have The most complete platform for both consumers and dealers to buy and sell their cars. And that may take the form of dealer to consumer or consumer to dealer, dealer to dealer. But when people think about buying or selling a car, We want them to use us. Really helpful. Just maybe one more for Scott. Could you just remind me, you talked about car offer gross margin scaling. Just kind of remind me where we think those could go longer term and sort of what's the, I guess, the COGS component within that business versus sort of the listing business? Thank you. Sure. We haven't said where it's going. So I Can't really comment there. Within that business is on the people side, there's onboarding service folks that we have that basically Bring the dealers up to speed, give them training on the matrix and so forth. Then there's pass through costs for inspections and delivery. Those are the major items. Actually, if I could sneak one more in, just on the instant cash offer that's in 3 states, can you provide maybe any color or sense of the rollout I guess why those 3 states and are there any sort of regulations as you go state to state with that product? Thank you. I can take that and Sam if you want to add. There are some regulatory considerations to make, but Three states in this case was we wanted to pilot to make sure that operationally we were providing a great experience. Those 3 states happen to be well, 2 out of the 3 happen to be larger states with where we have a lot of Dealer penetration, and so it's actually like a pretty good chunk of the country, more than 3.50 for sure. And yes, we expect to roll out more states in pretty short order. So we expect to make quite a bit of geographic expansion progress this year. Great. Thanks, Jason. Thanks, Scott. The next question comes from Jed Kelly with Oppenheimer. Please go ahead. Hey, great. Thanks for taking my questions. Just Scott, maybe on a follow-up. Can you just discuss what drove The gross margin improvement in car offer. And then when we're looking kind of over the next couple of quarters of the car offer, Should we think about it growing past seasonality trends just because you're the velocity of new dealers you can add? And how should we view that versus seasonality? Yes. I mean, so on a growth standpoint, I'll let Sam take that after because that's something that The team and us sort of figuring out dealer adoption, I think has gotten a bit of a tailwind for sure from the inventory situation. There's probably Some dealers out there that otherwise may not have jumped on Car Offer but are certainly trying it now while they're searching For inventory, but I'll let Sam touch on that further. With regards to the improvement in margins, part of it is scale. We've just had so many dealers jumping on and the team has updated capacity From an onboarding standpoint, so we've done well there. And we've put more resources into what we'd say are more account management customer success In sales versus what would be cost of goods sales versus that would sort of be traditional onboarding. So A reclassification of some resources also moved out a little bit. Chad, I'll jump in. Thanks for your question on future growth I don't want to project exactly where that's going to go. You know that the major players in the auction industry see Seasonal downside in the later part of the year, the last 4 months or so. The thing I can say as you're asking really Thoughtful question. They are growing through and blowing through some of the expectations we had. Certainly, our expectation of Enrollments from customers just jumping on that program, it's truly an innovative capability. There's no instant trade platform anywhere in the marketplace. So, the enrollments, the installations crushed our expectations, the transactions that those dealers Our trading on you heard about the $1,000,000,000 gross merchandise sales in the last quarter. It's just an Incredible set of results. So I can't predict so early in the adoption curve that it will blow Through all of that seasonality, I will say CarGurus is just in an early stage of getting our customers Signed onto the Car Offer platform. The Car Offer team is doing such a great job signing dealers on a day to day basis so dramatically. We haven't even optimized the CarGurus' adoption of the platform. We're moving and achieving that first phase of integration, but there's so much more to go. And as Enrollments go, transactions go and transaction fees and revenue go. So we're really excited about the next phase of the integration. That's very helpful. And then just as you think about getting more vertical or getting further down the transaction funnel with the consumer, I mean, how are you managing your relationships with the dealers? Are you seeing any pushbacks? Or are they pretty accepting of this? I mean, the dealers do like to own the customer. So how is this how are you managing that tricky spot with the relationships? Jason, you're going to take it or do you want me to jump in? No, go ahead. I'll jump first, which is, Jed, I think Instant Max cash offer is a perfect example of a win win in the marketplace. You're helping dealers who are saying there are other big retailers who are Winning consumer sales and when they're selling my vehicle, we need a tool to help us get there and get us to compete favorably. Now they have the opportunity to look at $35,000,000 $32,000 $38,000,000 whatever the number is each month that are coming to our site, who are interested in selling their vehicle and winning that new source of inventory. So as consumers move digitally and Say I'm more comfortable selling my vehicle online and we have this white glove capability for inspection payment and pickup In a consumer's driveway, what an opportunity for dealers to say, I've got the biggest challenge in 30 years in inventory acquisition. If you can give me access to those 35,000,000 consumers, I'm the happiest dealer in the marketplace. So we're opening up a Channel we hoped we would, it's probably quicker than we expected. And so the win win there is consumers having the opportunity to say I'm comfortable Selling online, you're giving me a max cash offer because those dealers are putting their bids into the buying matrix and I'm going to get something better than just going to 1 single retailer. And so these dealers are saying, I'm now competing with some of those big name players who are buying Consumers vehicles, so that's a win win for the marketplace. I think as Jason said, we go down the path of digital retail. We're doing the same here. We're going to enable dealers to get in front of a pre approved consumer, financial pre approved and then facilitate that transaction with that dealer and help them sell more vehicles. So we're I think these are win wins in our positioning in the marketplace. We're helping both sides of the marketplace facilitate transaction. Thank you. The next question comes from Nick Bachus with Raymond James. Please go ahead. Hey, guys. Congrats on a good quarter. Thanks for taking my question. So the number of paying dealers in the U. S, you talked about the ship shortage driving the lack of inventory and I'm hurting that number, driving that sequential decline. Could you just give more detail on your thoughts on the supply situation moving forward? It seems like you think it's It's going to start to improve into the back half, kind of how you're thinking about that? And what is guidance build in for dealer count kind of directionally in the Q3 and how are you thinking about that metric into the back half of the year in general? Hey, Nick, it's Scott. I'll take that. So we don't get too specific on what we're guiding to with the number, but for The quarter, as I mentioned in the prepared remarks, with subscription revenue, you're sort of walking in With a basis and with losing some dealer count in the core business that sets a lower basis than we walked into Q2 with. So that explains some of the revenue. I think the really positive thing that we saw though is Our versus Q1 and Q2, our retention rate with dealers was about the same, or if you inverse that, Churn didn't get any worse. It really what changed from Q1 to Q2 is when the inventory issue bubbled up, What sort of stopped first was new dealers moving on to the platform. And that's really what Change for us from a paying dealer count standpoint going from a net positive in Q1 to a net negative in Q2 is we didn't get as many new dealers on as We saw in Q1, but as I mentioned, retention, churn, roughly the same quarter to quarter. So as we look Into second half of the year and specifically Q3, like the inventory issue hasn't abated yet. We've seen some very modest Moving in the right direction with used inventory slightly ticking up. Obviously, new inventory is still sluggish because They are waiting on ships, but we have seen some positive momentum with used inventory. And as that creeps up, that could help us move Those dealers that are either sitting there on the freemium platform just sort of waiting to need to market again to jump back in. So No specific guidance there, but that's what we're seeing. I'll let Sam jump in. He's probably got some more commentary from the front lines of the sales team. Scott, not much more to add, Nick. Appreciate the question. As Scott said, that hearty customer retention is spilling into July as we hit into Q3. So I feel very good about Where we are, Scott talked about the macro trends. We do believe new car manufacturing will start to kick in again in the next short period of time. That will help, but it's not going to ease the situation of a 30 year low in our industry immediately. But we do feel very good, as Scott said, about customer retention. Now the effort is getting dealers to come back on board and saying I'm comfortable spending. Remember with our lead growth as high as it is, You can give 7 leads per vehicle and that's not going to help that car get sold. So We're being thoughtful about how aggressively we can grow our consumer audience. We're doing it really And very well for dealers and that lead volume has been really successful. Dealers are now saying as inventory comes back, as Scott just said, I'm more interested in spending and we're seeing that as a hopeful trend as we go forward. Got it. Very, very helpful. Thank you. Just quickly, sales and marketing, obviously, you guys have made Significant strides there in terms of marketing efficiency last year and into the first half of this year. How are you generally thinking about Kind of the right level of sales and marketing percentage, and how durable are the gains you made? Or do you give some of those back as you Press the accelerator on marketing spends going forward. I can take that. Thanks for the question. Yes. So, I think we are always in regardless of the environment COVID environment or inventory supply, consumer behavior, we are always looking to do 2 things. 1, make our Consumer experience as efficient as possible. And number 2, from both the traffic acquisition all the way through to The connection with the dealer making the leads as high quality as possible. So efficiency and quality Such that what we are delivering to the dealer is something that is high leverage for them, that they're not spinning their wheels On low quality leads. We have made a lot of progress in on both of those fronts. And so You just acknowledged some of that on the efficiency side. What I think I'm also just as proud of and it's hard to tell from the numbers is that We firmly believe we're also improving the quality quite a bit. You heard a couple data points of prequal lead generate or prequal lead Pre qualification lead quality, as well as in the CG convert propensity to convert to a sale. So And so that efficiency, all else being equal and quality have trended in terrific directions throughout. There are these times though where macro factors like COVID, like the inventory supply, do impact The level of spending that we think makes sense. And what I mean by that is that we're looking at Hundreds of metrics, a lot of metrics that speak to dealer level growth rates And dealer segment level growth rates, so that we are delivering to the dealer A product and a service that is always growing in value, but is also somewhat predictable and consistent for them, so they can plan their business around it as well. And so in an environment where there's lower inventory, there are not as many car they don't have as many cars and therefore, You could argue not only don't need as many leads, but having too many leads on one piece of inventory is not even helpful to them because They can only sell a car once. So we think, again, and all else being equal, Efficiency and quality have improved a lot, but this certainly has been a time most recently because of inventory where we were able to be more efficient in marketing because the units were low, the consumer demand was high. And so I wouldn't say that I think some of that efficiency goes away, but I think in reaction to some of the macro trends, we said this I think in the remarks, we do expect The final question today comes from Doug Arthur with Huber Research Partners. Please go ahead. Yes, thanks. Just Scott, on the revenue guidance for the Q3, and I Understand the caution on the subscription business based on everything you've talked about on the macro level. What I don't quite get is The implied number for car offer, I mean you're growing, you talked about The auction business, the seasonality and all of that, but you're growing at a very rapid rate. And your guidance for the Q3 basically Assumes a full stop in growth, I mean sort of flat sequentially. Is that what you're intending to imply? Well, full stop. Thanks, Dan. Full stop is a strong word, but I think the inventory issue sort of That bubbled up in earnest in April, and I think that just changed dealer behavior in a dramatic way and was a A huge tailwind to a business that was already growing really fast, but I do think we are Seeing early impact of seasonality. Also, I think there's some caution with dealers with regards to the pricing Being so high and some dealers are being judicious about how much inventory they want to buy at these prices and Is consumer demand going to be sustainable? So I think there's a it's a unique time right now with peak pricing, The lowest inventory, I think that dealers are monitoring both wholesale pricing and consumers' willingness to pay at these All time highs for pricing, used vehicles especially. So Also we have some insight, Doug, with regards to what we've seen in July, right? And so there's some modest We saw month over month increases all year long for a car offer and we've seen, as Jason mentioned, a slight Less growth from June to July than we saw in other months. So with that insight, we're just being a bit more prudent. But the operative word is you saw growth in July over June? No. I think Jason's prepared remarks that we saw a slight slowdown. Okay. All right. Got it. Thank you. Yes. This concludes our question and answer session. I would now like to turn the conference back over to management for any closing remarks. Thank you very much. So this is Jason. I just wanted to thank everyone for joining us today on the call and for your thoughtful questions. I want to thank again all of the CarGurus' car offer employees for all your hard work. We're so proud of the team and what we've accomplished. And we appreciate your interest in CarGurus and we look forward to talking with all of you again next quarter. Thank you very much for your time. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.