Great. Thanks everyone for joining. My name is Rajat Gupta, member of the J.P. Morgan Automotive Equity Research team. Very pleased to have with us CEO Jason Trevisan from CarGurus, and also Kirandeep Singh, Vice President and Head of Investor Relations. I guess, we're gonna start with Q&A, just go right into it. Maybe Jason, maybe to kickstart, you know, just a more broader macro high level question, could you just give us a sense of latest trends you're seeing, from a consumer demand perspective, you know, maybe the Q2, you know, since you re-reported earnings, maybe in early April, and into May? Any pockets of weakness or any noticeable trends in new or used vehicles or perhaps geographical differences that you're seeing in terms of search metrics or traffic trends?
Sure. Hello, everyone. Thanks for joining. It's nice to be here today. The auto industry continues to see quite a lot of volatility since COVID, honestly. It's been a few years now where we've seen volatility in new car production, in inventory levels, and in consumer demand and pricing as a result. All of those are interrelated. I would say most recently, some of the trends that we've seen, perhaps one of the most pronounced in the last six months, has been the return of production of new cars. They were really sidelined for several years because of chip shortage. That's a long lead time for new car production, and so those have now started to come back. As a result, you're seeing new car inventories come back on dealers' lots.
At the same time, used inventory has ticked down a bit over the last quarter or so. From a demand perspective, consumer demand has certainly weakened. Recession concerns and higher interest rates are the two primary drivers of weakened consumer demand. From a geographic perspective, no, I wouldn't say we've seen much of a difference in terms of demand. You've certainly seen, we are always seeing geographic disparity in where higher demand, stronger demand is based on the types of cars in the regions of the country, and that's actually one of the things that we think CarOffer in particular, but also our platform can really help exploit in a good way, which is to help dealers create those arbitrage opportunities in sourcing vehicles or in selling vehicles from a geographic perspective.
On traffic, no, I wouldn't say there's really any new trends, other than consumer demand being down, which in general will create a higher cost to acquire traffic for us.
Got it. That's helpful. Maybe just to touch upon, you know, you mentioned affordability, like, you know, financing. In the previous call, you had highlighted some softening in the consumer financing segment. I mean, obviously very small contribution from a revenue perspective for the company, but, if you could share any more color around any approval or credit trends you're seeing across the audience, you know, perhaps details on what you're seeing with regards to consumer drop-off rates, you know, due to monthly payments or opposed to, like, just lenders trying to, you know, just stay away or being a little more strict, from an approval perspective for the consumer. Yeah.
Absolutely. Let me just first orient everyone from a P&L perspective. We do have a small revenue stream, as Rajat said, from, we call it consumer financing, which is bounties that we get paid from lenders when we pre-qualify consumers for a loan with them, and then they get qualified and take on that loan through the dealer. That's also an integral part of an evolution that we have, which is more towards supporting more of the transaction on our site. We are increasingly having consumers get pre-qualified and even fully qualified for financing for a loan. Those are the areas in which we see consumer loan activity.
Yes, monthly payments have gone up materially for consumers, and in a lot of cases 2x or 3x what they were because of interest rates. That has consumers, number one, looking for much less expensive cars. We've seen a spike in search activity for lower priced cars among consumers. We've also seen consumers drop out of the funnel or the process after they've seen the rates that they would actually qualify for. Furthermore, we've seen lenders qualify fewer or a smaller percentage of applicants. Delinquency rates have gone up the last couple months, in particular for auto loans, lenders are scrutinizing much more carefully who they actually approve. Yeah, I would say almost in all fronts, the auto loan segment is absolutely tighter today than it was even two months ago.
Got it. Got it. That's helpful color. You know, just wanted to move away from macro, you know, we can come back to it again later. You know, just on Q2, you've given us, you know, revenue and EBITDA guidance. With respect to CarOffer in particular, you know, expected to improve sequentially slightly, you know, break even or higher. If I look at, like, the marketplace business, you know, excluding the CarOffer improvement, it seems to be taking a step down from an EBITDA perspective, like just taking midpoints of guidance. Any way to quantify how much of that weakness can be attributed to, like, dealer cancellations given, you know, ABRs versus, you know, just more softness in, like, some of the macro indicators you highlighted or maybe just on the OEM side?
If you could just help unpack that a little bit.
Sure. Just to simplify it to top-line and then EBITDA. From a top-line perspective, the two-Again, oversimplifying, but the two areas of revenue for us are marketplace subscription, which are dealers subscribing to our platform, and then non-subscription revenue, which is OEM auto manufacturer advertising and consumer financing. In the guide we've given, we've said that softness in automotive advertising and consumer financing, based on what we just talked about, are a headwind that's offsetting subscription revenue growth. Subscription is growing, primarily because we're growing what we call QARSD, which is quarterly average revenue per subscribing dealer. That's a metric that we've continued to grow for the last many quarters, and that's driven by a number of things.
Lately, it's been driven more by us holding firmer on unit pricing with dealers, as well as renewing dealers into new packages, higher packages, and also adding new products like Digital Deal, which is a migration to transactions on our platform. Those are the high-level dynamics from a revenue perspective. Really more of the story as it relates to EBITDA in the guide is about expense increase. There, we have taken on a new lease this year for a building we're moving into next year, but we're paying sort of double rents this year. That started in Q1, but it only had two months in Q1, so we have a full quarter of it in Q2. We have headcount grow over, we also have marketing expense, which can fluctuate quarter- to- quarter.
Got it. Just from CarOffer, you guided to sequential improvement, slight improvement in.
Mm-hmm.
EBITDA there. How much of that is function of you trying to, you know, just maybe shrink the business a little bit, focus more on optimizing operations versus, you know, gross margin or just leverage? You know, just if you could give us a sense of that trajectory and any more comments you can give us, like, on future trajectory of that business from a profitability perspective.
Yes. Again, just to level set, CarOffer is our digital wholesale platform, a business we acquired a couple years ago. It has grown very quickly as a business. It's still a young business. Toward the end of 2022, when unit prices in the wholesale industry went from two years of growing to starting to decline, we recognized a number of operational inefficiencies and challenges in the business that were not relevant or didn't expose themselves in a rising price environment. Very quickly, we and the CarOffer team worked together to really scrutinize every aspect of the business operationally to understand what was driving some of this new dealer behavior in a price declining environment and make sure that our platform and our system worked well in both rising and falling price environments.
Q4 identified and quickly jumped on those issues. Q1 worked very hard to remedy those issues, and frankly, did a better job than we expected to. Both our team and their team have done an outstanding job in getting in front of the operational challenges. Just to give you a sense of where that focus has been, inspections is a great example. If you have an inspection process that doesn't catch enough of the issues or most or all of the issues, and you send a car through that ultimately gets arbitrated by the buying dealer, that can trigger a series of dissatisfying events for the buying dealer and the selling dealer and us, frankly.
Really fixing inspections was at the heart of what we did, but it also includes focusing on transportation, on actual arbitration itself, on account management, on our policies at the company and systems. We've said it's gonna take a few quarters to really get that to a point where we feel as if we can be highly predictable, about what's going to happen with any cohort of transactions and make sure that we can repeatably, scale the business in a very profitable way. We're in a mode now where we were in Q1, and we remain there in Q2, where we're keeping volumes low. We're making sure that we have absolutely dialed in on all of the KPIs across the business before we start to scale it up again. You know, I think that's the mode we're in.
You have the external factor of if wholesale unit prices are rising or falling. If they're rising, you tend to find dealers more inclined to transact. They wanna bring in more inventory to their dealership because they believe prices are rising. By the time they recondition that car and go to sell it's gonna be worth more 'cause it's been an appreciating asset. If they feel that prices are gonna decline over the next four weeks, they're gonna be much more reluctant to trade in wholesale. Instead, they're gonna rely just on their trade-ins. That is a external factor that we can't always predict, but we have shared, we think we'll end the year at slightly lower prices per unit than where we are today.
What makes you decide whether when to step back on growth there? Is it the macro, or just you need to feel more comfortable with the operations? I mean, because there's obviously a huge market share opportunity there for the business, so it's up to you.
Yes. Yeah.
Yeah.
Huge market share. I mean, today, CarOffer probably has, you know, 2% of the wholesale market. Purely online, wholesale or online has probably less than 10% penetration of overall wholesale, and that's up from 0% three years ago. Huge runway for growth of digital penetration. CarOffer is one of the top-online providers, they have a matrix programmatic buying model that is different and more efficient than a lot of the traditional auction models. And we have customers that are using it for, in some cases, the majority of their wholesale buying or selling. Still very small market share overall. Yeah, huge runway. What's tempering the volume today is 100% getting the operations more dialed in than they had been.
Understood. That's helpful. Maybe I just wanted to turn to the audience, you know, any questions on some of the topics we've discussed so far? There's one there.
Just a question if you have visibility or see through to the financial health of your dealers, across the entire dealer network, what's the state of their wellbeing financially considering this environment? I know it's a broad.
Yeah
... dealers of all sizes, so maybe if you could speak to some of the smaller ones versus, larger guys.
Okay, sure. Yes. I was gonna start with the larger ones. There are six or seven public, so you can see those. Most dealers enjoyed extraordinarily, relatively extraordinarily high margins in the past couple of years, and those are starting to be pressured now, in ways they hadn't been over the past couple of years. Among smaller dealers, they're commonly, you know, cited as some of the hardest hit, because they don't have the sophistication, from a systems and technology perspective, nor do they have the scale of buying, and so mistakes for them sourcing cars are much more costly to them. We have seen more consolidation. That's a trend that a lot of people have seen.
In some cases, in addition to consolidation, we've also seen a slightly higher rate of closures among some of the smaller dealers than we had in the past. There's around, you know, 42,000-45,000 dealers in the country, about two-thirds are independents. You know, those that have those independents that have less than, say, 50 cars make up a high volume of rooftops, but they don't make up really that high volume, or that high a percentage of total units. Small has been hurt harder than big, and I think there's been a probably a lowering tide across the board as well.
How do you increase the quality of inspections without dramatically changing the cost structure of the CarOffer business?
We, for our inspections, we have a partner model, so we work with a handful of inspection partners. We have increased our how closely we work with them to also be tighter with how we grade our partners in what they're doing, how we measure and grade their performance at both the vendor as well as the actual individual inspector level. I would say the step function change has been that we have gone from almost exclusively cosmetic inspection to now electrical, mechanical, and frame inspection on certain segments of cars that have a higher propensity for issues there. We don't do that on 100%, but we do that on much more than what we did before.
We in order to do that, number one, we've raised the price of our inspections from about $100 to about $150. Number two, inspection partners that can do, say, mechanical inspections at scale at an appropriate price, have grown in number from what existed a year or two ago, where we were trying to almost create the market for third-party inspectors who can do all those things. Now there are more out there for us to partner with at the right price.
Any other questions? No. Maybe, you know, shifting to, you know, the pricing discussion, like big topic on the earnings call. We've seen a lot of the competitors make the same moves. Maybe you can throw in Digital Deal in there as well, but just early results from, you know, these ABR discussions so far, what concerns the dealers the most? You know, is it just uncertainty around inventory supply, or perhaps just, you know, the moderating gross margins from the peak-ish levels? Separately, what is the key ROI proposition you're pitching to dealers with this new pricing, and are there any underlying industry assumptions also embedded in those discussions?
Sure. One thing to sort of acknowledge about the auto industry is many auto dealers think in terms of monthly budgets. The idea that there is comfort in having a fixed monthly price is significant with many auto dealers. Putting that aside, inventory is probably the single biggest driver for many auto dealers in terms of their propensity to spend on marketing. You know, we give them stats around leads per unit, leads per dealer, cost per lead, et cetera. That's a big driver. What we ultimately try and get dealers to think in terms of is cost per sale and really ROI.
Because we do not, though, have a full closed loop attribution model with them, that is often a discussion, and it's not a hard and fast number that everybody can point to. When you look at the, say, cost per lead and then the quality of leads as measured by the conversion rate of those leads, you can get to a cost per sale. The dealer knows what they're making on the front end and the back end per sale, so sort of on the gross margin of the metal as well as the F&I and any additional add-ons they have. From a lot of our research, we know that on average, we are priced below our competitors from a cost per lead perspective. We know that the quality of our leads are exceptionally high.
I think one of the more helpful metrics is that consumers are 3x more likely to use our site last before purchasing a car than any other site. That gives a proxy for conversion rates. We also track conversion rates from third-party attribution sources, so we have a good sense for the conversion rate of leads that we send to dealers. Volume, price, and quality typically results in surveys that we do and research that we do is that we're the strongest ROI. We began several years ago pricing quite low in the market in order to gain a seat at the table. We have slowly, I would argue, moved that up over time, but we still feel that we have the most advantaged ROI in the industry.
Yeah.
Then I'll go on to Digital Deal later.
Yeah, I was gonna just ask on that, like, you know, how much of that ROI differentiation is due to Digital Deal, or are you already embedding that in that, in those assumptions yet, or is that more ups?
Everything I just said is on, call it our, just our core lead volume. We have been making a multiyear push to bring more of the transaction on our site. Consumers want that, and now dealers want that too. The reason consumers want it is because they obviously are much more comfortable doing more things online, but spending four or five hours in the dealership has never been, you know, has been a pain point for consumers. They'd love to take some of that time and move it online. Dealers also are more amenable to that because during COVID, they typically shrunk their sales forces quite a bit. Their sales teams now can't field or can't manage all of the leads that come in.
They're starting to pick and select the ones that they think have the highest propensity to close. We've been moving a lot of the transaction online, and that, today, that has manifested itself most clearly in something called Digital Deal, which is something that a dealer can sign up for, and it allows them to enable all of their inventory with the ability for a consumer to not only get pre-qualified for financing, but to get fully qualified for a loan on that car. The dealer can cross-sell any other F&I products that they would sell that consumer in their dealership on our site. They can get a trade-in valuation on our site if that consumer has a trade-in. The consumer can then, with tax title registration factored in and everything else I just said, get a penny perfect deal amount.
We will tell them on our site, "You're gonna put $4,000 down, and this is gonna be your monthly payment." They can then set up an appointment with the dealer, and they can put down a deposit with the dealer if they'd like to. Consumers who come through that flow of the funnel and go to the dealer are converting at 2-5x the rate that our standard leads are converting at. We're selling that as a fixed price product that dealers can sign up for. Again, that becomes an ROI exercise where we say, "X% of your leads are going to be Digital Deal enabled. They convert at," you know, we get more precise than this, but call it 3x the rate of a standard lead.
Therefore, the ROI on this add-on is X, and we're charging you Y. That's still a very strong ROI value prop. Increasingly, we're growing the % of consumers on our site who are going through that flow and spending an hour in the dealership instead of five hours in the dealership. We launched that product, Digital Deal, nine months ago. In the first nine months, we've got about 10% of our dealers have adopted it, and We are framing this as the future, the new normal. This is how consumers wanna behave. This is how dealers increasingly wanna behave. It's, we hope and think, quickly going from early adopter dealers to the norm, and the NPS among consumers who use this is extraordinarily high.
Got it. That's helpful. You know, maybe going back to, like, the business reviews, could you share any color around, like, how these business review decisions and the price increase decisions have tracked historically? You know, when dealers do leave the platform, after how many months do you see them coming back? You know, any historical trends you can point to that you could share with us today?
We have contractual relationships with dealers where if their inventory stays the same and they're paying a market price, then we typically will, you know, partner with them to think through how they can get the most out of our platform. We may sell them new products. They may upgrade to new tiers. If none of that were to happen, and we were to grow the value that we deliver to them, then at a year anniversary or a two-year anniversary, we will go to them and say, "You're at a below-market rate, and we need to either...
We need to change the configuration of your package, or if you wanna stay exactly at this package, then we need to move you to market rates. Historically, that's been an exercise that was on pause really for 2.5 years post-COVID. We have started to do those again in an earnest really at any sort of scale in Q1. A few things changed with it in Q1. Number 1 is we became much more consultative than we had been in the past. In the past, it was a much more arm's length. This is the new price. We would send that to them via email. It was not well executed at all.
We have since increased our interaction with dealers, and it's more consultative to give them options to say, "Here are a few different options that you can go to get more out of our platform. We do need to ensure that you're paying a market rate. The first thing that we're doing that's different is on execution. The second thing we're doing is we are selecting our dealers who are paying the furthest below market rate. We're saying to them, "You need to move up to a market rate," and it's always a negotiation with dealers, it always has been, but we're holding firmer on that floor, that unit price floor that we'll accept. By holding firmer on that, we created and instigated more involuntary churn from dealers who didn't wanna sign up for that.
In seeking that higher floor efficient frontier, it actually resulted in higher monthly recurring revenue for us, which is ultimately our metric of I mean, dealer satisfaction is as well, of course, but we'd rather focus on high ROI revenue than on number of rooftops, for instance. In doing that in Q1, we targeted the lowest paying dealers from a unit perspective. We held firmer on the floor. More came off the platform, but we ended up with closer to what we think is the efficient frontier. We always track the % of dealers that come back over time, and that's been a reasonably steady curve of return rates at three months and six months and 12 months.
Because we just finished Q1, we're sort of in the midst of tracking it now, but we are curious to see if that curve looks any different, and so far there's nothing to report on it.
Understood. That's helpful. Any questions from the audience? Got one here.
Thanks for taking my question. You mentioned the chip shortage for new cars, I guess that's been going on for well over a year now. Do you see, like, any potential pocket building in the vehicle fleet that could affect or excuse me, used car sales, you know, a few years down the road? Would there not be much of an impact from that?
We're certainly seeing pockets of new car volume returning, and it's happening now. It actually has reasonable pretty high variance between brands. Some brands' volume production is almost back to pre-COVID levels. Others, it's still below. A lot of those cars, new cars are hitting dealers' lots right now. We are seeing dealers start to shift attention to being more focused about, "Oh my gosh, I have to make sure I keep inventory turns on these new cars at a reasonable rate," because that's something they frankly haven't had to think about for almost three years now. The way that new car volume coming in will affect used car, I think is to be determined.
I think the most likely place to see that play out first is in used car pricing, because for a while during COVID, some used car prices, apples to apples, were higher than new car, that was just dislocated. I think that you'll start to see a more natural delta between used car and new car pricing, but we haven't said what we forecast, effectively what used car SAR would be in this year or even a year from now because of the new car influx.
Just the last piece, I think you're starting to see new car manufacturers start to dial up their incentives for new cars, which they had been for the last several months, and a lot of dealers were lamenting, they were receiving cars, but with no incentives, you're starting to see those come in now.
Thank you. Any other questions? No, I guess, I'll move on here. Generative AI, I think we need to talk about it. You know, it's obviously been a growing theme. Could you give us a sense of how you are thinking about or if you've already been has it already been a part of the operations or your product already, or how are you thinking about implications to your business going forward? What are the opportunities? What are the concerns? You know, both from an operational perspective, internally, how you manage expenses in your headcount, but also from a consumer, from a consumer perspective and traffic, et cetera.
We do have a small team. We had pockets that have been experimenting with various forms of AI and large language models. We recently have centralized that activity into a small team that is orchestrating and prioritizing all of, you know, as a broad term, but what I would call the AI activities of the company. Recently, our CTO, Matt Quinn, posted on LinkedIn a demo of a conversational AI beta or alpha that we had built that allows consumers to search in a conversational way of family of five, focused on fuel economy, you know, like a smaller car. It produces the top five makes, models with links to our SRPs. Conversational search is certainly an area.
Content creation is also an area, and in particular, in content, upper funnel content is an area that we have not really been active in, an active investor in the past. This could change the scale at which we can create that if we chose to. It also, in car shopping, a lot of times people like to compare cars, and so AI is a good opportunity to compare two models with each other. We certainly see some opportunities in consumer success, or customer success. Part of that could be dealer, but also part of that could be consumer. As we are taking more of the transaction on our site, we have more reason to engage with consumers, and consumers have more reason to engage with us.
Historically, we would hand them off to a dealer, and now, consumer success is an area that we're gonna be building muscle groups in and AI will certainly play a role in that. Internally with our sales team and our sales team working with dealers, we're finding applications that can help prevent churn, help, you know, recommend new products, but also probably more valuable recommending merchandising for dealers as well. That if our salespeople and our account managers can deliver that to them, it'll continue to position us as a thought partner to them.
Got it. That's helpful. Just checking if there's any other questions? There's one there.
From a consumer finance perspective, is there a threshold or range on rate that you think there was a, an inflection or a noticeable deceleration of demand, and subsequently that would return on a reversion back toward that threshold or range from a psychological standpoint?
It's such a short answer is no, because it's such a segmented market, that you've got, you know, super prime to subprime have very different thresholds. Just maybe two data points I would share that are more in the mainstream. One is a $1,000 monthly car payment, which historically has been considered extraordinarily high is shockingly more common now. I think that's a, that's a step function in consumers' minds. The other one, totally different type of data point is, I shared this in a CNBC interview, we're seeing a lot more consumers search for cars under $30,000. That seems to be a mental cutoff from a retail, used retail perspective for people. Not sure, you know, how that translates necessarily to monthly payments.
I think we have one more question.
Somewhat backing on the AI, more broader on the customer acquisition or performance marketing. Are you seeing customers start their search journey on various forums versus just standard search? Are you seeing benefits from that from a marketing perspective? Do you see benefits for Coming through for search bifurcation over the next few years?
Are you particularly thinking about, say, Google versus Bing or search versus social platforms or...?
Both or both of those, as well as do you have an ability to gain more direct traffic and keep more of them coming to you first versus going to a search engine because of something you can develop? There's short-term and longer term.
Yes. Short term, I would say there has not been any major shifts. I mean, I think everyone in this room is, the questions of AI related, there's a lot of Google market share commentary and if ChatGPT can help Bing gain share. We've not seen material changes there. Google has introduced some new forms of auto shopping, which we're taking part in and we're finding success in. Changes at Google don't necessarily mean a negative for us at all. In fact, it could actually give us more opportunities to leverage our endemic audience, but more importantly, our proprietary content in informing those new, those new techniques that they're using. From a social perspective, we've not seen a material change in actual low-funnel car shoppers, and we really do focus on lower funnel.
We have seen one of the fastest growth areas for us has been our app. That has been great, from an efficiency standpoint, excuse me, and also from a consumer relationship standpoint. A lot of that is because we were candidly late to invest in app as much as we should have. I would say it's probably us catching up to the market as opposed to the consumer mindset being more app-oriented for car shopping.
Great. Thanks. Maybe we have time for one last question. You know, just wanted to touch on capital allocation. What are your latest and greatest thoughts there? Trying to get a sense of how you're thinking about the buyback cadence. Maybe any potential M&A opportunities within the space. You know, tuck in AI, something more CarOffer-like, or maybe like just another player in the industry, if there's any consolidation opportunity there as well. Thanks.
From a broader capital allocation perspective, we have a lot of cash, $400 million-$500 million of cash. We generate a lot of cash. Our core business has, you know, very healthy EBITDA margins and cash flow through. We have announced a $250 million share buyback, and we've executed on part of that, but still have some runway there, which we're excited and eager to do. We do have the CarOffer Step three, which is the moment next summer where we look at the measurement period and value purchasing the balance of that company, which is the remaining 49% at a 12x trailing EBITDA multiple. That's a cash.
We can use cash or stock, but to the extent we use cash, that's a cash need and a moment in time that is an as-yet undetermined amount because we need to see how they perform. In terms of other acquisitions, we're always looking at M&A. I would say, we have acquired smaller businesses that are similar business models that have been tuck-ins. I would say more of our focus now is in added capabilities, principally around digital retail and ways that we can help dealers. At the same time, we are starting the process to prepare for integrating CarOffer, and that's a sizable business. I don't think we expect to be very active in M&A between now and then because we wanna make sure that we do that right.
Got it. That, that's fair. Great. Thanks. Thanks, Jason.
Thank you.
-for taking all the time. Thanks everyone for listening.
Thank you. Thanks, everyone.
Yeah. Next up is TrueCar.