Citi 2021 Global Technology Virtual Conference

Sep 14, 2021

Great. Thank you. Thanks everyone for being here today. I'm Nick Jones, an Internet analyst here at Citi. If you need my disclosures, you can find them. You email me, and I can send them to you, or our corporate access get consent. We're really excited to have cars.com here today and Alex Vetter, the CEO, to run through some questions. If anyone has questions, there's a box in the window you are looking at. Please submit you can submit questions through there, and I'll I'll be happy to ask them on your behalf. But, Alex, thanks thanks for being here. And Thanks for having Yeah. Absolutely. And and I think the, you know, the best way to kick things off would be to just kinda talk about what current trends you see. You know, the last eighteen months have been pretty interesting to say the least. There's an unprecedented shutdown in the economy last year, dealer shutdown followed by demand bouncing back rapidly. There's some supply constraints today. So, you know, what what are you seeing in terms of change in changes in behaviors at dealers and by car shoppers? Well, Nick, thanks again for having me here. Listen, I think if there's one thing that's happened over the past year, it's the durability of marketplaces and the durability of the local dealer model has shined through. You know, the last eighteen months have been pretty interesting, to say the least. But the auto industry, our strategy really is about arming the rebels. When I say arming the rebels, it's it's giving dealerships technology and tools to allow them to move their business into a digital first format. And the COVID pandemic and the the stay at home shutdowns really forced dealers' hands to actually have to engage and drive the strategy more proactively. And that's why you're seeing robust trends in my business where not only is our marketplace growth surge, but the growth in our technology solutions, which is enabling dealerships to compete, has also experienced double digit growth. And so this environment, as difficult as it's been, has really served as a boon for the business and the industry. So as you think about some of the behavior, I think consumers, to some degree, have kind of been evangelized and are more comfortable transacting online. How do you think about these trends? Do you see these as being sticky kind of from here? Or do things kind of revert over time as kind of the COVID impact wanes? You know, Nick, when I talk to investors, a lot of them, because of our brand strength and even our our stock ticker being Cars, they think about my company as being a singular website, cars.com. Well, our marketplace is is a core ingredient to our success, but we also are powering over 5,000 dealership websites across The US. We just launched our first Ford website last week. We we won a a deal to help build out Ford websites. There's over 3,000 in the country, and we just launched the first one last week. So I look at data across not just our marketplace, which which reliably has over 25,000,000 people coming to it every month, but I'm also to look directly into the the consumer behavior on over 5,000 dealer websites. And I think what we see is a very similar trend, which is that consumers are wanting to do more and more of the process online, are willing to complete more upfront work to save time in the dealership. And conversely, dealers are willing to meet consumers where they are. We've had record numbers of dealers adopting our digital tools that allow them to communicate directly with customers while they're actively shopping. But increasingly, the dealer body is willing to expand the footprint of their dealership and deliver cars directly to people's homes. And so I'm seeing really positive behavior on both consumers and how the industry is responding to advance their digital offerings. Great. So from here, as we look kind of through the back half of the year, and maybe beyond, how are you thinking about COVID variant? Do you think dealers are kind of prepared and we won't see kind of the shutdowns we saw last year, or is that potentially still a risk to the ecosystem as, you know, the Delta variant and now there's, I think, a new variant, you know, begins to spread? Well, look, it's hard to predict exactly what will happen. I think, local dealerships are one of the last groups of entrepreneurs in this country, right? They employ more than any other, small business category in this in this country, and and they are hyper resilient and very agile. And and you saw this vividly through the pandemic. When their physical showrooms were shut, they just pivoted and focused exclusively on their digital showrooms. And so don't back these these guys in the corner. They know how to compete. They know how to operate their their business locally, and they were the first to step up with home delivery. We had over 8,000 dealers opt in for home vehicle delivery right in the midst of the pandemic when most people were frozen and unsure what to do. These guys were promoting their ability to bring the cars directly to use. So I think the dealer body has evolved a tremendous amount. I think we have a long way to go. We only have 19,000 dealers in a realistic universe for us of about 40,000. So we have a long way to go to digitize the long tail of retailers in this industry. But I think the consumer durability of vehicle ownership is here to stay, Nick. We're seeing record numbers of first time buyers. We're seeing the average age of of driver's license drop for the first time in decades, meaning young teens are wanting to get their license sooner. And I think this is a a more broader trend, which is people shunning for mass transit, large format environments in favor of private, safe, secure transportation on their own. Great. Great. So may maybe this is a good segue into the supply constraints we're seeing in the ecosystem today, kind of for both new and used cars. You know, new has the chip shortage of used cars is in high demand. This is a big been a big topic of conversation for investors. How how does this dynamic impact your relationship with dealers today? They maybe don't have the inventory they wish they had to sell, does that impact how much they're kind of willing to spend to drive conversion? Well, you know, I think it strengthened our relationship with dealers. You know, one of our key messages to dealers is they need to spend less on advertising, you know, because while their cars don't need advertising because there's strong demand, but those cars do need to be found. And that's the beauty of our platform. They only list the cars they actually own, and therefore, they're only marketing their available inventory, not cars that they can't get ahold of. So our platform is, you know, matching supply and demand. It's hyper efficient. It costs pennies on the dollar compared to traditional advertising. So dealers can set us, forget us, and only worry about people contacting them about the actual cars they have on lot. If there's been a headwind for us, it's been actually on the OEM side. The OEM business is about 15% of our business. Certainly, car companies aren't promoting and drawing attention to their limited inventories. But I also know the inventory shortage is affecting all OEMs differently. Some are saying they're going to have supply back before the end of the year. Some are saying it's middle of next year. We see that the top 15 vehicles accounted for almost 75% of the decline, right? So if you look at like Ram trucks, Ford F Series, there just isn't any supply. So we're seeing consumer behavior in our marketplace. Consumers are now searching nationally for cars or trucks that they normally could find locally. So I will say the August trends are solid. Even though inventory levels are down, consumer demand is persistent. And we're seeing robust trends of dealer growth and consumer strength. And therefore, we think the business is going to finish the year on a real high note. Great. So how should we be thinking about supply constraints easing? Is overall of that end up being a net benefit to the marketplace business? Well, I think that the industry has certainly there are certain elements of this environment that the industry has enjoyed. I mean dealerships are enjoying record profitability because used car prices are up, in some cases, almost 30%. And so gross profit per sale is at an all time high. I think on the manufacturer side, they haven't had to spend their incentive budgets. OEMs are spending close to $4,000,000,000 in vehicle incentives, and OEM incentives have dried up virtually in this environment. And so that's adding more profitability for every vehicle sale. I think there's going to be a growing trend to align supply and demand. In fact, I think this is one of the growth areas for my business is that most of our users are ninety days from purchase. We sit in the pretail category, Nick. I know a lot of people in the industry are obsessed about investing in digital retail solutions. If you look at the market, pre tail, or where consumers go prior to purchase, is a much larger TAM. There's over $30,000,000,000 being spent in automotive advertising amongst dealers and OEMs, and we're aggregating all that demand on a singular platform and helping convert that traffic directly into dealerships' environment. So I think we're in a really good spot because we're seeing despite the inventory constraints, our solutions fit the mold. If OEM advertising comes back in a big way, you'll see much faster growth on top line and bottom lines of the business. Great. Great. So, maybe we could switch gears a little bit and talk about how you view the total addressable market. You talked about up to 40,000 dealers to you know, addressing this the long tail. But you also have products like Dealer Inspire and Fuel, which have seen strong early traction. So how does this change your view of really what the cars.com opportunity is, you know, particularly with these new solutions? Well, Nick, I think our opportunity is much bigger, and I and I don't think the the company's being recognized for its differentiated strategy, which is why I appreciate you giving me the platform here today. Again, I think most people see us as a singular website, cars.com. But look at any of the top dealer groups in the country, and we're powering their auto tech. Over 5,000 dealer websites are currently subscribing to our technologies. We have very SaaS like revenues, highly sticky because dealers aren't going to turn off their own website. And yet we have the operating margins of some of the strongest leading digital marketplaces globally. And so we have SaaS like revenues, strong free cash flow, strong operating margins, north of 30% last quarter. So The U. S. Auto advertising industry is $30,000,000,000 We're capturing less than 2% of that spend. But if you pan back just a little bit, the opportunity for automotive tech is close to a $90,000,000,000 TAM, right? And we're scratching the surface. Our solution strategy has been going at double digit rates. We bought Dealer Inspire just a few short years ago and have rapidly grown that business. We stood up a new business, Fuel In House, purely through innovation, that's going directly after the $10,000,000,000 being spent on traditional TV. And the whole strategy consistently is about giving the auto industry technology and tools for them to run a digital first business. And so the TAM is significantly more massive than I think the market realizes today. Great. As we you know, since your relationship with dealers kind of underpin the growth in in 2Q, we saw a slight increase in dealer count. Can you help give us a sense of what the growth outlook and retention for dealers looks like given the current backdrop? Is that something you're expecting to see improvement in kind of through the back half and into next year? Is it still kind of a touch and go environment today? Yes. Look, I think, first of all, we've grown our dealer base in five of the last six quarters. The only quarter where we saw a pause in growth was during Q2 of last year, the COVID quarter, when I think everybody was hit with a degree of shock. So the business has been growing, again, dealer growth in five of the last six quarters. Importantly, this is a time when you're seeing other marketplaces and other platforms go backwards in volume. So clearly, our value delivery, our brand strength and our tech forward approach is being rewarded through the data, dealers are seeing the value. I think you're also seeing this reflected in our growth in pricing. We've had 10% ARPD growth and crazy high retention rates. I think this is part of our differentiated solutions strategy, where the marketplace and the dealer website are working in tandem to drive operating efficiencies for the dealer body. So we expect growth in Q3 to be similar to Q2 levels. And ultimately, again, we're not assuming any return to growth in the OEM business. But I'd be remiss to say that, that business did eke out growth in the last quarter, and OEMs aren't going to sit on the sidelines forever. It's just a matter of when do you think they'll be coming back in a big way. Got it. Got it. I think, you know, I think this is a good segue. We have a question that came in, and and it kinda segued into kind of the competitive dynamic today. So how, you know, how how should we and how do you think about competition within the vertical? For the marketplace business, could you maybe touch on the competitive market dynamics, market share evolution and pricing trends that you just touched on ARPD growth? So any additional color there? Yeah. Look. I I'll I'll put competition in a couple buckets. Let's let's talk about the the similarly situated players. Most of the other marketplaces run gimmicks that really create a race to the bottom for the auto industry. They they incentivize dealers to lower the price of their car, and then they bid up search results and charge more for the privilege. So your cost base is rising, while you're reducing the price of your goods to to compete with your peers. Same thing on the new car side and the used car side. I think cars become we've run a level playing field. You know, we let the car be the star and the dealer is the hero on our model. And I think the difference in that is that, look, we've had competition for almost twenty five years. What doesn't change is the consumer's reliability of not knowing who to trust when they enter the car market. So every year, we've got 25 people every month coming to cars.com reliably with the bulk of that traffic coming to us organically. Most of our peers have got to bid crazy amounts of money, particularly in arbitrage marketing, to sustain their value delivery. We've got 75% of our traffic coming to us directly, and that's a direct reflection of the strength of the brand. I don't think there's ever going to be a day where people aren't going to do research prior to purchase. And knowing that our brand sits in the pretail category versus retail, I think we're really well positioned to have a seat at the table. I think the second big bucket of competition certainly are all the places that dealers and OEMs waste money today. The amount of money being spent on the Google auction or even in the Facebook marketplace is astronomical. But unfortunately, a lot of those efforts charge significantly high dollars for cost per click or cost per like or cost per engagement. The only thing you can source on cars.com are actual vehicle sales. We're driving traffic of people that are actually gonna buy. 70% of our audience is undecided on make or model, and 90% of our audience is undecided on dealer. So I don't care how much money you're spending to promote your own service, you're plugging into our ecosystem because this is a a rich reservoir of of source of sales and incremental volume. I think dealers are waking up to the fact that spending all your money to compete for clicks in in the auction may be driving a lot of phone calls for your service department, but they're truly not driving your variable fixed ops budget. And so, the business is highly sticky. It's got clear ROI for the dealers that participate, and we're going to continue to take share. And that doesn't even begin to touch what we can do with like things like broadcast television. Again, a $10,000,000,000 category where dealers are spending very little in video, online, and and we're gonna help lead that that, transformation from television and broadcast directly to online. I wanna I wanna touch on fuel in a moment, but but maybe just to explain a little bit. You know, you you'd mentioned a lot of things goes towards Google and Facebook. I mean, how do you think about Google or Facebook maybe entering the category more seriously? I think there was some evidence that Google is testing kind of an dealer focused search kind of search results page down in Texas. You know? Do do you see them being able to kind of viably enter the category and and kind of compete with the marketplace model? You know, I think everybody's asking that question for over over two decades, and and I think we've done fine just navigating the storm. Look at other categories. I mean, for commodity goods, I get it. Right? Plane tickets, hotel rooms, things you're gonna buy multiple times in a year, and and you're not living with it. Buying a car is the second largest transaction in people's lifetimes. And in a in a platform, a freemium model like ours, you're not finding consumers bypassing the research phase. And so this is never gonna be a category that's gonna be one search and done. Consumers are gonna do several hours of digital research prior to purchase. So I think dealer websites have a place in the future. I know marketplaces always do. I mean, just look at other categories, Nick. I mean, if Chewy can build a site around dog food, I'm pretty certain there's room for a vertical market for cars. That's that's that's fair. That's fair. Maybe then let's let's talk about, fuel a little bit. Can you walk us through how integrating video into your platform has been beneficial for capitalizing in kind of in market audience? And what other results the offering has provided dealers so far? Yeah. Look. Fuel was was the creation of both cars.com and Dealer Inspire coming together. Dealer Inspire had a programmatic bidding platform that is used to run campaigns for dealers. And cars.com spends close to $200,000,000 a year building its high quality first party audience. One of the things that's going to happen in the future, as everybody's aware, Nick, is, you know, the cookie is crumbling, and the ability for the auto industry to use modeled audiences to chase auto intenders is gonna that's a well that's gonna run dry. I I sleep really well at night because we generate all our own first party data of high quality in market shoppers, so our audience is pure. And what Fuel really enables dealerships to do is take the power of all the OTT platforms and digital streaming services and social media, you know, tools that are out there and marry that with our high quality first party data and narrowcast their advertising and marketing campaigns just to those people that are actively in the market to buy a car. You know, fuel doesn't come cheap because it's a precious, you know, commodity. There's only 5,000,000 people buying a car every month. And you think about how much of the auto industry is wasting money advertising to the general population across The US. And FUEL, what we see consistently is when the dealer subscribes to FUEL, they're narrowcasting their messages just to the cars.com high intention audience in a set geographic area. And in many cases, despite them spending five to 10x less, they're seeing 4x to 5x lift in performance, because of that narrow cast just to those people and percentage of the population that's in market. So FUEL is in the early innings. We just launched this during the heart of the pandemic. It's accounting for almost half of our ARPD growth. And then the subscriptions rates here are almost 5x what our core subscription rate is for our marketplace. So lots of headroom to go with FUEL. We're just getting started. Great. May maybe switching to Dealer Inspire. You know, it's another solution that's seen some, solid growth since the acquisition. Can you comment a little bit on the opportunity with GM and Ford? And how should we think about other OEMs engaging with dealers over time? Yes. Well, first of all, on GM, they went to a semi exclusive model from an exclusive model and only awarded GM dealers the right to use work with three other vendors, of which we're one of the leaders there. In fact, no provider has grown more share of GM websites than our Dealer Inspire business. We've got about 800 of the websites that have launched, which is about 85% of the sites that are already contracted to switch to us. There's still room to grow there. GM's got over 4,000 dealer websites, and dealers are increasing their investment to modernize their digital experience. So we've got room to grow there. The Ford deal was more recently announced. Again, I mentioned before, we launched our first Ford website, just about eight, nine days ago. And Ford's got over 3,000 dealers in its network that we can now go out and convert to our website solutions. So the pipeline here is growing. Again, we've got 8,000. So there's tons of opportunity just to go in new customer acquisition. But importantly, we're outfitting these dealers with digital tech. We've got digital retail solutions. We've got online chat solutions, trade in solutions, things that we're plugging into the dealer's website. And importantly, once they work with us on our tech, we can now plug those technologies into our marketplace and help generate incremental demand for the dealership. So again, lots of room to grow on our solution strategy. Great. Great. Maybe let's touch on traffic, because I think it's a it's something that that a lot of investors focus on because it's something, I guess, most of us can get access to. When we compare it to kind of the, you know, the broader landscape with some of the competition, you know, how should we be viewing traffic? You know, how, you know, how do we size kind of the quality of the lead, the cars.com that we achieved with this traffic versus maybe other competitors? And is traffic kind of the right metric to be looking at? Well, I do think traffic is a general strength and a sign of health of a of a marketplace because the more participants in the marketplace, the more network effects you can generate. And I'm proud to report that no marketplace has been growing faster than cars.com over the last few years. So what's exciting about that growth is it's really through the strength of our brand. We're not having to buy our traffic nearly to the degrees that others are to sustain value delivery. Part of that's because of the strength of the Bipla brand. The other part is because we're we produce high quality editorial content. We are critically reviewing best third row seat SUVs. We're talking about new makes and models so consumers can use the vast amounts of research and reviews on our platform to get smart prior to purchase. Again, we sit in the pretail part of the industry rather than focus purely on the retail. I think the part that's missing is that even though we've got 25,000,000 people every month using cars.com, Again, Nick, we've got 45,000,000 car shoppers every month across our network of dealer sites. And when you think about the exciting next legs for growth for the business, think about all the secondary market and growth opportunities in the financing space, in the vehicle trade in space. Any of these technologies that we plug into our network, we're not even we're not only plugging that into the strength of the cars.com platform, which gets 25,000,000 people a month, we can plug it into the 45,000,000 people shopping on dealer sites every month and help enable our dealerships to grow their business through those technologies and tools as well. So traffic is important. I think most people look at our traffic mix as only our marketplace. The the frequency and reach that we have on a day in and day out business is four times greater than what most people think about my firm. Got it. And and you noted on the on the two q call and and and and previously as well that the majority of your traffic is organic. You know, paid search is less efficient for engagement and conversion to sales. So, you know, what have been the major drivers of organic growth? And then, I guess, what, you know, what has that done to ROI trends for dealers on the cars.com platform given how much organic traffic you're you're able to win? Yeah. I mean, look. I think the strength of our app, if you look at both Android and and iOS environments, cars.com is consistently rated not only one of the most downloaded apps, but the the highest rated. And so our app has been a real strong source of growth over the years. Again, just the sheer volume of people that type cars directly into a search engine, and we benefit every time someone thinks about this category. So we have a high concentration natural organic value that we generate each and every month, which is also another reason why the industry needs to subscribe. It's not like this is traffic you can buy, elsewhere. These are users that are coming to cars.com for our research, our reviews. And our SEO has been growing faster than any other property in the category. We just completed a fairly significant overhaul in migrating our platform to the cloud. So our site speeds are significantly faster, and our ability to innovate has radically improved. And so you'll expect to see a much faster rate of innovation in the business and parity in terms of our experience and growing our traffic footprint. Great. I I think we have time for one one more question. Maybe you could talk about kind of, I guess, m and a or consolidation within the segment. You know, there's there's a handful of competitors. How how do you see this category evolving over time? Does this maybe look like some of the European markets where, you know, one really kind of dominates, or is this a category where there's gonna be a handful of players for a while and then maybe over time, as ROIs and things like that show up and additional solutions are provided to begin to kind of consolidate around fewer platforms? Yes. I mean, look, there are many fundamentals to our model with other European counterparts, whether that's our strong free cash flow yield or our industry leading EBITDA margins. I think when it comes to this market versus European markets, probably the biggest difference, Nick, is the volume and dealer density that exists in this country. And I think in other environments, the manufacturers did a much more modest rollout of franchise points across their geographic footprints. In The U. S, in Chicago alone, you've got eight Toyota dealerships within a 30 mile radius. So I don't think you're going to see consolidation to a singular player. Both consumers are using multiple sources to collect information prior to purchase. And in many cases, they're shopping two to three, you know, destinations prior to online engagement. I think dealers are resistant to have a singular winner. They like to have a level playing field to support them because of the the heavy amount of dealer density in the country. So, look, we've spent twenty years building our brand. It's a brand that consumers trust and rely on each and every time they go into the car market. And and I think the dealer body, growing five of the last six quarters, has recognized that, you know, we're an enabler for their success. And and most other marketplaces, I think, play more of a predatory role. And I think that's one of the reasons why the industry has has started to swing favor our way is that we're doing a lot more for them than than sending them leads. Great. Well, Alex, thank you so much for the time. This is great. This, this will conclude our call. Nick, thanks a lot for having you having me, and have a great rest of the week, everyone. You too. Take care, everybody.