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spk05: through us and so you know all the aspects of the transaction that you just mentioned a few text title there's the transaction itself there's the other F&I products there's trade-in that you know it's all of the steps that that you can think of we would enable the dealer to do those at their inventory on our site and and we would be the you know, the, the, the group that is, uh, helping the dealer, uh, complete all of those steps on our platform seamlessly to the consumer. And so, um, you know, that is when people talk about the buy button, that that is the buy button. That's what we're working toward. And, uh, when we have that, uh, and a great example is, is, you know, 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 offerings 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 single point of trust, uh, to come to, which would be us. Um, so, uh, and, and again, you know, trade in the example I used on trade in, uh, works when you're, you know, 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, you're doing a trade in, then, uh, we do have, you know, other options and P2P and, and some cash max offer as well. So, you know, 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, consumer to dealer, dealer to dealer. But when people think about buying or selling a car, we want them to use us.
spk07: 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, you know, where we think those could go longer term and sort of what's the, I guess, the COGS component within that business, you know, versus sort of the listing business. Thank you.
spk08: 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. Thanks.
spk07: Okay, thanks. Actually, if I could sneak one more in. Just on the instant cash offer that's in three states, you know, can you provide maybe any color or sense of the rollout plan? You know, I guess why those three states and are there any sort of regulations that
spk01: as you go state to state with that product. Thank you.
spk05: 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 three states happened to be You know, two out of the three happen to be larger states where we have a lot of dealer penetration. And so it's actually like a pretty good chunk of the country, more than 350th for sure. And yeah, 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.
spk07: Great. Thanks, Jason. Thanks, Scott.
spk02: The next question comes from Jed Kelly with Oppenheimer. Please go ahead.
spk06: 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 with the car offer, should we think about it growing past seasonality trends just because you're, you know, the velocity of new dealers you can add? I mean, how should we view that versus seasonality?
spk08: Yeah, I mean, so on the growth standpoint, I'll let Sam take that after because, you know, that's something that, you know, the team and us are figuring out. You know, dealer adoption, I think, has gotten a bit of a tailwind for sure from the inventory situation. You know, there's probably some dealers out there that – 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 that a little bit.
spk04: Jed, I'll jump in. Thanks for your question on future growth with Car Offer. 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 four months or so. You know, the thing I can say, as you're asking a really thoughtful question, they are growing through and blowing through some of the expectations we had. Certainly, our expectation of enrollments, you know, 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 are trading on. You heard about the billion-dollar 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'll 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.
spk06: That's very helpful. As you think about getting more vertical or getting further down the transaction funnel with the consumer, how are you managing your relationships with the dealers? Are you seeing any pushbacks or are they pretty accepting of this? The dealers do like to own the customers. How are you managing that tricky spot with the relationships?
spk04: Jason, are you going to take it or do you want me to jump in?
spk05: No, go ahead.
spk04: 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, you know, compete favorably. Now they have the opportunity to look at 35 million, 32, 38, whatever the number is each month. that are coming to our site who are interested in selling their vehicle and and winning that new source of inventory. So as consumers move digitally and say, I'm more comfortable selling my vehicle, you know, 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 million 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 one 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, if 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 I think these are win-wins in our positioning in the marketplace. We're helping both sides of the marketplace facilitate transactions.
spk01: Thank you. The next question comes from Nick Bacchus with Raymond James.
spk02: Please go ahead.
spk03: Hey guys, congrats on a good quarter. Thanks for taking my question. Um, some of the, uh, the number of paying dealers in the U S um, you talked about the ship chip shortage driving, um, a lack of inventory and, and, um, hurting that number, um, driving that sequential decline. Can you just give more detail on your thoughts on the supply situation moving forward? It seems like you think it's going to start to improve, um, into the back half. Kind of how are you thinking about that? Um, and what does guidance build in? for dealer count kind of directionally in the third quarter, and how are you thinking about that metric into the back half of the year in general?
spk08: Hey, Nick, it's Scott. I'll take that. So, you know, we don't get too specific on what we're guiding to with the number, but, you know, for the quarter, as I mentioned in the prepared remarks, you know, with subscription revenue, You know, 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, you know, our versus Q1 and Q2, you know, our retention rate with dealers was about the same, you know, or if you inverse that, you know, 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 onto the platform. And, you know, that's really what changed for us from a paying dealer account 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 forward, into the second half of the year, and specifically Q3, the inventory issue hasn't abated yet. We've seen some very modest movement in the right direction with used inventory slightly ticking up. Obviously, new inventory is still sluggish because they are waiting on chips, 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 with the sales team.
spk04: Scott, not much more to add. Nick, appreciate the question. As Scott said, you know, that hardy customer retention is spilling into July, you know, as we hit into third quarter. 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, you know, seven leads per vehicle, and that's not going to, you know, help that D that car gets sold. So, um, we're being thoughtful about, uh, you know, how, uh, aggressively we can grow our, our consumer audience. We're doing it really efficiently and very well for dealers. And that lead volume has been really successful. Um, dealers are now saying as inventory comes back, as Scott just said, I'm more interested in spending and we're seeing that we're, we're seeing that as a hopeful trend as we go forward.
spk03: Got it. Very, very helpful. Thank you. Just as quickly sales and marketing, obviously you guys have made significant strides there in terms of marketing efficiency, you know, 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, and, you know, how durable are the gains you've made, or do you give some of those back as you press the accelerator on marketing spends going forward?
spk05: I can take that. Thanks for the question. So, you know, I think we are always, regardless of the environment, of, you know, COVID environment or inventory supply, consumer behavior, we are always looking to do two things. One, make our consumer experience as efficient as possible. And number two, 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 on both of those fronts. And so you just acknowledge 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 pre-qual lead generate or pre-qual lead pre-qualification lead quality as well as in the CG convert propensity to to convert to a sale. So and and so that efficiency all else being equal and quality have trended in terrific directions throughout. There are these times though where you know 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 cars, they don't have as many cars. And therefore, you know, you could argue not only don't need as many leads, but having, you know, too many leads on one piece of inventory is not even helpful to them because they, you know, they can only sell a car once. So we think, again, all this 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, and we said this, I think, in the remarks, we do expect to improve.
spk01: grow our marketing as the market sort of normalizes. The final question today comes from Doug Arthur with Huber Research Partners.
spk02: Please go ahead.
spk09: Yeah, thanks. Just, Scott, on the revenue guidance for the third quarter, 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 that, but you're growing at a very rapid rate and your guidance for the third quarter basically assumes a full stop in growth. I mean, sort of flat sequentially. Is that what you're intending to employ?
spk08: Well, full stops, thanks Doug. Full stops is a strong word, but I think, you know, 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 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, you know, some dealers are, you know, 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 um, dealers are monitoring both wholesale pricing and consumers willingness to pay at these, uh, you know, all time highs for, for pricing, uh, used vehicles, especially. So it, it also, we have some insight, uh, Doug, you know, with regards to what we've seen in July. Right. And so there's some modest, you know, we saw a month over month increases all year long for a car offer. And we've seen, uh, as Jason mentioned, uh, a slight less of growth from June to July than we saw in other months. So with that insight, we're just being a bit more prudent.
spk09: But the operative word is you saw growth in July over June.
spk08: No. I think Jason's prepared remarks said we saw a slight slowdown.
spk01: Okay. All right. Got it. Thank you. This concludes our question and answer session.
spk02: I would now like to turn the conference back over to management for any closing remarks.
spk05: Thank you very much, Jason. I just want 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.
spk01: Thank you very much for your time. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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