CarGurus, Inc.

Greetings. Welcome to the Cargurus Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the call over to your host, Kandeep Singh, Vice President of Investor Relations.

Thank you, Operator. Good afternoon. I'm delighted to welcome you to CarGurus' third quarter 2021 earnings call. 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, Sam Zales, President and Chief Operating Officer, and Bruce Thompson, Founder and Chief Executive Officer of CarOffer. 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 fourth quarter and full year 2021, management's expectations for our future financial and operational performance and innovation, our business and growth strategies, our expectations for our car offer business and anticipated acquisition synergies, our expectations for CarGuru's instant max cash offer, the value proposition of our current product offerings and other product opportunities, the potential impact of the COVID-19 pandemic, the semiconductor chip shortage, 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 could cause them to differ materially from actual results. Information concerning those risks is available in our earnings press release distributed after market closed today and in our most recent reports on Forms 10-K 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 also be found on the investor relations section of our website. With that, I'll now turn it over to Jason.

Thank you, Kirandeep, and thank you to all those joining us today. I'm pleased to share that CarGurus achieved excellent results in the third quarter of 2021. Despite the ongoing semiconductor chip shortage, our performance demonstrated the continued resiliency of our leading foundational listings business, and impressive progress in our transaction capabilities, including digital wholesale, instant max cash offer, and digital retail. Since April, the automotive industry has been navigating the semiconductor chip shortage and pent-up consumer demand, resulting in depleted new and used inventory and vehicle price inflation reaching all-time highs. While some forecasts predicted a recovery in the second half of 2021, it appears that the chip shortage will last into 2022, potentially late into the year. Though it remains difficult to predict when the shortage will ease and the resulting implications on new and used inventory, we continue to work closely with our dealer partners to provide support as we all continue to navigate through these unprecedented times. Before I dive into their business results, I'd like to first highlight our successful third annual automotive industry conference, Navigate, which was held in October. This year, we virtually welcomed dealer registrants from across the US, Canada, and the United Kingdom. The three-day event discussed the move towards digital retail, wholesale optimization through car offer, brand building, and much more. We are pleased with the insights and the content we were able to provide dealers and look forward to an even bigger and hopefully in-person Navigate 2022. Now turning to our business performance. We are thrilled to have exceeded our guidance for the quarter. Performance this quarter was driven by three key factors. Our ongoing evolution from a listing business to an end-to-end transaction enabled marketplace. Our partnership with dealers to develop innovative digitally initiated solutions. And finally, our ability to provide consumers a self-selective digital retail journey when buying or selling a vehicle. With these three areas driving our performance during the third quarter, we were pleased to see strong dealer penetration of our Car Offer platform, swift execution and rapid expansion of CarGurus Instant Max Cash Offer, and continued innovation as we bring digitally initiated capabilities to our consumer audience and dealer partners. As we have said before, the addition of Car Offer has created powerful synergies through our integrated platforms that have further helped overcome the headwinds faced by the industry at large. and we are thrilled with the continued growth of the Car Offer business in Q3. Strong dealer adoption of the Car Offer platform continues as enrolled dealers increased by 27% quarter over quarter to approximately 7,000 rooftops with similar enrollment rates in October. Car Offer continues to drive enrollment with approximately one third of new dealers coming from the CarGuru sales team. The Car Offer buying matrix creates an opportunity for all types of vehicles, regardless of price, to transact on the platform, and as we continue to grow, we believe over time a meaningful portion of CarGurus listings dealers would be excellent candidates for the car offer platform. With no monthly subscription fee, dealers are encouraged to try the transaction-based platform as a method to source and or liquidate inventory. This quarter, revenue from car offers dealer-to-dealer business grew modestly to approximately $58 million. However, gross merchandise sales, or GMS, declined moderately during the same period to approximately $875 million. This decline was, in part, caused by dealer apprehensiveness in purchasing vehicles wholesale as prices trended downward from July through late August. However, we saw this trend reverse in September with an uptick in transactions correlating to a rise in wholesale prices that was caused by a dearth of new vehicle supply and even fewer lease returns. Furthering that trend, October marked a record month for Car Offer, driven by a record number of transactions. Despite wholesale price volatility and seasonality driving near-term transaction fluctuations, we're very pleased with Car Offer's progress. With each passing quarter, through further integration, we are harnessing the combined Car Offer and CarGurus technology to provide dealers a differentiated value proposition unlike anything else. Just a few of the initial examples of the power of our combined platforms include dealers now have access to our IMV pricing data in their wholesale matrix, retail prices next to wholesale offers in their CarGurus dealer dashboard, and access to a new source of consumer trade-ins via instant max cash offer. As we transition to a more digitally initiated environment where consumers can choose to complete some or all of the transaction online, we are pleased to see dealers embrace and evolve with the change in consumer behavior. We continue to make great progress on our end-to-end solution, with new functionality becoming available for dealers and consumers, like Instant Max Cash Offer, or Instant Max for short. Since its launch in Q3, Instant Max has expanded to cover over 50% of the U.S. population in just three months. Today, I'm happy to announce that this week we are expanding even further into three additional states. New York, Maryland, and Minnesota, now covering a total of 22 states. We are incredibly pleased with the performance since its launch. Since inception, we have already completed hundreds of transactions with vehicles, ranging in price from approximately $2,000 to $78,000, which shows how this product can serve a wide swath of the market. In October, we completed approximately 13 times the number of transactions we did in August. We are thrilled with the week over week growth as we continue to scale the business. As we expand further with national coverage anticipated in 2022, we expect to see continued growth across a wide variety of vehicles transacted on our platform. With each expansion effort, we continue to refine the consumer and dealer experiences. Recently, we streamlined the document upload process, added ACH as an alternative payment method, and invested in tools to enhance the intake experience for our logistics partners and landed dealers. We are combining CarGuru's customer centricity and experience with CarOffer's deep expertise in documentation, logistics, and inspections to create a service that consumers can reliably trust and leverage for their vehicle trade-ins and sales. We believe we are poised for success as we have built an offering that provides our industry-leading consumer audience the most competitive price from thousands of dealers and a great digital and offline experience. And dealers, the opportunity to become a landed dealer and receive access to thousands of consumer trade-ins otherwise not attainable. CarGurus is the only platform where wholesale dealers and consumers can transact instantly and at scale. Here's what our satisfied customer, Dalen, from Texas, had to say about his latest experience. Quote, the offer was better than any offer I was getting from dealerships or people in general. and it was just an offer I couldn't turn down. I will tell everybody CarGurus will give you a great offer. Also, it was a smooth process, an easy process for me to go through to get the car sold, so I would definitely recommend it to friends and family, end quote. Leveraging the same technology and dealer network that powers Instant Max Cash Offer, we are now offering dealers Consumer Lane, a powerful trade-in tool for their own website that enables them to instantly purchase vehicles directly from consumers with the confidence of a standing bid from another car offer dealer. Following a successful pilot, Consumer Lane is now being deployed by some of the industry's leading automotive groups. Consumer Lane reduces the risk for dealers offering to purchase a digital trade-in by using Car Offer's proprietary buying matrix technology, which leverages dealers who have placed standing buy orders and thus guaranteeing a value for the car to be traded. dealers can instantly make the most competitive offer on trade-ins to shoppers right from their website. With every consumer offer backed by the buying matrix buy order, Consumer Lane provides the originating dealer the opportunity to keep the car or simply click a button and sell it through the wholesale platform at the guaranteed price. Shoppers will seamlessly receive the highest cash offer from thousands of dealers in the matrix, which they can then bring into the dealership to receive payment or to use towards an upgrade. The integration of consumer lane provides dealers with an enhanced ability to retain consumer business from trade-in to new car purchase and adds yet another layer of transparency to the car buying experience for consumers. As we continue to grow our dealers capabilities to purchase vehicles from consumers, we believe it is an opportunity to not only raise awareness for instant max cash offer, but to enhance our brand awareness among consumers as well. we have evolved tremendously from our traditional listings business to an end-to-end transaction-enabled marketplace where consumers can now transparently shop, buy, and sell vehicles online. With such a compelling consumer offering, we're excited to expand our marketing to communicate our broader set of offerings. While we still plan to remain judicious with our spend and recognize efficiencies today on the listings foundation of our business, We are acutely aware that investment is required to ensure CarGurus is top of mind when it comes to vehicle trade-ins and a digitally initiated experience. In October, we launched a new Do More From Home brand campaign, which emphasizes how CarGurus uses technology and scale to equip consumers with the confidence and information they need to buy or sell a vehicle online. These brand campaigns are just one of our many avenues for raising consumer awareness and driving high-intent shoppers to our transaction-enabled marketplace. With the launch of Instant Max Cash Offer, we are realizing the synergistic effects of our combined car offer and CarGurus platforms. Consumers who utilize Instant Max Cash Offer to sell their vehicle are also more engaged shoppers in the market for a new vehicle. 56% of consumers who saved an offer utilizing Instant Max also used CarGurus to view vehicle detail pages for a new vehicle, and approximately 20% of InstantMax offer savers also submitted a lead through CarGurus. As our InstantMax offering scales, we believe we will be able to target even more consumers lower in the funnel that have sold their vehicles and are now in the market for a new vehicle. These early marketing synergies are just one example of where the sum of the parts is greater than the standalone components. Although we saw increased conversions from consumers using instant max cash offer, overall leads were down this quarter in the U.S. As prices for vehicles increased and consumers became more aware of the chip shortage, we saw consumer demand pare back, resulting in fewer leads. Our latest research from our 2021 Buyer's Insights report shows that 58% of current shoppers are aware of these higher prices, which has resulted in 31% of current shoppers delaying their vehicle purchase. While we view these dynamics to be temporary, we are still pleased with the quality of the consumer base we continue to attract and the high intent shoppers that come to our site as a result of our targeted marketing efforts. While Instant Max Cash Offer allows consumers to sell their vehicle from the comfort of their homes, our other recently announced capabilities allow consumers to complete more elements of car buying online. According to a national survey, 80% of dealers said the pandemic has accelerated their adoption of digital path to purchase experiences. And 90% of dealers expect to continue or accelerate digital retailing at their dealership. In order to meet this growing demand, we continue to innovate so dealers can reach and engage new shoppers in their local market and target new shoppers outside their immediate region as well. We recently augmented our CG Convert product, which is still in early access and only available to a limited number of dealers. With the addition of deposits and expanded financing capabilities. CGConvert allows car shoppers to start their purchase from a CarGuru's vehicle detail page and get to a near penny-perfect, personalized deal on the vehicle they're interested in purchasing before scheduling an appointment with the dealership to finalize the purchase quickly and transparently. Now, with Autofi integrated into CGConvert, shoppers can submit a credit application to receive real offers from a dealer's preferred lender group. With AutoFi's 40-plus lenders, we believe this not only is the next step to a fully digital experience, but also a path to create more lower funnel and qualified leads for dealers while they retain their profits from F&I products. Here's what Vita Presnia-Cavate, owner-operator at Midway Auto House, had to say about their experience using CG Convert. Quote, we decided to try Convert in an effort to get more quality leads. End quote. Additionally, For consumers who are ready to commit and lock in their chosen vehicle, especially during an environment of limited inventory, we have recently piloted the ability for a consumer to put down a deposit for the car on our site. The feature allows shoppers to place a $500 deposit to reserve a vehicle for 72 hours. This not only improves the car buying experience for consumers, but also provides dealers with a more committed, high intent shoppers that are ready to purchase. CGConvert, with its updated functionality, provides consumers a self-selective journey, allowing for a smooth online to offline transition. We're pleased with dealer feedback on the enhancements and are continuing to further refine CGConvert while in early access before supplying broader access to dealers who are eligible. Beyond CGConvert, we continue to enhance our other digital retail capabilities. In August, we partnered with SpinCar to provide CarGurus dealers with interactive 360 walk-arounds on their VDPs. The addition of 360-degree walk-arounds adds another element of digital engagement and builds trust between dealers and consumers by bringing the physical showroom experience to car shoppers online, allowing for a more immersive and engaging experience. Moreover, as we continue to work closely with our dealers, we have listened to their feedback and created even more optionality with AreaBoost. Dealers can now select a delivery range that best suits their business, providing a more tailored offering that fits each dealer's unique budget. Based on the preferred delivery range, dealers are likely to increase VDP clicks by 20 to 50%. With growing adoption for both AreaBoost and our consumer financing offering, combined revenue for those two products increased 36% year-over-year. Even with the addition of AutoFi, dealers continue to utilize our consumer financing offering for consumers that prefer a soft pull versus a hard pull, both still resulting in high-quality pre-qualified leads. Finally, as we mentioned at Navigate, we have begun testing our delivery pilot, which enables dealers to deliver vehicles to shoppers utilizing the CarGurus platform outside their local region without geographic limitations. Similar Instant Max Cash Offer the delivery experience associated with purchasing a vehicle needs to be flawless to earn consumers' trust. With CarGurus representing the last mile, it is imperative to ensure the customer receives a white glove, hassle-free experience, and dealers are worry-free of logistics, documentation, and customer service calls. We are eager to use our learnings from the pilot to quickly adapt and create a solution that's optimal for consumers and dealers. With these incremental additions, we continue to get closer to creating a full end-to-end digital retail solution. Consumers are shifting toward a digitally initiated mindset to reduce the guesswork and time commitment behind traditional car shopping. 51% of consumers prefer to sort out their financing online versus in the dealership, and 45% prefer to negotiate price before heading to a dealership. With consumer preferences to complete more elements of the transaction online having grown to over 60%, our digitally initiated tools allow consumers and dealers the flexibility to choose how far to take the transaction online. Our vision is to partner with dealers by supplementing what works in their dealerships with new tools that adapt to the evolving consumer needs, thus allowing dealers to sell more and sell efficiently. While the listings business that we were founded on has grown to become a piece of a much greater story, it still remains the fundamental core to the CarGurus platform, integrating all offerings into a unified marketplace that creates a flywheel effect for the overall business. This quarter, our listings business exceeded forecasted marketplace subscription revenue in the U.S. and internationally. We ended the quarter with 23,979 U.S. dealers, a modest increase quarter over quarter. Internationally, we continue to see growth in Canada with a slight increase in paying dealers quarter over quarter. while the UK had a nominal decline during the same period. Although Canada has followed our US business closely, in the UK there remains lingering effects from COVID-19 related shutdowns and a delayed impact from the semiconductor chip shortage. This quarter, while paying dealer ads remained modest, we are pleased to see dealer churn decline from elevated levels earlier this year. While we entered Q3 with fewer paying dealers on our platform than when we entered Q2, we're incredibly impressed with our account management team who continue to drive quarterly average revenue per subscribing dealer, or CAR-SID, growth. U.S. CAR-SID grew by $52 to $5,602, primarily through upgrades and product expansion. Moreover, new paying dealers that were added to our platform were generally higher paying franchise and independent dealers, while lower paying emerging independents churned. Internationally, Carcid increased by $33, driven by similar factors. As we continue to roll out additional features to create a full end-to-end solution for dealers, and dealers continue to re-engage in marketing efforts, we believe we are well-positioned to grow Carcid through product expansion and upsells. Our foundational listings business continues to expand, and there are several growth vectors for us that we believe can overcome the near-term headwinds of the global pandemic and chip shortage. We look forward to unlocking these opportunities to grow the business and further propel our initiatives in digital wholesale and digital retail as we develop a customer-centric, end-to-end transaction-enabled marketplace. We are pleased with our Q3 results. While the chip shortage continues to cause near-term uncertainty and volatility, we remain excited about our long-term vision and opportunity. By combining our foundational listings business with digital wholesale and digital retail, we are able to provide consumers and dealers with an automotive transaction-enabled marketplace experience that is unmatched anywhere else. We are the only full-featured platform that will enable dealers to purchase a vehicle wholesale using proprietary market insights, list it using our IMV technology, and ultimately sell it to a consumer all through a single suite of sites and before the vehicle even reaches their lot. This same platform offers consumers access to a one-stop shop from the comfort of their home to transparently and confidently shop, buy, finance, and even sell from the largest network of dealers and their inventory. As CarGurus has expanded its capabilities beyond being the top listings marketplace in the industry, we believe that with our vast consumer audience and the largest selection of inventory among major U.S. online automotive marketplaces, coupled with our technology roots, supplies us with an edge that is unparalleled. And it's these key differentiators that drive both our excitement and our growth. This was an exceptional quarter, and I would be remiss if I did not thank our extraordinary employees globally for their continued dedication and commitment as our evolution to an end-to-end transaction-enabled marketplace takes shape. This is an exciting period in CarGuru's history, and I'm energized to work with a talented group of individuals bringing our vision to reality. With that, I'll turn it over to Scott to discuss our financial results.