CarGurus, Inc.

Greetings and welcome to the CarGurus, Inc. fourth quarter and full year 2021 earnings results 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Khandeet Singh, Vice President of Investor Relations.

Thank you, Operator. Good afternoon. I'm delighted to welcome you to CarGroove's fourth 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 Treveson, Chief Executive Officer, Scott Bredow, Chief Financial Officer, Sam Sales, 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 first quarter 2022, 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 CarGroove'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 uncertainty, 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, as well as in our updated investor presentation, which can be found on the investor relations section of our website. With that, I'll turn it over to Jason.

Thank you, Kurndeep, and thank you to all those joining us today. It has been a year since I assumed the CEO role, and 2021 was nothing short of revolutionary. In 2006, CarGurus set out on a mission to build the world's most trusted and transparent automotive marketplace. Over the last 15 years, CarGurus has delivered on that mission and has helped millions of consumers and our dealer partners connect and transact offline while garnering trust and transparency. Along this journey, our business model has evolved to meet the growing and ever-changing needs of consumers and our dealer partners. As such, we believe our mission statement should evolve as well, to more accurately reflect our business today and where we are going. That is why I'm pleased to share our new mission statement with you today. CarGurus gives people the power to reach their destination. For consumers, this means empowering them with the tools and information necessary to confidently shop, buy, finance, and sell from the largest network of dealers and their inventory in the U.S. For dealers, it means continuing to provide innovative, forward-looking solutions by giving them the resources and capabilities they need to grow their businesses efficiently and profitably. It is through our consumer and dealer solution and our combination of listing, digital retail, and digital wholesale that we are able to create a differentiated value proposition as the only full end-to-end transaction-enabled marketplace. 2021 was a transformative year for CarGurus as we evolved from a listings business to a transaction-enabled marketplace, providing valuable cross-platform synergies to both our dealer partners and our industry-leading consumer audience. This was made possible with the acquisition of Car Offer, the launch of CarGuru's Instant Max Cash Offer, and the progression of our digital retail capabilities. These milestones were integral to the development of our end-to-end transaction-enabled marketplace. I'm thrilled to share that with these sizable new growth vectors, And through the remarkable resiliency of our foundational listings business, CarGurus achieved exceptional results and exceeded our forecasted guidance for the fourth quarter and full year 2021. We formally closed on the acquisition of CarOffer on January 14th, 2021, and could not be more pleased with its exceptional growth and performance this past year. The pandemic and the resulting semiconductor chip shortage created immense inventory challenges for dealers. Fortunately, Car Offer is the industry's first instant trading platform to help dealers navigate these unprecedented times. The wholesale solution allows dealers to source and or sell inventory 24-7 without the need for time-intensive auctions. The demand for inventory, the innovative Car Offer solution, and the integration with CarGurus has resulted in remarkable growth. In the fourth quarter, Car Offer generated revenue of approximately $179 million, growing over 1,000% since the acquisition closed in Q1. In the year we acquired Car Offer, it not only became a profitable business, but also grew adjusted EBITDA, a non-gap metric, to $33 million in Q4. Car Offer's novel solution for wholesale inventory, coupled with CarGuru's largest consumer audience and vast dealer network, create synergies that are unavailable elsewhere. It is through our collective offering that the combined CarGurus and CarOffer sales team enrolled another 2,100 dealer rooftops in Q4 for approximately 9,100 enrolled dealer rooftops on the platform by the end of the year. Approximately 37% of these newly enrolled rooftops this quarter were attributable to the CarGurus sales team, demonstrating the success of the cross-functional partnerships between our combined sales forces. Moreover, as we announced last week, Car Offer reached 10,000 enrolled dealer rooftops on the platform, growing approximately 180% since Q1, an incredible achievement in a short period of time. The benefits of Car Offer have attracted a broad array of dealers, ranging from independent and franchise dealers to nationwide rental fleets, who require the same, if not more, access to inventory as a typical dealership. As we enroll more dealers, the car offer buying matrix continues to grow in both diversity and liquidity of vehicles transacting on the platform. Industry-wide supply and demand constraints are not the only challenges we face this year. While seasonality typically impacts the retail and wholesale business in the latter half of the year, we were pleased to see the car offer momentum continue and outpace typical seasonality. Car offer revenue from the dealer-to-dealer business was $94 million, growing approximately 63% quarter over quarter and an incredible 506% since the acquisition closed in Q1. Strong revenue growth this quarter was driven by record-breaking transaction volumes month over month in Q4, further highlighting the power of the car offer matrix as more dealers enroll on the platform and begin to transact at scale. Gross merchandise sales increased quarter over quarter by 163% to $2.3 billion as a result of higher transaction volumes, adoption of ancillary products, and increased average selling prices as used vehicle demand remains at an all-time high. A key component to creating our end-to-end transaction-enabled marketplace is the ability for consumers to not only shop for a vehicle on our site, but to trade in their existing vehicle as well. The combination of car offer and car gurus allowed us to launch CarGurus Instant Max Cash Offer, or Instant Max for short. While Instant Max has been a part of the original vision for the platform, the effects of COVID-19 pandemic and the semiconductor chip shortage caused inventory challenges for dealers, resulting in limited inventory, and thus dealers making compelling offers on used vehicles. As a result, consumers are eager to sell their used vehicles at significantly higher prices than where they were just a year ago. As this dynamic persists, we will leverage this opportunity to capitalize on Instant Max's growth and provide dealers a fresh new source of inventory while simultaneously offering our vast consumer audience the only platform of its kind with the most competitive real-time offers from thousands of dealers. This quarter, the remaining $84 million of car offer revenue was associated with Instant Max, more than doubling the high end of our forecasted guidance. Instant Max saw tremendous growth, with transaction volumes growing over 1,300% quarter over quarter. Growth in Instant Max this quarter was driven by wider adoption in existing geographies, as well as expansion into new geographies. We ended the year, which was only five months after our initial launch, covering 22 states and D.C., which represented 58% coverage of the U.S. population. Since then, we've expanded into California, bringing our U.S. population coverage to approximately 70%. With each expansion effort, we take our learnings to further improve and optimize our offering and the consumer experience. In the fourth quarter, we launched on-site merchandising, enabling consumers visiting CarGurus.com in one of the 23 currently participating states to sell their vehicle right from our homepage, which has driven significant traffic. With 60% of car shoppers looking to trade in or sell a vehicle, our 29 million unique average monthly high intent visitors in the US can both purchase and sell a vehicle seamlessly through our platform. Moreover, we continue to take steps to enhance the user experience and post-offer conversion rates. For example, we recently added online scheduling capabilities for vehicle pickups. It is through a combination of our expansion efforts and continued conversion rate optimization that average saved offers per month increased 293% quarter over quarter, and monthly average sellers submitting complete documents increased 489% quarter over quarter. With each expansion effort, we are focused on ensuring we deliver an excellent customer experience and intend to utilize our learnings to improve upon our existing capabilities before expanding our footprint further. While critical, improvements to our product in the form of dealer and consumer experience is only one component of our growth story in 2021. Significant efficiency in our marketing efforts has complemented our product improvements in driving increased revenue. For every dollar spent on marketing for Instant Max, we also returned 17 cents in revenue for our listings business, representing remarkable cross-product efficiency in our marketing spend. Even more impressive, greater than 20% of consumers who save an offer utilizing Instant Max also submit a lead for a new vehicle purchase. Not only are we leveraging marketing efforts across the platform, but we have also improved the efficiency and conversion rates in our paid search engine marketing, which has seen an approximate three and a half times improvement in efficiency with greater than five times growth in conversion volume since the launch of Instant Max. As we plan for a national release, Increased marketing and brand awareness with consumers will be key areas of focus to drive growth, capitalizing on the exceptional progress of Instant Max to date. In addition to our digital wholesale progress in 2021, we made tremendous progress on our digital retail product pipeline as well. We not only improved upon our existing capabilities, but in October we announced three additional pilots for delivery, deposits, and hard-pull financing that, when pieced together with CG Convert, creates a near complete digital experience for consumers. Throughout the quarter, we continue to make progress on these pilots and are pleased with the early feedback from both consumers and dealers. We're seeing consumers utilize multiple elements of the digital retail suite to locate vehicles outside of their geographic region using area boost, get to a near penny-perfect transaction using CG Convert, place a deposit to secure the vehicle, and or ultimately take delivery through the platform. In an effort to further streamline and empower consumers, we've begun to pilot a Buy Now function directly on our website. Clicking this allows the consumer to place a $500 deposit on the vehicle for 72 hours, holding their vehicle of choice as they complete final purchase steps, including financing with the dealership. Dealers who have enabled this functionality have seen a greater than 70% close rate from these high-intent shoppers. As a result of this increase, the Buy Now feature has proven to generate our lowest funnel, highest intent leads to date. Consumers who are ready to take the final steps of purchasing their vehicle through our platform can do so by submitting a credit application to receive approved offers from a dealer's preferred lender group directly in the CG convert checkout process, allowing consumers to feel confident in the total purchase price of the vehicle. Since enabling this option in the fourth quarter, submitted applications increased 100% from November to December, and accepted loans increased 167% during the same period. We serve a broad array of consumers with varying degrees of readiness to purchase their cars. For those customers that want to see their financing options prior to performing a hard credit goal, we have a pre-qualified financing option within CG Convert as well. This gives consumers the ability to get pre-qualified with participating lenders layer in any of the dealership's F&I products, and get to a near penny-perfect offer. With the ability to see these offers easily and early in the buying process and with little to no downside to the buyer, we have seen consumers become 77% more likely to submit hard credit pulls in dealerships within 60 days. With easier financing options and deposits driving additional, high-quality consumers to dealers online, Dealers are looking to expand their geographic reach. To meet the demands of the consumer beyond just their local reach, dealers are utilizing features like Area Boost and adopting our delivery program. Dealers participating in our delivery pilot are shipping vehicles on average 1,500 miles away, highlighting both the need for delivery programs and the potential for geographic arbitrage. This has enabled dealers to further tap into markets beyond city and state line, and attract CarGuru's 29 million average monthly unique U.S. visitors, as of the fourth quarter, to their local lots and inventory. We're pleased with the feedback we are receiving from both consumers and dealers on our digital retail pilots. Consumers prefer the optionality to do more digitally, which is evidenced by NPS scores increasing 24% on CG Convert quarter over quarter. we will continue to optimize and enhance the pilot programs before we fully commercialize the end-to-end platform, which we expect to do later this year. Our solution will allow our vast network of dealers to conveniently offer consumers a self-selective journey with a seamless online to offline transition, all while providing trust, transparency, and freedom of choice from the largest selection of inventory in the U.S. We believe our digital retail capabilities will level the playing field for our dealer partners who are unable to provide these solutions to consumers on their own and or wish to utilize our largest consumer audience to sell additional inventory through the CarGurus digital retail platform to drive greater profitability. As we expand our capabilities and continue to offer our dealer partners more solutions through digital retail and digital wholesale, our high-margin listings business remains the foundation of our evolution supporting our growth initiatives. Despite the semiconductor chip shortage weighing on the automotive industry, our foundational listings business demonstrated remarkable resiliency in 2021. Our listings business exceeded our forecasted marketplace revenue this quarter, ending the quarter with 30,630 paying dealers globally and remaining relatively flat year over year. Additionally, our international business had a similarly positive year. we ended the year with 6,770 paying dealers up 1% year over year. Canada became profitable this year, and the U.K. continued to exceed our expectations. In December, inventory on piston heads crossed the 200,000 unit mark for the first time, further highlighting the unified Cargurus and piston heads value proposition continues to resonate with dealers as we continue to further penetrate that market. Internationally, we saw quarterly average revenue per subscribing dealer, or CARCID, grow by 46% to $1,546 year-over-year as a result of net new dealer ad mix, revenue expansion, and in part due to the free services provided to paying dealers in December of 2020 due to continued COVID-19 lockdowns. The U.S. ended the year with 23,860 paying dealers, down less than 1% year-over-year. 2021 marked a year of record profits for many dealers as demand and prices for vehicles remained at all-time highs and inventory remained low. These combined factors led dealers to pull back on marketing and advertising spend in aggregate. To ease dealer wariness, we paused renewals earlier in the year. While we have since resumed very select renewals, we remain thoughtful with our efforts, recognizing dealers continue to face inventory challenges and the chip shortage has not yet abated. This year, U.S. CarSid grew 6% to $5,633. CarSid growth was primarily driven by product upgrade, increased product adoption, as well as new enrollments from higher-paying franchise dealers at the end of Q3. As the chip shortage continues to weigh on the industry, we expect CarSid growth to come from new product sales and upsell pricing or packaging. With respect to paying dealers, we expect some new client acquisition depending on market conditions. This year, our listings business yielded strong profitability as we continued to recognize marketing efficiencies and added valuable new features to our listings experience, which contributed to strong dealer retention. With increased demand and less inventory, we were able to pull back marketing spend along with the rest of the industry. Despite our reduction in marketing, this year we delivered over 60 million connections and approximately 36 million leads in the U.S., representing only a modest decline year-over-year, which further demonstrates the stickiness of our platform with consumers while the market remains challenged with limited supply. Similarly, despite the macroeconomic headwinds and inventory challenges faced by dealers, we delivered an equivalent number of average leads per inventory unit for paying dealers in the U.S. for Q4 year-over-year, further highlighting our ability to bring lower funnel, high-intent shoppers to our site and deliver what we believe is industry leading ROI for our paying dealers. As we enter 2022, we plan to increase marketing spend to bring high intent shoppers to our site and deliver the highest ROI to our dealer partners who continue to navigate through the challenges of the semiconductor chip shortage. We are pleased with our fourth quarter full year results. While the automotive industry faced numerous challenges and unknowns in 2021 due to the semiconductor chip shortage, we remain nimble and quickly provided solutions to help combat the difficulties our dealer partners and consumers face. We are thrilled that 2021 marked a year of evolution and allowed us to combine our foundational listings business with digital wholesale and digital retail to ultimately provide the industry an unmatched end-to-end automotive transaction-enabled marketplace. The synergies across our platforms, such as IMV pricing data and Car Offers Wholesale Matrix, retail prices next to wholesale offers in the CarGurus dealer dashboard, access to a new source of inventory via instant max cash offer, and trade advisor competitive intel are just a few early examples demonstrating that the sum of the parts is greater than the standalone components. While we have come so far since our inception, this is still just the beginning of our journey, and I'm excited for CarGurus to become the one-stop shop for consumers to transparently shop, buy, finance, and sell from the largest network of dealers in the U.S. and their inventory, and for dealers to efficiently source, market, and sell to the largest and highest-intent consumer audience in the U.S. In 2021, we achieved many significant milestones, which would not have been possible without our incredible employees globally, who throughout all the challenges continue to innovate and drive toward our evolution of an end-to-end transaction-enabled marketplace. It is their commitment and dedication for our vision that gets me excited about our next chapter. With that, I'll turn it over to Scott to discuss our financial results.