CarGurus, Inc.

Good day and welcome to the CarGurus earnings conference call. Please note, this event is being recorded. I would now like to turn the conference over to Kirandeep Singh, vice president and head of investor relations. Please go ahead.

Thank you, operator. Good afternoon. I'm delighted to welcome you to CarGurus second quarter, 2025 earnings call. With me on the call today are Jason Treveson, chief executive officer and Sam Zales, president and chief operating officer. During the call, we will be making forward looking statements, which are based on our current expectations and beliefs. These statements are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in such statements. Information concerning those risks and uncertainties is disclosed in our SEC filings, which can be found on the SEC's website and in the investor relations section of our website. We undertake no obligation to update or revise forward looking statements, except as required by law. Further, during the course of our call today, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP comparable 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. We believe that these non-GAAP financial measures and other business metrics provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency as it relates to metrics used by our management in its financial and operational decision-making. With that, I'll now turn the call over to Jason.

Thank you, Kherndi, and thanks to everyone joining us today. We delivered outstanding financial results in the second quarter, led by double-digit -over-year revenue growth and expanding profitability in our US and international marketplace businesses, reflecting strong execution across our strategic priorities. We are innovating at a greater scale for our customers, delivering data-driven, differentiated solutions that help dealers run smarter, more profitable businesses and make the car-buying journey more seamless for consumers. These efforts have continued to drive better engagement and outcomes for our customers, which has translated into stronger financial performance for our business and has reinforced our market leadership. We ended the second quarter above the midpoint of our forecasted guidance range for total revenue and adjusted event top. Marketplace performance was a key contributor. Revenue grew 14% -over-year, adding 27 million, driven by the addition of 1,743 net new dealers globally, continued -to-share expansion among existing customers and improved retention. Marketplace adjusted EBITDA grew 31% -over-year, underscoring continued strong operating leverage. Our international business sustained outstanding revenue growth of 28% -over-year, with momentum in both Canada and the UK. We added 711 net new dealers -over-year across the regions, while driving greater adoption of add-on products and listings upgrades. We delivered substantial -over-year lead volume growth in both markets, driven by higher intent consumer traffic that further reinforced our ROI advantage and strengthened our competitive position. In the UK, we were the number one most downloaded automotive app in Q2, underscoring rising consumer engagement and brand traction. In Canada, our significant and growing scale was further reinforced by a multi-year deal with Auto Canada, one of the country's largest multi-location dealership groups, which named CarGurus its preferred digital retail and listings partner. Their commitment reflects the value of our performance-driven marketing, proprietary insights, and hands-on dealer support. Last quarter, we announced a strategic reassessment at Car-Off. That effort was prompted by the fact that rising market volatility continued to expose structural limitations in the Car-Offer instant-trade transaction model, despite the advancements we'd made with predictive analytics, AI-driven insights, and the many operational improvements. After that thorough assessment of strategic alternatives, we've made the decision to wind down the Car-Offer transactions business. Through Car-Offer's wholesale focus, we've built intelligent AI-driven technology and predictive analytics that empower dealers to make smarter sourcing decisions. And we saw that dealers who leveraged our insights enjoyed disproportionately better performance. Going forward, while we will no longer operate the Car-Offer transactions business, we will retain and continue to build on the underlying technology we created for it. Capabilities that we believe remain central to CarGurus' sourcing strategy. Our priority at CarGurus remains providing dealers with data-driven, scalable solutions that not only help them manage their businesses more intelligently, but also have strong unit economics and clear competitive advantages. Therefore, our focus going forward will be to provide our dealers with technology and analytics that enable smarter sourcing, appraisal, stocking, and pricing, but not facilitating the transactions themselves. We believe this will continue to position us as a valuable partner to our dealers, serving an increasing set of their needs, and focus us on the types of products we have a strong track record of delivering. This decision follows extensive effort and a thoughtful evaluation of alternatives by our team. And we're grateful to the Car-Offer and CarGurus teams who built and supported these capabilities. We're working closely with the dealers who relied on Car-Offer to ensure a smooth transition. And more importantly, we're excited about the opportunity to partner with them on the next chapter of our sourcing strategy. With this foundational decision behind us and solid execution in Q2, we've continued to advance our three drivers of value creation. I'll now walk through our progress in each. Driver 1, expanding our suite of data-driven solutions across dealers' workflows to help them drive more profitable businesses. A core focus of our platform strategy is giving dealers more granular control over how they manage, price, and promote inventory to help them run more profitable businesses. One of the clearest signals of that is the strong, sustained engagement with our Dealer Data Insights suite. Dealers are not just accessing this data frequently, they're actioning our insights across pricing, inventory mix, and marketing strategy. As of the end of Q2, nearly 18,500 dealers were subscribed to Next Best Deal Rating, our most widely adopted report. Our more specialized reports are scaling even faster, in part driven by successful international launches. Merchandising Health rose nearly 30% -over-quarter to 8,175 dealers, and Max Margin grew approximately 70% -over-quarter to 4,300 dealers. Just as importantly, we saw a notable uptick in actions taken per dealer, with usage intensity rising across every report type. That growing engagement has translated into stronger dealer performance. Historically, dealers using these insights have seen higher audience reach via VDPs, more prospects from leads, and faster turn times, leading to higher profit potential. We believe this kind of measurable impact is driving more dealer engagement and higher retention by giving our listings customers the competitive advantage in their markets. An actionable example of giving dealers more sophisticated control of their marketing is our introduction of VIN-level targeting for both our highlight and real-time performance marketing products, giving dealers greater precision over how they promote inventory. This added level of recommendations, coupled with granular control, is driving results. Highlight adoption is up 33% -over-year, and real-time performance marketing is seeing stronger engagement and improved retention. While still early, we believe the momentum underscores clear demand for precision marketing tools. Building even further on giving greater control to dealers is our launch of New Car Advantage in Q2, our first product specifically designed for new inventory. While the majority of our leads still go to used cars, we have the largest inventory of new vehicles when compared to other marketplaces, with over 2 million listings. This market-leading New Car Inventory asset matters because 53% of shoppers begin their search undecided between new and used. And according to a 2024 Claraboy study of US-based New Car Shoppers, over half of all New Car Shoppers visited CarGurus during their shopping journey. New Car Advantage gives dealers precise control to promote new inventory in the most relevant, high-traffic, used searches, while also surfacing monthly payments to spotlight affordability, a key factor among used car shoppers. Early results show a 34% increase in VDP views, a double-digit lift in new car leads, and 33% more new car searches from shoppers who engage with the title. As we advance our existing dealer products and introduce new ones, we're also making it much easier for dealers to access the growing value our platform offers via major upgrades to our Dealer Mobile app, a key workflow tool designed to support dealers wherever they work, whether pricing cars in the lot or monitoring performance offsite. In addition to core dealer app functionality such as monthly connections data, pricing notifications, VIN scanning, and real-time lead alerts, in Q2 we added two more capabilities, barcode IMV scanning to facilitate pricing vehicles at auction, and access to top dealer offers to enable mobile inventory intaking. Our rapid expansion of dealer app functionality has driven impressive dealer adoption with daily active users of 71% year over year, illustrating the CarGurus app's role as a go-to workflow tool. Together, these innovations are deepening dealer engagement across our platform. By giving dealers more control, intelligence, and flexibility in how they manage and market inventory, we're helping them run more efficient, more profitable businesses. That value has translated into higher usage, stronger customer acquisition and retention, and a growing reliance on CarGurus tools as part of their -to-day workflow. Driver 2, meeting the evolving needs of car shoppers by powering a more intelligent and seamless journey. We continued extending our reach across more stages of the car shopping journey, from early research to post-lead engagement. In Q1, we launched CG Discover, our AI-driven conversational experience designed to guide consumers toward more confident decisions. Users who engage with Discover now spend 3x more time on site compared to those who do not, and usage has grown over 70% month over month in the second quarter. Building on that momentum, we integrated CarGurus' produced video reviews into CG Discover in Q2, giving shoppers richer content to move from consideration to decisions with greater confidence. To further support early stage research, we launched our first sponsored content hub in partnership with a major OEM. The hub provides trusted resources to demystify the car buying process, from model comparisons and financing insights to broader automotive trends. We believe this format builds trust and influences brand consideration at the point when consumers begin exploring their options. As we have expanded research tools like CG Discover and the sponsored content hub to support shoppers across more stages of their journey, traffic to our research content has grown 170-fold year over year. We also continue to invest in high-impact user experience product enhancements that make the shopping experience more intuitive and personalized. In Q2, we launched multi-make and model search on web, enabling broader exploration without narrowing the search too early, which drove a measurable increase in mobile conversion. On the app, which now drives one-third of our leads, we introduced several usability improvements, including a full design and performance overhaul, a redesigned saved cars and searches experience, and the launch of Dartmode, one of our most requested features. We are innovating across the consumer journey, and it is translated into deeper engagement and higher intent. Cargories remain the number one most visited listing site in the US and had nearly 85 million average monthly sessions and 34 million monthly unique visitors. But our advantage goes beyond scale. Consumers now spend 74% more total minutes on our site than our closest competitor, and 47% of our monthly unique visitors do not visit our competitor sites. That engagement has driven performance. Cargories-led sales continue to grow year over year, supported by lead growth and sustained close range. These gains reflect progress in addressing more consumer needs, from discovery through transaction, and earning their time and trust as a result. Driver 3, enabling dealers and consumers to complete more of the transaction online, streamlining the final steps of the deal. In Q2, Digital Deal reinforced its role as a high-impact -to-offline solution, enabling consumers to complete more of the transaction online before visiting the dealership. This creates a more seamless shopping experience for consumers and delivers more efficient, higher intent opportunities for dealers. Adoption has grown to approximately 12,000 dealers globally, and today, Digital Deal leads account for over 27% of the dealer's email leads. By embedding high-intent actions, such as applying for financing, placing a deposit, or scheduling an appointment directly into the core site experience, we're driving a higher volume of quality leads. This growth reflects rising consumer demand to do more online, and dealer preference for leads that signal stronger down-funnel intent. Appointments are up 60% year over year. 47% of Digital Deal leads now include at least one high-value action, and we've seen a 68% -over-year increase in shoppers that complete the full Digital Deal submission flow. To build on this momentum, we introduced a pre-qualified finance-based shopping experience that helps consumers discover vehicles they're already approved to finance. This allows shoppers to stay within budget and move forward with greater confidence. Combined with our recently built capability, allowing dealers to receive full shopper credit applications directly in their finance management, these features are driving higher financing activity. Nearly 30% of Digital Deal leads now include financing. Collectively, by embedding more financing, scheduling, and decision-making tools directly into the shopping flow, we're driving stronger intent signals, higher quality leads, and improved close rates for dealers. Supporting more comprehensive transaction enablement in Q2 involves significantly bolstering Digital Deal's role in powering online to offline transactions, as well as assessing how we support dealers' wholesale sourcing and fulfillment. That latter focus is what led to our decision to wind down the Car Offer transactions business, including both -to-dealer wholesale and instant max cash offer, but still support their sourcing through technology, analytics, and insights. The Car Offer Instant Trade Transaction Platform performed exceptionally well during the price-rising chip shortage period. However, it has struggled in today's more volatile and unpredictable pricing environment, where dealers require more flexibility and broader automation to streamline fulfillment. We believe the underlying technology, analytics, and intelligence developed to support those transactions remain valuable capabilities. Sourcing is a foundational part of the dealer workflow, deeply linked to a dealer's retail success, and one where we believe CarGurus can deliver a competitively advantaged solution by continuing to provide the data connectivity and predictive intelligence that is only made possible by connecting retail and sourcing activities. We plan to concentrate our future sourcing offerings in two key areas, which together we believe offer a differentiated market solution and the opportunity to create long-term value. One, we'll continue to deliver AI-powered inventory intelligence through our Sourcing Insights Platform, backed by the industry's largest retail data and consumer insights mode, delivered in ways that will make it easy for dealers to act on those recommendations. These insights drove the highest usage and customer satisfaction across the Car Offer platform. And two, we will continue to enable consumer vehicle sourcing at scale through Top Dealer Offers, the preferred channel for both consumers and dealers. These decisions will allow us to leverage our retail and wholesale data to provide differentiated sourcing offerings to dealers that we believe have proven product market fit and clearer alignment with our platform capabilities. In Q2, we delivered strong performance while realigning our focus around our core capabilities and ability to differentiate, where our data, technology, and audience enable us to deliver tremendous value to customers, which we believe will help drive predictable and growing financial results. We are building with greater precision across the platform to help dealers operate more efficiently across their workflows and empower consumers to navigate their journey with greater clarity and control. As we enter the second half of the year, we plan to execute against a clear set of priorities, align capital to our strongest product foundations, and invest in the parts of the platform positioned to drive durable, profitable growth. Now let me walk through our second quarter financial results, followed by our guidance for the third quarter of 2025. Second quarter total revenue was $234 million, up 7% year over year, just above the midpoint of our guidance range, as double-digit -over-year growth in our marketplace business was partly offset by declining wholesale and product volumes. Marketplace revenue was $222 million for the second quarter, up 14% -over-year, in line with the midpoint of our guidance range. Marketplace revenue growth was driven by strength in our subscription-based listings revenue. In Q2, U.S. CarSid grew 9% -over-year. We added 1,032 paying U.S. dealers -over-year, marking six straight quarters of positive net dealer ads, as well as the second consecutive quarter of the highest -over-year dealer growth since before the pandemic. While this rapid dealer growth can moderate the pace of CarSid expansion, these trends underscore our ability to grow our footprint while increasing wallet share across our expanding base, driven by upgrades, broader adoption of add-on products, -for-like price increases, and higher lead quantity and quality. Our international business continued to demonstrate strong growth in the second quarter, with revenue up 28% -over-year and international CarSid up 19% -over-year. Wholesale revenue was approximately $6 million for the second quarter, down 52% -over-year, and product revenue was roughly $6 million for the second quarter, down 45% -over-year. These declines were driven by transaction volume decreasing 55% -over-year. I will now discuss our profitability and expenses on a non-GAT basis. Second quarter non-GAT gross profit was $207 million, up 14% -over-year. Non-GAT gross margin was 89%, up approximately 510 basis points -over-year. The -over-year margin expansion continued to be driven primarily by the revenue mix shift toward our higher margin marketplace business. Marketplace non-GAT gross profit was up 13% -over-year, and non-GAT gross margin was roughly flat at 93%. In our digital wholesale segment, non-GAT gross margin was up about 460 basis points -over-year. On a consolidated basis, adjusted EBITDA was above the midpoint of our guidance range at approximately $77 million, up 39% -over-year. Adjusted EBITDA margin was 33%, up about 760 basis points -over-year, reflecting the strong revenue growth and operating leverage. Marketplace adjusted EBITDA grew 31% -over-year to approximately $80 million, with margin up about 470 basis points -over-year. The higher margins were driven by leverage across our operating cost base. Digital wholesale adjusted EBITDA loss was approximately $3 million. The decline was driven by the -over-year decline in transaction volumes and deteriorating unit margins. Moving to OVEX, our second quarter consolidated non-GAT operating expenses totaled $136 million, up 3% -over-year. The -over-year change primarily reflects higher general and administrative and sales and marketing expenses, partly offset by modestly lower product and technology expense. During the second quarter, we recorded $32.6 million in total impairment charges associated with our car offer business. The impairment charge included $2.9 million booked in cost of revenue and $29.6 million in operating expenses in the digital wholesale segment. Non-GAP diluted earnings per share attributable to common stockholders was $0.57 for the second quarter, up $0.18 for 46% -over-year, reflecting primarily the increase in adjusted EBITDA and lower diluted share count. We ended the second quarter with $231 million in cash and cash equivalents, an increase of $58 million from the end of the first quarter. The higher cash balance was primarily driven by higher adjusted EBITDA, as well as working capital inflows of about $4 million, partly offset by $8 million in capex and capitalized website development costs. I will now close my prepared remarks with our guidance and outlook for the third quarter, 2025. Due to the wind down of car offer, we will no longer be guiding to consolidated revenue and consolidated adjusted EBITDA. Instead, we are guiding to marketplace revenue and marketplace adjusted EBITDA, as that is representative of our go-forward operations. We expect third quarter marketplace revenue to be in the range of $228 to $233 million, up between 12 and 14% -over-year respectively. Last quarter, we guided to exit the year at a low double-digit growth rate. We are now tracking modestly ahead of where we previously expected we'd be. For the third quarter, we expect our non-GAAP marketplace adjusted EBITDA to be in the range of $76.5 to $84.5 million, up between 9% and 20% -over-year respectively. Our guide reflects marketplace absorbing approximately $1 million in ongoing quarterly car offer expenses as a result of the wind down. At the midpoint of the EBITDA range, we expect margins to contract modestly on a sequential basis. As we explained last quarter, Q3 will include sequentially higher investments in sales and marketing, international and product innovation. We still expect annualized margin expansion in 2025 relative to 2024. We expect to substantially complete the wind down activities related to the car offer transactions business in the second half of 2025. We expect to incur total wind down related charges in the range of $14 million to $19 million. We expect third quarter non-GAAP consolidated earnings per share to be in the range of $0.50 to $0.58, up between 14% and 32% -over-year respectively, and diluted weighted average common shares outstanding to be approximately $101 million. Finally, I'm pleased to share that with only $15.5 million remaining under our $200 million 2025 share repurchase authorization, the Board has approved a $150 million increase to the existing program, reinforcing our commitment to returning capital to stockholders and our confidence in the strength of our performance, balance sheet and disciplined capital allocation strategy. The authorization is available through July 31, 2026. Since the fourth quarter of 2022, we have repurchased nearly 25 million shares at an average price of $22.39 for a total of about $553 million. With that, let's