CarGurus, Inc.

Good day and welcome to the CARGurus second quarter 2026 earnings conference call. Please note this event is being recorded. I would now like to turn the call over to Javier Zamora, General Counsel and Corporate Secretary. Please go ahead.

Good afternoon and thank you for joining us. With me on the call today are Jason Trevisan, Chief Executive Officer, and Sam Zales, President and Chief Operating Officer. We will be making forward-looking statements which are based on our current expectations and beliefs. These statements are subject to risks and uncertainties and our actual results may differ materially. Information concerning those risks and uncertainties is discussed in our SEC filings. We undertake no obligation to update forward-looking statements except as required by law. Please refer to our press release and our investor presentation on the investor relations section of our website for reconciliation of gap to non-gap measures. I'll now turn the call over to Jason.

Good afternoon. We delivered strong second quarter results with revenue growing 13% year-over-year to $251 million, above the midpoint of our guidance range, including another robust quarter in our international business, which grew 28% year-over-year. Adjusted EBITDA increased 7% year-over-year to $85 million at the high end of the guidance range at a 34% margin, reflecting disciplined investment. We also generated strong cash flow, converting 103% of our adjusted EBITDA, or $88 million, to free cash flow in the quarter. In the first half of this year, dealers have taken a more deliberate approach to incremental spending decisions. We believe market trends like dealer margin pressure and fewer days on lot coupled with one-time developments like recent FTC-mandated all-in price transparency requirements made dealers more cautious about spending. We view these factors as temporary, not structural. Despite these pressures, dealer engagement continued to grow on our platform. Average sessions per dealer on our platform were up 28% year-over-year in Q2, driven by increasing AI functionality in our products and expanded capabilities across more of the dealer workflow. We continue to grow wallet share, which we believe is driven by our strong ROI and new dealer product introductions. We believe we remain well positioned to continue capturing a disproportionate share of incremental spend as the environment improves. Our full-year revenue growth guidance is unchanged, and we remain confident in our long-term opportunity. We've also begun to realize meaningful benefits from our investments in AI, which is helping us accelerate the pace of innovation, Thank you for joining us today. As a result, we are raising our full-year profitability outlook and now expect full-year non-GAAP adjusted EBITDA margins to compress approximately 50 to 150 basis points in 2026 relative to 2025. We believe our ability to accelerate innovation thoughtfully and operate more efficiently positions us well for all market environments. More importantly, the investments we've made are reinforcing a virtuous cycle across our platform. As we have used AI to innovate faster and bring new products to market more quickly, we are seeing deeper engagement with our platform from both dealers and consumers. In addition, we continue to capture rich first-party shopper signals, nearly half a billion signals each day across demand, pricing, inventory, and shopper behavior that inform and continually improve our dealer software and analytics and consumer experience. This creates a differentiated data advantage that we believe helps dealers make better decisions while enabling a more personalized and trusted consumer experience. We believe faster innovation leveraging our proprietary marketplace data makes CarGurus increasingly valuable to both dealers and consumers and strengthens our competitive position by providing a better car shopping experience for both consumers and dealers. As we continue to expand beyond our leading marketplace business, our strategy is built around three value creation drivers. First, we're expanding CarGurus offerings into integral parts of the dealer workflow, connecting inventory, marketing, lead conversion, and data pillars through mutually reinforcing products. Second, we're focused on transforming car shopping into a trusted, AI-led journey from research through consideration and purchase, giving consumers greater confidence and increasing the value they get from CarGurus. And third, we are deploying capital with discipline with the aim of growing long-term earnings power and stockholder value. I will now walk through our second quarter progress across each of those drivers. Driver number one, expanding CarGurus offerings into integral parts of the dealer workflow, connecting inventory, marketing, lead conversion, and data pillars through mutually reinforcing products. We have increased dealer engagement with our platform, reflecting our focus on embedding data and insights into more of the dealer's daily decision-making. We're leveraging our differentiated data on retail dynamics, pricing and inventory trends, and deep consumer insights to inform smarter and more predictive dealer decisioning, which we believe results in an ultimately stronger ROI for our dealer customers. In fact, among subscribing independent dealers, those in the top quintile of engagement with our platform had a 78% higher leads per unit than those in the bottom quintile, suggesting that use of our expanding dealer product suite not only drives adoption among more people at the dealership, but also drives performance on our platform and ultimately dealer profitability. Within the inventory pillar, our focus remains on helping dealers source, stock, appraise, merchandise, and price inventory more effectively. In the second quarter, PriceVantage bookings grew more than 50% sequentially, with a higher AOS as the product has continued to prove its value. Dealers that adopted PriceVantage saw a median 15% lift in VDPs and 9% lift in leads per listing after adoption. In our marketing pillar, we recently introduced VinMax, our newest AI-powered product that helps dealers improve merchandising performance and achieve turn-time goals without dropping price and sacrificing margin. VinMax identifies high potential but underperforming VINs and dynamically boosts them across organic sort, highlight, and audience targeting. Since we began rolling out VinMax to early access dealers in February, promoted listings have sold 23% faster and received 34% more leads per day than comparable non-promoted listings. In the conversion pillar, we introduced a new competition filter to shopper signals that helps dealers understand how many other dealers the shopper has submitted leads to, allowing them to better assess urgency, allocate sales resources more effectively, and convert customers to sales at a better rate. Within the data pillar, we're building on our data advantage by equipping dealers with deeper competitive insights helping them benchmark their performance to competitors on metrics like leads per vehicle or recently sold vehicles on competitor lots so they can make more informed pricing and inventory decisions. We've seen a greater than 80% open rate on the weekly Competitive Digest email illustrating how our data has become a critical input into dealers' daily operations. Collectively, these new products have extended CarGurus beyond our marketplace and into daily dealer decision making. which we believe will fuel growing dealer engagement, greater product adoption, stronger retention, and more dealer wallet share over time. Driver number two, transforming car shopping into a trusted AI-led journey from research through consideration and purchase, giving consumers greater confidence and increasing the value they get from CarGurus. Buying a vehicle remains one of the highest consideration purchases a consumer makes, a process that often lasts several months as they research, explore, select, and negotiate their final deal. Consumers want confidence in their search, transparency in their results, and trusted guidance throughout that process. In July, we launched Guru, our end-to-end consumer-facing brand for all of our AI capabilities across the CarGurus platform. Guru currently exists in two forms, as an AI native experience, formerly known as Discover, and as a seamless overlay to our existing site. Together, fueled by real-time dealer feeds and a robust methodology and ontology, they serve as a trusted guide that helps shoppers research better, understand and compare their options faster, make more informed shopping decisions, and complete their purchase in the dealership with greater confidence. Engagement with Guru continued to grow rapidly. with Guru-driven leads up 60% sequentially in the US. In addition to better shopper-to-lead conversion rates, Guru provides much richer signals about user preferences and intent that bolster the depth and quality of the lead we send to dealers. Given the strong usage in the US, we recently launched our conversational AI experience in the UK and Canada. allowing shoppers to shop by describing their needs and use cases, which is not solved easily with traditional one-size-fits-all filters rather than searching by vehicle specs. In the consideration step of car shopping, Sell My Car continued to gain traction, improving the selling experience for consumers as we made enhancements to the consumer experience that increased funnel conversion and drove significant incremental leads. These improvements also gave dealers more efficient access to sourced inventory at a time when acquiring used vehicles remains a top dealer challenge. At the point of purchase, dealership mode extends the CarGurus experience into participating U.S. dealer lots by putting pricing transparency, deal ratings, payment estimates, and Guru-powered vehicle comparisons directly in shoppers' hands. Consumer engagement with dealership mode in our app more than doubled in the second quarter. further cementing us as a trusted tool for both consumers and dealers which we believe will deepen engagement and facilitate more closed deals and cars sold on our expanding platform. Driver number three, deploying capital with discipline with the aim of growing long-term earnings power and stockholder value. We believe our subscription business model is resilient and we expect it will continue to generate strong free cash flow that will fund our long-term growth initiatives while also allowing us to return capital to stockholders. In 2026, we have increased our investment in product, technology, and development to continue accelerating AI expansion on our platform and supporting a faster pace of product innovation. We've also increased our investment in sales and marketing to support the launch and adoption of new dealer products and create consumer awareness of our Guru and other AI user experiences. In addition to organic investment, we plan to maintain the flexibility to pursue disciplined M&A for compelling strategic opportunities. Finally, we remain committed to returning capital to stockholders through share repurchases. In the second quarter, we bought back $29 million in shares, increasing our year-to-date repurchases to $204 million of the $250 million available under the 2026 share repurchase program. Since 2022, we have repurchased approximately $925 million in shares, representing more than 30% of shares outstanding, Reflecting confidence in our long-term strategy, strong financial position, and commitment to disciplined capital allocation. We are excited about our accelerated innovation velocity and how that has translated into progress across all three value creation drivers. By introducing new AI-driven products and features that help dealers operate more effectively and give consumers greater clarity and control throughout their shopping process, we believe we will continue to deepen our role in the car shopping journey. We have embedded our data and AI more deeply into dealer workflows, driving deeper engagement from more people at the dealerships. Our expansion into software and data, all unified by our underlying data layer, is demonstrably improving the marketplace performance of adopting dealers and growing our TAM and wallet share potential. And among consumers, we are creating more personalized, trusted, and transparent experiences across more steps of the shopping journey. Backed by strong free cash flow and disciplined capital allocation, we will continue investing in the product innovation and AI capabilities that we believe will generate the greatest long-term returns and create durable long-term value for our customers and our stockholders. Now, let me walk through our financial results, followed by our guidance for the third quarter and full year 2026. Second quarter revenue grew 13% year-over-year to $251 million, above the midpoint of our guidance range, driven by adoption of add-on products. Our OEM business outperformed our expectations, benefiting from consumer interest in certified pre-owned vehicles amid ongoing new car affordability challenges. In the second quarter, U.S. car SID grew 8% year-over-year, and we added 673 paying U.S. dealers year-over-year. We continued to increase our dealer base while taking greater wallet share. In the second quarter, adoption of add-on products was the largest driver of year-over-year Carcid growth, followed by listings upgrades, like-for-like price increases, and higher lead quantity and quality. For the third consecutive quarter, add-on product adoption was the largest driver of the sequential increase in Carcid. Our international business had another robust quarter, with second quarter revenue up 28% year-over-year, driven by strengthened listings and Sell My Car in Canada and OEM advertising in the UK. I'll now discuss our profitability and expenses on a non-GAAP basis. Second quarter non-GAAP gross profit grew 12% year-over-year to $231 million. Second quarter non-GAAP gross margin was 92%, down about 90 basis points year-over-year. Second quarter non-GAAP adjusted EBITDA grew 7% year-over-year to $85 million toward the high end of our guidance range, and adjusted EBITDA margin was roughly 34%, down about 200 basis points year-over-year. Second quarter non-GAAP operating expenses totaled $154 million, up 16% year-over-year. reflecting higher sales and marketing expense and increased investment in product technology and development expense to continue the accelerated pace of AI product introductions. Second quarter non-GAAP net income per diluted share attributable to common stockholders was 66 cents, up 16% year over year. We generated strong cash flow, converting 103% of our adjusted EBITDA, or $88 million, to pre-cash flow in the quarter. We ended the quarter with $122 million in cash and cash equivalents, an increase of $50 million from the end of the first quarter, as $29 million in share repurchases was more than offset by our cash generation. Since 2022, we've now repurchased approximately 30% of our shares outstanding, while we continue to grow revenue and profitability. As of the end of Q2, we have $46 million remaining on our 2026 authorization. and we will continue to repurchase shares when we believe it is an attractive investment and consistent with our capital deployment priorities. I will now turn to our guidance for the third quarter and full year 2026. We expect third quarter revenue to be in the range of $253.5 million to $258.5 million, up between 9% and 12% year-over-year respectively. Our guidance reflects a more measured pace of dealer decision-making, which we view as temporary, not structural. We believe dealer engagement and retention remain healthy, and we expect contracted new product revenue to layer in through the second half, supporting our full year outlook. For the third quarter, we expect our non-GAAP adjusted EBITDA to be in the range of $82 million to $90 million. We expect third quarter non-GAAP earnings per share to be in the range of $0.63 to $0.69, and diluted weighted average common shares outstanding to be approximately $90 million. Turning to the full year, we are reiterating that we expect 2026 revenue to grow in the range of 10% to 13% year-over-year. We are raising our full-year profitability outlook. We now expect full-year non-GAAP adjusted EBITDA margins to compress approximately 50 to 150 basis points in 2026 relative to 2025. Our updated guidance reflects more efficient execution within our investment year plan while preserving our ability to invest in the most attractive growth opportunities. With that, let's open up the call for Q&A.