Cars.com Inc. Common Stock

as we roll out and rant throughout the. We also continue. At quarter end, we powered 5,650 dealer sites. And I'm excited to share that Subaru of America has named Dealer Inspire as a certified website and technology provider, giving us the opportunity to potentially service more than 500 and anticipate deploying our first Subaru. quarter of this year budget reductions across the entire website solutions are growing proving the power of our diversified solutions portfolio in total we are seeing our platforms strategy payoff in dealer growth and growth in average revenue per dealer At quarter end, cars had 19,517 dealer customers, a 672 customer increase sequentially and year over year. ARPD increases were driven by the ongoing success of our digital solutions. In summary, we delivered another quarter of solid results at the high end of our quarterly guidance. We are well positioned to further our growth in the second half of this year and beyond through the continued realization of our platform strategy. And now I'll turn the call over to Jandy.

Thank you, Alex. Like Alex, I'm pleased with our continued momentum. We delivered strong results in the second quarter.

Revenue and adjusted EBITDA were very strong.

and both were at the high end of our guidance, setting us up well for continued growth and margin expansion for the remainder of 2022 and setting up a great starting off point for our subscription business in 2022, which grew 5% year over year. As a result of 4% growth in dealer customers and 1% growth in ARPD, which was driven by continued adoption of our national revenue, which is close. closely correlated with the ongoing production challenges, was 13% down compared to a year ago. Note that AccuTrade also contributed to our growth in the quarter, which you'll see primarily in the other revenue line items. Connected product, this subscription revenue will show up in dealer revenue and continue driving our ARPD growth. Despite the ongoing inventory shortages, inflation, rising gas prices and interest rates, Our products, our diversified business model, and value we deliver to our customers gives us confidence that we will continue to deliver solid growth.

Moving on to expenses.

For the quarter, adjusted operating expenses were $139 million, $6 million higher compared to the prior year. This increased the expenses, including compensation and consulting costs, related to the AccuTrade and Credit IQ acquisitions. As planned, marketing and sales investments increased to help drive traffic and grow solutions revenue. partially offsetting these increases with a decrease in depreciation and amortization expense. Net income for the second half of the year, we delivered a adjusted EBITDA of $45 million, or 28% of revenue, again, the high end of our guidance.

Sequentially, margin expanded by $120 million, and we achieved a solid quarterly result. We were pinned by strong fundamentals, retains dealers, evidenced by growth of 672 dealers, or 4% year-over-year, putting us at 19,517 dealer customers at quarter end. AccuTrade-only customers, to a single digital dealer, financial and operational position, prohibited them from continuing to partner with us.

Excluding these two items, dealer customers would have still grown during the quarter. We continued to push for growth in the universe.

The continued adoption and growth in our digital solutions fueled 1% year-over-year ARPD growth. To grow, at June 30th, website customers up 600%. 150 from a year ago and up 150 sequentially. Dealership was 14% compared to the prior year. Unique, high-quality traffic and an engaged audience is something we've consistently delivered for our dealer and owner. We had 27 million average and 28 million visits.

We're our UVs, which best represents in-market car shoppers by 3% year-over-year due to elevated traffic in the prior year related to strong consumer demand from the 2021 Federal Economic Stimulus Plan.

Our performance and strong execution

continue to enable substantial cash generation, which we have been investing back into our business, strengthening our financial profile, and returning to shareholders through our share purchase program. Cash provided by operating activities for the six-month period ending June 30, 2022, was $42 million, and free cash flow was $34 million. Cash flow in the current year period was down year over year due to three primary reasons.

First, timing of payables. We had one extra payment run in the current year period.

Second, lower year-over-year EBITDA. And third, recall that last year we had a $9 million income tax refund associated with the CARES Act and our ability to carry back our NOLs. As a reminder, this temporary step-up reflects last quarter's borrowing to fund the AccuTrade at this level due to our strong commitment to the range in coming quarters. We continue to maintain ample liquidity with $185 million available on our revolver, supplementing our cash on hand.

Further, our strong balance sheet provides us with the financial flexibility to return to our shares for $18 million, bringing our total shares repurchased to $18 million, representing 3% of our shares outstanding.

Now turning to guidance. For the third quarter of 2022, we expect to deliver revenue of approximately $165.5 million, representing continued solid year-over-year growth as well as sequential growth. Our guidance reflects our strong first half 2022 performance, balanced against the continuing industry-wide inventory shortages and economic environment. We expect our adjusted EBITDA margin for the third quarter to be between 29% and 31%, reflecting sequential margin expansion, and our focus on profitability and expense management, optimizing for growth. For the second half of 2022, we expect revenue growth of 6% to 8% year over year, assuming the inventory does not recover before 2023. While we are encouraged by the OEM segment this year, our guidance reflects continued momentum and sequential revenue growth based on performance of a well-executed and integrated solution strategy.

In conclusion,

As we look to the second half of the year, our strong financial position leaves us poised to execute and deliver value and profitable growth for this year and beyond. With that, I'd like to turn the call back over to Alex.

Thank you, Jandy. Our platform strategy is working. Revenue is growing and diversifying, and margins are expanding. The business continues to prove resilient and sustainable in many market conditions, And despite the challenges of the current environment, we have confidence to accelerate our solution strategy. Operator, we're ready to begin the Q&A.

Absolutely. If you would like to ask a question, please press star followed by one on your telephone keypad.

One. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered.

The first question comes from the line of Naveed Khan with Truist Securities. You may proceed.

Yeah, thanks a lot. Just a couple of questions. So one, you can provide some color on the interest level you're seeing from the dealers. It looks like you did the data test, and it was positive. Talk about the demand there from the dealers. And in terms of the accrued, I think right now you're having a subscription model. Can you touch on what the opportunities are?

Can you move to a usage-based monetization as adoption continues to grow? Thank you. Thank you. Well, since our debut at NADA with AccuTrade connected to cars.com, to say response has been overwhelming would be dealers. We've done over 1,000 demos since that time. As you know, we are selling a subscription product, so it's not like you can sign up and configure something for free. It's going to take us a lot more time to get to looking for billable dealers and we've got to ramp and onboard them. So average onboarding time for a dealer with Accutrade takes more than a few weeks or say our marketplace takes 48 hours. And so, you know, there will be a slower ramp here as we get dealers on board. But, you know, as we shared on the call, there's been meaningful step changes in dealer profitability moving to our Accutrade solution, both on vehicle acquisition, time efficiency in the dealership, and an overall more accurate vehicle valuation, which is saving... ...revenue. Our introductory pricing is $1,500 a month. ...room to take that further. ...market share, because I think dealer... ...voices will be our best... marketing and testimonial. Then we will look at a D2D trading based on transactions. But that will be phase two. Got it. And then just some update is looking like and we'll come here. Yeah, well, we just. We just launched the consumer utility nationally, and that was largely because we got to every city now already using Accutrade. And so we felt that we could turn on the consumer functionality on cars.com nationally. We made a press announcement this week. and we'll begin marketing that directly to consumers. Ironically, we don't need to do much marketing because, as you know, we get the propensity of our traffic through organic means. And so we're already seeing significant consumer volume on both vehicle appraisal and instant cash offer without any incremental marketing. That may change because we're going to have to support a much bigger base of dealers, but I'm starting this functionality on. sufficient volume to support the dealers that we've got. And importantly, AccuTrade is more than just the opportunities that we generate. Dealers are using this to appraise vehicles in their service lanes. Dealers, like we shared in the call, in some cases are processing hundreds of appraisals using AccuTrade technology. in addition to the opportunities that we're generating for them through cars.

Got it. A quick follow-up, if I may. Let me just talk about Google Vehicle Ads. I think it was participants.

Sure. So we're, of course, monitoring Google's moves closely, and both as the longtime across our dealer business as solutions provider. And so I'll just share that we've seen both positive and negative impacts. I think, first, you know, Google VMS is more efficient. We're seeing, you know, our own participation in the channel, you know, generate cost per actions lower than historical SEM.

The other side is that, you know, it's pushing

organic results you know I guess the upshot for that is we're watching our competitors be far more negatively impacted than we are and we're general content and operating model and so you know there's it's a mixed bag there the channel is definitely being consumed mostly by the and most of our competitors are having to biddle or in some cases three in organic ranking, and that's not an issue that we're seeing at this time for our brand. I think on the dealer customer side, we also are hearing, frankly, lukewarm feedback. We're buying VLA. Google's search bar is not high intention in the moment. It's very preliminary research, even more so than cars.com, And so, you know, they're less likely to convert coming off of the Google search bar. Our vehicle is generating almost five times more efficiency for the dealer than the Google vehicle adds. So I think we feel really good about the strength of our subscription offering relative to this open auction. but we're watching it closely. Great. Thank you.

Thank you, Michelle.

Great. Another question on instant offer. You covered that quite well already.

How many of your 20,000, almost 20,000 dealer base do you believe would be good customers for instant offer? And a follow-up question, just on EBITDA margin, the guidance for third quarter was quite strong. It would be more like fourth quarter you would get there. Is this a sustainable level, or is this just a function of pulling back on marketing spend or other expense items? If you could just comment on how you see EBITDA margins performing, that would be great. Thank you.

Sure. Well, first of all, from a TAM standpoint, Buy Cars Today, 40,000 dealers are sourcing cars at auction. I mean, they all have legacy systems. And then the digital auctions, again, 30,000 dealers minimum buying cars through these dealer-to-dealer auctions. So You know, I look at Accutrade and say, like, this PAM can be larger than any of our other solutions that we've introduced. If you're not a Cars.com customer, using Accutrade accurately and quickly and reducing friction between your customers is a benefit into itself and has a potential that could be wider than our marketplace. But at the same time, we are integrating these things so that dealers see the benefit of both being on our marketplace For instance, the Accutrade dealer on their vehicle detail page is on cars.com. So when they're marketing to consumers shopping for a car, they can begin the trade-in process online directly from their cars.com vehicle listing ads. I do think it's going to take time to ramp Accutrade up for free in configuring what you want to buy. so that dealers are going to have to do a little bit more due diligence to understand the onboarding teams, and we've got more subscriptions now that we need to get launched and live, with growing demos, you know, coming throughout the second half of this year.

From a margin perspective, Marvin, it's actually a combination of both incremental revenue. So as our subscription revenue continues to build and grow, marketing is about 25% of. We're planning on that being at about the same level as it was in the second quarter, but that's a lever. But across the whole business, we're definitely watching expectations. combination of both nice flow-through from the revenue perspective as well as the expense management.

Perfect. Thanks, Alex and Jandy. Appreciate it. Thanks, Marla.

Thank you, Mr. Fong. Presto Pino with Barrington Research. You may proceed.

Good morning, all. I've got a number of questions here. I just want to clear up one thing with AccuTrade and this instant offer. Does a dealer have to be a marketplace customer to get AccuTrade? No, they can use the website for a lower fee, Gary, and use the AccuTrade functionality on their own website in the store. package which brings incremental vehicle buying opportunities direct from our marketplace, that does require... Okay, so... Yeah, most of them are... ...desire to be... ...from the open market. Okay, so... An instant offer is kind of worked through Accutrade, is that correct? It works through Accutrade. So the instant offers, you know, the dealers can go in the Accutrade, get the car, put the number on it, get the instant guarantee from us, and buy the car directly from the consumer. But the opportunities flow directly into Accutrade. So that's what I'm saying is they still, no matter what, a dealer, in order to do instant offer, is still going to have to pay something to be on the AccuTrade platform. It might not be the same as a marketplace guy, but they're still going to have to pay, right? Or am I wrong there? Correct. No, that's correct. Okay. Okay, that's fine. And then with the Subaru business offering their dealers co-op ad sign up for you on the website side? I don't believe there's co-op dollars eligible for the website. They negotiate with us so that partnerships between us and Subaru. A lot of our OEMs do offer co-op dollars for on the base website. Subaru is eligible. We'll check today okay that's fine and then lastly i just want to clear something up here you you said you had a net increase of 17 dealers and along with and that includes 180 active trade dealers so it looks like you do the math it's a net loss of 163 dealers um And then it's cancellations related to a single digital dealer. Could you kind of clear up that? Or maybe I'm, you know, or am I right with my math there? Because it's just a single digital dealer. How did you lose so many dealers?

So the single customer has multiple locations, so the subscriptions are based on the locations where that cancellation, that more than offset the addition of the Accutrade dealers, the 180 Accutrade.

If they're a digital dealer, they shouldn't have locations. They should just be all done on the web. So that's what I'm trying to understand. Got Gary. We charge based on the DMA. So if a digital dealer wants to sell cars in San Antonio, in order for those cars to appear in San Antonio zip codes, they need to pay access to that market. And so physical dealers don't have to think about this and worry about this, but the virtual dealership certainly every time they want to expand their reach and have their searches appear more. Okay. That clears it up. Thank you very much.

Thanks, Gary.

Thank you, Mr. Prestapino. Again, if you would like to balance your questions, please press star followed by one on your telephone keypad. The next question comes from the line of Tom White with DA Davidson. You may proceed.

Thanks for taking my question, and good morning.

I guess I'm

1% maybe disaggregate a little bit, kind of the different moving pieces there between, I guess, maybe pricing and how should we think about ARPD growth kind of in the back half of this year? And then I have a follow-up on the Subaru deal.

Yeah, yeah. So from a solutions perspective, perspective, that's really what's driving the growth in ARPD solutions and fuel. We also, as you probably remember, have been... ...across the dealer base... ...to the ARPD growth... ...downgrades related to lower inventory levels. So as you know, part of our pricing is dependent upon how many cars dealers have on their loss and with the significant declines over the last two years, well six quarters I suppose, that's put pressure on the marketplace ARPD.

The other piece in there as well as mix.

So as we continue to grow our dealer customers, dealers are typically coming in at slightly lower rates than existing customers. So that's also putting pressure on marketplace.

Okay. So that's super helpful. And I know you guys don't guide ARPD, but, I mean, given kind of all those moving pieces and kind of what's going on in the macro, I mean, do you think that ARPD can kind of continue to grow at a similar level here over the back half? Or, you know, is there reason to maybe be a bit more conservative on modeling that piece?

Yeah, you know, Tom, we really expect ARPD to be the driver of our growth here with the solutions that we're rolling out, with AccuTrade, with continued growth in DI, and even, you know, the stability in the marketplace, dealer customers and the core business. We do think that ARPD can continue to grow and will continue to grow, particularly because this AccuTrade connected package is being sold to dealers, And that's what's going – you know, we'll see that come through in dealer revenue and come through in ARPD.

Okay. Sounds good. And then on the Subaru deal, I remember I think it was with the GM deal, there was sort of like a – you could only try and attack all 750 or whatever the number was, all those dealers at once. Just how should we think about kind of the phasing potentially there?

Yeah, so Subaru being – Being a smaller OEM than GM was when we rolled out GM has no staging. And so basically it's more of a jump ball. And we've seen strong inbound interest from Subaru dealers nationally. And then importantly, there's on DigiAd spending so we can support more of the dealers' marketing spend that's co-operable by Subaru.

And the websites, yeah.

Okay, thanks, guys.

Thanks, Tom.

Thank you.

Thank you, Mr. White. There are currently no further questions registered at this time, so as a reminder, please press star followed by one on your telephone keypad if you would like to ask a question. There are no additional questions waiting at this time, so I will now pass the conference back to Alex Rutter for closing or additional remarks.

Just wanted to say thank you for your interest in CARS and joining us today. And that concludes our call. Thank you.

The CARS second quarter 2022 earnings conference call. Thank you for your participation.