Greetings and welcome to CarGurus, Inc.'s First Quarter 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. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to your host, Josh Goldstein. Thank you. You may begin.

Thank you, Operator. Good afternoon and welcome to the CarGurus' first quarter 2021 earnings call. We'll 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, Scot Fredo, Chief Financial Officer, and Sam Zales, President and Chief Operating Officer. 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 2021, management's expectations for our future financial and operational performance and innovation, our business and growth strategies, the future proposition of our CarOffer acquisition, the potential impact of the COVID-19 pandemic 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 the market closed today and in our most recent reports on Forms 10-K and 10-Q which, along with 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 financial 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 turn it over to Jason.

Thank you very much, Josh, and thank you to all those joining us today. I'm thrilled to share that CarGurus generated strong results in the first quarter in both, our core listings and digital retail businesses as well as the CarOffer business. Our strategy is producing results. We are leveraging our market-leading automotive marketplace to continue expanding our digital retail capabilities as well as to catapult CarOffer's digital wholesale platform. Emerging from 2020, we are now a stronger, more efficient company and investing even more to build the single best digital platform for consumers and dealers to buy and sell cars. It's been a year since the pandemic initially impacted our industry. And in this past quarter we've grown beyond, where we were before COVID lockdowns. Not only have we returned to year-over-year growth, but we also believe, we have a structurally more profitable business, despite the larger investments we're making in our digital retail and wholesale growth pillars, which we expect to drive long-term growth. Our first quarter results exceeded our own expectations. In particular, we are so impressed with the top line results and business model efficiency that CarOffer achieved in, its first quarter as part of our business. I'll walk through our results and alignment with our three-pillar strategy. First, our core U.S. Listings business exceeded our bookings and revenue plan driving sequential growth and maintaining the remarkable efficiency of our marketing spend to produce both, nominal growth in operating profit and expanded margins versus Q1 2020. I've often said that the core unit of value of our Listings business is leads. And we're pleased to report that our U.S. leads were up mid-single digits versus Q1 2020. And leads to paying dealers were up 16.6% versus the same period last year. This speaks to our continuous…

Thank you, Jason. I'll provide a detailed overview of our first quarter performance, followed by our guidance for the second quarter of 2021. Before discussing the details of the quarter, I would like to address our results relative to our Q1 guidance. At the time of providing our Q1 guidance, we had not finalized our accounting policies for CarOffer. Through this process, we concluded that transportation and inspection revenues realized in CarOffer transactions should be recognized on a gross basis, meaning that the full consideration collected from the customer and the cost paid to third-party vendors should be reflected in full in revenue and cost of revenue, respectively. At the time of providing Q1 guidance, this policy had not been finalized, so our Q1 guidance reflected the projected revenue for these services on a net, rather than a gross basis. Our Q1 results reported today include the company's actual quarterly revenue for these services on a gross basis. Additionally, the company's earnings per share guidance for Q1 2021 was calculated based on a preliminary estimate of its post-CarOffer transaction share count, which was higher than the share count that the company subsequently used to calculate its Q1 EPS reported today. The company's Q1 EPS guidance took into account the potential dilution to its share count that would result from the exercise by CarOffer of a put right respecting the remaining 49% of CarOffer stock. For accounting purposes, we had assumed that the company would use its own stock to purchase the remaining 49% stake in CarOffer, if CarOffer were to exercise its put right, which would have had a dilutive effect on the company's share count. Upon finalizing its accounting policies, we're expecting the CarOffer transaction. However, the company concluded that as of March 31, 2021 there had not been…

[Operator Instructions] Our first question is from Dan Kurnos of the Benchmark Company. Please state your question.

Great. Thanks, good evening. Maybe just to follow up on those final comments there Scot and the initial comments from Jason just around the dealer -- potential dealer headwinds, or should we be thinking of that in terms of pricing? Should we be thinking that in terms of dealer net adds? And how do we think about kind of product attach rate forget CarOffer for a second. As the year started off on a very strong note I guess as some guys probably re-up at higher lead volume pricing. But I'm just -- I'm curious how we kind of think about that balance?

Dan it's Sam Zales. Thanks for the question. It was a great quarter. We're thrilled with the results that accrued from what we think we're doing and always have been doing which is driving the best ROI and the best low funnel shoppers at the highest volume to our dealer partners and that led to both the really strong dealer acquisition results and also QARSD growing, or have we always described the quarterly annualized revenue per subscribing dealer. I think we saw that QARSD number growing because we're driving great lead volume. We are getting dealers to renew with us and also to buy additional products as you said. And we're increasing pricing as well. So all of those worked in the right direction, I think the industry issues with inventory are real there. And obviously hurting new car and then obviously as a cascading effect to used cars as well. So I think what you'll see is not the same kind of dealer adds, not the same kind of QARSD growth we'll be careful about doing things like renewals during the time that dealer inventories are down so significantly. I do think the one thing that CarGurus is -- two things CarGurus relies on though when we think about our success even in tough markets like we did emerging out of COVID situation last year is; one, the ROI we're driving to those dealers allows us to have a different and what we think is the best ROI of all the marketing channels dealers use. We think we can still do well from a customer retention perspective and a QARSD perspective. We just won't be as aggressive at putting those additional products or renewals into play on that front. But number two is, we now have CarOffer. And the partnership with CarOffer is we're solving the biggest pain point for dealers right now. And by providing packaged offerings of CarGurus' listings and a solution like CarOffer to drive inventory sourcing in an automated way like no customers have never seen before is an incredibly powerful combination that we think will help us sustain during this tough issue in the industry. I'll also say just very quickly, when you think of things like Area Boost. That's been a product that you've seen the growth on from a revenue perspective for CarGurus because we're helping dealers source customers from outside their local markets. So I think for all those factors it won't be the quarter that we just came out with from a dealer adds and QARSD perspective, but we think we can weather the storm better than other players in the market because of those factors.

Got it. That's super helpful. So growth but maybe not as much growth I think I'm characterizing that right. And then obviously CarOffer out of the chute was, I don't know at least 50% higher probably than where most of us thought it would come out even with the stump quarter. I guess maybe Scot, are you willing to kind of tell us what you think CarOffer does in Q2? How much is embedded in that guide? And then to the extent that you guys are still trying to figure out exactly how you want to attack the market. Any thoughts on competitive positioning against say an ACV that's in the market? And obviously it's just gone public. Or kind of how you think about attacking the consumer sourcing vehicle opportunity as a potential add-on there, or just focusing on the main CarOffer offering for now?

Hey Dan, I'll take the first part of the question and then turn it over to Sam. We're not going to give any sort of specific guidance for CarOffer this quarter and I'm not sure what we ever will. But we did in our investor deck; I actually highlight their performance through the year including April because they've had such; A, such strong momentum. And B, it's new to us and new to all of you covering us. So we felt it was worthwhile to be a bit more transparent on the trends through the quarter and through April. So really great execution as Sam mentioned and I think he's going to talk a bit more about the other opportunities for growth for that business through these times.

Dan, I'll follow on. Thanks, Scot, well said. Dan, I can't be more excited about the CarOffer business and what they're bringing to the market. Number one, they're an instant trading platform, which is completely different from all the players in the market even the ones that you mentioned newly public players. What they do is they don't require a buyer at a dealership to watch vehicles going across the screen or figure out is that one I may want to buy? What was the price I want to put on that? It is built as an instant trading platform much like a stock exchange. Bids are in for buys, bids are in for selling. The automation is there completely for inspection, for transportation, for transactions. And what it's leading to right now is hundreds and then many more than hundreds of dealers saying, I've got to have this solution right now. It is solving the biggest problem in the marketplace and transactions going from thousands to many more than that on a monthly basis that are really driving the success of this business. It is exceeding all of our expectations. And it's doing that just like the quote from our dealer partner is, "I just have never seen anything like this in the marketplace. I wish I had it earlier at the time that inventory is challenged." And it is growing that business tremendously as I said, in multiples as you'll see in the dealer presentation. Scot put together dealer acquisition going through the roof and even more so here in the second quarter and transactions lifting that business from a revenue perspective even further. The one thing I'll say that you asked a good question on is consumer transactions. I think our dealers are saying if you can put this capability in front of consumers who want to sell their vehicles and we as dealers can participate in that marketplace, I can't wait till you launch it. We're working on it. We're not committing anything to that but that will be the next phase that you might think about as an incredible next stage of that business opportunity.

Our next question is from Ralph Schackart of William Blair. Please state your question.

Hi. Good evening. Thanks for taking my question. Maybe just staying on CarOffer for a second. I'm not sure if Sam is the right person for this, but give us a sense of maybe how strategic or more strategic CarGurus is now in sort of the eyes of your dealership customers. I know in the short-term with kind of chip issues and coming out of COVID things are tough on the renewals and on trying to offer more products. But as we come out of the COVID tunnel give us a sense of your strategic relationship and perhaps how that grows with dealers?

Thanks, Ralph. Sam Zales, here. Yes, you got it right on. It is strategic not just because it is a platform that is solving the inventory issue better than any other solution out there in the marketplace. But when you think about it the combination of CarGurus and CarOffer is truly strategic in that you are accessing and leveraging the power of data. So we're providing to those dealers here is all the consumer transaction capability the consumer search data. Where are consumers looking? What are they focused on from a geographical perspective from a make or model perspective? Where those searches growing in your local market? And then how do you think about sourcing those vehicles by having a powerful combination of both retail data or instant market value data and what I can do with my matrix bids in the instant market -- instant trading platform at CarOffer? I know what I can do wholesale, what I can do in retail. An example of that is us putting the price points now into the dealers CarGurus dashboard. So we're now opening up capability for dealers to see. I've got this product on the market today. It's at retail hoping to sell for this price point $20,000. Holy cow, it's been sitting on the lot for 40 days. I can get it it's an instant transaction through CarOffer at $19,500. Isn't that great for my business to quickly reap the kind of success that I wanted by looking at the data, seeing it in my dashboard running both businesses wholesale and retail out of one dashboard. It's a phenomenal success story. And I think when you think about that you take it one step further to the last question Dan asked which is how the consumers play in that again? Consumers are looking to trade-in a vehicle and we know that 10 million-plus transact consumer to consumer here's another great way to say how does the dealer participate and compete with some of those big-box retailers or some of the other players in the marketplace to get action and get into the inventory a consumer is willing to sell to them. You put those pieces together and those are our pillars of what digital retail and digital wholesale really becomes?

Right. That’s really helpful. Thanks, Sam.

Our next question is from Jed Kelly of Oppenheimer. Please state your question.

Great. Thanks for taking my question. You had an interesting announcement a couple of weeks ago on CarGurus conversion. Is this the first step in terms of potentially allowing dealers to operate on a pay per lead basis? And then with CarGurus' conversion I mean how do you think about getting the larger franchise dealers to sign up? I mean we've heard some skepticisms that CarGurus will ultimately try to take some of the back-end money and some of the insurance money. So can you just talk about that opportunity?

Sure. Hi, Jed, it's Jason Trevisan. Just confirming you can hear me okay?

Yes.

Okay. Good. I'm on cell and it’s had some issues. So, yes, I assume you're talking about CarGurus Convert, which is in fact an expanded program that we're offering to dealers, which allows the consumer to do different aspects of the transaction on our site so that by the time they are in fact interacting with the dealer they are a much more qualified shopper. And they have done things like they trade-in value estimation do some financing and other F&I offered by the dealers, get a penny-perfect set of numbers and economics for the deal and set an appointment. And we've had a ton of interest from dealers on that because as I said what it does for the dealer is it saves them a lot of time. And what we've proven is that by marketing all of their products they're able to cross-sell as much as they can if the person were in the store and so they are many hole on it. So we have a lot of dealers who are signing up for it. We also have evidence now that consumers really want it, because a very good and growing percent of consumers interacting with that dealer's BDPs are going through different aspects of this convert set of features. We've always said that we do this to make the dealer whole. And so much like our prequal consumer finance product where we make economics from the lenders, because we're delivering value to them, I would think of Convert as the same way. We are giving this -- all of this sort of enhanced lead capability to dealers for free and making them whole on it. So it really is a win for them. It's a win for consumers, because it lessens -- they're able to do more things earlier on our site versus spending several hours in a dealership. And it helps us, because it differentiates us from other marketplaces where you can't get some of these features. And as I said in my prepared remarks on digital retail, these are Area Boost and prequalifications were sort of Phase I. The CarGurus Convert is Phase II. And then we're increasing our investment to bring more of those purchase elements onto our site. And we're having interest – sorry, one other point, you had said you had maybe heard there was concern among large franchises. We have very large national groups that are eager to get on board with us with this.

Great. That's helpful. And then just one more for me. It looks like the monthly new installed dealers in April were very strong. Is that coming mostly from dealers that were already using CarGurus, or these dealers that were new to -- are these just new dealers that weren't -- didn't have relationships with CarGurus?

So are you talking about installed dealers for CarOffer?

CarOffer. Yes. So is it more of a cross-sell, or is it dealers totally new to your site?

It's both. So if you think about the volume of dealers that we have in our installed base, which is well over half. You would imagine that there's a decent chance that if they're signing up for a CarOffer that they're also using CarGurus, but not necessarily by any means. What we're excited about is that CarOffer is in fact growing the number of dealers that they're installing enrolling and installing very quickly. And as Scot said earlier, if you look at just the year-to-date growth, it's pretty astounding how that's been accelerating. And we have only started to -- I mean, if you think about it we closed January 14 on the deal and it took us several weeks to kind of get everything in order once the deal closed. And so we've only really begun passing warm partners of ours handing them to introduce them to CarOffer for really only a couple of months. And so there's that sales and account management synergy, and then there's the offers in the dashboard. And so that's also going to be a really big boost to introduce a lot more dealers who are not currently on CarOffer to their product and to the power of their instant trade platform.

[Operator Instructions] Our next question is from Doug Arthur of Huber Research. Please state your question.

Yes. Thanks. Scot, I'm just trying to -- you threw a lot out there about the accounting treatment for CarOffers. I'm trying to reconcile what appears to be pretty strong second quarter revenue guide now granted that includes CarOffer and sort of cautious adjusted operating profit guide. Because it seems to me if you don't -- if the dealers pull in their marketing spend and that impacts you because of tight inventories, you'll have optionality on your sales and marketing spend as well, which we've seen in spades in the past. So I'm just trying to reconcile those two guidance numbers.

Sure. Thanks Doug. So, yes, our Q2 guide is really, really strong. It's coming off an extremely strong Q1. That momentum really came in Q1. We had phenomenal bookings on our core business and CarOffer's momentum as you can see has just been phenomenal through the year with a record month in March, and they expanded on that in April. So really great momentum. The thing that we wanted to caution about that the headwinds sort of turned a little bit in April with the inventory issue is marketing spend may be reduced to the dealer and OEM level. And to your point if that happens not unlike last year where we were able to flexibly -- flex on our marketing spend, we would do the same so that we are providing the right amount of traffic for the right amount of value that our dealers want to receive and pay for. So there's -- we're very conscious of that. We look at that almost weekly, as to how much we're spending on traffic acquisition and flexing accordingly to relative to what we're seeing in the market.

Okay. Got it. Thank you.

We have reached the end of the question-and-answer session. I will now turn the call back over to Jason Trevisan for closing remarks.

Thank you, Hilary. Thank you very much everyone. I'd like to thank again all of those who joined us this evening. I'd also like to thank our employees globally for their hard work under these remote circumstances. I'd like to thank our customers for their business and their partnership. And then last, I'd like to thank our investors for your support and confidence in us. We're incredibly excited about our performance, but more importantly, we're very excited about our strategy and our future. Thank you very much and have a great evening.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.