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. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kirndeep Singh, Vice President of Investor Relations.

Thank you, operator. Good afternoon. I'm delighted to welcome you to CarGurus' 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 Trevisan, Chief Executive Officer; Scot Fredo, Chief Financial Officer; Sam Zales, 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 of 2022. Management's expectations for our future financial and operational performance and innovation, our business and growth strategies, our expectations for our CarOffer business and anticipated acquisition synergies,, our expectations for CarGurus 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 uncertainties, which could cause them to differ materially from actual results. Information concerning those risks is available in our earnings press release distributed after market close 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 now turn it over to Jason.

Thank you, Kirndeep, and thank you to all those joining us today. It has been a year since I assume 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 in 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 US. 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 were 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 is made possible with the acquisition of car offer, the launch of CarGurus instant Max cash offer and the progression of our digital…

Thank you, Jason. As Jason mentioned, 2021 has been a transformative year for our business. And we believe that our financials should reflect the evolution of our business. In the press release issued today, and our 2021 form 10-K the income statement has been disaggregated to reflect revenues and cost of sales between the marketplace, full sale and product components of our business. We believe the disaggregation of our revenue, and the associated cost of revenue provides greater transparency, and more accurately reflects our revenue streams from our new growth factors. I'll provide further details regarding this approach, as well as a detailed overview of our fourth quarter and full year performance, followed by our guidance for the first quarter of 2022. Total fourth quarter revenue was $339.3 million, up 124% year-over-year, and nearly 54 million ahead of the high end of our guidance range. Marketplace revenue was $160.8million for the fourth quarter, up 6% from $151.6 million in the prior year. For the full year 2021, marketplace revenue was $636.9 million, up 16% from $551.5 million in the prior year. Marketplace revenue and its associated cost of revenue are inclusive of dealer subscriptions to our listings, packages and real time performance marketing digital advertising suite coupled with the addition of Area Boost. Marketplace revenue also includes advertising and finance partnership figures that were previously disclosed within our wholesale and other or advertising and other line items in prior periods. The growth in our fourth quarter marketplace revenue year-over-year is primarily due to product upgrades within our foundational listings business as well as new dealers enrolled within the franchise dealer segment at the end of the previous quarter. Product revenue was $96 million for the fourth quarter, and $119.3 million for the full year 2021. Product revenue encompasses certain revenue…

Thank you, ladies and gentlemen, today, we will now be conducting a question and answer session. [Operator Instructions] Our first question comes from Dan Kurnos with Benchmark Company. Please proceed.

Great. Thanks. Good evening. First is on instant max to like be in the quarter versus the guide. You know, obviously Scot, you gave some commentary just on in combination of both existing and new. And, Jason, in your prepared remarks, you talked about some significant deficiencies that you were seeing because of IMC or whether it's we being submitted for the search marketing benefits. So can you just kind of walk through on what we suspect was there was clearly some marketing. That's probably not what you would consider full scale. Why you got such traction where the sort of incremental outperformance came from a little bit more granular. And as we look out next year, clearly, you want to advertise behind the whole product. But if you're getting some initial marketing efficiencies how do we think about the balance between, those marketing efficiencies continuing to scale versus how much will stand against that as you kind of ramp the whole product?

Sure. Thanks for the question, Dan. Before I answer that, and jump-in, I would just like to mention, and take a moment to acknowledge that the – in a very apolitical way, the danger and potential losses that people in the Ukraine are finding themselves facing right now. We have colleagues and partners based there and we want to emphasize that the safety of our colleagues is unequivocally our highest priority. So our thoughts are with those who may be affected. As to your question, Dan, yeah, there are – I would think of a couple different angles to what you asked. The first is efficiencies in the form of synergies with our dealer to dealer wholesale business and our listings business. And then I would also think about efficiencies in the form of sort of ongoing optimization. So from a synergy efficiency perspective, driving more instant max volume is a huge benefit in differentiator to our dealer to dealer wholesale business. It as we scale volume there, it becomes really the only channel that a lot of dealers will be able to have access to – to get consumer cars. So we think that really helps the car offer wholesale business stand out. From a listings business, many consumers who are selling their car need to buy a car. So we gave some statistics there that show that many of them become leads and digital retail candidates and are then using our marketplace to shop for inventory. From ongoing optimization perspective, there is I think of it as maybe three different buckets. There's ongoing optimization in the marketing that we're doing. We have really only just begun this a few months ago. And marketing, for Instant Max specifically has not scaled all that much, it's starting to now. As…

Got it. That's helpful. And then maybe a follow-up just to Bruce you or Sam assumes on the call just and I feel like I asked this to Sam almost every call, but just in terms of the go-to-market, given the strength that IMC started, you know, finished a year and sort of the strength of your forecasting for Q1. Just how do we think about, you know, going back out to the dealer base where you've begun, as Jason said, I think selective renewal Scott. But -- you just how do we think about going back to them and saying, hey, look, you know, now we've got 70% product coverage. Obviously CG converts expanding? You've talked about pricing and bundling like does this -- how does this change at all, if anything sort of your go-to-market and sort of your outlook for your ability to kind of help in car sale?

Hi. Thanks, Dan. It’s Sam Zales. I think it's the synergies that Jason talked about that we'll lean on first. It's not price increases, it's getting the most out of the very elements of our value proposition across the base. So you saw how many customers were enrolled at car offer from the CarGurus platform in the last quarter. We’re going to continue to do that. IMCO as Jason says, is just -- its unique value proposition saying I'm getting access to inventory, I couldn't find anywhere else. So where the packaging and benefits of having our dealers get onto the car offer platform and get access to those vehicles. Likewise, there are some car offer customers that we haven't signed to our listings package. So how do we do that? With pricing and packaging, as you just said. I think we'll continue to look at products like consumer lane, which is the Instant Max cash offer in a box, if you will, right on the dealer's website. And you'll see us get more aggressive about that packaging and pull that together into our roadmap. So I think it's less price increases. It's more seeing this value, as Jason mentioned in his prepared remarks, seeing offers in your dashboard to be able to sell wholesale versus retail, IMV capabilities where more and more car offer customers are now using instant IMV -- the CarGurus IMV retail pricing to set their pricing in the wholesale arena. You're just going to see more and more of that going forward. I think the packaging will drive more and more product adoption across our platforms. The digital retail is just the next one. When you think of a consumer being able to trade in and then buy and finance, we’ll have an entire package end-to-end and probably the only marketplace out there to give that end-to-end solutions. So, I think you'll see a lot more of that in our packaging going forward.

Our next question comes from Chris Pierce with Needham and Company. Please proceed.

Good afternoon. Following-up on Dan's question, I think you mentioned 37% of the specific figure of new car offer dealers that came from the car dealer community. Should we be thinking about that other 63% as somewhat low hanging fruit to come onto the subscription platform? I’m just kind of curious, could you talk about the collective offering and I see the benefits of having both sides. So just talk me through why dealer would only be on CarOffer and how you position both products for them?

Thanks, Chris, it’s Sam Zales. What the -- mention in the remarks was that 37% of the newly enrolled rooftops this last quarter were attributable to the CarGurus sales team driving those themselves. So you've got a CarGurus sales team that they're selling our core listings package, obviously, now selling digital retail as we build more of these capabilities into the marketplace long-term. Those were the enrolments that came from our base from our sales team, initiating those to the CarOffer sales team. So our effort will be to continue to take that large base of customers that are not yet on the CarOffer platform and continue to feed those over to the CarOffer team. But I'm thrilled with the CarOffer team doing so on their own, they're experts at selling that product. And so the majority of their sales came from their terrific sales team, selling to -- selling the customers on their own. It wasn't about the customer base they're bringing in, some of those are CarOffer sells already on the CarGurus platform. But we will do be doing more of that, as we integrate these packages and incenting dealers to say, the more transactions you do on the CarOffer platform that's a benefit to our overall business let's incent that. Likewise for any CarOffer customer that's not on the CarGurus platform will be doing the same. So that stat reflected how many of those enrolments came from the CarGurus salesforce selling those directly. Hope that answered your question.

That does. Thank you for clarifying. And then I think Jason mentioned rental car companies and CarOffer. Can we talk to you about how that process comes together? And where you're at as far as penetration? And is it safe to assume these are mostly sellers on the platform?

Thanks for the question, Chris. I can start it. And then oh, sorry, Sam do you want to go ahead?

No, go ahead Jason.

I was going to start, and then Bruce, if you want to add colour. Yeah. So as rental car companies depleted their stock, their fleets during COVID, they then were looking to build them back up and absent the OEM channel producing a lot of new cars. Some of the rental car companies came into the used wholesale arena for the first time in the last quarter. And the -- one of the many beauties of the CarOffer platform is its efficiency and scalability. And so any large buyer, like a rental fleet would just see tremendous value in CarOffer. So we did have them as customers, we haven't commented on specific share or numbers, but they were certainly very compelled by the product and the platform. Bruce, do you want to…

Yeah. I reiterate that Jason. And also we had, you know, we see them coming in as both buyers and sellers. I will say that 82% of our sales come from detours that would be outside of our top 40. So we really have a lot of resiliency and a lot of backup offers within the matrix. It's very disappointing time. It's very resilient, in terms of the number of buyers of the number of dealers that we have on it, but yes, a real car companies and fleet companies is very efficient, probably the most efficient platform, I think in the country for them to source inventory, and then also sell.

Our next question comes from Marvin Fong with BTIG. Please proceed.

Good evening. Thanks for taking my questions. I guess, I guess I'll start with one that just put you on the spot. I mean, if you saw the news that Carvana acquiring ADESA from car, do you have initial thought on how this might help or hurt profits business? I mean, it would seem to me that this would send dealers kind of looking elsewhere for inventory. But we appreciate your thoughts on that. And then also, just a little more detail on CarOffer in the quarter is that, is the average purchase price or average transaction price to about $20,000 or better than $20,000, or is the ASP that you're seeing changing on the dealer side and how is ASP on the on the instant cash offer side looking? Thanks.

Sure. Happy to take that. Hey, Marvin, its Jason. So on the Carvana car transaction, we continue to be focused on technology platforms and asset light services. And as I think about or as we think about it's fresh news, but the impact it may have for our dealer to dealer wholesale business, I don't think it changes much to be honest, if anything, as you pointed out, it could benefit us. There has been a consistent shift from physical offline auction to digital. And we believe furthermore within digital that CarOffer continues to gain share. And so we think both of those trends, certainly the physical, the digital will continue. And I don't think that this will change it. I think as a frontline retailer of cars as a dealer, Carvana owning a wholesale platform, because you point out, could create some channel conflict if they also own the auction piece of the value chain, because they may have conflicting interests as both a wholesale buyer as well as a retailer. But that's not for us to decide. In terms of the AFPs, yes, they have held pretty steady. They're both in the high 20,000s -- both dealer to dealer and to max.

Yes, got you.

That's great. Thanks so much.

Our next question comes from Jed Kelly with Oppenheimer. Please proceed.

Hey great, great, thanks for taking my question. Circling back on CarOffer, just relative to other wholesale platforms that might go further down the value chain or resort service, lower price cars, do you see yourself wanting to service cars or for CarOffer that are below like that $20,000 price? How shouldn't think about that?

I'll take this one. This is Bruce. We think we really found a niche with the high $20,000 vehicles that really transact on our system. The efficiency of our platform, the reason that we're profitable is we don't have to have a staff of 1000s of inspectors across the United States, we leverage third parties. And so the way our system works is it's automated, just like the stock market. Offers are available for sellers and on a continual basis. They go in, they click the button, when they accept an offer, then we dispatch a third party inspector post, that acceptance. And a lot of our dealerships right now or I'd say 90%, 85%, 90% are franchised stores. So, you know, we like to the niche, we're very efficient at it. We believe it keeps our arbitration rates low and also allows us to feel that need for the franchise store.

Got it. And then the summer subscription, or any way how we should be thinking about maybe subscription pricing as you marry in IMCO with the potential to from IMCO to send dealers higher targeted leads, should we ever see a subscription bump from that, or how should we think about that?

Sorry. Repeat the question, if you could, sorry, IMCOs…

Yeah, just IMCO driving higher targeted leads, and how should we think about that benefiting substantially benefiting the subscription product?

I think what you're going to see is that more and more dealers want to get on the listings platform and the car offer platform, the D2D platform to get access to those consumer purchases. So I think what you're going to see is that you're bringing in unique inventory, you're bringing in an opportunity for those dealers to say, I've got to beyond the car offer platform, and it will drive you know further penetration of our base to get on both platforms. What we may see in the future, I don't think you'll see anything from a subscription basis. On the on the car offer platform, the transaction fees are the core element of the revenue model there but you may see us having opportunities to package and scale bundled programs and drive our listings pricing long-term. We certainly want to grow IMCO, and if we do that it makes more difference for all of the 1000s of dealers on our platform giving them access to this program. And we might see a bundled package longer-term that says, the more you do on both packages, the more access you get. And that will be a way to drive the revenues up further as we go forward. So I think you're thinking correctly about where that business goes. But to do that, we're going to keep investing in this IMCO business to grow scale, impact. All of those dealers have the synergies of a CarGurus listings package, the D2D wholesale platform and IMCO, all working in concert to drive the overall revenue per dealer.

Thank you.

If I can add just – thanks, Sam, if I can add to that, because I think you've hit on another concept. That's an important one. If I understood the question correctly, it was Instant Max Cash Offer is driving higher quality leads to dealers. And the answer is that it is just like many of our digital retail features are, so if we're delivering a lead to a dealer, and that consumer has put down a deposit, or they've done a hard pull financing, or they've bought other F&I products from the dealer, or we know they've just sold their car, those are all much lower funnel leads, and they're absolutely of higher value. And so, as we are able to fulfill more of these transaction elements for consumers, whether it's steps toward buying a car, or in this case, the step of selling their car, we know that we're delivering more value to dealers. And then as Sam said, as that starts to get bundled between Instant Max cash offer and car offer, with our listings business, with our forthcoming digital retail components, you're hopefully seeing the picture of the incremental value that we're delivering to dealers.

Thank you.

Our next question comes from Doug Arthur with Huber Research. Please proceed.

Yes, thanks. I think, I just answered my own question. But the -- Scot, you talked about the one-time adjustment in amortization, I think, of technology software. Obviously, that accounts for the gap, negative $11.5 million in D&A. It looks like there was a round a $13 million plus adjustment. Is that the -- in the adjusted expenses, you got a $13 million item there. So just trying to get a sense of what the actual run rate was in the fourth quarter. Sort of --

Yeah. Yeah, Doug. I think that was -- yeah, because it was a catch up that we re-classed from prior periods. So we obviously didn't really stay prior periods, but did a catch up adjustment moving it from OpEx to cost of goods sold. And I believe the run rate is in the $5 million zone.

$5 million. Okay. And then, you made some comments on marketing expenditures for the rest, as you roll out these products, and ramped up marketing and product, consumer awareness, I mean, how should we think about the cadence of marketing in 2022, quarterly?

I'll take that and if Sam or Jason wants to jump in. So we've been talking about marketing expense for a while, like, I mean that we need to invest more and part of it being market driven. And now we have the Instant Max product, in addition to the core listings, that we're going to invest in marketing. So on the core business, we saw in Q4, the cost of traffic got a bit more expensive. So bringing leads to dealers is getting more expensive than it was, especially in Q2 and Q3 of last year. So we saw that in Q4 and expect that to be similar rates of investment, potentially more through the course of 2022. And then, we're in the very early innings of starting to market Instant Max. We're leveraging -- and I think Jason mentioned this earlier, leveraging existing channels, we've got the 30 million uniques coming, looking for cars, so we're leveraging that as best as possible. But also, we want to get active with brand and build more of an audience with consumers knowing that two-thirds of car shoppers are likely looking to trade in a car. And so, that's a huge opportunity. So we can capture them when they come to our site. But we also want to create more brand awareness for Instant Max. So that's an additional part of our marketing spend for 2022.

Okay, great. Yeah,

Yeah. I think that's well said Scot, and that -- this is Jason. And the one thing I'd add to put a little more teeth into the sort of reality of it is that, consumers have now been educated, either through experience or through popular press about the high prices of used cars right now. So they know that car prices are high, and now it's not a great time to buy a car on a like-for-like price basis versus a year ago, and inventory is down. So selection is down prices are up. And as a result, those are some of the factors that give evidence to what Scott said before about the cost of audience acquisition being higher today than it was, say, six months ago.

But just as a quick follow-up on that, I mean, you've commented in the past that the ability to sell cars to IMCL is not that well known nationally yet. So -- and you're having great success. So I guess the question is, if the consumer brand awareness was greater that could substantially increase the available TAM, so to speak?

Oh, my gosh, of course, yes. I'm talking about marketing. Sorry, I should have been more specific. I was talking about marketing for our listings, driving leads for our listings business. Yes, 100%. I mean, we -- to your point, we firmly believe that we have a better value proposition, and a better mousetrap, and a better business model for our Instant Max cash offer than any single dealer who is offering to buy a consumers car, because the simple fact that we are presenting the consumer, our consumer with the highest offer from 100s or maybe 1,000s of dealers who are bidding on that car. So we absolutely agree with you that as we get more brand awareness, both simply for the fact that you can sell your car on our site. And then furthermore, supported by the evidence that you're likely to get a better offer, because of our business model that the TAM, as we said, we think the TAM for Instant Max is close to $500 billion market. There are 30 million cars sold by consumers every year. So enormous TAM, we think we have a better a better mousetrap. And so we're very eager to get the word out. So I think that was it for questions. So again, would just like to thank everyone very much for your interest and for tuning in. We're incredibly excited about how our business is evolving. And we think the really strong performances last quarter is evidence of that both a sound strategy as well as really strong execution. And we're equally if not more excited about 2022. So, thanks again, and we hope everyone has a great evening.

This does conclude today's conference. You may now disconnect.