Good day, ladies and gentlemen, and welcome to CarGurus Inc.'s First Quarter 2024 Earnings Results Conference. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Kirndeep Singh, Vice President, Head of Investor Relations.

Thank you, operator. Good afternoon. I'm delighted to welcome you to CarGurus first quarter 2024 earnings call. With me on the call today are Jason Trevisan, Chief Executive Officer; Sam Zales, President and Chief Operating Officer; and Elisa Palazzo, Chief Financial 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 discussed in our SEC filings, which can be found on our 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 to 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 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 over the call to Jason.

Thank you, Kirndeep, and thanks to all of you for joining us today. Each year, I share a theme that serves as our North Star. For 2024, our guiding principle is intelligent acceleration as we leverage our industry-leading marketplace business, end-to-end transaction-enabled platform and integrated retail and wholesale data ecosystem, with the aim of continuing to grow our business even more profitably. We'll begin the discussion today with a high-level review of our quarterly results, then highlight the progress against our drivers of value creation and take you through our exciting journey to innovate and transform the way dealers and consumers predict, source, market and sell used and new vehicles. Before we dive into the quarter, I want to take a moment to recognize Ismail Elshareef, our new Chief Product Officer. As we continue to innovate new products and services to bolster our platform, Ish's extensive experience with subscription and transaction models and his rich appreciation of both enterprise and consumer needs will be invaluable in strengthening our partnership with dealers and deepening our connection with consumers. Turning to our results. I'm pleased to share that we ended the first quarter at the high end of our forecasted revenue and above our adjusted EBITDA guidance range. In the first quarter, non-GAAP consolidated adjusted EBITDA grew 24% year-over-year, achieving the highest first quarter EBITDA margin in the last 3 years, driven by continued growth in our subscription base. In our Marketplace business, revenue growth accelerated again in the first quarter to 12% year-over-year, and our quarterly net new bookings grew 28% year-over-year. We're also particularly pleased with the performance of our international business, which profitably grew revenue 24% year-over-year in the first quarter. Our strong Marketplace results were driven by our ongoing focus on optimizing QARSD through the levers we've discussed…

Thank you, Jason, and thank you all for joining us today. My commentary will cover a detailed overview of our first quarter performance, followed by our guidance for the second quarter of 2024. First quarter consolidated revenue was $216 million, down 7% year-over-year, driven by lower wholesale and product volumes, partly offset by healthy expansion of our monthly recurring revenue base. Marketplace revenue was $187 million for the first quarter, up 12% year-over-year, driven by continued strength in subscription, as net new MRR grew 28% year-over-year, resulting in a $20 million increase in Listings revenue. Consolidated QARSD grew approximately 14% year-over-year, driven primarily by the addition of new active dealers at current market rates and increasing adoption of adding products such as Top Dealer Offers. International QARSD achieved the strongest year-over-year growth since the first quarter of 2022, reflecting positive momentum in renewals, both in the U.K. and in Canada. Wholesale revenue was $16 million for the first quarter, down 36% year-over-year, driven by a decline in dealer-to-dealer transaction volume, as we continue to focus on rebuilding our go-to-market engine and improving our product offering and customer service, which we believe will result in a higher degree of confidence and trust among our dealer customers. Lastly, Product revenue was $12 million for the first quarter, down 69% year-over-year, reflecting Instant Max Cash Offer decline as a growing number of consumer and dealers continue to obtain for our highly profitable, subscription-based consumer vehicle sourcing product, Top Dealer Offers. Despite a decline in Instant Max Cash Offer transactions, we have seen increasing demand for Top Dealer Offers, which drives high-margin subscription revenue to our Marketplace business. The combined impact of these two offerings is accretive at the consolidated gross profit level. I will now discuss our profitability and expenses on a non-GAAP…

[Operator Instructions] Our first question comes from Marvin Fong of BTIG.

Two questions, if I may. So was interested in your disclosure, the net new bookings was up 28%. Correct me if I'm wrong, but I don't believe you've ever given us a specific percentage number on this. I'm just curious, how should we view this as a leading indicator of revenue growth? What's sort of the correlation and the phase-in of those bookings into revenue? And then my second question, just on Top Dealer. Understand the excitement around that product. How much of a driver of QARSD improvement was that in this last quarter? Was it material at all, considering how early stage the product is? Maybe you can just kind of help us understand the dynamics there.

Thanks for your question. So in terms of Marketplace revenue, I recommend you -- I would point you out to the listings, which were actually up $20 million this quarter versus $60 million last quarter year-over-year. And so we are seeing a continued acceleration of the top line growth at the Marketplace.

And it's reflected in -- this is Jason, Marvin, and it's reflected in the guidance to give you a sense for flow through.

Okay. So we should just kind of see it as that revenue that's sort of recognized in the next quarter.

Yes. I mean, typically, when we bring on a new customer, that gets activated fairly quickly. I mean, sometimes, they'll have an intra rate or something like that, but it can -- it tends to materialize in pretty short order. Now it does depend in terms of when it's booked in the quarter in terms of its impact in that quarter relative to the next quarter. But they're monthly -- they may be an annual contracts, as you've heard us say in the script, but they're built and recognized monthly. So the flow-through is the best way for you to get a sense for that, outside of those sort of intra-month comments and intra rate is through the guidance. In terms of Top Dealer Offer impact on QARSD, there are a number of drivers of QARSD. As you've heard us say, the primary ones are us bringing new customers on at more commensurate market rates. The other is -- another big one is upgrading dealers to higher packaged tiers, and a lot of that is driven by us continuing to add more and more tools, insights, features, even some products into the higher tiers that are packing more value into that, rather than charging a la carte. And then the third is new products. And so a Top Dealer Offer, we would consider a new product.

The next question comes from Jed Kelly of Oppenheimer & Co.

Great. Just looking at your -- the margins in the Marketplace, looks like they were pretty strong. Can you kind of tell us, is that the right basis to look at? And then can you kind of give us a sense on -- I -- granted you gave us 2Q guidance, but can you give us a sense on how you're sort of thinking about the marketing cadence going for the balance of the year?

Yes. So the Marketplace business continues to experience strong growth at the top line and also to demonstrate operating leverage, and you should expect that also going forward. In terms of the marketing cadence, so I'll remind you what we said about OpEx. As a percentage of revenue, we expect it to be flat in the second quarter and then to decline sequentially in the second half of the year. In terms of marketing spend cadence, what we anticipate is Q1 to be the largest quarter, as we front-loaded our branding expense related to our new advertising campaign, Your Car, Your Way, and then Q4 to be the smallest quarter in terms of marketing spend as we typically dial down our media spend around the holiday season.

Our next question comes from Rajat Gupta of JPMorgan.

Great. Maybe just to clarify the second quarter commentary. The complexion of the Marketplace revenue, can you give us a sense of how much of that sequential pick up? Or maybe you want to talk about year-over-year is coming from QARSD improvement versus paying dealers. And maybe relatedly, if you could touch upon the outlook for the international business a bit more over the next few quarters. Any initiatives in the pipeline that could potentially catalyze this segment further? I mean, clearly, strong uptick here in the QARSD and also dealer count there. I was curious, what's going on there? Any solid commentary would be helpful.

So in terms of QARSD, it was up 14% year-over-year and was primarily driven by dealers migrating to higher subscription tiers as well as new dealers joining at Marketplace. And the number of dealer-- yes, and the number of dealer -- sorry, the number of dealer was also up sequentially from the fourth quarter, as we registered the highest number of new dealers joining our platform since the first quarter of 2021. And also we had 30% of our -- of the contracts for new dealers being longer than 1 year, which suggests that, over time, our retention will go up.

Got it. And the second quarter guidance on Marketplace, does that assume continued improvement on both the QARSD and the dealer count? Or is one dominating the other, as you think about the remainder of the year?

Yes. We don't guide on these two specific drivers. However, what I can tell you is that our guidance implies to add year-over-year more revenue, both at the low end and the high end, to add more revenue than we did in the last 2 quarters. So we are seeing continued momentum in the Marketplace business.

Got it. And just on the international side, any updated thoughts there? And any new initiatives during the pipeline Q2 to capitalize that segment further?

I'm happy to take it, Rajat. Thank you for noticing. Our business is cranking in the marketplace across the globe, so I'm really proud to say that it's not just one market that's doing it. You know that we got the profitability in those markets, and we're really excited about where they're going. We're fueling fast growth there. I think we described the 24% growth in the international markets. So we're really excited about where those are going. It open up -- opens up huge opportunities for us. We're catching the market leaders. It leaves us opportunities to launch some new products that we've launched here in the U.S., and that means more QARSD growth and more ability to add dealers as we have in the international markets. But it also opens up partnerships to look at other ways to continue to add on new product capability beyond what we build organically, and we'll probably follow the path we're doing here with -- you've seen the addition of new products that have helped consumers move further down the transaction cycle. And so both of those give us huge opportunity to continue catching the big market leaders there. And I think we're really astounded by the growth and profitability in those businesses and are excited to keep that going.

The next question comes from John Colantuoni of Jefferies.

Wanted to zoom in on CarOffer. A few years ago, there was a ramp of investments in product and marketing to expand awareness and build tech capabilities behind the offering. After having already gone through that initial investment phase, are there any learnings that could help make you more efficient next time around once you're ready to relaunch the Wholesale offering, so there might be a more tempered increase in expenses?

John, thanks for the question. Sam Zales here. I don't know that I'd characterize the investment a couple of years ago as major investment in product and marketing. Quite honestly, as we're looking at this business, and we couldn't be more excited about the combination of Wholesale and resale -- Retail coming together. We're still the only instant trade platform in the market, and we know that putting Wholesale and Retail together, as you heard in the prepared remarks, that we are now seeing some really interesting growth in transactions from those dealers who are using the CarGurus information on consumer demand tied to their inventory strategies and making more investments in that way. So we were still building and running a start-up there that was running and incented on daily profits. That business focus was how do we get the most out of each day to maximize our incentive and the acquisition of the business. We are now running the business like we run the CarGurus business. Our focus in this investment is product first. Let's make sure that the product capabilities and the analyzers that we've built into matrix are going to optimize customer results. And quite honestly, we're rebuilding customer demand from a product capability that we didn't have in the days that we didn't fully acquire the business. So the focus on product now, the focus on tooling our operations to make sure those are optimized, so we make money at a low volume as a business when we get to that point, and now recrafting our go-to-market team and our sales and service teams, to focus on consulting and putting this data analytics and the AI we're creating, to look at CarGurus data on consumer demand, match to inventory strategies and inventory profits for our dealers is showing its first sign of growth in this 2 to 5x increase in transaction activity. So I wouldn't say that the -- anytime in the past, there was real investment for the long term on product and marketing. At CarOffer today, we're making those investments now, so we can retool and build back the business demand that we've had from our customers in the past and go for growth as we go forward.

The next question comes from Naved Khan of B. Riley.

So it's great to see the traction you're seeing with the -- with dealer count and new dealer growth. Maybe can you just share with us the monthly trend? If you saw strength kind of building throughout the quarter, how does April look like? And the other kind of related question is on the -- you shared the percentage of annual contracts. What -- in terms of pricing, does an annual kind of look the same on a sort of monthly times 12? Or is it -- do the dealers get a discount? How should we think about that?

So I can take it. Naved, thanks for the question. So I mean, monthly trends building towards the quarter, we don't talk about current quarter. So in our scripted comments, you can see and hear a number of trends that we talked about that resulted in the first quarter. In terms of contracts, I mean, there's a number of -- if I understood the extent of that question, so correct me if I'm wrong or clarify, the -- an annual contract, I think, is helpful in a number of ways. I think it sets a different expectation for customers in their relationship with us. I think it's actually a function of us building closer and better and more consultative relationships with our customers. I don't think they would be willing to sign an annual contract, frankly, if they didn't think that we were going to be a longer-term partner. And in the past, we weren't necessarily always earning the right to be a long-term partner to them. But now, as we're delivering more insights and more tools, and as Sam just referenced, ways in which we're helping them source smarter and price smarter, they realize that we're adding a lot more value beyond just leads. We haven't ever commented on pricing implications for annual contracts versus monthly, but I think you can think of them as very similar, although a lot of software companies for longer-term contracts may initiate a slight discount, but not anything big. I mean, they think of our pricing in a very similar way, whether it's signing a monthly or an annual.

The next question comes from Tom White of D.A. Davidson.

Great. Jason, your comments about the DDIs and also kind of the more consultative approach you're taking with CarOffer, I don't know. It seems to me like you guys are -- maybe you have been talking about this, but it seems like you're increasing your focus on leveraging all of your data in more creative ways and kind of circling it back to your customers. Can you just talk a little bit about the high-level kind of monetization opportunity of that strategy? And then I got a follow-up.

Sure. Tom, so you're right that we are talking about it more because we are delivering more. I would think of it on maybe a couple of different dimensions. The first dimension is how we're using our insights to just help them sell cars better, smarter, faster with higher margin in our Listings business. And so you've heard us talk about, over time, as we have had a pretty steady introduction of these, we're giving our dealer customers information on their market share of leads in the market relative to their market share of units of inventory. We're giving them information on how quickly they are dropping in prices and the magnitude of their price drops. We're giving them information on what are demand trends in the market relative to supply data. More recently, we've talked about Next Best Deal Rating, which helps them reduce how much they drop the price of a car to maintain margin, but generate a lot more interest on the car by increasing the rating of that car and getting more activity on our site. You heard us talk about an inventory acquisition recommendation tool that uses, again, supply and demand data and to inform or if they should be stocking on their lots. And so as we -- we're really starting to take our -- and the next level is with CarOffer, I'll get to that in a second. We're really starting to reorient our thinking as we've been building a lot of these capabilities, products, insights and taking more of a customer lens through our dealers to say, "We can tie all of the steps that you need to do as a dealer together through our data." So you need to source inventory and predict how that inventory is going to do. You…

That's great. That's super interesting. Maybe just a quick follow-up. QARSD growth obviously continues to be super strong. And it looks like the guidance, by my math, kind of looks like another double-digit kind of growth quarter for QARSD. How should we think about the sustainability of this level of QARSD growth kind of over the next several quarters?

I'll keep going. I'm on a roll. It is quite sustainable. I mean, we've talked about many levers that drive it. Most of those levers exist for a long time. And the example I just gave is a perfect reflection of that, that as we add more value to dealers, even if we do it through bundling of a listings product, it's actually adding a ton of value to their dealership. And so I think, we think their mindset is shifting from I'm not just paying for leads, I'm paying for the ability to elevate the sophistication of my dealership, and it just so happens it's coming from CarGurus who is also providing me leads. So package upsells, I think, has continued upside if we continue to execute on introducing these value-added features and insights, bringing dealers to market rate. As we bring on new dealers, that's -- we have a lot of dealers that have been on for a long time and are still well below market. We think our competitors are raising unit prices as well. And so the unit pricing ceiling continues to rise, and we still think we're very strong ROI because we think on balance. We're still less expensive. And then other products, Top Dealer Offers a good example of that. We have a lot of new ideas, and you heard me introduce Ish very briefly in the talking -- in the script, rather. And he's bringing just a really terrific lens through the dealer customer-centric lens. And so between his -- what he's bringing and the more unified activity with CarOffer, we think there's new opportunities for new products that didn't exist before.

Our next question comes from Doug Arthur of Huber Research.

Elisa, on the operating expenses, it seemed GAAP or non-GAAP sales and marketing was elevated. Product development was down. G&A was elevated. Can you -- is there anything to read into a trend there? Or is that more just on the sales and marketing side opportunistic?

Yes. Thanks for the question. It's primarily the marketing that was elevated in first quarter, as we said, because we front-loaded our branding spend related to the advertising campaign. But as we said, this should decline into the fourth quarter and throughout the year, and our OpEx in the second half of the year as a percentage of revenue should also continue to decline.

The next question comes from Ron Josey of Citigroup.

This is Jamesmichael on for Ron. Can you help us unpack the 30% inventory that you saw in the quarter? What trends are you seeing in the new and used autos macro? And what controllables are you executing against your expanded inventory? And then any more color on the potential you see from the new inventory acquisition recommendations tool would be helpful as well and if you think this is a driver for QARSD.

Sure. I can -- but I might have you repeat the second part of that because that was fast. I mean, on the inventory expansion, that's -- there's two functions to that, paying dealers and how we treat our premium dealers and bring them on. And there was not a lot of change in terms of our treatment of premium dealers. We grew paying dealers modestly, so that will help it a little bit. But at the stage that we're at now, it's largely just market macro increases and decreases. And what you've seen recently is an increase in new cars, for the most part. I think used cars have continued to tick up a little bit. They're still not at pre-pandemic. New is still nowhere near pre-pandemic. But the biggest changes most recently were new car inventory. Inventory acquisition tool is you asked, I think, how that affects retention. It is -- first of all, it's our most recent ones, which is in pilot. And it's still small numbers of dealers. We think all of these tools are going to have a positive impact on retention. I mean, one thing to keep in mind is that different segments of dealers. And if you think about it really simplistically, there's franchise large and small, independent large and small. And then there's varying levels of sophistication and capability within each of those segments. And -- so to some dealers, inventory acquisition recommendation tool is going to be something that's perhaps like Next Best Deal Rating, they use every day. Others may have other tools or may not be as reliant on it. But we think each of these will -- for the segments that they apply the most, will help with retention. To be honest, that's hard to isolate that as a test and measure how much of an improvement it will have, any one tool will have on retention. But our philosophy, and I think what you will see from us, is we're going to continue to introduce a lot of these insights. We're kind of just getting started, especially as we bring CarOffer together with us that we think, in aggregate, will have a very positive impact. I did not catch the last part of your question.

Yes. I think you addressed the question on the inventory or recommendation tools. That's helpful. My second question is just around the app. Obviously, some success in kind of downloads, engagement, the 25% lead contribution. Can you talk about the investments you're making in either marketing or the core app infrastructure to drive some of those gains?

A lot of that is in product and tech. It's not -- there's a little bit more marketing that is geared toward app, but a lot of it is that we're improving it from a product perspective. In hindsight, we were probably a little bit behind the curve from an industry perspective in terms of investing in our app because we were being so successful in mobile web. And I think now as we start to invest more resources in the product, we're seeing really fantastic results. In fact, we started seeing improvement in results before we started putting resources on it. As we put more resources on it, and when I say on it, I mean, things like engagement and features that are unique to an app usage environment, that's distinct from a web usage -- mobile web environment, we're just seeing tremendous uptake. We're seeing an engagement and growth in the app. Things like registration and things like frequency of use, engagement with dealers, time spent, our ability to message and communicate with them. So we're really excited about the app, and we're proud of how it's getting recognized relative to others in our sector.

James, I'm just going to add something. It's Sam Zales here. Thanks for the question on both because Jason hit it all, but just a couple of pieces of color from the market. One is when you add things like Top Dealer Offer to your app and you say, "Sell my car," we're the only player in the market that offers either the white glove, pick up the vehicle at your home or drop it off at the dealership and make a little bit more money. It is a truly unique offering in the market. It's one of the reasons 70% of the app users are registering and saying, "I want to think about this. At some point in my future, I'm going to be in the long-term transaction model of auto ownership." It creates that incredible #1 position in the app space for automotive marketplaces. Number two is on the inventory acquisition report, as another example, as Jason was talking about analytics. A dealer typically says to us, quantity and quality of leads is the price of entry into this business. And you can see from our QARSD growth, our Marketplace growth, the lead growth we talked about year-over-year at double-digit, the lead we have on our competitors for visitors and visits, the lead we have in our competitors from an inventory perspective, that all fuels that lead volume and lead growth and lead quality that we have that we believe drives a highest ROI in the business and leads to that growth in our Marketplace business. The second part of that, though, is can you teach me how to run my dealership more profitably. So all of those analytics reports that Jason is talking about, including this new inventory acquisition report, nobody in the market can take consumer demand with the largest audience in the marketplace and match that against inventory turns in a local market and help that dealer say, "Here's your best option. To meet the market demand in your market, acquire that inventory and turn your inventory more quickly," which is both a CarOffer and CarGurus value proposition in the synergy of our businesses that we think is truly differentiated.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now hand over to Jason Trevisan for closing remarks.

Thank you very much. I just wanted to give a special thanks as we always do to all of our employees. We're extremely proud of all the innovation and growth that we're experiencing as a company. I'd also like to thank everyone today who joined for your interest and support of us. We look forward to seeing many of you at upcoming conferences. Have a good evening.

Ladies and gentlemen, that concludes today's event. Thank you for attending, and you may now disconnect your lines.