Good morning, and welcome to the Cars Second Quarter 2023 Earnings Conference Call. This call is being recorded, and a live webcast and the accompanying slides can be found at investor.cars.com. An archive of the webcast will be available at Cars' Investor Relations website. Now I'd like to turn the call over to Robbin Moore-Randolph, Director of Investor Relations.

Good morning, everyone, and thank you for joining us. It's my pleasure to welcome you to the Cars' second quarter 2023 conference call. With me this morning are Alex Vetter, CEO; and Sonia Jain, CFO. Alex will start by discussing the business highlights from our second quarter, then Sonia will discuss our financial results in greater detail along with our 2023 outlook. We'll finish the call with Q&A. Before I turn the call over to Alex, I'd like to draw your attention to our forward-looking statements and the description and definition of non-GAAP financial measures, which can be found in our presentation. We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA, adjusted EBITDA margin, adjusted operating expenses and free cash flow. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the financial tables included with our earnings press release, and in the appendix of our presentation. Any forward-looking statements are subject to risks and uncertainties. For more information, please refer to the risk factors included in our SEC filings, including those in our most recently filed 10-K, which is available on the IR section of our website. We assume no obligation to update any forward-looking statements. Now, I will turn the call over to Alex.

Thank you, Robbin, and welcome to our second quarter 2023 earnings call. I'm pleased to report another quarter of solid results and profitable growth. Revenue grew 3% year-over-year to $168 million driven by dealer revenues that increased 6% year-over-year to $153 million. We also improved our adjusted EBITDA margin sequentially to 27%. Our success this quarter was driven by a number of factors that will underpin performance for the balance of this year and into next. Specifically, the rollout of our marketplace repackaging initiative, increased adoption of our digital solutions and our continued investment in delivering the highest quality in market digital audience to our partners. We are over 60% complete with our marketplace repackaging initiative that we started earlier this year, and the results have been strong. We're seeing improved yield from repackaging with two-thirds of our dealer customers opting into our upper tier packages. This is driving both revenue and adjusted EBITDA. Our new packages allow dealers to capture the benefit of our investment in product development, and more than 30% increase in traffic and value over the last five years. As dealers opt in to our higher-tier packages and leverage more features, their engagement increases and it is far more likely for dealers to stay within our ecosystem. In fact, we're seeing our strongest retention from higher ARP dealers who use at least three of our products, which leads to an ARPD of approximately three times the average customer, and shows a clear upside potential as we remain focused on cross selling additional products. As with any pricing initiatives, we experienced incremental cancellation and as expected, this was largely confined to a segment of lower inventory dealers with legacy rates. In total, ARPD for the quarter grew 6% year-over-year and marketplace accounted for more than 50% or…

Thank you, Alex. We achieved another quarter of solid results, delivering both revenue and adjusted EBITDA within our guidance range. Total revenue for the quarter was $168 million, representing 3% year-over-year growth. While we experienced continued softness in our OEM and national revenue, dealer revenue growth was particularly strong and up 6% year-over-year, driven by continued growth and solution and media products, as well as growth resulting from our marketplace packaging initiatives. And given the subscription nature of our business, we expect to build upon second quarter’s results with accelerated revenue growth in the third quarter. Diving deeper into our financial results, I'd like to cover our expenses and the disciplined approach we're taking to invest in top line growth. For the quarter, adjusted operating expenses were $147 million. $8 million higher compared to the prior year. This increase is primarily due to higher marketing and sales expenses due to compensation and our investment in the Cars.com brand, including the launch of our possibilities campaign. These investments are critical to maintaining and growing our industry leading brands, which allows us to deliver a highly engaged audience to our dealer customers. As Alex mentioned Cars.com drives more new consumers to dealer websites than any other marketplace. And through the addition of features, like instant cash offer and instant financing, we're helping our dealer customers further identify high intent, ready to transact consumers. We also continued investing in product development to support our growth, which led to hire product and technology expenses driven by compensation and third party costs, specifically related to licenses and consulting costs. Net income for the quarter totaled $94 million, or $1.37 per diluted share, compared to $6 million or $0.08 per diluted share a year ago. Our current quarter net income was primarily related to the release…

[Operator Instructions] And our first question comes from Tom White from D.A. Davidson. Go ahead, Tom.

Great. Good morning, everyone. Thanks for taking my question. A couple if I could. So, I guess, so, revenues for this year -- for the quarter rather, total revenues came in at the low end of the range, but dealer revenue was up nicely up 6%, beat our forecast by a couple million bucks. So, it looks like I guess, national revenue and the other line, maybe let you down a bit. And I think you said last quarter that the national was perking up a little bit. So, I'm curious to hear a little bit of an update on that. But, net-net you're tightening the range for the full year on revenue to the high end. So, maybe just a bit of color on what's giving you confidence to do that? Sounds like maybe it's not national revenue perking up. Maybe it's better retention rates from dealers after the price hikes. Just kind of curious what's giving you the confidence on that?

Thanks for the question, Tom. So, we did have a really solid Q2 print, particularly in dealer revenue. It's not just the marketplace, repackaging that we think. It's putting a lot of momentum into the business. But we're seeing -- we're still seeing strong cross-sell activity with solutions and our media products as well. You're spot on that we did experience a little bit of softness in OEM and national as well as in our other line. We don't talk a ton about the other line. But there was some revenue that we've been seeing last year, related to the acquisition of Accu-Trade, some license agreements that we inherited, that we anticipated would run off this year. And what you see in the delta there is simply the run off of those license agreements, which were actually non-cash. So they don't really have any material impact to adjusted EBITDA. I think in terms of the forward looking guide a little bit on that, we have the marketplace repackaging. The 6% year-over-year growth that we reported on ARPD, is sort of like a blended view of what we saw transpire over the course of the quarter. I think we've talked a little bit about how we've taken a phased approach to repackaging launching kind of cohorts each month. And so, as you can imagine, the benefit of ARPD is building and each sequential month. If you look at June as an example, and peel back the onion a little bit in terms of the drivers of ARPD, our core marketplace, ARPD actually did grow double digits on a year-over-year basis. I think one of the challenges in the numbers right now when you look at dealer revenue and dealer ARPD is the fact that we also had digital dealers in our numbers last year that we don't have in the numbers in the same way this year, and that's offsetting some of the benefits of marketplace repackaging.

Okay. That's helpful. And then just on the national line. I could be wrong. But I was under the impression that last quarter, there was some comments that you've suggested that, maybe that was perking up a bit and, TrueCars OEM revenue line, I know, it's different than yours. It's, not kind of display advertising based. But they has perked up a little bit quarter-over-quarter. So, just curious, like, what you're hearing there from OEMs. Did anything slip out of the second quarter and kind of get delayed to the back half? Or is it still just very, kind of hard to forecast, hard to know exactly how that line is going to come into? And then I'll get back in queue. Thank you.

Yes, Tom, my understanding of their OEM business is incentive spending. And we do know that OEMs are increasing incentives, as inventory isn't moving nearly as fast as they would like. We think that's a low road to growth for OEMs. And we're recommending them spend more dollars to promote and compete for those vehicle sales as opposed to moving immediately to discounting. So we do have fundamentally different approaches to creating value for OEMs. I think we were very pleased with the reception we're getting from OEMs. Certified Pre-owned, has picked back up where OEMs are starting to lean back in and the conversations we're having are all very productive. We're just not getting the conversion yet that we would have expected. But we still feel good about the business line going into the second half of this year. And don't see downside feedback from clients, but rather more upside.

Good. Thank you.

And our next question comes from Marvin Fong from BTIG. Please go ahead, Marvin.

Good morning. Thanks for taking my questions. Maybe, Sonia, I think you mentioned that the dealer churn stabilized in July, just exactly what do you mean by that? Do you mean that the dealer account was kind of flattish compared to June? Or is the churn just stabilizing but still at a negative number. Just more color on that would be helpful?

Yes, I think a little bit more stabilizing from a dealer account perspective relative to June. We think as I mentioned earlier, we've taken kind of the phased approach to rolling out the repackaging where we get notifications to dealers in advance. Q2 saw a lot of activity between notifications and actual rate increases, given that we have some going into effect in Q3. So almost became a little bit of a bottleneck so to speak as you think about dealer communications coming out of the second quarter, we're 60% complete with repackaging as of the end of Q2, as of the end of July, we're 80% complete. So as we head into the back stretch of the year, we're shifting from our focus a little bit from repackaging and more to like our ordinary course activities of continuing to focus on the cross sell of our solutions and media products.

Great. Thanks, And my next question just on OEM advertising, I guess, just to drill down on that. So you're full -- you provide a full year guidance and obviously, does it implied fourth quarter performance. So, what's sort of your assumptions embedded in your guidance right now. And just for how OEM that line item will perform in the fourth quarter. Should we expect another sequential improvement from third quarter or just share your thought there would be helpful? Thank you.

Yes. No, great question. Generally, what you said, we are cautiously optimistic about the OEM and national line, as Alex mentioned earlier, the feedback and the reception we're getting from our OEM customers has been positive. But as I think I'm sure you're aware of while production levels have been increasing, new model launches continue to be shifting out. And that's typically one of the big drivers for OEMs. And that being said, we are expecting a modest improvement in our OEM and national revenue as we look sequentially into Q3 and then into Q4.

Perfect. Thanks so much.

But we'll still just to caveat on what I mean by modest. It's likely that the numbers will still be down year-over-year, but we'll see an uptick relative to where we are right now.

And our next question comes from Rajat Gupta from JPMorgan. Please go ahead, Rajat.

Great. Good morning, and thanks for taking the question. Just have one clarification first on the repackaging initiatives, the 60%, you mentioned, and then the 80% you are in the third quarter. That is a subset of like the 25% targeted dealer base, you were targeting this year, right? Or is that 80%, relative to the 25% number, just want to clarify that?

Happy to clarify. So, we were actually targeting much more than 25% of the customers. So we are targeting the majority of our -- substantially the majority of our dealer customers.

Got it. So its 80% of all your dealer customers?

No. We're not going to all of them. A lot of them are already at market rates today, but call it like 70-ish percent.

Understood. Got it. That's helpful clarification. And then, in terms of the dealer account sequential move lower. Any granularity on the franchise versus independent dealers? One of your dealers continues to see pressure in the independent segment. And wondering if you're seeing any similar trends. And also, like any conversations you're having with some of the digital-only used car dealers around potentially returning to the platform? And just have one more. Thanks.

Sure, Rajat. Great question. one point of clarification I want to make is that while we are targeting the majority of our dealer base, we also are targeting the biggest increases came early in the year. And so, now that we got through July, we picked up another full 20% of the dealer base through the repackaging, please, that July results were stable on dealer account, which means we're getting better at justifying the rate that we're asking for and minimizing dealer churn of the churn that we did experience, it was largely two things, the largest increases, the dealers that were furthest away from market rate. So their increases were much more sizable than others. And there was a heavy concentration of that of smaller independent dealers with lower inventory. So, I think the combination made a lot of sense to us that we were asking a lot in a year-over-year from these dealers, but we know the values there. I think your point on digital dealers is timely, and that as you know, we're entering this year with almost 650 dealers taken out of our denominator, about 650 I think Sony was the number of digital dealer locations that we had advertising on the platform. And so that's been a headwind, we've been out running, but still generating decent growth on dealer revenue. And we are now back in discussions with many of the digital dealers. It's not in our guide. We're not expecting that to come back in any meaningful way this year. But I think it's telling that the digital dealers that pulled back end of last year beginning of this year, are starting to realize that they've got to spend money if they want to move inventory, and we're a fertile marketplace to help them do that. You had a follow on question too I think.

Yes. Just last one on the EBITDA margin guidance for the fourth quarter, the exiting -- the exit rate 30% number. The reason for putting that out there is that to imply that 2024 is going to be at least 30% EBITDA margins on an annualized basis? Or was that to indicate some sort of new seasonality in the business, just classification there? That's all I have.

Yes. We have had that 30% target sitting out there sort of since the beginning of the year, really just to be working very committed to showing kind of the sequential improvement that we can drive in terms of adjusted EBITDA margin in the business. It is subject though to investments. And I wouldn't necessarily, and we have historically as an example, tended to have lower margins as an example in Q1 when we have big industry events. So it's not necessarily setting a new bar for go forward expectations. We'll set our 2024 adjusted EBITDA guidance in subsequent different quarters.

Got it. Great. Thanks for taking the questions and good luck.

[Operator Instructions] And our next question comes from Gary Prestopino from Barrington Research. Please go ahead, Gary.

Hi, good morning, everyone. The dealer customers being down. Was there any more drip digital dealers coming out this quarter or was that all gone by the end of March?

Yes. Good morning, Gary. On the digital dealer question that was really done in March. So no, additional stress there.

Okay. And then assuming the dealers that you were using that really pulled out, were they the majority, they were not using any of the really high priced digital solutions, things like that. These were just mostly independent that were low budget dealers?

That is correct. When you look at a Q2 and some of the churn we experienced, the majority of those dealers are independent dealers. And even within that, they tend to be our lower ARPD, lower inventory sort of one product using dealers.

Okay. So all right. So in terms of Accu-Trade, Alex, are you finding that the dealers that you're signing up for Accu-Trade do not have a solution to source used vehicles from consumers or trade amongst themselves? Or are you displacing something or are they just taking on two or three different services that do the same thing?

Great question, Gary. Dealers generally have multiple ways they source inventory. The most prevalent or legacy way of doing that is obviously buying cars at auction. The emerging trend in the industry is obviously buying cars more directly from the public, because you're able to get fresher inventory. That hasn't cycled through the retail market yet. And typically, if you can help a customer get out of a car, you've got a much higher likelihood of selling them a new car, so it gets really two for one. If you think about the legacy way of buying cars, you can spend 1000s of dollars and fees at auction were with Accu-Trade for $1,500 a month you have unlimited buying power, right? Every customer that comes through your service lane, everyone who's shopping for a car on your lot, and of course sourcing private party opportunities directly from our marketplace. So we were really thrilled to see the organic lift in the number of cars appraised through Accu-Trade. The dealer account number is growing nicely. Solutions accounted for 50% of our ARPD growth. And that's very sticky revenue. And we see that with the dealers are using multiple solutions from us, it not only stabilizes that or creates a new revenue stream, but it also has a stabilization for the marketplace. And so we're thrilled with the growth in Accu-Trade and just need to accelerate now, which will naturally happen when we're through this marketplace repackaging. It takes a lot of cycle time to get through 16,000 dealers with rate negotiations for your core marketplace offering. And so, our teams are largely through that with 80% of it through July. And so you'll see a shifting more towards cross-selling and upselling now in the second half.

And then, can you make any comments on fuel. We haven't heard anything in your narrative there. I mean, and that is a very high priced product out. How is that-- How's the uptake been going there in terms of both your acceptance of that?

Great, great question, Gary. Fuel is one of a few and media offerings that we have. And generally, we're pleased with it. We didn't call it out specifically, because we are seeing interest from dealers and more media services from CARS. And so, that's actually something that we're looking forward to exploring more in the second half, because dealers are starting to see inventory, not turning quite as fast, organically on their lots. And so they're turning to us for more additional media services. I think it wasn't a huge focus for us in Q2, again, for the marketplace repackaging initiative. But now that we're through that dealers are talking to us more increasingly about spending more to move inventory. And not only do we have fuel, but we've got retargeting solutions, we've got an inventory extension solution. So, we may not call it out by name, but media upsells are picking up steam right now, which is nice top line and high margin revenue for us.

Okay. And lastly, do you guys see the OEM revenue ever getting back to, maybe where it was pre COVID or a year or two before COVID. Given that you read -- everything you read from these OEMs, is we got to cut costs. All right. GM said that directly on their conference call. Mean, is that something that you think we'll ever recover? And if it's not going to recover is there anything that you can do to really try and increase the profitability of that business at a lower revenue stream?

Gary, I'm a believer. And I think the only thing we could debate is by win. I think the macro thesis, do you believe that car companies need to do more digitally or less digitally going forward, and I think overwhelmingly, the data supports that they need to do more digitally. OEMs continue to force dealerships to spend on their physical plant, and we believe that they need to help dealers spend more on their digital plan. And we're well-positioned to do that. As you know, we've got multiple vectors for growth with OEM. We are talking about raising rates on our website offering, because we know we can justify higher fees there. There's more that we can do on data targeting, particularly with the collapse of the cookie and IP tracking, they're going to have to spend more with first party data sources to reach people when they shop, which we've got the largest organic audience for them to reach buyers there. And we're also talking to them about technology solutions. I mentioned last month that we're talking to a few OEMs, about using our trading tools, our financing offerings, so there are new revenue streams and discussions that were happening. And I'll tell you that initial upfront for 2024 are preliminarily very, very strong in terms of what we're hearing from them. So I'm a big believer. I understand what the inventory shortage. Why it hasn't been a big boon for our business this year. But I'm a definite believer that this line of business is going to grow materially over the next few years.

Okay. Thank you.

Our next question comes from Steve Dyer from Craig Hallum Capital Group. Please go ahead, Steve.

Good morning. This is Ryan on for Steve. Just one follow-up or I guess one question from us. Curious on the OEM and national. Are you having any increased interest or conversations from OEMs as they look to advertise new EV models, as they're ramping production demand seems a little lackluster for certain OEMs anyways. Just curious any interest on the EV side?

EV inventory has exploded up almost 230% on our platform, but consumer demand has actually softened from a consumer demand standpoint. And what we know about the EV market is search trends tend to correlate more with gas prices than they do with product availability. Consumers flocked to EV, search share last year when gas prices were clipping north of $4 or $5 a gallon. And now that those prices have moderated, we're seeing search share wane. Unfortunately, many OEMs are immediately moving to drop price. And we think that is certainly one way to move that inventory. We think that there's generally low consumer awareness of the various EV offerings out there still. And I hope that the OEMs that are listening right now and their agencies will call us, because we can introduce their products to people who are actively shopping for them in real time, and increase their likelihood to convert much more than just dropping price and screaming incentives.

Very good. Thanks. Good luck.

Thank you

And at this time, there are no further questions. I would like to turn the call back over to Alex Vetter, your CEO for closing remarks.

I want to thank you for your interest in CARS today and joining us, I'd like to mention that Sonia and I are going to be participating in the BTIG Virtual Conference on August 16. And we'll keep you posted on another investor engagements throughout the year. This concludes our call.

This concludes today's conference call. Thank you for attending.