CarGurus, Inc. (CARG) on Q1 2021 Results - Earnings Call Transcript
Operator: 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. 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.
Josh Goldstein: 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.
Jason Trevisan: 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.
Scot Fredo: 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 a dilutive impact resulting from the CarOffer put right as it does not become effective until 2024. Accordingly, the actual share count that the company used to calculate its Q1 EPS was lower than the estimated share count on which it had based its Q1 EPS guidance. Now on to our results. Total first quarter revenue was $171.4 million, up 9% year-over-year and nearly $11 million ahead of the high end of our guidance range. I would like to make it clear that only about half of that overperformance against the high end of the guidance was due to the aforementioned accounting adjustment of gross revenue for delivery and inspections. Our total marketplace subscription revenue fell 2% versus the year ago period to $139.6 million. Other revenue in the first quarter grew 101% year-over-year to $31.8 million, which largely reflects the impact of CarOffer and also includes growth of our consumer financing products. Wholesale revenue includes transaction fees earned by CarOffer from facilitating the purchase and sale of vehicles between dealers where CarOffer collects fees from both the buyer and seller. CarOffer may also fulfill buy orders from dealers through the acquisition of vehicles at other marketplaces. In these instances, CarOffer collects a transaction fee from the buyer. CarOffer also charges buyers' fees for inspection and transportation services on all wholesale transactions. Our US business generated $132 million in marketplace subscription revenue in the first quarter. Our international business generated $7.5 million in marketplace subscription revenue for the same period. The US accounted for 95% of total revenue in the first quarter. US revenue increased 10% versus the year ago period to $163 million, while international revenue declined 14% year-over-year to $8.4 million. The growth in United States revenue is primarily related to our recent CarOffer acquisition. The decline in international revenue is primarily related to a 9% decline in paying dealers as the U.K. in particular extended lockdowns during the pandemic. Turning to paying dealer count. We ended Q1 with 31,213 total paying dealers representing an increase of 582 dealers from Q4 and a decrease of 2,047 versus the year ago period. In the US, we finished the quarter with 24,371 paying dealers, which is an increase of 437 dealers from the end of the fourth quarter. In our international business we finished the first quarter with 6,842 international paying dealers, up 145 from the end of the fourth quarter. Please note that these paying dealer counts as well as our other KPI metrics are exclusive of CarOffer. In the first quarter US QARSD was 5,466 representing a 3% increase compared to the prior quarter and a 7% increase compared to the year ago period. International QARSD was 1,113, representing a 5% increase compared to the prior quarter and a 6% decrease compared to the year ago period. Quarter-over-quarter QARSD growth was driven by strong quarter-over-quarter revenue growth primarily in our core listings. I will discuss expenses and profitability on a non-GAAP basis, which backs out our stock-based compensation expense, amortization of acquired intangible assets, acquisition-related expenses and losses attributable to redeemable non-controlling interests. First quarter non-GAAP gross margin was 86%, down roughly 670 basis points versus the year ago quarter. The contraction in gross margin percentage is attributed to the impact of the CarOffer business on our consolidated results. As our Q1 consolidated gross margin excluding CarOffer was 93% versus 92.7% in Q1 2020. The gross margin on CarOffer in Q1 was approximately 16% on a non-GAAP basis which impacted the overall gross margin percentage of the company. As I described earlier, CarOffer's transportation and inspection revenue is treated on a gross basis which has an impact to our overall gross margin percentage. Additionally, due to the significant volume of dealers being added to the CarOffer platform through our onboarding resources and cost of revenue that should scale longer term and we expect to see leverage in CarOffer's gross margins. In the quarterly update on our Investor Relations website, you will find a non-GAAP summary of CarOffer's financials indicating a modest non-GAAP operating loss in Q1 of $214,000 on $15.6 million of revenue for the stub period since acquisition which is January 14 through March 31. Total first quarter non-GAAP operating expenses were $98.9 million, down 18% year-over-year. Non-GAAP sales and marketing expense fell 28% year-over-year to $65.4 million and represented 38.2% of revenue, down from 57.6% of revenue in the year ago period. The improved sales and marketing leverage is primarily the result of efficiency gains in our traffic acquisition and deliberate reductions in spend as a result of macroeconomic conditions. Our first quarter non-GAAP product technology and development expenses grew 13% versus the year ago period to $19.4 million. The investments we are making in our technology team impact multiple initiatives, including supporting our core marketplace business in both our domestic and international markets in addition to our growing efforts in digital retail and wholesale. We continue to allocate resources as needed to manage near-term business needs and support longer-term growth initiatives. We generated non-GAAP operating income of $48.5 million representing a margin of 28% and roughly $12 million ahead of the high end of our guidance range. Non-GAAP diluted earnings per share attributable to common shareholders was $0.33 for the first quarter $0.10 above the high end of our guidance range. On a GAAP basis we generated first quarter gross margin of 86% and incurred total operating expenses of $121.5 million, down roughly 9% year-over-year. The decline in operating expenses was primarily driven by a decrease in our variable consumer marketing expenses. First quarter GAAP operating income increased 115% year-over-year to $25.8 million. First quarter GAAP net income attributable to common shareholders totaled $22.4 million. Geographically first quarter US GAAP operating income was $29.4 million up 45% year-over-year. We had a GAAP operating loss of $3.6 million in our international business compared to an $8.2 million loss in the year ago quarter. We ended the first quarter with $240.7 million in cash and investments, a decrease of $49.6 million from the end of the fourth quarter. The decrease in our cash balance was driven primarily by our recent CarOffer acquisition. We generated $37.6 million in cash from operations in the first quarter and $35.4 million of non-GAAP free cash flow which includes capital expenditures and capitalized website development costs of $2.2 million. I'll close my prepared remarks with our outlook for the second quarter of 2021. We expect our second quarter revenue to be in the range of $186 million to $192 million non-GAAP operating income in the range of $35.5 million to $39.5 million and non-GAAP earnings per share in the range of $0.23 to $0.25. As you update your models for the rest of the year you should consider Jason's comments regarding the inventory issues in the industry facing the OEMs and our dealer partners. Although our Q2 revenue guidance is a considerable increase from Q1 results, we expect that the chip issues facing the automotive industry will continue to constrain inventory and potentially impact automotive marketing and advertising spend for several months. On behalf of Jason Sam and our executive team I'd like to thank all the CarGurus and CarOffer employees for their continued hard work as we enter year two of remote work. With that we'll open it up to the call for Q&A.
Operator: Our first question is from Dan Kurnos of the Benchmark Company. Please state your question.
Dan Kurnos: 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?
Sam Zales: 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.
Dan Kurnos: 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?
Scot Fredo: 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.
Sam Zales: 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.
Operator: Our next question is from Ralph Schackart of William Blair. Please state your question.
Ralph Schackart: 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?
Sam Zales: 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?
Ralph Schackart: Right. That’s really helpful. Thanks, Sam.
Operator: Our next question is from Jed Kelly of Oppenheimer. Please state your question.
Jed Kelly: 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?
Jason Trevisan: Sure. Hi, Jed, it's Jason Trevisan. Just confirming you can hear me okay?
Jed Kelly: Yes.
Jason Trevisan: 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.
Jed Kelly: 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?
Jason Trevisan: So are you talking about installed dealers for CarOffer?
Jed Kelly: CarOffer. Yes. So is it more of a cross-sell, or is it dealers totally new to your site?
Jason Trevisan: 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: Our next question is from Doug Arthur of Huber Research. Please state your question.
Doug Arthur: 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.
Scot Fredo : 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.
Doug Arthur: Okay. Got it. Thank you.
Operator: 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.
Jason Trevisan: 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.
Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.
