Cars.com Inc. (CARS) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to the Cars First Quarter 2021 Earnings Conference Call. This call is being recorded, and a live webcast can be found at investor.cars.com. A replay of the webcast will be available until May 20. A copy of the accompanying slides can also be found on the company's investor relations website. I'd now like to turn the call over to Robin Moore Randolf, Director of Investor Relations.
Robin Randolf: Good morning, everyone, and thank you for joining us. It's my pleasure to welcome you to the Car's first quarter 2021 conference call and my first call as Cars, Director of Investor Relations. With me this morning are Alex Vetter, CEO; and Sonia Jain, CFO. Alex will start by discussing our highlights from the quarter and providing an update on our expectations for 2021. Then Sonia will discuss our financial results in greater detail, along with our second quarter expectations. We'll finish the call with Q&A.
Alex Vetter: Thank you, Robin. We're very excited to have you join the team to share with the investment community the details of our strategy, our growing momentum and the large opportunity ahead of us. Welcome, and welcome to our first quarter call, everyone. I'm pleased to share our performance this quarter and the acceleration we've made on our path toward market leadership. Our momentum continues, driven by dealer customer growth and ongoing product adoption, resulting in revenue growth. COVID has encouraged more dealers to embrace digital solutions, and they are now increasingly comfortable operating in both physical and digital environments. Not only are they meeting shoppers' expectations in terms of when, where and how they want to shop, but they are also achieving great efficiencies by embracing our market-leading digital solutions. These trends are driving our highest customer growth since we became a public company, and the momentum continues across all lines of our business. We delivered solid year-over-year revenue growth for the quarter, driven by continued growth in ARPD. Dealer customers increased sequentially for the third straight quarter following Q2 of 2020 when dealers were obviously impacted by the COVID pandemic. We have now grown our dealer customer base in five of the last six quarters. We grew our revenue and our adjusted EBITDA year over year, and we expanded our margins while making disciplined investments to drive future growth. Our investments focused on ever-increasing traffic quality and our value delivery is increasingly evident to dealers. COVID has made dealers realize that they can't focus solely on the physical showroom, and we are now seeing dealers look for more data and insights around the quality of their digital traffic.
Sonia Jain: Thank you, Alex. Before I dive into our results, I'd like to call your attention to the fact that we have remained our revenue categories to better align with our customer type. You may recall that the last of our affiliate contracts ended in 2019, and the wholesale retail distinction is no longer relevant since wholesale revenue will no longer be part of our prior period comparison. Beginning with Q1, we have renamed what was our direct revenue to dealer revenue and our national advertising revenue to OEM and national revenue. No reclassifications were made between revenue categories. This is simply a name change. Now moving on to our results. We continued our momentum from the last several quarters and again delivered solid financial results this quarter. Topline revenue and adjusted EBITDA growth were strong, and we nearly doubled free cash flow year over year. Revenue for the first quarter was $153 million, up 4% year over year, driven by increased ARPD from digital solutions sales and underpinned by strong operating performance. Our momentum continues with strong sequential growth in dealer customers. And year-over-year, dealer Inspire revenue grew 25%. While dealers are benefiting from tighter inventories, it is not necessarily been the same for OEMS, OEM and national revenue in the first quarter was $18 million, down $1.3 million or 7% year over year. Although OEM and national revenue showed signs of stabilization over the past two quarters, recent supply chain disruptions have resulted in reduced advertising spend. While our advertising products are best in class and provide OEMs with access to a pure end market car buying audience, continued disruptions in the new car supply chain may constrain our ability to grow advertising and marketing sales to OEMs in the near term. Now let review expenses.
Alex Vetter: Thank you, Sonia. Our outlook for the industry remains bright. Strong consumer demand, continued dealer health and our differentiated solution strategy position us well to continue driving growth throughout 2021 and beyond. Operator, we're now ready to begin the Q&A.
Operator: Your first question today comes from the line of Marvin Fong with BTIG. Please proceed with your question.
Marvin Fong: Thanks for taking my question. First one, just on the Ford Direct win, congratulations on that. Just wondering if you could help us understand the dynamics on that. You're one of five. How does this line up with the GM precedent? How many incumbents were they prior? And then, also, if you could just give us an idea of when potentially dealers can start opting in to work with dealer Inspire, what will be the cadence of that rollout that would be great. And then, I have a follow-up.
Alex Vetter: Sure, Marvin. Thanks for the question. The Ford and GM deal are similar in approximate size of the opportunity, GM has got about 1,000 more dealers in our network than four. But I think there are some fundamental differences. Number one; recall that GM was an exclusive provider with one website company prior to opening it up and Ford has always provided choice. So, we're not going against an entrenched customer base that's all consolidated with one provider. So, Ford's got five providers now that they've opened up to where GM went from one to three. And so there are some fundamental differences in the opportunity based on existing providers. As far as timing goes, when the announcement was made, obviously, it began the excitement within Ford and within dealer Inspire and dealers contacting us about our solutions vis-a-vis their existing providers. So, slightly smaller opportunity, but yet our pipeline has begun just a few weeks ago.
Marvin Fong: Terrific. And then, my follow-up. I believe your leverage target was three times. It looks like you guys have hit back on a net leverage basis. Just curious now how you're thinking about the use of cash? You guys have done well with our recent acquisitions, haven't done anything in a while. Curious your thoughts on maybe doing some inorganic growth and leveraging M&A? And just in general, how you plan to deploy free cash flow going forward? Will debt pay down continue to be the priority?
Sonia Jain: Yes. I would say, we're really excited that we were able to bring leverage down below the three times level. That being said, I don't think our capital allocation priorities have materially changed. We remain focused on driving growth in the business, both organically and also inorganic opportunities could be of interest to us, as well as continuing to pay down debt, which we think just gives us far more strategic flexibility as we think about driving growth in the future.
Marvin Fong: That's great. Sonia. And Alex, congratulations on the great quarter.
Alex Vetter: Thank you, Marvin.
Operator: Your next question today comes from the line of Dan Kurnos, with The Benchmark Company.
Dan Kurnos: Great, thanks. Good morning. Alex, was a pretty strong dealer customer add number in Q1, kind of in line with what we thought on the DI and the website customers. So, always tough to kind of parse out underlying organic versus DI and dedup. But maybe if you can just help us think about as we go forward here, obviously, we're all very well aware of the inventory constraints. I don't know if we have thoughts on consumer demand pull forward, especially with the massive amount of stimulus that's in the market, but you seem to still be having pretty good traction. You talked about dealer retention. So, I don't know that we should be expecting similar size of step-up. I guess your guidance would really imply that anyway. But just how do you think about sort of the legacy or underlying core marketplace dealer count growth going forward given the marketplace dynamics?
Alex Vetter: Thanks, Dan. Well look, we're really pleased that we had record sales in Q1. The year started strong. And by the way, continues the momentum. We're growing our dealer count well in Q4 of '19 and grew it again in Q1 before COVID. So, we were on a growth trajectory before COVID. Certainly, the whole world changed in Q2 of last year, but we're right back on that growth agenda and again, experienced record sales in Q1. I think we are not expecting to set another record in Q2. But that said, we're finding really strong persistent work on the retention front. Our dealer base is sticky and strong and that's accentuated by our solutions revenue mix. I think where we see opportunities continues to be on the ARPD side. Even though there are inventory shortages, our digital solution COVID strategy continues to grow at a strong rate. And we're pleased that dealerships with fewer visits to their physical showroom are shifting more to invest in digital technologies and tools, which has been a growth vector for us for quite some time and is part of our differentiated strategy. I think on the traffic side, we definitely believe we pulled forward some traffic. I know February was muted a bit by snowstorms across the U.S., which led to some of the softening in the Q1 trends. But we are seeing persistent consumer demand. We believe that, that is going to lead us to a robust retail market for much of 2001 or '21. I think maybe it's worth adding to that I think COVID has also brought a lot of new consumers into the market for a purchase of a car, whether it's because they're nervous about mass transit options or some of the shifts in terms of people moving from urban to suburban areas are also driving an increased attractiveness of car ownership. That's a great point. We're seeing growth in sales rates in markets like San Francisco, New York, cities that used to not really think highly of car ownership, and we're seeing great retail sales volumes in those markets.
Dan Kurnos: A great point. Got it, that's helpful. And Alex, you always talk about the strength you're seeing with fuel. Just to kind of go off of your comments as to go about ARPD growth. Obviously, I would think, a pretty good contributor. You probably don't want to break it out, but how rapidly is that scaling in terms of where it's being offered, uptake to tax rate? You can kind of give us there, I think would be very helpful.
Alex Vetter: Well, I think what's exciting about fuel, Dan, is that it's leading to some of the strong gains you're seeing in ARPD. And yet that product platform has only penetrated less than 15% of the U.S. So, we've seen strong initial adoption by the most digitally progressive dealers across the country, but we've got a long way to go to fully penetrate fuel across the U.S. So, I feel like we're still in the very early innings of our introduction of fuel, which is why we're still in education mode, helping dealerships understand the efficiency of narrow casting your message only to end market shoppers and that being far more efficient than a lot of the mass marketing the dealers is still spending on today.
Sonia Jain: And I think to sort of build on the ARPD growth, fuel has certainly been really beneficial to us as we look year over year. But we've increasingly, particularly as BI has continued to grow, look at the cross selling opportunities between our solutions customers and our marketplace customers as then we penetrate our base more deeply with our set of products, we're also seeing really nice growth in ARPD from that.
Dan Kurnos: Got it. The additional color there in that makes sense, not trying to short sell the call sell. Just trying to understand the big driver. But anyway, thanks for all the RealREIT and a nice start to the year.
Alex Vetter: Thanks, Dan.
Operator: Our next question comes from the line of Nick Jones with Citi. Please proceed with your question.
Nick Jones: Great. Thanks for taking my question. Two for me. First, you mentioned strong SCO helped reduce the planned marketing investments. Can you talk about the sustainability of this strength? Is it growing versus the competition? Do you expect this to kind of persist throughout the year? And then, I have a second question.
Alex Vetter: I'm sure, Nick. Our SCO strength certainly has been persistent over the past three years. There's been no platform growing its share of organic traffic more consistently and repeatedly quarter to quarter than cars. And so we think key to that is our differentiated content strategy, while other marketplaces, just harvest listings, we're the largest producer of original programming, whether that's our expert reviews or our dealer review platform, we're generating tons of unique content that can only be found on cars. And Google is certainly rewarding that authority. And so yes, we do think it's been proven to be very durable and consistent. As you know, we spend consistently less on marketing than our peer group, but yet are generating outsized traffic than they are because we spend more in sales. They spend more on marketing, but yet we're growing faster, driven by SEO strength.
Nick Jones: Great, that's helpful. And then, maybe just looking at opportunities in the landscape, maybe, I'll call it, auto tech. You have fuel, you have dealer Inspire, one of your big competitors got into kind of the auction environment. Do you see opportunities out there as dealers get? I think they're zeroing in on finding inventory more creatively or more aggressively? Are there other areas that get involved as maybe more transactional as opposed to maybe more lead gen or web presence type services?
Alex Vetter: Sure. Well look, we still got a lot of runway to go with our existing organic solutions, right? We're still under 5,000 dealers on websites and a much bigger universe. We still haven't even really begun to focus on the independent dealer segment with website solutions and fuel, as I mentioned before, early, early innings. So, we've got a lot of upside and growth to have on our existing solutions. I think there has been a lot more investment in Autotech in the past year, driven by COVID. And what's exciting about that is all of these technologies really need distribution. And whether that distribution is to a large consumer installed base on our marketplace platform or through our robust sales network that's established with over 19,000 dealers, we can bring solutions to market. And so we are contacted frequently by a lot of the innovations in the category who've got great technology but really need distribution. And so we will continue to look for solving problems in either consumer market or the dealer market, if there's pain points there that we can deploy technology to drive out cost from the industry or to make the process better. We're active in looking at those opportunities.
Nick Jones: Thanks.
Operator: Our next question comes from the line of Steve Dyer. Please proceed with your question.
Unidentified Analyst: Good morning. Ryan on for Steve. Curious on the dealer growth and the customer pick up there. How much of that was reactivation of suspended dealers versus new dealer growth?
Alex Vetter: Well look, everybody lost a lot of dealers during the pandemic, Ryan. And so we're almost back to our pre-COVID levels. So, a good healthy percentage of that is dealers coming back. We saw particular unnoted strength in franchise dealers engaging in the platform. And so we're right back almost to our pre-COVID levels. And we were growing dealer account, again, pre-COVID. So, I don't have the exact percentage of new sales that were former dealers, but we're definitely bringing back a lot of the accounts that we lost during the pandemic.
Sonia Jain: We are. And the great thing is we're actually bringing back a lot of new accounts. It's a mix of new and folks who suspended during the COVID period. But I think it's, call it, roughly 50-50 between the two buckets.
Unidentified Analyst: And then, just a follow-up on that. How much is left in kind of the pipeline of suspended accounts that haven't necessarily made a decision whether to drop or to reactivate yet?
Sonia Jain: I don't know if that's necessarily the right way for us to look at it, right? What we're trying to do is go out there and create like a healthy dealer base that is interested in not just our marketplace solutions, but our entire suite of products, which includes BI and fuel. So, we're evaluating the opportunity that way as opposed to specifically suspended dealers.
Alex Vetter: Right. We have no dealers that we are grandfathering in or had anybody. We ended that in Q3 of last year, where we basically said, do you either need to resign or we'll cancel the outright. So, we've got no dealers in a suspended status from last year.
Sonia Jain: And then, just on Q2 I get the OEM revenue down and the challenging new vehicle, just from the supply side, etc. But I guess, it sounds like fuel is on fire. It sounds like DI is doing well. You have this new for GM's ramping. I guess, all of the good stuff that you talked about with the business, it feels like that should be able to offset. But I guess, is the OEM channel really that challenged, that it's more than offsetting all of those things relative to Q1.
Alex Vetter: Well look, we are being cautious because the chip shortage is a macro factor that's evolving by the day. So, I think our low end of the guidance range is partially driven by that, like there's just a lot of uncertainty there. I would say we're seeing really strong robust trends on the demand side and on the dealer side, which are all going to be growth. But on a subscription basis, the great success we had in Q2 only contribute so much to the Q2 picture. It definitely accelerates and continues throughout the year, but with so much uncertainty around the OEM front, we did provide a more cautious outlook because of the uncertainty there.
Unidentified Analyst: So, I guess are you assuming potentially dealer churn because of that environment? Or do you think dealer growth can continue, and this is primarily an ARPD, I guess, headwind?
Alex Vetter: Yes. It's not an ARPD headwind. That's been strong and growing. And dealer count has been solid as well. In fact, we grew dealer count in April. So, we're seeing the growth trends on dealer continue. I think where we've applied some conservatism is just on the national uncertainty and outlook there, which, as you know, doesn't impact ARPD, but rather our national revenue bucket?
Sonia Jain: Yes. No, that's right. I think when we look at the business in terms of dealer revenue, we do see a lot of momentum there between our solutions business, right? DI grew 25% year over year just in Q1. And in the marketplace, we continue to see really strong retention rates. And there is strength in sort of the franchise base of dealers that we have an orientation toward. So, what you see in the guidance range we've put forward on the revenue front is some level of conservatism, which we thought was prudent just given the uncertainty around the inventory supply chain. It's a little bit out of our control. And OEM revenue has always been that OEM and national revenue line has always been slightly more volatile because it's not a traditional subscription business that we have on the dealer revenue side.
Unidentified Analyst: Yes, makes sense. You talked about or I guess the online shopper, there's a lot of push toward end-to-end online solutions for dealers. Have you seen any cannibalization of your marketplace subscriptions with customers that are doing more with DI?
Alex Vetter: No. It's just the opposite. In fact, as dealers are embracing digital retail, increasingly, what we're hearing from dealers is wanting to augment their website volume with users from our marketplace. And we're seeing this through the DI connected platform right now. If a user comes to the dealer's website through cars.com, they are converting at two times the rate of all their other traffic sources combined. And so that's been one of the exciting things on COVID is that with showrooms empty, dealers are studying these digital metrics with a much finer tooth come and seeing the qualitative aspects of our audience. And so we now have more inbound demand for dealers wanting to source in market audiences because they see that it converts higher.
Sonia Jain: Yes. And just to build on Alex's comment, as we look at our shared customers who are using both the dealer Inspire products as well as marketplace, that's actually grown substantially year over year. It's up, I want to say, over 20%. So, we are seeing more uptake as opposed to two left.
Unidentified Analyst: Great. And I'll hop back in the queue. Good luck, guys.
Operator: Thank you, Ryan. There are no further questions in queue at this time. I turn the call back to Alex Vetter.
Alex Vetter: Well, I want to thank everybody for your interest in cars today. Sony and I are going to be presenting at the JPMorgan technology, media and communications conference on May 24, and there'll be information posted on the details of that event on the IR section of our website. This concludes our call. Thank you very much.
Operator: And this concludes today’s conference call. Thank you for your participation. You may now disconnect.
