Greetings and welcome to CarGurus' first quarter 2018 earnings results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Marc Griffin, Invester Relations. Thank you. You may begin.

Thank you. Good afternoon and welcome to CarGurus' first quarter 2018 earnings call. We will be discussing the results announced in our press release issued today after the market close. With me on the call this afternoon is Langley Steinert, CarGurus' Founder and Chief Executive Officer, Jason Trevisan, Chief Financial Officer of CarGurus and Sam Zales, CarGurus' Chief Operating Officer. During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the second quarter and full-year 2018, our growth strategy and plans to execute on our growth strategy, the growth levers we expect to drive our business, our ability to maintain existing and acquire new customers, our expansion into international markets and other statements regarding our plans and prospects. Forward-looking statements may be identified with words and phrases such as we expect, we believe, we intend, we anticipate, we plan, may, upcoming and similar words and phrases. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise these forward-looking statements, except as required by law. Forward looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained under the heading Risk Factors in our quarterly report on Form 10-Q filed after the close of the market today and as updated by our other SEC filings, all of which are available on the Investor Relations section of our website at cargurus.com and on the SEC's website at sec.gov. Finally, during the course of today's call, we will refer to certain no-GAAP financial measures which we believe are helpful to investors. A reconciliation of GAAP to non-GAAP measures is included in our press issued after the close of market today, which is available on the Investor Relations section of our website at cargurus.com and the SEC's website at sec.gov. With that, let me turn it over to Langley.

Thanks Mark and thanks to everyone for joining us on the call today. The first quarter was a strong start to 2018, highlighted by robust Listing subscription bookings that drove both revenue and profitability above our guidance. We remain focused on delivering attractive combination of growth and profitability of scale and accomplishing that while investing aggressively in the business to capitalize on a large market opportunity. Our investments include new products, brand building and international expansion while extending our leadership position with consumers and growing the value we provide to our dealers. Based on our strong first quarter results and momentum, we are increasing our guidance for the full year 2018 which Jason will detail in a moment. At a high level, the company continues to execute well against our mission to become the world's most trusted and transparent automotive marketplace. Underpinning that mission is a set of strategic initiatives upon which our company is maniacally focused and we believe our success in these areas will have a substantial impact on our enterprise value in the near and mid-term. In 2018, our five strategic initiatives are, one, growing our audience connections and brand, two, introducing new dealer products, three, expand our share of wallet by providing dealers more value through connections and products, four, continued strategic international expansion and five, invest in building the best consumer to consumer or P2P marketplace. I would like to focus for a moment on the first initiative, growing our audience connections and brand. The traction of our platform with consumers was evidenced in Q1 by the 39% year-over-year increase in total worldwide user sessions with 37% growth in the U.S. and 68% growth in international markets. Our total worldwide monthly unique visitors grew 36% on a year-over-year basis, which included 33% year-over-year in the…

Thanks Langley. The first quarter was in fact a strong performance by our team and it positions us well to outperform the 2018 financial guidance we initially shared last quarter. Let me start with a more detailed review of our first quarter results and I will close by outlining our second quarter guidance and a preview on the full year 2018. Beginning with the P&L, our total revenues were $98.7 million for the first quarter, up 47% year-over-year, a little over $4 million above the $94.5 million high-end of our guidance range. The primary drivers to total revenue is marketplace subscriptions which group 48% year-over-year to $89.3 million and contributed the bulk of our strong performance. Advertising and other revenue represented the remaining $9.4 million of total revenue, which is an increase of 37% on a year-over-year basis. As a reminder, this piece of our business can at times be lumpy and is less predictable than our subscription business. That said, we have been pleased with the improved performance in advertising and other revenue since we took our advertising sales function in-house at the beginning of 2017. We expect advertising and other revenue will continue to grow at a healthy pace based on the growth of our large and engaged audience and the introduction of new advertising products in future quarters. From a geographic perspective, U.S. revenue totaled $95.2 million, up 45% year-over-year and international revenue represented $3.5 million, up 119% from $1.6 million in Q1 of 2017. We ended the first quarter with 29,026 total paying dealers worldwide, up 24% year-over-year and a net increase of 1,356 from the end of the prior quarter. Total paying dealers in the U.S. ended the quarter at 26,261, up 1,139 from the prior quarter and international grew to 2,765 total paying dealers,…

[Operator Instructions]. Our first question comes from Heath Terry with Goldman Sachs. Please proceed.

Hi. You have got Daniel, on for Heath. Just a couple of quick ones from us. You touched on a little bit of this in the call. Saw the nice sequential growth there in pricing. It accelerated on a year-over-year basis on AARSD. Just wondering if you could unpack a little bit for us in more detail around what drove that and how much SEM Plus launching had to do with that? I realize it was beta, but any other color you could provide there? And then outside of the U.S., you spoke to the launch of Italy, but interested to hear what you also have to say about the competitive environment that you are seeing in the U.K. Thanks.

Sure. Thanks. This is Jason Trevisan. So in unpacking AARSD, we don't quantify the balance of the components of that. But at this stage, it's similar to last quarter, which is that the biggest driver is our volume growth of connections. And I would say our second biggest driver continues to be unit pricing and packaging. And then the third is the adoption of new products or additional products outside of Listing. And SEM Plus is, as we have said a couple of times, it just came out of beta. So it's still quite early, although it is a higher price point than Dealer Display, it's just coming out of the gate. And so Dealer Display at this point, I would say still continues to be a bigger contributor to AARSD that SEM Plus does. So directionally, those of the three components. Competitive environment in the U.K., I will have Sam speak to that.

Hi Daniel, Sam Zales. I think we are seeing the same story that we saw here in the U.S. in each of those markets we are entering. You asked about the U.K., but I would probably say the same in each of the markets. For consumers, the pain point is not enough transparency in that auto shopping experience. They would like to see a reflection of price point and comparative to the market for good deals as well as those that aren't good. And they would like to see their search process optimized to the right cars they are looking for, not who is paying the classified site the most. And on the dealer side would really love a return on investment and comparative partnering, digital marketing to acquire customers cost-effectively. So we are seeing the opportunity for dealers raising their hands and saying, I would like to participate in that program. I think that's evidenced by our year-over-year growth and we think as that opportunity exists, we are going to continue to use the model we used here to continue to drive a great audience and a downfall of shopper and for our sales team to convert basic dealers to the paid program because we offer a return on investment that's beneficial to those dealers.

Great. Thanks guys.

Our next question comes from Ralph Schackart with William Blair.

Good evening. A couple of questions, if I could. First, I think you talk historically about some alternative pricing models. Just curious how those are trending and sort of the feedback from your customers? And then two, maybe a little bit broader bigger picture. Given the advertising campaign success that you are seeing, in particular with TV that's, I think, you have called out the last couple of quarters, what's your philosophy around potentially reaccelerating or spending more on marketing and given your market leading position and maybe just a stronger foothold from where you are today going forward? Thanks.

Sure. Hi Ralph, it's Jason. So I will start with the second question. So just to clarify, you wanted us to talk about trajectory of brand spend in the U.S. I was jotting down notes as you were talking.

Yes. That's correct. Given the success you are having, I guess, more specifically with the domestic brand spend, what considerations around maybe spending more?

Sure. So yes, as you have heard us say, we really since the midpoint last year, we began brand spend in beginning of Q3 and a lot of last year was testing and this year as we have seen the results of those early this year, we have been encouraged. The things that we are measuring are our aided and unaided awareness via consumer surveys conducted by us and by third parties, branded direct URL traffic and branded search and branded organic search. And all of those are on pace with what we expected to see given the amount of spend. We are also seeing a rising tide effect in our paid search, even unbranded paid search as more people are familiar with our brand name when we are showing up in results. So it's creating a tailwind there is well. And you heard us say that we are reinvesting a meaningful portion of the revenue upside that we generate already and expect to generate and some of that's going into brand because we are excited about it. We have always felt that we were well positioned because we had very low awareness, but a sizable audience and really, really strong consumer satisfaction because of our consumer centricity and we are starting to see that play out. We launched a new creative campaign in TV in Q1 and that's performing well. And we are starting to move from simply generating awareness of our name to actually starting to articulate some of the benefits to the consumer in ways that we are different from our competitors. So I would say, the headline is, it's playing out as we had hoped it would. It's producing the results that we would hope it did. And we are now marching down the path of how you actually develop a brand starting from close to scratch.

And Ralph, it's Sam Zales. I will take the first part of your question which was about pricing models. I would say two things are happening right now. One is, we are demonstrating through the use of attribution and looking at data on our connections driven into the dealers and how was the closing to more of an ROI-based pricing model so that when you better align the value we are driving to dealers with the price point, you will see that evidenced in our AARSD continuing to grow as we continue to evolve that methodology for using RPI as a basis for driving value to dealers at price points that should be increasing. The second is, we are testing those alternative pricing models you mentioned. I think on the last call I mentioned, we were in the top of the first inning, to use a baseball analogy. On that front, I would say we are probably in the bottom of the first-inning now. We continue to look at models that ascribe pay-for-performance. We will continue to test various models on that front. We are pleased with where those are testing in an early stage and we will continue to evolve those. We think this is a longer-term process where we will find optimal models over time. But we are positive about the results we are seeing in those tests at this point.

So Ralph, this is Langley. One point that I think underlies what you just asked and Daniel asked previously about AARSD growth is that, we have noticed probably in the last, I would say nine months that our market leadership, which is now widening against our competitors, the major competitors, is really a major key point that the dealers have to think about when they think about either signing up with us for their first paid product or renewing with us. I think they look at the scale that we represent and now it's a widening scale of being the number one player and they really realize they need to be on our platform because of that scale. So they really care about two things. They care about scale and they also care about close rate and Sam highlighted that. I think that the RPI and what we deliver to our dealers is quite high. But first and foremost, I would say one of the changing elements in the last nine months has been our widening gap and the fact that we are the number one player in U.S. now by a decent margin.

Great. Thanks for the extra color.

Our next question comes from Mark Mahaney with RBC Capital Markets.

Great. Thanks. I was wondering if I could take a shot at asking you to summarize your investment areas in the following way. What it sound like you are doing is, as you have upside you are using, you are letting some of that flow-through but you are letting some of that on the topline, you are letting some of that accelerate investments in other areas. So if you were to categorize or triage your investment areas, your investment needs over the next one to two years, what would you say are the top three areas that, if you have that revenue upside, what that would flow to? What are the three most important areas in importance to you in terms of new investment spend? Thank you.

Yes. Mark, it's Langley. I am going to take a swing at it and then Jason can maybe pickup if I missed anything. But I think first and foremost, I would say it's brand. We feel like we are in a position to use the leadership that we have and the dollars that we have to invest in the brand and get the message out, as Jason alluded to. We feel like we have a big point of differentiation with our product versus our competitors and we want to educate consumers about that. So I would say, first and foremost, that's brand. Second is international. But as we think being able to address a bigger addressable market is an important part of our future growth, we will prefer not to be limited just to the United States. When we talk internally about addressable markets and number of dealers, we do not tend to quote just the U.S. market. We quote U.S., Canada, England, Germany, now Italy. So we see essentially buying more runway for our business. I would say, third is products and I would characterize that as more dealer products. The second product, first it was our Listings product. Then it was our display ad service. Third with our search engine marketing product. And we have other products which we have in the pipeline that we are going to roll out. In the long run, we would like to be a dealer's digital marketing partner. We want to help them spend their dollars in whatever category may be as efficiently as possible applying technology to make it a smarter spend. And then lastly, which is much farther down the road is P2P. We haven't spent much time talking about that but we believe, as we talked about on the road show, that someone's going to, to use the analogy of the last business I was in which is obviously with TripAdvisor, someone's going to Airbnb this category and we want to be the disrupter to capture the peer-to-peer, consumer-to-consumer trading element of this market. It's a big part of the market here in the United States as well as overseas. And we think there is a real opportunity to create a more trusted platform, mobile optimized trusted platform where the existing products you could use to do a P2P transaction, we believe, are fairly flawed and they are not being mobile optimized, not addressing issues of trust around trying to sell a private car. So I would say, those are the major areas.

Okay. Thank you very much, Langley. I appreciate that.

And our next question comes from Aaron Kessler with Raymond James.

Yes. I have a couple of questions. First, I think in the past you have talked a little bit maybe on the P2P line was the vehicle of transaction enablement as well as for things like inspections, financing warranties. Kind of how should we think about those as potential opportunities? And second, if you could give us a little bit maybe on the size of some of the dealers you are adding in the U.S. market given that you probably have all of the larger ones, are these kind of similar to the ones you already have? Or are these generally much smaller? A little more color on that would be great. Thank you.

Yes. Aaron, it's Langley again. So I would say, specific around transactional business models, it's something, I think especially in the P2P space we are excited about, but as we have cautioned a number of times during the IPO road show and in subsequent earnings calls, the whole P2P platform, we are really in the very early stages of that product. So it would be premature for us to comment on how we see that playing out in terms of monetization models. So yes, I would say, it's very early. We are excited about the opportunity which we think we have uncovered in terms of building a more trusted platform. I would say that optimizing for revenue at this point is something we are still working on.

And Aaron, it's Sam. My comment on the size of dealers that we continue to acquire is a mix relative to the rest of the mix of our paying base. We have not seen, if you are leaning that way, a degradation to much smaller accounts. It's a mix. As you know, we appeal to the broadest set of dealers in the marketplace because we appeal to consumers who are looking for a whole set of choice between the smallest independent dealer to the largest franchised dealer in the marketplace. And we still have penetration available despite the fact that we are further penetrated than any player has been in the marketplace with 26,000 dealers. We have large franchise still coming on board as we have midsize, large and small, independents. Obviously, we are at uncharted territory in the marketplace. That acquisition will slow down at some point. But we feel very positive about the mix that we are continuing to bring in. But it looks a lot like the base that we have.

Yes. If there was a big mix change, that would get reflected ultimately in AARSD and as you saw, AARSD grew. So that's kind of a good barometer for any big mix changes which we haven't seen yet.

Great. Thanks and congrats on the quarter.

Our next question is from Ron Josey with JMP Securities.

Great. Thanks for taking the question. Just Langley, you mentioned on the call, the team is doing a better job at articulating the value to dealers. And I think Sam, you talked about demonstrating attribution is one of the reasons why. But maybe can you help us understand over the course of the past several years how the sales process evolved? And. I ask only because 26,000 dealers, we get a lot of question, how many dealers can join the platform? So understanding how the sales process has evolved would be helpful? And then longer-term, as you do have more and more users on the platform, just talk about how you think you can best maximize the value from the inquiries provided to the dealers for you all, if that made any sense, maybe from an AARSD perspective? Thank you.

Yes. Ron, it's Langley. So yes, it's a long story but I will try to make it short. So if we back up to five years ago, I think ourselves and our competitors were really selling leads to dealers. Leads being defined as email leads and phone leads. The thing that I think has changed the marketplace, at least for us, I can't speak for our competitors, is the advent of the mobile phone. I mean that's like 75% of our traffic is on mobile devices now. When you are on a mobile device, a consumer for the most part is going to be far less willing to fill out a form to even call a dealer. They are most likely going to click on the URL to that dealer's website to find out more about the dealer and go to the dealer or they are going to click on map and directions and go to the dealer. So the first step of our evolution of selling value and not leads was to move from selling, quoting our pricing to dealers in terms of leads to touching in the context of connections. Connections being the whole umbrella of a phone lead, an email lead, a URL click to the deals website, a click on a map and directions, text chat, all these together taken as a basket is what we call connections. And so we have been trying to work with our dealers to couch our pricing in terms of connections and not leads. That was kind of the first step. The second one which we did over a year ago and honestly, I would give credit to a new board member Greg Schwartz. At Zillow, we spent some time talking to the Zillow folks and we got a little…

So once you have that 7X ROI, how do you bring that down to maybe 2X or 1X or something? Thank you.

I will turn that one over to Sam. The short answer is carefully.

Northing much more to add to that, Ron. I think it's the nature of the business. I think the one thing that helps you do that is having a leadership position and the consumer connections and the consumer audience you are driving and taking up further leadership positions. So I will say that that we are starting to get more aggressive about our positioning that we clearly have the leading audience in terms of number of unique visitors, the repeat visits they make to the site, the down funnel nature of those shoppers and when you win that consumer audience, we have always said the marketplace wins the dealers side, the supply-side, if you won the consumer side. I think that argument when you look at that seven times ROI moving down slightly is just the nature of your driving that much more new car sales to those dealers and earning a fair value for what you have driven into that dealer. So we do it carefully. We are not looking to rapidly change that price value equation. But we are doing it, as you see, steadily in that AARSD growth for our business. And we think that will continue long-term.

Ron, this is Langley. Just to circle back on your question in all seriousness, I would just reiterate what Sam said about, we are very careful about our price increases with our dealers because we have done quite a bit of analysis, a lot of sensitivity analysis around what is the inflection of a dealer's sensitivity to a price increase. And while certainly on the face of it, we could probably justify mathematically some really big price increases, but we are also very careful about making sure we don't raise prices so fast that our dealers drop off the network. Because that's kind of thing we want to do in a subscription business is kick up a bunch of dealers leaving the network. And we also see our dealers as our partners. And we are in this for the long-haul. If we raise prices slowly over eight to 10 years, we are fine with that. So I think it's really a question of communicating ROI, but bringing the pricing up slowly so that we retain our customers and don't have them leaving the network.

That's great. Thank you very much.

Our next question comes from Dan Kurnos with The Benchmark Company.

Great. Thanks. Good evening. I think we have talked a lot about brand already. So if we could just shift over to paid and targeted a little bit. I mean, look, your sales and marketing spend was a lot lower, I think, than most anticipated in the quarter. One of your competitors has been out there kind of trumpeting as what they would term anyway a fast follow on the traffic algo side. So curious if you are seeing any pressure in paid channels at all? And then separately, while we know that Google is a very much evolving machine. There were two broad-based rollouts, including one that was a little bit more, we felt than routine in April. And now they are starting to roll out mobile first indexing. So I am just curious if you could talk to either on the product or traffic side, what you are seeing as an impact or how you are optimizing based on those changes? Thanks.

Dan, it's Langley. I will take the second one first about Google's algorithms Honestly, over the last 10 years, I guess, we have seen the ups and downs of many Google algorithms. I would say that and we talked about this on the road show, that four years ago that would have been a tough and sensitive question for us to answer and I would have had to, honest to say, we spend a lot of time worrying about that stuff. But honestly in the last three years, we have spent a lot of time and a lot of money deemphasizing our exposure to any Google algorithmic change to the point now where honestly it's not really huge affect to our business. I am not going to say we don't keep an eye on it, but it's not a real big fixation for us. So we did notice there was a change made a couple of weeks ago and actually think we fared very favorably actually. But I guess the only point I want to make is that as a company, we don't spend an enormous amount of time fixated on that issue because we just don't think that's consistent with building a long-term brand value. We are probably more interested in our brand building efforts through TV, our search engine marketing, which we do, which are paid channels. So that's something we certainly can control a lot more. On mobile, yes, I believe there is a new algorithm going out, I think, in July. We do have some work going on to make sure that we will fare well in that. I mean we are fairly confident we will.

And then Dan, I will take the first question on paid channels. So we call it algorithmic traffic acquisition or ATA. I am not familiar with the reference you made to fast follow. But I would tell you that in here, that is a pretty sizable team for us of engineers and developers and data analysts and it's been in-house and a big investment for us for a long time now. And so there is a learning curve that we are very far down. And there is a learning curve that occurs that accelerates I should say with increasing spend. And we have been spending for a while. So we are the level now where and Langley gave the example earlier in the talk about how some dealers that we go to are working with someone that's targeting a few hundred keywords and then we come in and we are targeting, in some cases, a couple million keywords. So for our own algorithmic traffic acquisition, we are optimizing on a number of parameters that have taken us, at a very fine level that have taken us many years to uncover and unpack. We are still finding new channels that have good acquisition opportunities for us. We are still getting better at retargeting and using our own data to target our consumers and return consumers better. And then both of those are getting this tailwind that I mentioned earlier from our brand spend as well as growing word-of-mouth. I mean, I think you have done some of this already, based on our conversations, you have talk to consumers and you hear that when they use us versus some alternatives that there is just a great sense of satisfaction and they are willing to tell their friends about it when they have good experience. And so in here, in these four walls, we continue to make a ton of progress on really sophisticated end of the learning curve. And back to the fast follow. I think again familiar with it specifically, but I would say the flaw with that is the term fast, like this stuff doesn't really happen fast. It takes time. And it's not only, what I think of sort of front end things that I described about optimization and using our data, but it's sort of all rooted in having a great product and having the most inventory because having the most inventory helps with paid search significantly and because of our freemium model, we have more inventory than others do.

Yes. Got it. Thanks. That's why I phrased it as technically fast. Thanks for all the color guys and congrats on the quarter.

Our last question comes from Tom White with D.A. Davidson.

Great. Thanks for squeezing me in. Just one on the guidance. Obviously you are raising the full-year revenue outlook well in excess of the first quarter beat. Just any other color you can give on, is that just sort of broad-based strength everywhere may be driven by the audience growth? Or is there particular driver that maybe you guys are seeing as particularly strong? And then just a follow-up. We are seeing some reporting that some of the car OEMs may be looking to increase their co-op ad budgets they make available to franchise dealers or lessening the restrictions on where franchise dealers can deploy that? Just curious if you are seeing maybe, do you have any expectation of that trend continuing or how you guys might potentially benefit from that or how you are positioned to potentially benefit?

So I will take the first one. Hi Tom. Yes. So we did have a strong first quarter and a lot of that was subscription and so that is going to flow through. That said, we still have a lot of work ahead of ourselves the rest of this year to, at a minimum continue the bookings that we have planned and if we are so lucky then we could exceed that. And that's on the subscription. On the advertising side, that requires a lot of continued execution because that's less recurring. So we do think that almost a 5% revenue increases is meaningful given the size of the numbers we are dealing with. But we still do need to close a healthy amount of new business to drive our growth and set us up well for 2019.

And Tom, on the co-op side, I think whenever funds are available and made more available by OEMs, we partner with all of the players in the marketplace. We think by driving a high ROI and the biggest and fastest growing audience in the marketplace will allow us to grow the business, regardless of whether co-op funds are available or not for our dealers. So we don't want to get concentrated to the point where we think co-op is essential to the investment in our business. And so as those become more available, it's helpful to us where a dealer can use the co-op funds for either our Listing program or our display product and now the search engine marketing product. We think that's a great sign that OEMs are seeing these new digital channel, digital marketing opportunities as being more important to their dealers selling more cars. And so we will participate there. But we think that out path will always be, drive the best audience to our dealers, whether they have a co-op fund available or not, they are going to continue to invest in our business and we hope that's a smart way to keep less concentrated in the marketplace.

Got it. Thank you.

Ladies and gentlemen, this concludes tonight's program. You may disconnect your lines at time. Thank you all for your participation. And have a good evening.