Greetings and welcome to the CarGurus' third quarter 2018 earnings results conference call. As a reminder, this conference is being recorded. I would like to turn the call over to your host, Rodney Nelson, CarGurus’ Investor Relations. Thank you. Please begin.

Thank you, operator. Good afternoon and welcome to CarGurus' third quarter 2018 earnings call. We will be discussing the results announced in our press release issued today after the market close and posted on our Investor Relations website. With me on the call today is Langley Steinert, CarGurus' Founder and Chief Executive Officer, Jason Trevisan, Chief Financial Officer and Sam Zales, 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 fourth quarter and full year 2018, management’s expectations for our future financial and operational performance, our business and growth strategy and our plans to execute on our growth strategy, our brand awareness efforts, our investments in and ability to drive adoption of new and existing products, the value proposition of our products, 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, prospects and expectations. Forward-looking statements may include words and phrases such as we expect, we believe, we intend, we anticipate, we plan, may, likely, upcoming and similar terms. 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 today's market close as may be updated by our other SEC filings. Further, during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release issued after market close today. The press release and our SEC filings can be found in the Investor Relations section of our website at investors.cargurus.com and the SEC's website at sec.gov. With that, I will turn it over to Langley.

Thanks, Rodney and thanks to everyone for joining us today. After a strong first half of 2018, we built on our success in the third quarter by investing and growing our brand, expanding our audience and fostering the most trusted car shopping experience for consumers. In the US, we eclipsed 37 million average monthly unique visitors in the third quarter and we surpassed 100 million average monthly sessions for the first time. The investments we're making in our brand are paying dividends, resulting in not only a larger audience, but a more engaged one. Our unique users are visiting our site more frequently now than they ever have and our unique combination of scale and engagement is driving an ever increasing volume of connections to dealers. Audience growth is one of our fundamental revenue drivers, so these trends supported another quarter of strong financial performance. Third quarter revenue rose 43% year-over-year and operating income came in ahead of our guidance. Based on our year-to-date performance and the strength of our business, we are raising our guidance for the full year, which Jason will outline in more detail shortly. We believe our marketplace represents the most transparent car shopping experience for consumers and we have invested heavily in our brand over the last year to spread this message and attract new users to our marketplace. To this end, we recently launched a new customer testimonial brand campaign in the US that has enjoyed strong initial results. This campaign showcased our trusted, transparent marketplace, provides unparalleled access to information about a vehicle and its price that helps our users find great deals from top rated dealers. The consumers featured in this are actual users who represent our broader audience, engaged car shoppers who are ready to purchase a vehicle and appreciate our…

Thanks, Langley. I'll provide a detailed overview of our third quarter performance followed by guidance for the fourth quarter and our updated view for the full year 2018. I'll finish my remarks by providing some high level commentary on 2019 before turning it over to Q&A. I'll begin with the income statement. Total revenue was 119 million in the third quarter, up 43% year-over-year and roughly 6 million ahead of the high end of our guidance range. Our marketplace business surpassed an important milestone in the third quarter, as we achieved more than $100 million in subscription revenue for the first time. Total marketplace subscription revenue grew 43% year-over-year to 105.8 million. Advertising and other revenue grew 46% versus the year ago period to 13.2 million. As we invest in our brand and grow our audience, our platform remains an attractive advertising destination for OEMs and other automotive and auto finance partners. Campaign timing and promotional activity from our advertising partners can vary quarter-to-quarter and as we've seen year to date, we expect advertising and other revenue to exhibit less linear growth than marketplace subscription revenue. Looking at our performance by geography, the US remains the principal driver of our revenue growth, as the US has represented 96% of our total revenue year-to-date. In the third quarter, US revenue rose 43% year-over-year to 114.6 million with growth coming predominantly from our marketplace subscription products. Our international segment grew 71% versus the year ago quarter to 4.4 million, despite the fact that we continue to prioritize inventory and audience building over commercialization at this stage in our international expansion plans. Turning to our paying dealer count, we eclipsed 30000 total global paying dealers in the quarter. We ended Q3 with 30593 total paying dealers, up 15% year-over-year and representing an increase…

[Operator Instructions] Our first question comes from the line of Tom White with D.A. Davidson.

Just one on your investments in kind of new products and I'm not asking you, I think I guess too much away in terms of the product pipeline, but I heard a lot of talk about kind of trying to capture some of the other digital advertising spend that dealers are making, is that really sort of the priority now in terms of, as we think about your product pipeline over the next couple of years, more so than maybe trying to penetrate other parts of kind of the dealer software ecosystem, if you like maybe around the time of the roadshow, you talked about that a bit? And then just on your display business, your display advertising business, I know it's a huge part of the business, but I’m just curious about whether there are new product innovations there that you guys think might enable you to maybe better capture some of the money that OEMs are spending kind of outside of traditional advertising in areas like incentives and stuff like that?

Tom, it's Langley. So on new product, it's probably not in my best interest to get into kind of telling you what our product pipeline would look like. But suffice to say that as we think about how a dealer thinks about digital marketing, we'd like to be involved with as much of that business and pocketbook as possible. Probably have to leave it at that before the lawyers get me. But yeah, I mean, we're excited. We're excited because we're a technology company and we feel like we understand how to apply technology to acquiring customers be it off our own site, or even helping a dealer attract a customer to their own site and we feel that in this category, we're kind of more uniquely suited to apply that technology more efficiently than some of our competitors. So I can turn it over to Sam to talk about the display business.

Yeah. Tom, thanks. Sam Zales here. We are constantly thinking, as Langley just said about the digital marketing suite that employs all of the new technology to drive consumers to both dealer and OEM sites. We're doing that aggressively and having success on the dealer side and the OEM side. We are constantly innovating, we're having strong demand, obviously because of that consumer base we're driving a down funnel shopper to both audiences. So you will be seeing future thoughts around innovation on the product set in that arena. Both strong, both pressing us to get in front of that down funnel and growing audience that we're driving of consumers.

Our next question comes from the line of Dan Kurnos with Benchmark Company.

I know it's not really super -- hasn't been super relevant before but obviously [indiscernible] between the last two calls, so if you guys can just call out if there was any impact you saw from the recent Google algo change on organic search rankings, is there any impact on traffic for you guys? I know you've navigated it in the past and hasn't been a big component, but just any impact on traffic and traffic acquisition costs? Thanks.

Sure. Thanks, Dan. This is Jason. We did expect, someone asked us today, so yeah, we have described to folks in the past that over the last couple of years, two things have happened. One is that our traffic acquisition channels have become less dependent on organic search in particular and we've increased quite a bit our direct traffic through our brand investment. And so those are two macro trends that we're very pleased with. We've also said that over the last 10 years, there have been -- over the last 7 years, I think there have been 11 algo changes and we've grown through them. And while we're not going to comment specifically on this one, I would tell you that our organic traffic and our organic traffic from Google was up in Q3 versus Q2 and it was up year-over-year.

Yeah. And this is Langley. I mean, Dan, if you look at our uniques, year-over-year, in Q3, it was 43%. So I think I'll let that numbers speak for itself.

Our next question comes from the line of Ralph Schackart with William Blair.

Hi. This is Kevin on for Ralph. You mentioned the strong results from your brand marketing efforts year-to-date. To the extent you can, could you help us understand perhaps the magnitude of its impact on traffic in the quarter and I suppose more broadly throughout 2018? Thanks.

This is Jason. So we don't -- we're not going to quantify the specific impact that it had on traffic. One, because we've never broken out traffic acquisition channels, but two, because the attribution for it does get complicated and the best example I would give you is that, as we invest in brand, some of our paid search channels start performing much better because consumers are more familiar with our brand when they may see us in a paid search atmosphere and how one attributes that could be different from how another one attributes that. And it's not discrete. These tend to be sort of a blended approach to acquiring consumers. What we do though is measure a lot of the things that we talked about in the prepared remarks. So we're looking at unaided awareness, we're looking at direct traffic, we're looking at branded search volumes and all of those as you heard us say have been outstanding and in fact exceeded our expectations. And so as a result, our direct traffic has gone up quite a bit and – but we're not going to quantify what -- exactly what that is.

Kevin, this is Langley. The thing that I would go back to when people ask me about marketing, be it TV or search engine marketing is that the thing that we're proudest about is in fact our product and the reason why I would argue marketing works so well with our product, be it TV or search engine marketing or retargeting is that we have such a wide point of differentiation and it all goes back to the product that without disparaging our competitors, we have a wide point of differentiation because of the fact that when you search on our platform, you get price transparency, you get dealer reputation, you get days on market, you get price drops and none of our competitors provide that level of transparency. So when you boil it all down and talk about marketing, you have to fundamentally start with the product. Okay. I mean, you can do all the marketing in the world you want against a product that's not as good and it's not going to do you a whole lot of good. So again I would always go back to -- it all starts with the product and that's the thing we're most proud of.

[Operator Instructions] Our next question comes from the line of Heath Terry with Goldman Sachs.

I was wondering if you could maybe characterize for us what you're seeing in some of your international markets, particularly UK and Germany in terms of the adoption rates among free dealerships on the platform and then of course the conversion, where you are seeing it from free to pay, how does it compare to your experience in the US? And then on the consumer side, how do you see the consumer adoption comparing in those markets?

Keith, it Sam Zales. I'll start with that and if Langley or Jason want to follow in, they can. We've talked about five steps to international country development. The first is acquiring the inventory, so to your point, acquiring dealers to our free basic program. Number two, building out the website to ensure that it's marketed and developed for that particular custom audience. Number three is then growing the consumer audience. Number four is then converting some of those dealers on the free program to paid and number five would then be launching new products as we are here in the US. Without -- I'll speak in generality, because we’re not breaking out individual markets and they're all at different stages of development, but we're certainly very pleased with and I guess if I gave a characterization, because the US market developed over a series of years here in the US with different business acceleration and models that we use, we’re moving quicker in those markets, we're investing in those markets more quickly. So our pace is more rapid. We're seeing great adoption to the free freemium model of dealers having the opportunity for choice of saying, I'm going to put my inventory on the platform for free and I'll gauge what that opportunity is for the consumer to interact with me through that anonymized e-mail process. But as we build the consumer audience and Jason's points on the growth rate and Langley speaking to the audience growth in those international markets, which was really tremendous in the third quarter, we are seeing fairly quick adoption for dealers understanding the ROI of moving to the paid program is so tremendous. I can turn that single point of connection between the consumer and the dealer to five connection types. Email, phone, chat text, direct clicks to the website and map and directions that we're moving a significant portion of that freemium model over to the paid program. So I'd characterize it as, we're very encouraged by our progress in those markets. Each one of them is different characteristics, but the basic paying point is consumers without the transparent experience, dealers in each of those markets saying I've got in typical cases, one monopoly player, in some cases, two players in that market and I don't have enough choice for a return on investment based customer acquisition channel. So both the consumer traffic as you've seen in international markets is growing quickly. We've amassed great inventory in those markets from the freemium model and we're now converting them to paid dealers and working on that monetization process. Each country moving at a different speed, we're very encouraged with where we are in each of those markets.

Yeah. Heath, it’s Langley. Sam alluded to it, but our unique visitor growth quarter-over-quarter and the international markets was I believe around 70%. So we're seeing good traffic adoption, which is in the end of at all what dealers are looking for.

I guess one follow-up question just as we're thinking about the model. Sales and marketing, you saw a pretty meaningful leverage, particularly on a year-over-year basis in the quarter. Is there a way, even if it's just qualitatively that you can disaggregate for us sort of what piece of that is traffic acquisition, marketing and then dealership acquisition from a sales perspective, where are you seeing the leverage?

Sure. It's Jason. The first directional disaggregation I would flag which I think you know, but just as a reminder is that the US is a lower percent of revenue than it is in international. International, we're still building those markets and so it's inflated. So, what you're seeing at the consolidated level is certainly artificially higher than it would be for a market that is more established like the US. The second thing I would say is that traffic acquisition, just given where we are, does -- it remains the largest. And the sales and then the other three components, which are all second to consumer traffic acquisition is sales -- dealer sales, dealer marketing and then consumer branding, not in any particular order, but those three are all second to traffic acquisition. The leverage will come from, in the near term, consumer traffic acquisition. Over time, we think it will also come from brand, but we're in this funky time where brand just started 4 or 5 quarters ago and so that has -- that still has a little bit of a ways to normalize before we start to see leverage there.

Our next question comes from the line of Doug Arthur with Huber Research.

Just in terms of how you frame kind of a gradual slowdown in sequential growth of US paying dealers, I'm just trying to get a sense of the cadence of that. I think it was a little over 600 sequentially added in Q2, so a little under 300 in Q3. Is that likely to bounce around as you go through ‘19 or will we see further slowdown there and I realize you've got an awful lot of dealers in the network already, just trying to get a sense of what gradual slowdown means.

Yeah. I think it's a fair question and in the long run, yes, that will decline as we've said as our penetration reaches the levels that it's reaching, but quarter to quarter, it's going to move around. I mean, there's a couple of things at play. One is, there is a little bit of seasonality in the industry that has been masked a little bit by our growth and it's not always entirely predictable, but if you look at car sales, car sales have a couple of different peaks in the year and so dealers behave differently in different months. So that's one factor. Another factor is that, we still do have opportunity to further penetrate some large dealer groups and so we can get large wins that come in fell swoops, whereas others, it may be more one-offs. So I think you're going to see some bouncing around. I know you're going to see some bouncing around, but to your point, if you just look at the math at 27,000 plus and against a total market of 43000 and you carve out a couple of dealer types who will not perform as well in our marketplace, we are going to reach an end point at some point.

It’s Langley, Doug. The other thing I would stress is that, when we did the road show, we were careful that how people think about not just our domestic dealer count, but our global dealer count because as we highlighted in the earnings release, there are 55,000 dealers in all the markets we're in. So I think it's -- you have to be careful about not include -- not excluding the runway that we've kind of tried to acquire those additional markets we're going in to. So, it obviously represent additional runway. And then secondly, when one looks at revenue growth, you have to disentangle dealer acquisition and then AARSD growth and quarter-to-quarter, our AARSD growth is over 21%. So we're looking at both levers in terms of acquiring dealers globally, but then also domestically raising AARSD through pricing and layering on new products as well.

Our next question comes from the line of Tom White with D.A. Davidson.

Just on the US dealer trend, thanks for the added color there. I think last quarter, you talked a little bit about looking to kind of add field, more field sales people. So I guess, should we not expect that as those people get added and sort of ramp productivity, that that should have some sort of benefit to adding new dealers or are they sort of more focused on selling in new products? And then just on Facebook, just curious to hear your kind of updated thoughts on Facebook as a percent -- potential source of demand either for you guys directly or maybe as a channel that you would help manage their own kind of dealership campaigns on?

Tom, it’s Sam Zales. I'll start with the first one, which is field sales. We have added a small number and remember, we're highly efficient inside sales operation. We do have a small set of staff members out in our major metro markets, talking to the largest dealer clients out in the marketplace. They are a combination of hunter farmer sales people. So I'd subscribe to Jason's comment that the slowdown in customer acquisition will -- gradual slowdown and that process will continue. But as we said, there are some large dealer groups that are partially penetrated, so a group that might have 100 stores, we may have 70 and the effort for that field sales representative on the hunting side would be to say, let me go get the rest of those stores, improve the return on investment of the first 70 to get the last 30 on. But as you said well, their farming effort and Langley just said it, the comparison of acquisition to expansion is one we're balancing and obviously the big upside is the expansion business for us. So the farming effort out of those field representatives to develop those relationships in the large accounts and then offer those next set of products as cross sell to the listings product. So they will be in there on pricing and packaging and renewals, but also selling next set of products. I'll turn it to Jason to talk about Facebook.

Yes. So on Facebook, we use Facebook as a customer acquisition channel and we think we use it quite well for our own site and so much like our broader algorithm traffic acquisition, we feel our capability there is market leading. We also know that the demand exists. We recently were -- had gathered a couple of dozen key dealer customers of ours and talked about social and their appetite for it and the demand absolutely exists. And so one would think that there's an opportunity there. I would say though that we're careful to really go into areas where we can develop products, where we can be differentiated and as opposed to going into areas where we feel that there may be a commoditized product set and it's just a way to sort of grab low margin revenue and we're committed to not doing that. With our SEM product as an example, we could have launched something much sooner that was not as differentiated as it is, but we've chosen the path we have because we're a technology company. And so as it relates to Facebook, we, a, want to be differentiated, b, we also want to be careful because in order to get the benefit from that platform, you're working with a single other partner in Facebook as opposed to working with hundreds of partners across the web. And so we want to navigate a relationship there. If we do, that allows us to maintain leverage, allows us to maintain control and is in fact differentiated, but it's certainly on our radar because our dealers say to us, you guys are our technology versus our agency partners and we'd love to see you do something there.

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

Hey, it's a small question, but can you just comment a little bit more on this Google search algorithmic change. It seems like TrueCar and Cars.com have both talked about it. I assume this is just standard operating procedure for anybody who's trying to gain traffic or win traffic and has to rely on Google, but just talk about the magnitude of it, is this standard core for business, is this something you've toggled with and worked through in the past, just put it in context of other algorithmic changes? Thanks a lot.

Hey, Marcus. It’s Jason. So we -- you may not have heard earlier that this topic came up and what we shared was that we’ve -- in the past 7 years, we've gone through a dozen or so algorithmic changes and grown through them. This one is no different. Our organic traffic was greater in Q3 than it was in Q2. Our Google organic traffic was greater in Q3 ‘18 than it was in Q3 ’17. And so these happen. Google doesn't give a ton of guidance as to what exactly is underlying their changes other than to say they're trying to get consumers to have the best experience and I think that comes back full circle to Langley's point, which is these aren't just words, like truly, it is the best marketing tool is our product and so one of the data points that we were most excited about in this quarter is that our visits per unique was higher than it's ever been. To us, that says that we are building an engaging product and when you sort of parse through all the Google -- all the comments that Google makes, they say they want their consumers to be engaged with the destination they send them to. So, yeah, they happen, I know it affected some others, it was kind of run of the mill for us.

The margins Langley. The other thing is, as we talked about during the roadshow at the IPO, we have worked really, really hard over the last 3, 4 years to deemphasize our relationship, or not a relationship, but our dependence on organic traffic from Google mostly through paid channels. I would say right now proportionately, Google free traffic is something to our business, but it's, I would argue that it's nowhere near what it was three years ago and it's probably to the point now where it's, I would argue, it's not hugely material to our business, but in any case, as Jason said, you look at our numbers, uniques quarter-over-quarter this year, we're up 43%. I can assure you none of our competitors have anywhere near that kind of growth. And again as Jason has said, if you drill down specifically on Google organic, I believe quarter-on-quarter, our traffic was up. So I'm not sure what our competitors were referring to when they were alluding to any of our traffic woes, because we don't have traffic woes.

Thank you. We have reached the end of our Q&A session. Allow me to hand the floor back over for closing remarks.

Yeah. I would like to thank everyone for their time and we’re, as we said earlier, really excited about prospects for the rest of the year and going forward. So thanks for everyone and have a good evening.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.