Good day. And welcome to the CarGurus, Inc. Second Quarter 2020 Earnings Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Scot Fredo, Senior Vice President of Financial Planning and Analysis. Please go ahead.

Thank you, Operator. Good afternoon, and welcome to CarGurus' Second Quarter, 2020 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. With me on the call today is, Langley Steinert, CarGurus' Founder and Chief Executive Officer, Jason Trevisan, Chief Financial Officer and President, International and Sam Zales, President and Chief Operating Officer. During the call, we will make statements regarding our business that may be considered forward-looking, within applicable securities laws, including statements concerning our outlook for the second quarter and full year 2020. And management's expectations for our future financial and operational performance, our business growth and international strategies, the potential impact of the COVID-19 pandemic on our business and financial results, the impact of our enterprise system upgrade and overhaul of our data architecture and other statements regarding our plans, prospects and expectations. These statements are not promises or guarantees and are subject to risks and uncertainties, which could cause them to differ materially from our actual results. Information concerning those risks is available in our earnings press release distributed after market close today. And in our most recent reports on forms 10-K and 10-Q, which, along with our other SEC filings, can be found on the SEC's website and in the Investor Relations section of our website. We undertake no obligation to update forward-looking statements, except as required by law. Further, during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP and non-GAAP measures is included in our press release, issued today. We will also refer to our paying dealer key performance indicator, during today's call. As Jason will explain, and as further disclosed in our press release issued today, we have revised our definition of paying dealer and completed a data reconciliation effort. As a result we have revised, certain prior period paying dealer metrics. All references to our paying dealer metric during today's call where we will reflect, the revised definition. Our updated investor presentation can also be found, on the Investor Relations section of our website. With that, I will turn it over to Langley.

Thank you, Scot, and thanks to everyone joining us today. Although, our industry and our business are facing unprecedented uncertainty amidst the COVID-19 pandemic, CarGurus generated strong results in the second quarter that demonstrate our business' flexibility and resilience. Over the last several months, our employees have produced remarkable successes all while navigating work-from-home environments and often challenging circumstances. As a result of their hard work, we continue to deliver what we believe to be market-leading innovation. And return on investment to our dealer customers. Our business showed several signs of recovery in the second quarter, as consumer demand increased significantly in May and June, yielding strong lead generation and helping dealers rebuild their sales pipeline. We began a broad rollout of our real-time performance marketing suite, generated record engagement on our consumer financing platform and continue to develop additional features, of the online transaction to offer more digital retail elements in our marketplace. Although, we saw traffic and leads decline in April, as state and local governments mandated business shutdowns and sheltering in place, we saw strong consumer demand in our U.S. marketplace in May and June. In the second quarter, we significantly reduced our global advertising spend, as we observed falling consumer demand and sought to maintain strong ROI with the traffic acquisition spend we did deploy, in the quarter. The bulk of the reduction occurred in the U.S. in an effort to maintain business flexibility, through the heightened uncertainty of the health crisis. Despite our reduced spend we averaged 37 million monthly unique visitors and 93 million monthly sessions, across May and June, a testament to the health of our funnel and growing brand recognition. And we generated strong down funnel conversion. Consistent with the last several years, our lead growth outpaced traffic growth, as a result…

Thank you, Langley. Before I speak to our results, I'd like to first recognize Rodney Nelson who as many of you know is leaving the company. Rodney has led our Investor Relations effort since its inception shortly after our IPO. He built the program from scratch into what it is today. Along the way building strong relationships and establishing trust and respect in the investor and analyst community. In addition, Rodney has made tremendous contributions to our business. It's been a pleasure working so closely with him over the past two years. And on behalf of our management team, we wish him the best in his future pursuits. Now I'll provide a detailed overview of our second quarter performance followed by some directional comments on our outlook for the third quarter and full year 2020. Total second quarter revenue was $94.7 million, down 35% year-over-year though nearly $10 million ahead of our most recent guidance. Our marketplace subscription revenue fell 38% versus the year ago period to $80 million reflecting the fee reductions we offered to our paying dealers in April, May and June. As a reminder, we offered U.S. and Canadian-paying dealers fee reductions of 50%, 50% and 20% in the months of April, May and June respectively. In our U.K. business, we offered paying dealers fee reductions of 50% during every month of the quarter. On a non-GAAP pro forma basis, total revenue would have been $141.5 million which is inclusive of approximately $126.7 million non-GAAP pro forma marketplace subscription revenue and $14.8 million of GAAP advertising and other revenue. Each of non-GAAP pro forma total revenue and non-GAAP pro forma marketplace subscription revenue are adjusted to exclude the impact of fee reductions and also assume that we had no incremental churn other than realized in the relevant…

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Jed Kelly of Oppenheimer. Please go ahead.

Great. Thanks for taking my question. A couple if I may. One, can you talk about how July dealer trends are trending in terms of retention and adding? And then two, can you talk about your strategy in optimizing for paying leads and how that's factoring into your traffic acquisition?

Jed I'm going to go first. It's Sam Zales and I'm just going to confirm with my team that you can hear me okay. The trends as we've described them post the April sort of March and April COVID impact have moved all in the right direction for us both the rewinning of canceled dealers from the time that they really did not want to spend and we're holding up as the COVID impact the dealer industry, but also the retention of accounts that are with us. I think we've referenced our lead growth which has been very, very strong. And for those paying dealers there's great return on investment. So staying with our program has been obviously a big success for us. But the rewinning of accounts that canceled has been tremendous. So that trend that we talked about in the latter half of second quarter in May and June continues in July. I'm going to turn the traffic question to Langley.

Yes. So, on the traffic front, we spent a lot of time well before this quarter focused not only on traffic in general unique visitors, but more on delivering even within the concept of traffic versus leads focusing on paying deals versus free dealers. So, we're really encouraged by I think the trend towards showing positive growth in leads to paying dealers. But it's certainly a result of a lot of hard work.

And just as a follow-up, you're adding more lenders on your platform. And I guess as consumers adopt more digital shopping habits, I mean how do you think about actually moving up in the transaction funnel for your dealers, but also preserving your F&I income to maintain a healthy relationship?

Yes. So, I mean -- this is Langley. I'll take that one again. I mean, I would say first and foremost everything we do both in digital retailing and within that financing is going to be done in partnership with our dealers. We want to be their partner in that regard and everything we're doing is really about helping them close more business. So, that's certainly one of the core tenets of what we're trying to do in digital retailing and finance.

Thank you.

Your next question is from Dan Kurnos of Benchmark. Please go ahead.

Thanks. Good afternoon. If I could just maybe first follow up on the first question just around dealer count, maybe Sam, is there kind of a view in your mind on when you get back to pre-COVID levels? And obviously, I think the thesis was especially in the downturn given the disruptive product and the billing discounts that there might be consolidation of platforms. Maybe the drop was too quick and the consumer spent too much I guess in May to really witness that. But I don't know, if you could provide any anecdotal evidence around -- if you saw any of that or expect that to continue as things start to normalize here.

Thanks, Dan. Sam Zales. I think we've had a number of industry macro trends that are going on. I think, as you study this market, COVID we're not past it. There's certainly some markets where we're seeing Texas, Florida, the West Coast. South and West are challenged with still health concerns and that's changing consumer behavior. I think if you studied the market the inventory trends are challenging in the used car arena. There is consolidation as you said. I think franchise dealers are getting more aggressive at sourcing as much inventory as possible that's left some of the smaller independent dealers challenge. And so as those macro trend -- to find inventory and be able to sell to consumers, our studies have showed consumers are still strong in their interest to buy vehicles right now. So I see some of that consolidation happening. I think the key for us is to continue selling the highest – what we believe is the highest ROI product to the marketplace. And with our lead growth that has been quite significant and certainly to our paying dealers, we have done a tremendous job of selling that value story to dealers. Jason referenced in the script call, we referenced the Bates White study. This is our first use of a third-party research study that looked at inventory turns for dealers who are utilizing our platform. And I think when we think about consolidation of spend for dealers on platforms like ours, when you look at a study that says by using a second or third partner there is very limited improvement to sales for a dealership, it does say that as they come back on and start spending again, dealers are going to look to the lead platform and ROI. And our platform is providing that with very little upside to joining the next set of platform. So yes, we are seeing that Dan and I hope that trend will continue as health returns to those markets that had some COVID impact. I hope that answered the question.

That's helpful. And I guess maybe one more just obviously, the whole online retailing space has been incredibly hot. We've had Vroom kind of mentioned that they want to spend a lot on your platform but it feels like a challenge Langley, given that you want to remain organic sort. So how do you accommodate the potential increased desire to spend from those guys while also remaining somewhat wary as they build out a rather haphazard partner inventory model?

Yes. It's Langley. The short answer is, since I started the company in day one our – one of our philosophies has always been to do what's in the best interest of the consumer. So the sort order on our – the Bates – to piggyback off of Sam's comment. The Bates White study talked about it as well is that our sort order and how we rate deals is in our organic listings which is the majority of the page is completely unbiased. And so while – yes, we have plenty of money being thrown at us by many partners including some of the ones you mentioned. Our core sort order will always be completely unbiased and we think that goes to the heart of why consumers flock to our site because they feel like they get the most truthful answer from us in terms of providing great search results for consumers. So despite all the pressures we're always very careful in our organic search results to make sure it's completely unbiased.

And do you have any concerns about them building out their own kind of partner inventory?

I can't conjecture on their business. I would say at the moment we feel – I would say the second stool of our consumer proposition is the breadth of our offering. So for – not just for the foreseeable future but for quite a long time, I believe, we're going to continue to have the largest selection of cars out in the – out on the marketplace whether it's us or any of our competitors. So no, I'm not particularly concerned about that.

Got it. Thanks very much.

Your next question comes from Ralph Schackart of William Blair. Please go ahead.

Hi, good evening. First one maybe Langley. During the script, you talked about a new version of the restricted offering within the 30-day period. I think we talked about removing vehicles when threshold were met. Just curious about the conversion of sort of non-paying to paying. And if they're not completely paying at this point just maybe give us some perspective on how the conversations are going on that process. And do you feel like it's having an intended impact to convert to paying dealers?

Yes. I mean to answer your – I mean, I'll turn it over to Sam in a moment. He can probably give a little more color. But I think the early returns are that a lot of people that have been using our free product for a long time have realized that the nature of their relationship with us has fundamentally changed and they're seeing quite a bit more value in our paid product. So I'd say the intended effect is positive. I will say that it's somewhat clouded by the COVID environment that we're living in. I think all dealers are being careful about their budgets and about the future. But overall, I'd say, it's having the intended effect, which is weighing that careful balance between making sure we provide the most selection to the consumer but also being fair to our paying dealers and try to be as explicit as we can with nonpaying dealers that we're going to allow you to be on our platform for some period of time. But not unlike for instance Dropbox, the free product is going to have some limits. And so the limits are probably quite a bit more explicit now. And so far – anyway, I'd say it's having the intended effect, yes. Sam, if you want to chime in more I don't know.

I thought you gave all the points, Langley. Ralph, I hope that was quite the clarity that you need.

It was. And maybe just one follow-up, just on the digital retail opportunity with a lot of products and services. I know you talked about consumer financing getting some good traction but maybe just kind of give some perspective. I'd love to hear your thoughts about the opportunity to be – or enable full e-commerce transactions and purchasing of vehicles. I'm guessing COVID at a minimum has pulled these conversations forward. But maybe just kind of give us your thoughts on that opportunity and how car dealers could facilitate that?

Sure. Hey, Ralph, it's Jason. Thanks for the question. Yes. So as you heard in a few spots in the script we are building various elements of online transaction capability or digital retail capability. And really everything we do is with consumers in mind and helping them have a seamless process as they'd like as well as dealers and making sure that dealers are getting the most out of a transaction. And so the term digital retail is a broad one. It has a lot of elements to it. It involves financing and contracting and tax title registration and delivery and add-on to the dealer. And so we're building it in a way and consumer finance is a great example that incents the dealer to want to do that so they're made whole financially and it doesn't harm them in any way. And then it incents the consumer to complete as much of the transaction as they'd like online and -- but also still going to the dealership if they want to complete it there if they want to do the test drive and so forth. So we're looking at which of those components, we should build which ones we should partner on and taking it sort of component by component so that consumers can complete as much as they'd like. And we're giving to dealers instead of a low funnel lead we're giving to dealers someone who is much lower funnel. They're already in the purchase process. And again consumer finance was sort of step one in that. Delivery our delivery product is another step in that direction. And then these pilots that we mentioned today are a further step in that. And so this will be a process that we go through to build this out, but we think it's critical for our dealers to enable them to frankly sell more cars to a wider audience, but also consumers who are looking to do more online.

Great. That’s helpful. Thank you.

Thank you question is from Ron Josey of JMP Securities. Please go ahead.

Great. Thanks for taking the question. I just wanted to follow-up maybe on that question Jason and the opportunity around the full, sort of, digital transactions. I understood this is to help both consumers and dealers. Maybe you can help us a little bit more understand around like the timing associated with it. And we -- and I ask this because we're seeing the growth at Carvana. We're seeing the growth at Vroom in terms of delivery and also less visits to dealers. And so can you provide us just with an update on how dealers view this and the speed to sort of moving to more digital transactions overall and how P2P, sort of, fits into this as well? Thank you.

Sure. Hey, Ron. So I think maybe the first thing to just set the context is that digital transactions as we're calling them for cars today is still less than 1% of the market. And on those transactions even on those, let's just call it 1%, there's still in almost every case a phone call required and interaction with the dealer. There are -- there's a bigger percentage of transactions where certain elements are done online, but then ultimately ends up with the consumer going into the dealership to like I said do a test drive or complete the transaction. So while it's certainly a growing market getting a lot of attention dealers are -- spend a lot of time thinking about it with us and with others it's still small, but it's an area that we're investing in because that we believe that that growth will continue. It is very complex and so I think the pace at which it goes there is going to be determined by that complexity. Buying a book online you don't need to talk to anyone and you don't need to give your social security numbers. That's easy. In this case there are questions about the product. People have questions about the car. If there's financing involved, there's tax title registration, which is a complicated process. So that's why we look at the -- both the transaction completion and the delivery of the vehicle as two work streams that are each in their own rights have a lot of parts and we're trying to be thoughtful and strategic about how we execute each of those parts and how quickly we do so that we have again like I said both the consumer we're solving for the consumer and we're solving for the dealer and keeping them whole. In terms of P2P when we built out a lot of the components of P2P, it was to complete a transaction, right? And so there are certain elements of that. The payments is one example that are similar to when a consumer buys from a dealer and those can be leveraged and ported over to our call it dealer digital retailing process. And then there are others that are unique like an inspection and things like that that you don't need with a dealer. So we're certainly getting leverage from some of that work, but we also have a pretty sizable team working on building out the rest of digital retail.

A lot to talk about. Thank you, Jason.

Of course. And just one thing to add to -- sorry is I mentioned it earlier that dealers are now getting an even lower funnel lead our -- the consumers that we send to dealers with prequalified consumer financing close at a much higher rate than our leads that are coming with non-prequalification. And so, I think that's evidence of the more we can do to help the consumer get further into the transaction, before they go to dealer helps the dealer a lot, because they don't need to they convert higher, and they don't need to spend as much time with a consumer sort of hand-holding them. And it helps the consumer because they could presumably still get the car they want, but spend less time in the dealership.

And if I could, just one quick follow-up. Just forgive me, I think we're a year into launching your financing opportunities. Can you talk about just maybe percentage of total leads that come with financing to that point of lower funnel leads? Thank you.

Yeah. So, we actually mentioned that in the script, and I think it I think we said one in 10. So about 10% of leads are coming prequalified which is yeah, no, no. No problem, which is we're really happy with that. And there was a question earlier, too, about specifically about consumer financing and doing it in concert with the dealers. Remember, we get our revenue stream and consumer financing is from lenders. It's not from dealers. So the dealers still get the compensation they otherwise would.

Thank you, Jason.

Your next question comes from Naved Khan of Truist. Please go ahead.

Yeah. Thanks a lot. Two questions, if I may. One on the dealer rejoins or the win-back that you're seeing, are these dealers coming back at a similar spend level that they left, or are they coming in at a different tier? And maybe just on the financing product, how broad is the coverage now of the consumers with different credit profiles? Do you see room for adding more lenders to broaden it further?

Naved, hi, it's Sam Zales. I'll take the first question. As we mentioned in the script that we've gone to elimination of our discounting, that we're bringing dealers back on at a full rate. And obviously, as lead growth continues, that rate continues to move in the same direction. So, we're winning back dealers at a non-discounted rate. And as we continue to move forward more the dealers that come on, we'll accentuate their pricing because of that lead growth. So we're happy to say that, once we remove discounts, we're getting those dealers that are ready to spend again back on because of our lead volume and then at a regular pricing. Jason?

Yes. Hey, Naved, on the financing coverage. So financing right now is available on 85% of our vehicle listings and a growing percent where there's more than one lender. And so now we have two sorry, now we have three lenders. And yes, we do think that having more lenders is an important thing. One, it gives the consumers more choice, obviously. But then two, when the consumer then walks into the dealer, prequalified, if the dealer works with a number of lenders on our platform, then they're able to pick and choose what might be the optimal lender for both that consumer as well as that dealership. So yeah, we are continuing to add more.

A quick clarification on Sam's answer. So, I'm really trying to sort of understand if a dealer was spending at just in dollar terms, say, $1,000, are they coming back at the same spending level, or do they just start afresh and build up from there?

Yes, Naved. Sorry, if I wasn't clear. If they were paying $1,000 beforehand, they're coming back at that same full rate pricing. And as we bring on continued dealers in the flow going forward, the pricing reflects where is our lead growth. And I think we've talked about the substantial lead growth we're getting. So dealers that come back on will be paying that increased fee, because of that lead growth over time. So yes, they're coming back at 100% of their fee structure.

Thank you.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Langley Steinert for closing remarks.

Yeah, I want to thank everyone for dialing in tonight. I also wanted to give out another thanks to our employees for their hard work in these challenging times. And working from home many times with kids at home as well is not an easy task. And for that, I wanted to take another moment to say thank you to everyone. With that, I'll just say good night. Have a good night, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.