Thank you for standing by. This is the conference operator. Welcome to the CarGurus, Inc. Third Quarter 2020 Earnings Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] 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' third 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 are 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 fourth quarter and full year 2020, management's expectations for our future financial and operational performance, our business growth and international strategies, the potential impact of the COVID pandemic on our business and financial results, 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 actual results. Information concerning those risks is available in our earnings press release distributed after the market closed today, and in our most recent reports on Forms 10-K and 10-Quarter, which along with 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 to non-GAAP measures is included in our press release issued today. Our updated investor presentation can also be found on the Investor Relations section of our website. With that, I'll turn it over to Langley.

Thank you very much, Scot and thank you to all for joining us today. I'm pleased to share that CarGurus generated strong results in the third quarter. Despite the ongoing uncertainty amidst the COVID pandemic, our performance demonstrates the durability of our market leadership position and the flexibility and resilience of our business model. Since March our employees have navigated work-from-home in often challenging circumstances, and I want to thank them for their tremendous effort and dedication. As a result of their hard work, CarGurus' financial performance was well above both our revenue and profit guidance for the quarter driven by improved dealer retention versus Q2, and outstanding audience acquisition efficiency. Before I discuss the business results, I also want to recognize our events marketing team for orchestrating our second annual automotive industry conference, Navigate. Needless to say, this year it was a virtual conference. We had over 2,000 registrants from across the U.S., Canada and the United Kingdom. Feedback has been extremely positive from attendees and I want to thank all the Gurus who supported this event for our dealer community. I look forward to Navigate 2021 when we can hopefully convene in person again. Now on to the business performance. Back in Q2, consumer demand in the market was volatile and uncertain. So we led the way with proactive discounts for dealers and introduced contactless services on our platform to enable consumers and dealers to connect in a safe manner. We had over 8,000 U.S. dealers offering contactless services in Q2, which grew to over 9,500 dealers in Q3 plus over 2,700 dealers in our international markets. Through innovation like this in addition to our continued audience leadership, deep talent engagement and consistently high ROI we were able to retain dealers better during Q3 than we forecasted in…

Thank you, Langley. I will provide a detailed overview of our third quarter performance followed by our guidance for the fourth quarter and updated outlook for the full year 2020. Total third quarter revenue was $147.5 million down, 2% year-over-year though nearly $13 million ahead of the high end of our guidance range. Our marketplace subscription revenue fell 4% versus the year ago period to $130 million reflecting the impact of COVID on our business and our dealers. Advertising and other revenue grew 17% year-over-year to $17.5 million as OEM advertising rebounded after the second quarter which reflected COVID-induced cancellations. The U.S. accounted for 94% of total revenue in the third quarter. U.S. revenue declined 2% versus the year ago period to $138.4 million, while international revenue grew 3% year-over-year to $9.1 million. The growth of our international revenue reflects the earlier stage of this segment enabling faster backfill of lost revenue due to COVID, supported by strong execution from our increased focus in Canada and the U.K. Our U.S. business generated $121.8 million in marketplace subscription revenue in the third quarter. Our international business generated $8.1 million in marketplace subscription revenue. Turning to paying dealer count, we ended Q3 with 30,162 total paying dealers, representing a decrease of 96 dealers from Q2 and a decrease of 2924 versus the year ago period. In the U.S., we finished the quarter with 23,659 paying dealers, which is a decrease of 147 from the end of the second quarter. In our international business, we finished the third quarter with 6,503 international paying dealers up 51 from the end of the second quarter. Our U.S. paying dealer count decline of 147 dealers from the prior quarter is primarily driven by cancellations within our smallest dealer segment, which we call emerging independent dealers, defined…

Thank you. [Operator Instructions] Our first question comes from the line of Dan Kurnos with The Benchmark Company. Please proceed. Your line is open.

Great. Thanks. Good evening and thanks for mixing it up with the one for make it different than normal. Just a quick question maybe for -- I don't know whoever wants to take this just on renewals. Obviously, kind of a big focal point right now given the tight inventory. You touched on it a little bit. Nice kind of growth in traffic even without the incremental spend. And the lead commentary color you gave Langley was appreciated. I'm just curious as you go back to dealers demands for leads at this point how you're kind of viewing that evolve over the coming quarters and sort of the receptivity that you're getting understanding that you've been able to do some pretty good optimization work here. Any thoughts there would be helpful. Thanks.

Hi, Dan. It's Sam Zales. Thanks for the question. It's thoughtful. I think Langley really outlined the combination of macro factors in the industry that are affecting dealers. And I think we always have to look at these renewals and anything customer acquisition and pricing on a basis of customer segment. We clearly outlined the -- what we call our emerging independent segment, which is the smallest independent dealers facing the biggest challenges. They can't acquire inventory as effectively as the franchise and what we call our medium and large independent dealers. The demand for products on the vehicle side on the consumer end is really a higher-end product than the lower end, which reflects a lot of what's going on in the economy. We said that we were going back to full pricing in third quarter in July. As you know, we were very thoughtful about listening to the market through the toughest months of the second quarter. We went back to full pricing and we're being very thoughtful. We'll always be deliberate looking at the markets that have the best elasticity and the best current market conditions right now, which is the franchise and independent medium and large accounts versus the small independents. So we're going to be thoughtful about that. Yes, renewals will continue on as we go forward. But we're going to be measured and thoughtful about that effort based on those macro factors, based on what's going on with our lead volume. It's certainly been a significant volume of leads that we've driven into that medium, large independent and large franchise accounts. So we're going to be thoughtful there. We'll be smart about it and it will tell us on a segment-by-segment basis. Yes, we can start up renewals, but we'll do it in a thoughtful way as we go forward. And we think those results are coming in exactly where we had expected. We're going to be thoughtful and not push it in the tougher hit segments of our marketplace.

Got it. That's really helpful. And then maybe just one on marketing. You've already called out, obviously, a little bit less profitability in Q4 and we kind of heard that marketing starts to come back some incremental investment. I'm sure you guys are keeping the -- situation is relatively fluid at this point, right? So obviously, there's a lot of variability in that number, but maybe you could just talk about where you think you have the opportunity to start pulling some levers here with an eye on increasing sort of traffic and lead volume growth heading into 2021 barring some kind of major COVID return.

Hey, Dan, it's Langley. So I think we referenced it in the earnings transcript that a couple of things we feel good about going forward in addition to the quarter that we just had number one just the general efficiency of our marketing work. And I think we highlighted in the earnings transcript that our focus really is not on unique visitors, it's more on driving traffic that generates leads, and then turn leads to paying dealers and even within that segment of paying dealers trying where we can to drive leads to franchise dealers, because they generally have a bigger marketing budget than independents. So there's a lot of work our team has done to make our marketing spend as efficient as possible. And I think you've seen some of the wins if you will from that work in this last quarter. And I think there are also just some tailwinds that we benefited from -- organic traffic has been strong. Our brand traffic has been strong. So I think Jason alluded to the fact that we're not sure that all these macro factors will continue to hold so well in our favor going forward, but I do think that a significant portion of them will. And so we do think that our earnings will probably continue to be pretty strong going forward.

Can I just press you a little bit on that Langley just in terms of your thoughts around where you're at from a funnel optimization perspective? I'm just – obviously, it's a different environment and who knows how long the organic traffic tailwinds stick around, but I mean you guys have clearly taken a pretty -- aggress is probably the wrong word, but a pretty effective and strong approach to focus on putting leads in the right place and focusing on kind of higher LTV customer acquisitions. So I'm just curious where you think you are in kind of that stage and when that starts -- that process starts to level out.

So in my prior life at TripAdvisor with Steve Kaufer, we were always surprised that we were always able to find continued efficiencies. It's -- some of these efficiencies can be small numbers, but -- small ratios on big numbers can generate large earnings. So I would say that we think we will continue to find continued wins in conversion optimization merchandising on the site to try to drive as I said not necessarily unique visitors, but visitors that are going to generate leads and in fact leads to paying dealers and within that context leads to franchise dealers, because we think that generates the best economics for our business.

Thank you for your questions. [Operator Instructions] And our next question comes from the line of Naved Khan with Truist. Please proceed. Your line is open.

Yeah. Hi. Thanks a lot. I don't know if I missed it, but did you guys break out the growth in traffic from organic sources and then the growth in lead from organic sources? And then I have a follow-up. A - Jason Trevisan Hey, Naved. It's Jason. Thanks for the question. No, we did not break out traffic growth by channel. We did say that organic and direct was much stronger sort of, I guess, obviously, because we spent less and still generated really nice traffic trends, so it would have to have come from those two. But no we didn't get specific on numbers.

Okay. And then maybe a question on the other line OEM as well as financing. How much of the strength is from OEM? And then financing, how meaningful has it become in terms of the driver of growth if you can give us some sense of that?

Naved, it's Sam Zales. I'll jump in first on OEM, and I think Jason may take consumer financing. That line is strong for us. I think on the OEM front, we saw very strong results in our advertising business. I think that comes because we're the largest endemic advertiser with down-funnel shoppers, who take action. And I think our OEMs at a time that they're now spending again are excited about working, with our business and doing more with us at a time we were curious as to what the COVID environment would mean to them. So solid results and we're proud of what we're doing with the OEMs, and hope that continues. Jason, did you want to jump in on consumer finance?

Sure. So on consumer finance, it was not a big lever in growth from Q3 to Q2. We continue to do quite a bit of work on it. And you heard about some of the developments that Langley mentioned in terms of making it even more seamless for the consumer, when they walk into the dealer, making it even more seamless for the dealers they have the information ahead of time. But the consumer financing, the auto financing industry started to face some macro kind of market-level issues, I guess, around consumer credit. And so the market, itself was quite a bit softer in Q3 than it was in Q2. We are a tiny, tiny fraction of the total market. So we're – it's not like a direct correlation, because we're – we believe optimizing and growing through a lot of that. But nevertheless, in a softer market, it didn't contribute to a lot of growth.

Thank you for your questions. Our next question comes from the line of Nick Jones with Citigroup. Please proceed, your line is open.

Great. Thanks for taking the questions. I guess, first with your focus on leads, can you touch on, how you're generating – I guess, the leads you're generating versus which leads are actually converting to actual car purchases, and I guess that leads to dealers paying. Are the – is the conversion of the lead to an actual purchase kind of stable, or is the supply constraints kind of showing up where you're delivering leads, but the dealers can't really sell a car? And then I have a quick follow-up.

Yeah, Nick, it's Langley. I mean I think there are a confluence of issues going on, and we tried to allude to that in the earnings transcript. I think one macro factor is in fact, the supply issue. But we think that abating quite a – well, it's abating. OEMs are ramping up production again. Some of the wholesale auctions – a lot of wholesale auctions are coming back online. So we believe the supply factor will kind of play itself out, that kind of being a temporary issue. I do think our benefit – I don't want to make light of COVID because COVID's certainly been a horrible, horrible event for our entire country, if not the whole world. But dealers, I do think I've seen – or put a premium on online leads from partners like ourselves, because of the fact that just the general walk-in traffic has substantially dropped. So I think that is a huge plus for us. As for the percentage of cars that are converting, I think, it's been pretty well documented in the press that dealers are doing quite well, especially in the used car space, because of a whole bunch of factors. And, again, we alluded to some of these in the earnings announcement around the flight to suburbs, people buying cars that previously didn't own a car, because they may have been living in the city, people's aversion to for the foreseeable future taking public transportation. So dealers are doing well. And I think their close rates on the leads, we send them, I think continue to hold up quite well. So overall, we – as we've alluded to earlier, we're quite pleased with where the business is tracking.

Great. Thank you. And then just one follow-up with kind of maybe an increased focus on franchise dealers, I think historically CarGurus has had more used car inventory on the site. I mean, should we expect that to shift as kind of these smaller dealers were more constrained and are struggling to adapt and there's an increased focus on a franchise there's kind of the unit mix change on the site? Thank you.

Yes. It's – listen, we want to have all dealers on our site, because all dealers means more inventory. More inventory means more choice for the consumer, at all price points. And independent dealers have clearly lower price point cars than a franchise dealer will – for the most part will. Having said that, as a business, we are skewing a lot of our efforts towards franchise dealers, probably disproportionately more towards the franchise dealers because they have larger budgets, they tend to acquire more additional add-on products like our RPM product. I mean, some indies do but a lot of independents don't have – they just don't have the marketing budgets that a franchise dealer has. So it's a balancing act, and we need to make sure that we don't exclude indie dealers at the detriment of our consumers, the people that are using our site. But where appropriate if we can merchandise a car from a franchise dealer to a consumer, we will probably do that, because it generates a higher – generally, it generates a higher-paying customer for us.

Great. Thanks for taking the questions.

Thank you for your question. Our next question comes from the line of Marvin Fong with BTIG. Please proceed your line is open.

Great. Thanks for taking my questions. Just two for me. Just curious, I noticed again I think for the second quarter in a row that those sessions is diverging more than the user growth so that the sessions per user is trending down. Just curious, if you can attribute that to anything in particular with the website or just user behavior what might be causing that. And then second question just on the larger dealers that did churn out in the past couple of quarters, what's your view on what might be holding them back from returning to the platform? That would be great. Thanks.

Marvin, hi, it's Sam Zales. The first part of your question on sessions per user, I think our focus continues to be on driving leads. I think Langley and Jason's comments at the beginning of the commentary really set up how our business is focused. We're looking to drive consumers in a down-funnel way into a lead generation effort for our dealers. So our effort continues to be a focus there. I probably won't comment specifically on session per user. I think our effort is find the down-funnel shoppers, the focus on leads that we can drive to our dealers and that being the effort that we're focusing most on. And so I hope that's answering the question for you. Specifically on sessions per user, I'll probably take a look at that afterwards and see if there's any details on that. We still hold a phenomenal lead in the marketplace in terms of consumers', repeat usage their time on site, the down-funnel experience. And I think that's what's driving our lead growth and so our effort will always be look at the results on a lead basis as opposed to specific visitor statistics. And I think that's driven what we think is the big success for our dealers.

Great.

Did I miss the second half of the question? Was there another?

Yes. I had a question just on -- like I appreciate the comments you had about the emerging dealers having trouble. Just curious on if there were larger dealers that had churned out in the last quarter or two that still hasn't returned to the platform, what's your view on what their main concerns are for not returning to the platform yet? Thanks.

Yes. Thanks, Marvin. The results for the franchise what we call our independent medium and large segments are moving in all the directions we want them to, partly driven by that consumer demand for higher-end vehicles and their ability to acquire inventory in this very difficult market. So both the acquisition and retention of those two segments has been terrific for us and we'll continue to focus there. The independent -- small independent dealer segment is one that naturally churns, more than those other two segments. I think in COVID times that's been hit worse. And we're making a deliberate effort to sort of be careful about that what we call the one to 35 vehicle segment and saying "Let's be thoughtful about taking risks to acquire some of those customers. Let's be smart about the new customers we bring on." So both the new business and the retention of the franchise and independent medium large segment has been solid for us both because of the boost and the tailwinds of the market and macro factors and because we drive a great ROI to those dealers. The small independent is the one that we're being thoughtful about acquiring because of the risk factor and their difficult standing in today's market.

Thank you for your questions. That does conclude the question-and-answer session. I'll turn it back to Mr. Steinert for any closing remarks. Mr. Steinert?

Langley, are you there?

Yes, I just want to thank everyone for dialing in tonight. I also wanted to put in a special thanks to CarGurus employees for all their hard work during these challenging times. So with that I'll say good night. Thanks.

That does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.