Greetings. Welcome to the CarGurus Third Quarter 2021 Earnings 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] Please note, this conference is being recorded. I will now turn the call over to your host, Kirndeep Singh, Vice President of Investor Relations.

Thank you, operator. Good afternoon. I'm delighted to welcome you to CarGurus' third quarter 2021 earnings call. We will 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 Jason Trevisan, Chief Executive Officer; Scot Fredo, Chief Financial Officer; Sam Zales, President and Chief Operating Officer; and Bruce Thompson, Founder and Chief Executive Officer of CarOffer. 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 2021. Management's expectations for our future financial and operational performance and innovation, our business and growth strategies, our expectations for our CarOffer business and anticipated acquisition synergies,, our expectations for CarGurus Instant Max Cash Offer, the value proposition of our current product offerings and other product opportunities, the potential impact of the COVID-19 pandemic, the semiconductor chip shortage and other macro-level industry issues 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 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 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 now turn it over to Jason.

Thank you, Kirndeep, and thank you to all those joining us today. I'm pleased to share that CarGurus achieved excellent results in the third quarter of 2021. Despite the ongoing semiconductor chip shortage, our performance demonstrated the continued resiliency of our leading foundational listings business, an impressive progress in our transaction capabilities, including digital wholesale, Instant Max Cash Offer and digital retail. Since April, the automotive industry has been navigating the semiconductor chip shortage and pent-up consumer demand, resulting in depleted new and used inventory and vehicle price inflation reaching all-time highs. While some forecasts predicted a recovery in the second half of 2021, it appears that the chip shortage will last into 2022, potentially late into the year. Though it remains difficult to predict when the shortage will ease and the resulting implications on new and used inventory, we continue to work closely with our dealer partners to provide support as we all continue to navigate through these unprecedented times. Before I dive into their business results, I'd like to first highlight our successful third annual automotive industry conference, Navigate, which was held in October. This year, we virtually welcome dealer registrants from across the U.S., Canada and the United Kingdom. The three-day event discuss the move towards digital retail, wholesale optimization through CarOffer, brand building and much more. We are pleased with the insights and the content we were able to provide dealers and look forward to an even bigger and hopefully in-person, Navigate 2022. Now turning to our business performance. We are thrilled to have exceeded our guidance for the quarter. Performance this quarter was driven by three key factors: our ongoing evolution from a listings business to an end-to-end transaction-enabled marketplace, our partnership with dealers to develop innovative digitally initiated solutions and finally our ability to…

Thank you, Jason. Before I begin, I am pleased to share that in October, we released CarGurus' first corporate social responsibility report. The report highlights our focus on making a positive impact in the areas of environmental, social and corporate governance. While there is still much to learn and even more to do as we formally launch our ESG journey, we look forward to continuing the momentum and sharing our progress along the way. Now I'll provide a detailed overview of our third quarter performance, followed by our guidance for the fourth quarter and full year 2021. Total third quarter revenue was $222.9 million, up 51% year-over-year and nearly $7 million ahead of the high end of our most recent guidance range. Our marketplace subscription revenue grew 11% versus the year ago period to $144.6 million. The increase in marketplace subscription revenue aligns with Jason's previous comments regarding the strength and resiliency of our foundational listings business despite the ongoing macroeconomic industry headwinds faced by our dealer partners. Wholesale and other revenue in the third quarter grew 347% year-over-year to $78.3 million. However, it continues to drive strong growth as inventory constrained dealers look to source vehicles through an efficient acquisition channel. As seen in our investor presentation and as reported in our 10-Q, wholesale revenue for the quarter was $63 million, a 10% increase from the prior quarter. A meaningful portion of the quarter-over-quarter growth was driven by the launch of Instant Max Cash Offer, which contributed approximately $5 million in quarterly revenue for the third quarter, an incredible contribution since its launch at the end of July. As we continue to expand across additional states, Instant Max Cash Offer has the ability to meaningfully drive revenue while creating a flywheel effect for our listings and digital retail businesses.…

We will now be conducting a question-and-answer session. [Operator Instructions] Your first question comes from Dan Kurnos with Benchmark Company.

Great. Thanks. Good evening. A couple here, obviously, good progress CarOffer across the board here. But Scott, just to be clear, were you making a comment that you expected dealer growth to be sequentially up in Q4?

Paying dealer growth?

Paying dealer count that would be sequentially up.

I don't think we said anything about that, Dan.

Okay. Just you said future growth. All right, that's fine. Just wanted to double check. And then just in general, you guys have obviously announced more expansion on INCO, it's a huge ramp in Q4. You guys already cover more than 50% now. So just can you give us sort of any initial learnings you have in terms of timing to stand up. So market stands up. How much is coming from, let's say, the initial three to ten markets that you launched and kind of what you're seeing and maybe how that is influencing your decision to expand on the time line you are? Thanks.

Dan, Sam Zales. I'll start it, and I'll turn it over to our friend, Bruce Thompson, the great CEO of CarOffer to share any color behind it. It starts with consumer experience. So we started with three states move to eight, got to 19. Now we're moving to 22. We're thrilled with our performance. And it starts with the consumer experience, are they having a great quality experience when they instantly receive an offer, do they save it? Do they sell their vehicle and our NPS and consumer satisfaction scores have been phenomenal on that front; number two, can we keep up with the operations. There's a process and Bruce can talk to it of the title transfer, the processes we take to ensure a great consumer and dealer experience, digital payments and everything else that goes into that; number three is, does our marketing work on site? Are we using all those visitors who are coming in and turning them into the funnel we need and is the brand awareness up there that you can now sell your car on CarGurus from an incredible digital experience. And are those consumers also turning into leads for us. I think Jason's comments remarked that Sell My Car or Instant Max, consumers are coming in and actually submitting leads as well as selling their vehicles, which is really important to us. And then finally, is there a gross margin to this business that really can scale up for the long term and create a profitable business. We've seen all of those things work really, really well so far. And dealers are having a great experience in the landed dealer concept that locally they receive that vehicle. All of those moving in the positive direction tells us to keep moving to more states. And Bruce, I'll ask you to add any color from something I've said there.

Yes. Thank you, Sam. Yes. So basically, late July and August, it was all about really getting our operations down from getting that white glove service to pick up these CarGurus customers operationally, as Sam indicated, handling is titles of money transfer the payment. Secondarily, the logistics, we got to make sure that we can scale in every market, which we are doing. We're leveraging a lot of the ridesharing services, which gives us really a limited scale, which we're proud of that. We also developed a system that the way we rolled out with an intake process to be able to take those documents at a consumer's home or place a business, get those documents instantly uploaded, we have teams here that can analyze those in minutes and finalize those transactions. And I think you also mentioned from the first set of dealers to the second set of dealers, I think we launched a second set of dealers, roughly 30 days or so, 30-days maybe post launch. I saw about a 30% lift in terms of volume from the secondary launch and excited to keep the momentum going.

Awesome. Thanks for the color. I appreciate it guys.

[Operator Instructions] Next question comes from Tom White, D.A. Davidson.

This is Tevis on for Tom. Just one question for you. Wondering, could you elaborate a bit on the size of the addressable market opportunity for Instant Max Cash Offer for the next three to five years?

I didn't hear the first name, sorry, I couldn't hear it, but thanks for asking the question.

Travis.

Thank you so much. It's Sam Zales. I'll start in. It's an enormous TAM. I hate to put numbers on it, but there are about 30 million vehicles that are transacted every year from a consumer either trading in or selling to another consumer. We look at that market, and I'll say to you that what we're most excited about is that I think you heard the range of vehicle prices that we've worked on and Sell My Car and the Instant Max capability. It's gone from low single thousands to $80,000 vehicle, $78,000 or maybe more was our highest transaction. But the average transaction is very significant, the price of the vehicle. So when you look at that 30 million vehicles, and we think we can participate in both the trade-in process or the peer-to-peer transaction process. We think it's hundreds of billions of dollars in TAM, and we look at that as a huge opportunity for us. And we're going to take more of that share because the consumer has this unique value proposition with hundreds or thousands of dealers bidding to the highest bid to win their Sell My Car offer. It's an unbelievable differentiated offer, and we think we can take a large share of that hundreds of billions of dollars in TAM. Anybody else want to add to that on the team?

I would just echo that from our perspective, the reason that we did – really did this deal with CarGurus in January was to capitalize on the 34 million, 35 million, 36 million consumers that visit and really develop a system, a platform to take these cars in and deliver those to our dealer networks and our dealer clients. And feel like we can really level the plan for them. Deliver a lot of cars been with a brand-new consumer channel that they typically don't have the marketing scale to be able to reach and collectively with CarGurus and the CarOffer, we can deliver those cars.

Great. Thanks so much. Great info.

Thank you. Next question comes from Naved Khan with Truist Securities.

Hi, can you hear me?

Yes, we got you, Naved.

Great. I have a few questions on CarOffer and Instant Max Cash Offer. So maybe just a clarification. So the $875 million in GMV, that's just dealer to dealer, right? And then on the gross margin side of things, gross margin did go down between Q2 to Q3. And the numbers are a little noisy because Instant Max Cash Offer. So how should we think about the margins in just the dealer-to-dealer side, what are the puts and takes and what might have shifted? And then just on the stand-alone basis, how does Instant Max Cash Offer look like on a margin basis? Is this something that can be comparable at scale to the dealer-to-dealer?

I can – Scott, do you want to go here? I mean to take a shot. Okay. Thanks, Naved. So on your first question, the $875 million gross merchandise sales is just B2B. And in terms of gross margin dynamics at CarOffer, which I'll focus on D2D to start. I think we've outlined in the past that we include quite a lot of our trade advisers and account management and our cost of sale. And so you'll notice that there's not that much OpEx below the gross profit line on a relative basis, which is what allows the business to be as profitable as it is at this early stage, and we think that's a testament to the far more efficient business model than a lot of other wholesale platforms that have to have heavy sales forces at dealerships, trying to remind them to launch vehicles and remind them to bid on vehicles. So in any given quarter, there are a mix of revenue streams between buy and sell transactions. We have other products, transportation is a revenue stream. And so depending on the mix of those that will – that can influence the gross margin line from an operating expense and also from a headcount perspective that goes in the cost of sales, that the company is growing fast. And so there may be a quarter here or there where we're hiring ahead or behind on hiring that could influence that as well. But I think ultimately, what is so impressive about what Bruce and his team have built there is the efficiency of the business model. In terms of your last question in terms of margin profile for Instant Max Cash Offer, that's – you can think of that like other wholesale operations of other dealer groups, I would say, which tends to be in the mid-single digits from a gross margin perspective. And the OpEx associated with that is not that intensive, especially when you get to scale. And the fact that we can leverage a lot of our audience from CarGurus is a huge benefit because we can be much more – we can control much better the marketing expense associated with it because we have this baked in audience already. The price of the vehicles can influence gross margin as well because a buy fee for $14,000 car is the same as a buy fee for a $24,000 car under our model right now. So as car values come down and the transaction fee stays the same, the gross margin would tick up naturally because of that.

Understood. Thank you.

Of course.

Next question, Chris Pierce with Needham and Company.

Hi. Just looking at the average U.S. average monthly uniques in the past couple of quarters, would you say this is kind of related to consumers pulling back in the used car market in terms of shopping? Or is this a large percentage of these efficiencies that you guys are able to ring out to learn from the pandemic in the sense that marketplace subscription revenues were flat quarter-over-quarter on much less visitors. Are they higher quality visitors? Were you kind of scraping less quality business in the past? I'm just kind of curious about this dynamic here.

Sure. I can – thanks for the question, Chris. I can take it. It's Jason. It's all of the factors that you said. So – but just to reiterate them, number one, inventory is down. And so with dealers having less cars on the lot, there is less reason for us to drive high volumes of leads on a single given unit. The second thing is that we have gotten much more effective at acquiring users to our site who are – have a higher likelihood to convert. And so we're able to drive – think of it as we're now able to drive the same volume of leads on a smaller audience than we could have a year ago or two years ago. And then I guess, maybe it's related to inventory. But the point that I think somebody made earlier about dealers' interest in and willingness to market right now is pretty limited for two reasons. One, they have less inventory; two, demand is high, and so they're able to garner pretty high prices, which is terrific for them, but they also don't need to market as much. And so in the absence of us renewing we're, again, sort of picking our spots and being thoughtful about the timing of when we would want to drive a lot of volume. So this has been a question that we've gotten often as to the correlation between traffic and our audience size and lead volume. And we are sort of squarely focused on lead volume and traffic is sort of a means to an end. Two other sort of macro comments I'll make is that, one, there's seasonality in Q3 from Q2 typically. And then the second is that – and we talked about this in the script, consumers are aware of these high prices. So despite the fact that they're paying high prices, I think leads into dealers at an industry level are likely down just because consumers 31% of our shoppers said that they're going to delay their purchases.

Thank you.

Next question, Marvin Fong with BTIG.

Terrific. Thanks for taking my questions. Just two, if I may. First, a little more on Instant Max Cash Offer. Just – I know it's early days, but I'm just curious on how the dynamics work? How quickly after you launched in your states or regions, do you feel like it takes for dealers to kind of start reaching a level of bid that's very competitive with, say, the local CarMax or whoever is it pretty competitive out of the gate? Or does it take time for that to sort of mature? And then my next question, just on the guidance, it looks like you're guiding for non-GAAP operating income to be down sequentially. And just curious if that's being driven by marketing costs and investing to support the launch of Instant Max Cash Offer? Or are there other dynamics at play? Perhaps you could also throw in a comment about CPCs and what you're seeing there? Thanks so much.

Yes, this is Bruce. I'll take that first question and Scott can handle the second. The beauty about our system is it works very similar to the stock market. And so buy orders are placed in what we call the matrix and dealers go in and they enter those orders in the system for the quantities of cars, the specific – the cars that they want to buy across the board. In any given day now, we have billions and billions of offers that are in that Biomatrix. When a consumer launches his car, what we've essentially done is basically point the same matrix that operates on the dealer-to-dealer platform to the consumer, right? So it's instantaneous. So when a consumer goes online and launches his car, we take that car and push that Ben number through the matrix and it's automatically going to match it to the highest by order in the system, just like you would with the stock market, and we then turn around and display the offer. So in terms of traction, the traction is immediate. All of the dealers on our platform today want these consumer cars and have a high demand for the consumer cars. And so launching a region or an area, market area is instantaneous as far as that goes. And it's a testament, I mean, we mentioned that October was a record month for us. That's – it's on every front. That's with the Instant Max Cash Offer, the dealer-to-dealer and enrollments as well. So we're thrilled with our October and the way the fourth quarter started. And with that, I'll turn it over to Scot for the second question.

Thanks, Bruce. And Marvin, thanks for the question. So a few things on the profit guidance. It is a bit of what you allude to. We – as Jason talked to in his prepared remarks, we have been and will continue to be judicious on our marketing spend for, let's call it, the core listings business. We are definitely leaning into marketing for Instant Max Cash Offer. With that expansion into many states and more to come, we will continue to invest there to drive that and build consumer awareness as well as half of our 30 million unique audience. We also have finally are getting some good traction. It's no secret. Everybody's talking about great resignation or reshuffling, but we are getting good momentum rebuilding our workforce after some challenging times from the Q2 of 2020 expense reduction that we made and then challenging times in 2021. So we are seeing great progress with adding to the team, and we have a lot of investment there to make going forward into 2022.

Great, thanks, Scot and Bruce. I appreciate it.

Next question, Nick Jones with Citi.

Great. Thanks for taking the questions. Can you just comment on kind of your pilot of the kind of last mile delivery? What kind of investment might that be for you as you gain traction decided to expand it. I mean, is that – is there a way that you're going to maybe control some of the logistics and actually own it? Is it largely going to be outsourced? Can you just give a little more color on how that's evolving in the early days? Thanks.

Sure, Nick. Thanks for the question. This is Jason. So the pilot right now is with a short list of dealers and it's us, acting us CarGurus serving as a delivery layer, I would call it, to third parties who are doing the delivery. And so the idea is the dealer can work with a single party, which is us and really sort of be hands off with the delivery in so much as we are ensuring that it's a seamless process, that's a good consumer experience that consumer interactions are with us, but we are not driving trucks around. And so it's an asset-light technology and service layer between the dealer and the buyer.

Great. And maybe just a follow-up on some of the last mile delivery. I think some other maybe direct-to-consumer players that are using third-party logistics have had some challenges in kind of providing the white glove service that consumers want in the delivery. Are there ways to kind of solve that? Or is there kind of never a path to where you get more involved in making sure the delivery is kind of up this enough for consumers?

Sure. Well, I think a lot of credit goes to Bruce and the team because they've been moving cars around for a couple of years now at really high volume. So they've brought a tremendous amount to the table in so much as expertise and how to work with partners and how to ensure the best possible experience for both shipper and recipient. We are very focused on it as well. And so we're working closely with partners to make sure that there's a consumer interface and a consumer angle to it rather than any sort of long-haul mindset. And we're also building – we're working with them to build some features as well. And I think the ultimate testament is that our consumer satisfaction and NPS of Instant Max Cash Offer is extremely high right now. And we're – that's something that is we talked about expansion before. We won't expand if we feel that there are any issues bubbling up on the consumer experience side. And so are there plans for us to own it? No. Right now, we don't have plans to own the logistics. We have, again, CarOffer had built a network of logistics providers. We're leveraging that with them. And so far, and we know it's early days on a relative basis. But so far, it's working well. We have an NPS consumer NPS and Instant Max Cash Offer that's extremely high.

Thanks.

Next question, John Colantuoni with Jefferies.

Thanks for taking my questions. I have two. Just wanted to start with sales and marketing expense. It looks like by our estimates, it's down around 40% per unique visitor from pre-pandemic levels. just for the legacy business. And I know you've talked about more efficient traffic acquisition, but maybe you could talk about how much of the decrease is being driven by structural improvements versus transitory dynamics resulting from a unique industry backdrop? And I have a follow-up.

John, it's Scott. I'll take that as best I can. We've talked about this for probably four maybe six quarters of the overall market being down. So competitive spend is one factor, but we also believe that we have even prior to COVID, become much more efficient in the way we look to drive traffic and ultimately lead to leads that we can monetize. So I think those elements and the – I can't put a dollar figure on it or a percentage, but those elements are durable and are internal and will continue. But the investing more in marketing, both for the core business and for – to drive the new engine of Instant Max Cash Offer are especially a new venture like Instant Max Cash Offer will be, say, less efficient at an entry point, but we have the efficiency of the core business already to leverage on an ongoing basis. I mean we focus far more on lead economics, like leads per unit of inventory, leads per dealer versus total traffic numbers. So we will keep trying to drive traffic in that way, and that's where it will be more efficient than we were prior to the pandemic.

Great. And just one about CarOffer. It looks like 3Q revenue was about flat sequentially after excluding $5 million from Max Cash, and that's despite gross transaction volume moderating about 12%. Can you just help us better understand, what drove the sequential increase in take rate? Thanks.

Yes, I can take that one. This is Jason. So it's largely through other products. CarOffer in broad brush strokes has a D2D business and now an instant Max cash offer. But within their D2D business, they do have other products and other revenue streams. And so it's largely through the mix of those other revenue streams. It's not – when you mentioned take rate and we've gotten that – we've gotten questions posed like that in the past. And I understand why there's value in looking at it that way. It's not exactly the case here just because it's not a percentage of the – it's not driven by a percentage of the gross merchandise value. It's instead driven by features, transaction pricing, other revenue streams and then you can sort of compute a take rate off of that. So it's an output rather than input.

Thank you. I will now turn the floor over to Jason for closing remarks.

Thank you very much, operator. So thank you, everyone, for the questions and joining us today. And of course, thank you for your interest in our business. We're extremely proud and very excited about our progress and about what we built this last quarter, but also this entire year. I also wanted to recognize Veterans Day on Thursday and thank not only our CarGurus and CarOffer veterans, but also in their family members, but also all veterans for their service. So thanks again, and have a wonderful evening, everyone.

This concludes the teleconference. You may disconnect your lines at this time and thank you for your participation. Goodbye.