Good morning, and welcome to the CARS' Third Quarter 2021 Earnings Conference Call. This call is being recorded, and a live webcast can be found at investor.cars.com. A replay of this webcast will be available until November 18. A copy of the accompanying slides can also be found on the company's Investor Relations website. I'd now like you to turn the call over to Robbin Moore-Randolph, Director of Investor Relations.

Good morning, everyone, and thank you for joining us. It's my pleasure to welcome you to the CARS' Third Quarter 2021 Conference Call. With me this morning are Alex Vetter, CEO; and Sonia Jain, CFO. Alex will start by discussing our acquisition of CreditIQ, and our highlights from the quarter. Then Sonia will discuss our financial results in greater detail, along with our fourth quarter expectations. We'll finish the call with Q&A. Before I turn the call over to Alex, I'd like to draw your attention to our forward-looking statements and the description and definition of non-GAAP financial measures, which can be found in our presentation. We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA, adjusted EBITDA margin, adjusted operating expenses and free cash flow. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measure can be found in the financial tables included with our earnings press release and in the appendix of the presentation. For more information, please refer to the risk factors included in our SEC filings, including those in our annual, quarterly and current reports, which are available on the Investors section of our IR website. We assume no obligation to update any forward-looking statements or information as of their respective date. Now, I'll turn the call over to Alex.

Thank you, Robbin, and welcome to our third quarter 2021 earnings call. We continue to focus on execution and delivered yet another quarter of strong growth in dealer customers, ARPD and revenue. Before we dive into the details of the quarter, I'm excited to talk about our strategic acquisition of CreditIQ, which strengthens our automotive technology platform and delivers value to dealers, lenders and consumers. CreditIQ has built cutting-edge auto finance technology that will leverage the massive audience of high-intent, in-market car shoppers that visit the CARS platform and will enable us to generate incremental revenue from a new set of customers, lenders. The ability to complete more of the card purchase online will allow us to better monetize the 142 million visits to Cars.com and the additional 247 million visits across our DI dealer websites. This makes CARS more transactional for our dealer partners, while giving us robust financing capabilities for dealer websites. This latest technology addition to our scalable platform represents our entry into the fast-growing multibillion-dollar auto finance segment, which aligns with our vision of creating a frictionless omni-channel experience for buyers and sellers. We're excited to participate in this market with a powerful digital solution that better allows lenders to compete for car loans online, saving consumers time and helping bring transactional capabilities to our dealer partners. CreditIQ's robust API technology enables a near seamless integration into both our marketplace and dealer websites, connecting buyers and sellers using the dealer's existing lender network. As we roll out this dealer-centric platform to our marketplace, and the 5,200 website we power, dealers will benefit from its advanced features for credit application management and contract-ready digital retailer. In turn, dealers will be bond with preapproved loans, saving them valuable time in their finance offers, enabling them to drive greater…

Thank you, Alex. Let me start by saying how excited I am about CreditIQ. Its addition to our platform will create a new diversified revenue streams, build incremental shareholder value, and help drive our already strong growth. In addition to sharing more details on our acquisition of this cutting-edge automotive finance technology, I'm also pleased to share that we delivered in another quarter of solid results. Both revenue and adjusted EBITDA were at the high end of our expectations, and our performance also yielded yet another quarter of robust cash flow generation. Revenue for the third quarter totaled $156.6 million, up 8% year-over-year. Dealer revenue grew by 12%, or $15.4 million year-over-year. Performance was driven by a combination of dealer customer and ARPD growth across all products. We grew both marketplace and website customers and ARPD growth was driven by FUEL and increased digital solutions penetration. Dealer Inspire revenue grew 27% year-over-year. OEM and national revenue for the quarter was $15.3 million, 14% lower than the prior year. Results reflect the impact of the ongoing chip shortage and the resulting pullback in OEM advertising due to the delay in new model launches and lower inventories. One of the bright spots this quarter was certified pre-owned. This market has seen robust sales in this inventory constraint environment, and our CTO products have seen strong OEM interest. As new car inventory levels began to normalize, we expect OEM advertising spend to pick up and continue to shift towards the more efficient and targeted digital advertising solutions that we offer. Now turning to expenses. Our operating expenses for the third quarter were $144.5 million, compared to $125.3 million for the prior year period. On an adjusted basis, operating expenses increased by $15.6 million, or 13% compared to the prior year. The increase is…

Thank you. We will now proceed to Q&A. [Operator Instructions] Our first question comes from Nick Jones from Citi. Nick, your line is now open.

Great. Thanks for taking the question. Could you kind of talk a little bit more about the fintech acquisition and how we should think about the economics and how it will flow through to the P&L from here? And I guess really how big the opportunity is as you see it? And then the second question would just be as new cars the supply remains constrained, how are you thinking about kind of the dealer mix? I mean is this an opportunity to maybe regain independent dealers as used cars remain in demand? Thanks.

Thanks, Nick. Well first of all, the fintech opportunity is an emerging market and a growing one at that. And the TAM on it certainly is significant. And when you think about it, there's 40 million vehicles that are being financed every year which predominantly are done by the larger franchise dealerships that are financing vehicles which is the core of our customer mix. And so, I think what the opportunity is enabling those transactions not only for the users, but the dealers and saving the dealers' time and money and helping preserve their profits by closing more of the transactions online. I think if you look at some of the public digital dealerships that are out there, they're certainly being successful helping consumers, get more of the process online and we're going to bring that same power to our 20,000 dealer network, which is extremely exciting. Certainly, you can imagine the possibilities also just enabling this on the 5,200 Dealer Inspire websites alone. Every dealership is wanting to advance their digital strategy. And now we've got an industry-leading solution to enable it. I think -- and Sonia anything else you add on that?

Yeah. No. I think as Alex mentioned, we think there's a huge opportunity out there. If you look at the number of vehicles sold by dealerships on an annual basis today, I think upwards of 60% of those end up being financed, not to mention what's happening in private party channels. And we think we have an incredible opportunity to play in this space. I think from a timing perspective to your question around, how this will flow through the P&L, as I mentioned in the outlook section, we expect closing to happen over the course of the next couple of days. So impact to 2021 financials is obviously going to be quite muted. Our focus is really on getting to a rollout beginning in Q1 of next year. And we will be investing to ensure that that rollout moves smoothly, right? It's about dealer adoption number one and making sure we get that consumer experience nailed down really well, so that we can accelerate the implementation of this technology across our network.

And the second part Nick on dealer mix, we are seeing strong pickup in the dealer growth, right? We had a great quarter on dealer growth. It was more evenly balanced between the two, but the fact that independent dealers are realizing location-based marketplaces are the most efficient way to get word out on the cars that they have in stock. And then keep in mind, almost half the leads that we're generating for dealers have a trade-in opportunity included with it. And I think dealers are recognizing with Cars.com they're not only able to sell their vehicles more efficiently, but it's a reservoir of opportunities to restock their inventory. And I think that's been one of the reasons why our platform has performed really well in this supply-constrained environment.

Great. Thanks for taking the questions.

Thank you, Nick.

Our next question comes from Dan Kurnos from Benchmark Company. Dan, your line is now open.

Great. Thanks. Good morning. Alex, just to follow up on that line of questioning. Just to be clear, are you -- I mean this is an LaaS-type product? Are you selling this on a subscription basis, or is this kind of like a product attached, or is it dependent on conversion? Just to be clear on that. And does it also include things like digital deposits to use your capabilities or do you need to add to that stack? And then I'll follow-up on FUEL.

Well to your first question, thanks for the question. It's both actually. So primarily, we view this as a new lender based revenue stream. It's not necessarily going to be subscription based with the lenders, right? It's going to be based on the number of funded loans. So it is a transaction based model. But again given the sheer volume of consumers we have coming both to the Cars.com marketplace as well as our Dealer Inspire websites. And bear in mind, we have an installed base of online shopper dealers as well. We think there's tremendous opportunity on the basis of this transaction based revenue stream we're going to develop on its own. In addition, yeah, there is a lending as a service opportunity here as well that the CreditIQ team has already been out there pursuing where we would be able to effectively white label their solutions and APIs to other customers. And we think that it's an exciting opportunity. In our view this kind of solution is imperative for folks who want to have credibility in the automotive space to be using and leveraging. And while we're talking about it, I should mention one of the key differentiators of this solution and one of the reasons we were so attracted to it was the dealer-centric model that it embraces. We are not forcing dealers to work with just the lenders in our network. We are in open -- effectively an open platform. We will support dealers preferred lenders as well. So the dealer doesn't have to make any changes on their end. It's actually going to be extremely seamless for them. And that is a key differentiator of what we're bringing to market versus what others are doing right now.

Got it. That's helpful. And thank you for that color. And then obviously, kind of, nice again you guys have been talking about this for a while pickup in ARPD. I mean, look supply constrained issues, notwithstanding, the dealers are just absolutely flush your cash right now, and so better conversion prototype products are probably being well-received in the market. Can you just talk about the conversations you're having with dealers around incremental attach rates, multi-product attach rates, and how you guys are thinking about either accelerating or enhancing the pipeline of the next digital product offering at this point like what might be on that?

Sure Dan. Well, first of all we're pleased with the growth in ARPD. And then I also know that you know how our business works and that we charge based on the market and the dealership size of inventory. And so with inventory levels depleting and us selling into smaller geographies, you would actually expect our ARPD to decline. But what you're seeing is the strength of our solution strategy come through. We've had tremendous success with FUEL. We've had dealers recognize that this is the most efficient way to acquire trade-ins, and it's the most efficient way to advertise specific inventory that they've got versus general or mass market advertising. And so dealerships are operating with record profits, but I would tell you they're having a greater appreciation for the power of our platform strategy and its unique contribution to their success. You see this reflected in our not only strong retention rates, but our growth in dealer count and rising ARPD. And so the conversations have been extremely healthy. I think perhaps the biggest change I've noted in the past two quarters is how much dealers are leaning into their website metrics, which also was where our value is shining through particularly relative to other marketplaces who are really just aggregators and don't drive traffic directly to the dealerships' website, which is increasingly becoming the focal point in dealerships. Dealerships now are obsessing over their website metrics more than their physical store metrics because they now have better line of sight on what's converting sales. I think CreditIQ is just going to extend our lead as a platform that delivers traffic deeply into the dealer system. And we're excited to begin those discussions with dealers who -- the initial response I've gotten today has been extremely positive.

Got it. Super helpful. Thanks Alex. Thanks Sonia.

Thank you Dan. Our next question comes from Naved Khan from Truist Securities. Naved, your line is now open.

Yeah, hi. Thanks. Maybe just on FUEL. Can you talk about the geographical coverage where are you with respect to that? And also maybe the customer count. And then another question on Ford rollout, how should we think about the time line for that?

Yeah. So on FUEL, FUEL is continuing to grow really rapidly. We experienced double-digit sequential growth this quarter, so just quarter-over-quarter growth has been tremendous. And we're seeing really great take rates. We are currently -- we currently have a presence in all of the top 40 DMAs. So dealers really are leaning into the solution. We haven't really been talking quite as much about dealer count specifically for this product. The interesting thing with it is that we're selling FUEL on a ZIP code exclusive basis. And actually what we're finding in many cases is that some of our early adopter dealers on a sequential basis or as their contracts roll are looking to actually expand the number of ZIP codes that they are participating in. So we really think the key here is to ensure that we are in the markets that matter. And that is definitely taking shape as we speak. In terms of Ford, the Ford rollout is a little bit different than the GM rollout in the sense that for GM dealers, they really haven't had a choice of providers before the DI got program acceptance there. And they created a window, a transition window so to speak where dealers opted in to working with us. Ford is a little bit different. So Ford already had choice and we are simply coming in as additional choice and we think we offer excellent value. But there is no formal window in which dealers have to opt in. So we expect to see the Ford website come in on a rolling basis. That being said, we had really strong outreach from Ford dealerships when they first heard the news. And that's part of the pipeline that we are currently working through even as we continue to grow the pipeline of Ford dealers. I think the best way to think about it is ultimately we do believe that we will get our fair share of Ford dealers. There are about 3,000 Ford dealers in the U.S. today. And so I would lead it there very healthy response from our foreign partners.

Great. Thank you.

Thank you, Naved. Our next question comes from Gary Prestopino from Barrington Research. Gary, your line is now open.

Thank you. Good morning, everyone. Hey Sonia, did you call out what the Dealer Inspire revenue increased in the quarter?

Year-over-year Dealer Inspire revenue increased 27%.

Okay. All right. Now, I got a number of questions revolving around this CreditIQ. I'm trying to understand it here. Does -- and does the dealer, have to be a customer of yours via either your legacy market platform or website platform to use this product?

They -- yes, they have to be a participant with us either through our websites or through our marketplace.

All right. So how many dealers does this company currently have right now on the platform?

It's a relatively small customer base, but it's a bigger lender network that they've built including over 1,000 integrations with various systems Gary, throughout the industry so that as we wire our traffic and value into this platform, it breezely feeds directly into the dealer systems of records. And that's one of the big benefits where other competitors are just flagging a FUEL and an e-mail lead, we're actually converting the opportunity for the dealer directly into their systems allowing them to improve their workflow, make this easier to manage and get further along in getting the loans fully approved.

So, is CreditIQ integrated with the Dealertrack lender network? Is that one of the ways it's convenient or...

You've got it, Gary. And RouteOne, right? So we fully integrate into the existing systems that dealers are using to process loans and that's going to greatly improve the quality of the experience for the user and certainly save the dealerships a ton of time.

Okay. So, this is basically kind of a pre-approval process before anybody walks into a dealership right, if you're considering buying a car. So does this take any of the decisioning on the part of the F&I guy? Does it circumvent the F&I guy at the dealership, or does the F&I guy play some kind of role in this through this whole process?

Well, certainly we can with technology help enable faster decision-making for the user experience and even helping the dealerships optimize towards profitability for them. And so we can do this dynamically. So yes, we are automating a lot of the things that today dealerships manually have to do. The great news about this is that it will allow the dealership to process more transactions with fewer resources. They can work with their existing lender network, so it enhances their ability to run their finance teams more efficiently. And again, it delivers a better user experience, because the dealership is accelerating the customer experience to either deliver the car to their home or to reduce the time that the customer has to spend in the physical store. And so it's on our quest to help dealerships be more efficient. And at the same time, leveraging their existing workflow and systems Gary, as you know changing dealer process takes time. The beauty of the CreditIQ platform is it taps into the dealer's existing workflow.

Right. And so…

And adding to that -- sorry Gary, I was just going to add, there is a lending as a service component to the CreditIQ business. So technically speaking, there could be some dealers who are not part of our network who are accessing CreditIQ's technology through the lending as a service component of the business. But I mean I think ultimately long-term the way we see it, with our rollout which we expect to start next year, the vast majority of dealers who are using it will be using it directly through us.

So my last question, so would be, so if I'm on your one of your -- I find a car on your site. I go through the whole pre-approval process. It comes back to me. Does it tell me what rate I'm going to get on the loan?

Yes.

Okay. So does that also include the does that also include a dealer markup, because usually they're going to mark up the loan a little bit? Was that included in that whole bundled price?

Yes. It's the dealers that out-the-door offer to the consumer.

Thank you.

Thank you, Gary. Our next question comes from Marvin Fong from BTIG. Marvin, your line is now open.

Great. Thanks for taking my questions. A couple more on CreditIQ. Congratulations on that deal. So I just thought I'd ask about the earn-outs. If you could maybe help us understand what might be the triggers for those and how many different payments there might be with that? And then just drilling down, I think you said there'll be some further investment to build out that product. So is there any meaningful EBITDA drag that's embedded for CreditIQ in your fourth quarter guidance? And then maybe help us think about it for next year the potential EBITDA drag? And then I have one other follow-up on advertising.

Yes sure. Thanks for the question, Marvin. So yes taking the first one on earn-out there are really two components to the earn-out. They're performance based. One is we are excited that CreditIQ comes to us with a solid network of lenders to begin with. It really does cover sort of the consumer credit spectrum from the outset. But we do believe that there is opportunity to expand that further. So we do have a set of milestones associated with bringing more lenders to the platform. But I'd say the more sizable component of the earn-out is really tied to EBITDA performance milestones. So those are the two primary drivers of the earn-out. I view 2022 as a bit more of an investment period in the business as we invest a little bit and also look to scale across the dealer network and fine-tune the consumer experience. So I would think the earn-out payments are not necessarily going to be front weighted into next year. That being said, if they end up being sold that would be excellent right, in terms of how quickly we were able to get things up and running. I think you had a second...

Yeah, just about any EBITDA impact any in the fourth quarter and maybe thinking about it for next year?

Yes. Not really any material EBITDA impact to the fourth quarter. I mean when you think about it, when we at the time you close it's really going to be somewhat de minimis from a timing perspective in terms of how long we've owned it in Q4. I do expect that we will invest against it in 2022 and you can provide more color on that when we do guidance next quarter. But I think when you look at our overall CapEx and how judicious we are I think you can trust that we will be thoughtful in terms of what that incremental investment does end up looking like.

And Marvin the benefit of this opportunity is it has tremendous synergy right? Our go-to-market systems are built. We're enabling our existing dealer network and using both the consumer volume that already exist on Cars.com and on dealer websites to enable our success here. And so there's just a tremendous amount of synergy with the deal that you're not going to have to model this with like ramping costs. Like this is really taking advantage of our existing distribution strength.

100%.

Right. No, that's great. And then just a quick follow-up. I think Sonia you mentioned advertising a little bit. It sounds like you continue to be cautious for good reason. But just in terms of the P&L any additional color you can give on just maybe how advertising might what your outlook for the fourth quarter is maybe relative to the third quarter. Should we expect it to be flattish maybe down a little bit more, or have you seen the bottom?

Yes. I think when you look at our marketing investments over the last couple of quarters it has been relatively tightly banded. It's always challenging to -- let me put it this way. I think what you've seen from us the last couple of quarters is kind of consistent with where I would think we would land in Q4. That being said we are always looking for opportunities to be efficient when the opportunity presents itself and to take advantage and lean into the channels where we can provide the most value delivery to our dealers because ultimately that is what determines the marketing investment is the value delivery that we're sending to our dealer customers.

That's great. Thanks for that. On the revenue side how do you think your OEM advertising might perform? Thanks.

I think we're actually pleased with some of the signals we're getting in Q4 from OEMs. It is a varied picture by OEM. And we flagged that we are seeing some great success with OEM certified preowned programs with limited new car inventories. They too are focused on how to get more sales of certified vehicles in their brands which is one of our key strengths. I think with the traffic levels we're seeing and the strong performance of our organic audience, we feel good about next year particularly as many OEMs are preparing to launch EV vehicles, which is another strength of ours. We held a huge EV webinar last week. The amount of content consumers are searching on which EV to buy. We know we're sailing towards an EV market share battle and consumers are going to do heavy amounts of online research comparing and contrasting the various merits of the different EV players which again fits right into our original content strategy. And so I think we're feeling really good about what we're hearing in the 2022 upfront despite some of the current fourth quarter softness that we're guiding against because we just want to be prudent in this year end finish.

Great. Thanks so much. Appreciate guys. Thank you.

Thank you, Marvin. Our next question comes from Steve Dyer from Craig-Hallum. Steve, your line is now open.

Good morning, guys. This is Matt Wegner on for Steve. Thanks for taking my question. A lot of mine have been answered already, but just curious on the -- in the quarter the mix of your net new dealers. I mean was it primarily the core marketplace solutions? Was there more -- was it more weighted towards FUEL and online shopper and any new products? Just any color on that? Thanks.

Yes. The growth has been in both right? We had good growth in marketplace. We had good growth in website customers and the adds were relatively even between franchise and independent dealers. But again 65% of our mix tends to skew towards the franchise dealer market. So it was healthy across the board. Sonia what else would you add?

Yes I would just add you also mentioned FUEL. In order to purchase FUEL from us you actually have to be a marketplace customer, but you're already embedded in the customer count. But I'd just reiterate what Alex said which is we've seen good customer growth kind of across both marketplace and the solutions side of the business. And it was a little bit more even this quarter relative to others in terms of the mix of franchise versus independents in terms of a net add perspective.

Got it. Great. All will pass it back to queue. Thanks guys.

Thank you, Steve. [Operator Instructions] Okay. We have no further questions for today. I will hand back over to Alex for any closing remarks. Alex over to you.

Thank you. Look in conclusion I just want to reiterate how pleased I am with our performance across the business and certainly the acquisition of CreditIQ. And hopefully we see great continued success heading into next year as our progress as a differentiated platform for the industry is more essential than ever. Our platform strategy is working and we're excited to bring transactional capabilities to enhance that strategy on our path to category leadership. This concludes our call. Thank you.

Thank you for joining today's call. You may now all disconnect.