Good morning, and welcome to the Cars First Quarter 2022 Earnings Conference Call. This call is being recorded, and a live webcast can be found at investors.cars.com http://investor.cars.com. A replay of the webcast will be available until May 19. A copy of the accompanying slides can also be found on the company's Investor Relations Web site. I'd now like 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 Cars' first quarter 2022 conference call. With me this morning are Alex Vetter, CEO; and Jandy Tomy, interim CFO. Alex will start by discussing business highlights from our first quarter, then, Jandy will discuss our financial results in greater detail along with our 2022 outlook. 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 table, included with our earnings 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 IR section of our Web site. We assume no obligation to update any forward-looking statements. Now, I'll turn the call over to Alex.

Thank you, Robbin, and welcome to our first quarter 2022 earnings call. Our momentum continues, driven by robust dealer customer growth, ongoing product adoption, and record retention, resulting in continued revenue growth for the first quarter. Dealer revenue increased 6% compared to a year ago, and total revenue grew 3% in an inventory-constrained operating environment that has also impacted OEM and national revenue. Consumer demand remains strong, and outpaces supply as new car production was muted as a result of the ongoing chip shortage. Sales of used cars on the other hand, remain robust. This has led to elevated retail prices for both new and used cars, and soaring profitability for brick-and-mortar dealers. The average retail prices for new and used vehicles listed on Cars.com increased 27% and 37% in the first quarter, respectively, as compared to the prior year. Despite the current market conditions, dealers continue to value and adopt our industry-leading digital solutions. Our consistent value delivery resulted in us reaching 19,500 customers, the highest dealer count in more than three years and an impressive 677 increase compared to last year and 321 compared to the fourth quarter. This is tremendous growth, and we still have ample room to grow our dealer base with over 40,000 dealerships in the U.S. Our solutions are also attracting and retaining a wide spectrum of dealers with both franchise and independent, recognizing the exceptional value we provide across our platform. ARPD growth reflects the ongoing success of our core marketplace, Web site solutions and our targeted advertising solution fuel despite the impact of inventory shortages. Dealers continue to invest in our digital solutions to add more touch points with consumers, which is underscored by our continued growth in Web site customers reaching 5,500 at quarter end. This expanded network is creating substantial…

Thank you, Alex. I'm pleased with our solid start to the year. Revenue totaled $158 million, a 3% increase compared to the prior year. Dealer revenue grew 6% to $140 million as a result of 4% growth in dealer customers and 1% growth in ARPD driven by strong customer retention rates and further adoption of our digital solutions. The ongoing inventory shortage continues to impact our OEM and national revenue, which was down 16% from a year ago. New car inventory is expected to begin to recover until the fourth quarter of this year. Despite the macroeconomic headwinds associated with inventory shortages, inflation and rising interest rates, our diversified business model gives us confidence that we'll deliver another year of solid growth. Turning to expenses, for the quarter, total operating expenses were $147 million, compared to $137 million a year ago. On an adjusted basis, operating expenses were $141 million, $10 million higher compared to the prior year. This increase is primarily due to an increase in marketing, including the return to an in-person NADA as well as higher product and technology expense driven by higher compensation and consulting costs, including the addition of the integration of CreditIQ and Accu-Trade. Net income for the quarter totaled $4 million or $0.06 per diluted share, compared to $5 million or $0.08 per diluted share a year ago. We delivered adjusted EBITDA at $42 million or 27% of revenue within our guidance range. Margins for the quarter reflect our product mix, lower OEM and national revenue and higher growth in our solutions business. Now turning to our key metrics, our business is underpinned by strong fundamentals. The value we deliver attracts and retains dealers, evidenced by growth of 321 dealers in the quarter, putting us at 19,500 dealer customers at quarter end. This…

Thank you, Jandy. I'm pleased with our progress in advancing our platform strategy, enabling OEMs and dealers to better compete in a rapidly evolving industry that's driven by changing consumer preferences. And with that, we're ready to begin our Q&A. Operator?

Thank you. [Operator instructions] Your first question comes from the line of Dan Kurnos of The Benchmark Co. Your line is open.

Great, thanks. Good morning. Alex, nice result on the dealer customer growth, it's pretty positive, especially in this environment. May be just a couple of things, I know it's super early with the acquisitions you've made, you were at NADA, you're having conversations, Jandy just made comments just about the tough environment. So, how are you thinking about things? I feel like I asked this a lot, but it's especially important now. I think how are you thinking about things like bundling, trying to get these guys locked in to longer-term commit? Or I know you're doing some piloting and testing right now, especially on the C2B side. So just help us think through the strategy here and how it evolves maybe over the coming quarters in light of the backdrop and trying to just continue the strong dealer momentum that you see, now that you have kind of a more robust product to be to offer.

Sure. Thanks, Dan. Good to hear your voice. We were very pleased with the dealer growth in the quarter and see a continued opportunity to add dealers to our platform because, to your point, we've got a range of solutions that start from entry level to people like we feature in the call who participate with us across the full enterprise suite of solutions. And so, I think that gives us tremendous flexibility to solve dealers' individual problems and then grow the relationship over time. You're seeing that in our strong ARPD in that we're able to get more solutions sold. When I look at the opportunities with both Accu-Trade and CreditIQ, keep in mind, these are opening up brand-new TAMs for us. On CreditIQ, we've now been in active discussions with all the U.S. large lenders who are eager to figure out how they can better help compete for market share. And then, on vehicle acquisition side, every dealer that we've talked to is interested in adding tools that will help them buy cars from the Street. And so, I think knowing that we've chosen solutions that meet the customer need, gives us a wide net of opportunity on ARPD. And then certainly, the cross-selling opportunity grows because your question about contracts, I would say we're less focused on trying to quote lock dealers into long-term contracts. We're winning with value, and we're winning with service. Our philosophy is we want to win dealers based on our innovation, but we're going to keep them with service and value delivery. And I think that's what you see, double-digit lead delivery growth. Web site solution sales continue to grow and now these new products are going to add to our capabilities.

And just to be clear, Alex, the conversations even in this environment, obviously, given sort of the uncertainties from the macro front, you're basically trying to communicate, though, that you're having still very constructive conversation, there's no hesitation in these communications.

Yes. No. I think -- well, first of all, we know that dealers are reporting record profits, and they are also eager to shift their business aggressively toward tech. I think if there's been any softness, it's on things like fuel and other broader marketing strategies in this environment because they are dealing with such limited inventory. But on the Technology Solutions side, there is an eagerness about how they can run their dealership with fewer resources, relying on tech. And so, again, I think the only areas that are soft right now for us would be OEMs which obviously don't have product to push and so they are not doing as much.

Got it. And just on the marketing front, Alex, just as we kind of go forward throughout the year, understanding again sort of the tricky macro, you guys are investing. You've got a bunch of stuff to invest against now, which I think is very telling for '23. Just how do you balance kind of maintaining sort of healthy EBITDA levels versus sort of going after the TAM expansion that you talked about over the coming quarters, depending on how the environment evolves?

Dan, it's Jandy. It's a great question. I mean it's one of the things that's so great about our business is the tremendous strong cash flow that we're consistently generating. It gives us a lot of options, right? So obviously, we are -- we've been a company and continue to be a company that's very, very focused on profitability and cash flow. But in end, we can use that cash flow to invest back into our business, which is what you're seeing with the numbers this year, right, with the guidance we've given for the rest of the year as well as our results here this quarter is we're putting a little bit more money back into marketing into our people and into these acquisitions, which you see across our operating expenses. So, certainly, it's a balance. And as the revenue mix changes, we're mindful of the impacts to cash flow, but we're constantly looking for investing back into growth into the business.

Got it. Thanks very much. And a solid start to the year.

Thanks, Dan.

Thanks, Dan.

Your next question comes from the line of Tom White of D.A. Davidson. Your line is open.

Thank you. Good morning, guys. I guess first off, Alex, could you maybe talk a little bit about -- a little bit more about Accu-Trade solution there and maybe how that offering is differentiated from some of the other competing consumer digital platforms out there? And I guess, sort of as a follow-up there, should we anticipate any kind of like normalization in the growth rate of that business? I know it's still like super early, but I guess I'm just sort of looking forward to a period when local dealers used inventory levels start to kind of normalize and they start getting inventory from the more kind of traditional channels like consumer trade-ins at the dealership. How do you sort of see the growth rate of the Accu-Trade business kind of behaving once that happens?

Sure. Well, Tom, we're in pilot right now with our dealer partners, and they're helping us develop the proper go-to-market here. But I can flash a couple of examples. I mean dealerships are spending, in some cases, in excess of $10,000 a month on various tools from different suppliers that, frankly, we can bring them all together through Accu-Trade -- whether that's pricing and analytics or trade-in widgets on their Web site or third-party services that allow them to source cars, in many cases, dealerships have three to five different vendors trying to do these things for them at any given time. And if you look at what Accu-Trade does, obviously, our pilot go-to-market is on a subscription basis. We do see an opportunity to enter into a variable model as well, particularly as we get into dealer-to-dealer trading. But we are intentionally being somewhat disruptive on pricing because we believe that dealer network wants fewer tools from a smaller number of vendor providers, and we certainly are bringing a suite an enterprise strategy to the dealer network. I think when you look at the strength of a trade, it really comes down to a few things, such as VIN-specific valuation capabilities that is far more precise than, say, generic make model mileage type valuation tools in the market. They don't -- we don't rely on third-party inspections. And certainly, we are backing up the Accu-Trade offer with a guarantee. So, we've got a lot of things that are helping dealers buy cars without any friction between them and the seller. And we're doing it in a Software-as-a-Service type model where dealers know that we're enabling them to do this, not just of online, but in their physical stores, in their service lanes they are using Accu-Trade across their whole business and aren't using it as one narrow buying channel. You're going to hear more about this next quarter as we reveal some of the success stories that we're finding in our pilot, but there's no reason every dealer in the country wouldn't want Accu-Trade.

And to further that point, there's no reason that a change in consumer behavior would impact the way dealers are looking to acquire vehicles, right, in value vehicles. This is something that they can continue to use going forward, no reason to change if the environment -- right trade-in is at the dealership, they can use Accu-Trade to properly value the car and buy it on the spot in the physical form. Great point.

Got it. I appreciate that, Jandy, thanks. And then, just a quick follow-up, apologies if I missed this, but did you guys comment on whether dealer count and ARPD grew for the core listings business this quarter?

It did.

Okay, terrific.

Your next question comes from the line of Naved Khan of Truist. Your line is open.

Hey, guys. Thanks for taking the question. This is Vincent [indiscernible] on for Naved. Two questions, if I may. So the first thing that dealer inventory appears to be approving and we've seen some signs of price inflation somewhat settling down. So, how do you expect these dynamics to try marketplace revenue growth over time? And the second, on the outlook for the EBITDA margin approaching 30% by 4Q, how confident are you in OEM ad spend rebounding pre-COVID levels by then, given new car inventory now expected to recover into the latter-half of the year.

Sure. Well, first of all, I think even what's interesting, if you look at inventory levels on the new car side, we know those are down massively, but the used car business still remains very robust and dealerships do have healthy levels of inventory, particularly those that are relying on tech to acquire cars and keep inventory levels flush. I think even though the used car pricing is coming down, our subscription model is somewhat tied to inventory levels. So, we think our ARPD strength is actually quite good considering inventory levels are down and most of the dealer additions that we've had over the last few quarters are coming in at a much lower subscription rate than, say, we were at a year ago because they just have lower overall inventory. And so, as inventory levels increase, it somewhat helps stabilize and/or even grow ARPD, just being tied to that dynamic. I think the opportunity for us, obviously, is that -- I'll let Jandy comment on the second part of your question?

Yes. Yes, absolutely. From an outlook perspective and the margins you were asking, the margins reaching 30% by the end of the year isn't necessarily directly tied to OEM revenue returning back to growth. I mean we certainly are expecting it to not get worse. Well, to recover and be rather flat by the end of the year from a year-over-year perspective. So, we're not assuming massive growth in OEM by the end of the year, more of a recovery and rather flat from a year-over-year perspective. So, that -- just to put a little bit of a finer point on that. And then to Alex's point, and I think the other -- the question that Tom asked at the end of his was about marketplace, ARPD and dealer growth, dealer count growing dealer count from a marketplace perspective, did grow ARPD, though. There are several components of it, right, there's the solutions from a Web site perspective, there's fuel and then there's the core marketplace. The core marketplace, ARPD was a bit down year-over-year. It's the solutions and the fuel business that really drove the year-over-year growth. Like Alex just said from inventory levels being down and new dealers coming in at lower rates, ARPD from just pure marketplace subscriptions was a little bit down year-over-year. So, I wanted to make sure I clarified that.

Awesome, thank you.

Thank you.

Your next question comes from the line of Doug Arthur of Huber Research. Your line is open.

Yes, thanks. Jandy, just to clarify, are you saying the ARPD for the core listings business was down? Or that, as well as total revenues, attributed, ex new solutions, ex fuel, ex-Dealer Inspire was down a little bit year-over-year?

You know what? I actually don't know the answer to that because we don't look at it broken out that way. You know actually, no, here it is. It was up. Marketplace, just the core solutions was up year-over-year, driven by the customer growth.

Okay, because I mean if you guys -- Alex, you said, I believe, if I caught that correctly, that the new dealer core listing marketplace customers are coming in at a lower price. So, the new solutions adoption must be pretty strong given you're up in overall ARPD. Is that a fair reading of it?

Well, dealer customer growth, right, just the customer count alone, even though it's coming in at a lower rate, it's still bringing in incremental revenue. So, yes, the combination of those two factors leads to revenue growth year-over-year. Does that answer question?

Yes. Yes. Okay. And then just going back to the margin outlook, I mean, given the fact that there's a lot of demand variables here for the rest of the year, what -- as you look at your expense, how do you modulate expenses, particularly in marketing, what's -- how flexible do you feel or how much flexibility do you feel you have on some of these expenses depending on where revenues come in?

It's a fair question. I mean we certainly have flexibility in different areas of the business. Marketing is one example. I think we've proven to be pretty strong operators, especially when you go back two years ago to COVID, I mean, I'm certainly not talking about pulling some of the levers that we did back then. But there are other areas that we can look to, to try to curb spending if revenue lines are coming in softer, but --

Okay, I got it. Thank you.

Thanks, Doug.

Thank you, Doug.

[Operator instructions] Your next question comes from the line of Gary Prestopino. Your line is open.

Thank you, good morning Alex and Jandy. A couple of questions here, first of all, when you're talking about closing nearly 200 deals in NADA, would you kind of -- were most of those deals point solutions? Or did you also get a goodly amount of new dealers looking at your marketplace business wanting to sign up for it?

Well, they were across the board, Gary, but the majority of the dealer sign-ups there were wanting to participate with us with Accu-Trade. It was an absolute home run on that front. And so, we're beginning the enablement and the production side of all those orders now in Q2, getting those all as the initial pilot dealers up and running.

Was that -- were most of the dealers that we're signing up for Accu-Trade were the independents versus franchises? Or was it just mixed across the board?

It's almost all franchise. NADA largely is a big franchise dealer show, but we do have tenant operators that are interested for sure.

Okay. So, from the time that you sign these entities up for either Accu-Trade or CreditIQ, how long does it take for you to actually roll out the product to the dealer and the dealer starts using the product?

We're working through a lot of those details. We can turn on the digital side of it fairly quickly, particularly because we have all the dealers' information already in-house, either through Dealer Inspire or any of our existing solutions. I think for the dealers that are wanting to use Accu-Trade. for their in-store appraisal process and even in their service lanes, certainly, that's requiring a little bit more time to get them to fully appreciate the totality of the solution. But we can start revenue recognition and dealer value delivery really quickly. It's just trying to get the whole dealership operation to embrace the tech is -- takes a little more time.

So it's really kind of a training issue to make sure that they fully appreciate everything the product does…

Right.

So, they can enjoy all the [technical difficulty] from it.

Would you know if the dealers that signed up for Accu-Trade had a competing product and they were going to double source or were these dealers that really didn't have a product to source cars from consumers?

Well, I think the answer is both there, Gary, because part of the value is obviously sourcing sales either from their Web site or from our marketplace. And dealers across the country have various tools that do that today. Certainly, none that are integrated to do both through one technology, like a dealer will use a third-party vendor for a widget on their Web site, they'll source leads through a various third-party or a buying matrix type solution and so they're using multiple tools. With Accu-Trade, they can do all of those things through one interface. And so, dealers initially reporting, oh, my God, I can actually save a lot of time. I have less things to train people on, and I can buy cars directly from my own Web site and from Cars.com, it's far easier. So, I do think we will replace a lot of existing tools, but there is no reason that we also can't be in addition to other solutions that they use. Okay. And do they have to be a marketplace customer to use Accu-Trade? Or can you sell this just as a point solution? They don't. But I will tell you, we've already won a lot of dealers back to the marketplace because when they heard about Accu-Trade. They wanted to buy Accu-Trade, and then said, let's get back onto the marketplace as well because now we can sell cars and buy them from you. So, that's been a nice positive as well.

Okay. And then, a couple of more questions, I promise I'll get off. Just in terms of as we look at the expenses as a percent of sales in the quarter, are those levels as a percentage of sales pretty much going to be consistent throughout the whole year, Jandy, in terms of revenue operations, product technologies, marketing, sales, and G&A.

So, marketing and sales is a bit elevated in Q1, frankly, because of NAG. Year-over-year, you see that. But also if you look at the trending out throughout the rest of the year, it will come down a bit. It's still -- we're still expecting to spend more each quarter than we did last year, but it will be lower than Q1. Product and tech is from kind of a pure dollars perspective, is a little bit light in Q1 simply because we only owned Accu-Trade for one month. So, Accu-Trade being kind of fully in for the rest of the year, you'll see a little bit of a step up there. And then G&A, you have to look at it without stock-based comp. Stock-based comp actually is going to go up a little bit. We brought more employees into the equity program this year. So, stock-based comp will be out. But if you look at it kind of normalized and without stock-based comp, G&A is probably flattish for the rest of the year.

Okay. And then, just lastly, on your share repurchase. Just curious, you only repurchased 338,000 shares in the quarter. Were you locked out of buying your stock after the announcement that on you had left or was leaving?

We certainly do have restricted trading windows. And because of the timing of when we put the plan in place, we didn't have the opportunity to have set up a 10b5-1 -- they needed a 30-day cooling-off period. So, that's part of the reason why the shares were kind of concentrated toward the beginning of the month.

Okay, thank you.

Thanks, Gary.

There are no other questions over the phone. I'll turn the call over back to Alex Vetter, CEO.

Thank you for your interest in Cars, and enjoy the rest of your week.

This concludes today's conference call. Thank you for participating. You may now disconnect.