Good morning, ladies and gentlemen, and welcome to the Cars' Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, May 9, 2024. I would now like to turn the conference over to Katherine Chen, Vice President of IR. Please go ahead.

Good morning, everyone, and thank you for joining us. It's my pleasure to welcome you to the Cars.com Inc. First Quarter 2024 Conference Call. With me this morning are Alex Vetter, CEO; and Sonia Jain, CFO. Alex will start by discussing the business highlights from our first quarter. Then Sonia will discuss our financial results in greater detail, along with our Q2 2024 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, adjusted net income and free cash flow. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the financial tables included with our earnings press release and in the appendix of our presentation. Any forward-looking statements are subject to risks and uncertainties. For more information, please refer to the risk factors included in our SEC filings, including those in our most recently filed 10-K, which is available on the IR section of our website. We assume no obligation to update any forward-looking statements. Now I'll turn the call over to Alex.

Thank you, Katherine. We're excited to have you leading shareholder engagement and guiding our discussion of our platform strategy for the investment community. I'd also like to thank Robin for her contributions to our Investor Relations program over the last 3 years. And I'd like to welcome everyone to our first quarter 2024 earnings call. We're starting this year with strong growth across our suite of products that simplifies car buying and selling for consumers, dealers and OEMs. First quarter revenue was up 8% year-over-year, and we're pleased with our double-digit growth in OEM and national sales. Average revenue per dealer grew 5% year-over-year reflecting increased adoption and successful cross-selling of our solutions and adjusted EBITDA margin of 29% reinforces the strength of our brand, the inherent profitability of our platform strategy and our track record of driving disciplined growth. Our Q1 performance was achieved through steady execution of our platform strategy and key growth drivers. Over the last several years, we've not only expanded our leading marketplace but also thoughtfully added software and digital solutions that broaden our addressable market and provide us with multiple ways to deliver growth. This diversified approach powered first quarter results by transforming OEM relationships, cross-selling cars commerce platform solutions and the strength of our engaged market-leading audience. We leverage this momentum to achieve our best quarterly top line growth in over 2 years, putting us on solid footing to deliver full year expectations, and we see the potential for even greater traction as macro tailwinds intersect with our value proposition to maximize advertising and operating efficiency that drive more vehicle sales. Turning to our growth drivers. OEM and national revenue was up 13% year-over-year from strong upfront and incremental sales that benefited from our consistent investments in OEM-related products. In light of dynamics…

Thank you, Alex. We started the year on strong footing, delivering solid revenue growth and an adjusted EBITDA margin that exceeded our guidance range. Revenue was slightly above $180 million in the first quarter, an 8% increase over the prior year and the best quarterly growth we've seen in over 2 years. Both dealer revenue and OEM and national revenue were up year-over-year across all product categories. Dealer revenue grew 8% year-over-year to $162 million, driven by contributions from repackaging, the acquisition and continued growth of D2C and continued product penetration. OEM and national revenue was $15 million, up 13% compared to the prior year. We benefited from additional OEM investments as they seek to raise consumer awareness amid rising inventory levels. Now turning to expenses. For the quarter, total operating expenses were $167 million compared to $155 million a year ago. Product and technology expenditures increased $4 million year-over-year as we enhanced marketplace features, further augmented our product portfolio and invested in our back-end systems. As a reminder, unlike the earnouts associated with our other acquisitions, the D2C earnout runs primarily through G&A as it was deemed compensation expense under GAAP. And in the period, we expensed $2.8 million associated with the earn-out. Adjusted operating expenses were $155 million, $9 million higher than the same period last year, primarily related to the aforementioned investments in technical talent and software to support our platform and products road map. And a $3 million increase in depreciation and amortization. Net income for the first quarter was $0.8 million or $0.01 per diluted share. Compared to $11.5 million or $0.17 per diluted share in the prior year. The change in net income is primarily attributable to earnouts associated with our acquisitions. I'll also note, in our comparison, net income in Q1 2023 was…

We will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from the line of Rajat Gupta from JPMorgan.

Great. I had one clarification on the second quarter guidance and then another broader question. So seasonally, if you look at second quarter versus the first quarter, EBITDA is always up. Typically, you've also guided to higher revenue sequentially. I was just curious like why does the midpoint imply a step down in EBITDA. I know you mentioned some OpEx shift, some spending shift from 1Q to 2Q. Maybe if you could quantify how much was that? And is there anything else to keep in mind when it comes to the seasonality this time around? And I have a follow-up.

Thank you for the question. It's Sonia. No, you're right. Historically, Q1 has typically always been a quarter with a little bit higher investment, particularly given the timing of events. Just given performance that we saw in timing of a couple of investments, some of the investments we were originally planning for Q1 shifted into Q2. Nothing material in terms of how that would change our outlook for a full year. We still believe we're very much on target. And if you kind of take the 2 quarters together, you can see that we're pacing really well against that target. It's literally just a little bit of a shift in a couple of areas.

Got it. Got it. So do you mean like combined first half OpEx was tracking in line with what you had initially anticipated. Is that the right way to think about?

That's the right way to think about it, take it as the first half versus individual quarters.

Understood. That's helpful. And then just further on, you provided some helpful guidance around like dealer count trajectory for the full year. I'm wondering if you could tie that with expectations for ARPD as well? And where do we stand from a product attachment perspective, what incremental initiatives are in the pipeline to improve the monetization? Our sense is that as some of the dealers come back to the platform that should be further accretive to ARPD? Or are you having to like work with them on pricing to get that retention back in any way. So just curious like how should we [indiscernible] those 2 as you think about the count and the ARPD through the course of the year?

Great question. Well, first of all, I'll address the last part of your question, which is we don't think price is the lever we need to pull to win dealer adoption, meaning that we're not going backwards in terms of our pricing to win dealers back. In fact, we're seeing dealers that canceled last year due to our pricing action are now engaging with us again. In fact, inbound dealer inquiries to the company, meaning dealers raising their hand, contacting us are up 20% year-to-date. So we're seeing dealers realize that our value is fantastic and they need help moving inventory. I think a lot of the other initiatives that are going to continue to drive ARPD growth are things like integrating Accu-Trade and CreditIQ into dealer websites. We think we can help dealers reduce third-party expenses by giving them both trade-in and online financing tools that can sit natively on their website and be integrated and then protect the dealers' data which is a big initiative for us to help dealers, control their own first-party data and information. And then we're testing also things like an independent dealer offering for smaller dealers to an entry point for them, to be on our marketplace or with our website solutions. And that will -- like it pulls down ARPD because we're going to be selling smaller dealerships with smaller inventory size. But that's not going to take away from the value upside we see with larger franchise dealers and growing spending there. Cross-sell remains a big priority for the business.

So we can expect like ARPD to -- is it fair to assume the 1Q is a low point for ARPD as well as dealer count? Or is there is that more like...

Our plan calls for us to grow both, right? We want to reliably grow dealer count and we want to make incremental gains on ARPD. So that's -- we're seeking to do both.

Your next question comes from the line of Tom White from Davidson.

Great. Alex, I was hoping you could just share a bit more color on what you're hearing from local dealers as it relates to their priorities for marketing investments this year and maybe for the next couple of years. On one hand, rising inventories would suggest the dealers need to find incremental sources of demand. But I guess on the other hand, a lot of the dealers we talked to we're talking about prioritizing their own direct digital spend like search and social. We've heard dealers say that sort of thing for years. And you guys have been able to grow dealer count and your peers have been able to grow kind of paying dealer count despite that kind of chatter from dealers. But I'm just curious if you can comment on, are you seeing any kind of significant change on the part of local dealers to engage with platforms like yours, particularly as they're undergoing kind of a broader digital transformation of their operations kind of more generally? And then I have a quick follow-up.

Sure, Tom. Great question. First of all, as you know, I mean there isn't a retailer out there, not just auto, but any retail category that wouldn't want 100% of their traffic is to come straight through their own front door and not have to rely on channels to generate growth. That said, as much as I understand why people want that, the consumer need for independent third-party research is a nonnegotiable for the consumer. The consumer has proven over 25 years that they reliably are seeking out trusted independent objective meta data and advice before they enter the retail auto market. And so regardless of the industry desire to put more investment to get traffic to come directly to them, we see through data that our third-party research marketplace platform is extremely durable. I think second to that point, because we power over 7,000 dealer websites, we see the disproportionate amount of money that dealers are spending on other channels to generate traffic and leads. Without exception, the Cars.com marketplace is the most efficient traffic that they're buying that converts at a much higher rate than all their other traffic sources combined. And so the bigger macro trend we see is that dealer profitability challenges are waning, meaning that dealers are experiencing with rising inventory levels and pricing coming down on cars, their overall profitability is challenged. And when you interrogate their marketing mix, it universally supports dealers need to be featured on these marketplaces because it's far more cost effective to generate sales.

Just a quick follow-up, if I could, on OEM and national. You guys had some encouraging things to say there, I guess, in the prepared remarks about interactions with OEMs and the impact of rising inventories. And I guess, growth accelerated in the quarter, and it looks like it's going to accelerate a bit in the second. But I don't know, I guess, do you guys have confidence that this line item can return to kind of pre-pandemic levels of revenue kind of in any reasonable time frame here? Or is there any risk that OEMs have kind of maybe move their focus when it comes to brand spend to kind of like the latest shiny object, be it social or connected TV or TikTok. Just trying to understand like the long-term kind of trajectory for this line.

Tom, ironically, it's a little bit of the same answer in that manufacturer marketing and advertising spend is largely agency-led, and agencies and OEMs, again, want all car buyers to go directly to their brands and buy a car without any outside influence. And we do not believe that, that is realistic, nor does it map at all to the consumer behavior that overwhelmingly shows that research online is fundamental to the car shopping journey, and you're not going to bypass that channel. And so as OEMs become more confident that they've got to be in front of shoppers while they shop, where they shop, we do think OEM can return to prepandemic levels. I think your question on timing is probably the more difficult one to answer in terms of we were pleased with OEM results in Q1. We saw not only strong upfront, but we saw an increase in scatter dollars as well, which is more reactive to market conditions. And so we're really pleased with the progress in the quarter and even the continued momentum in Q2 but it's also been hard to predict the OEM channel reliably over the last few years. So we think we're on a very healthy growth rate right now.

Your next question comes from the line of Naved Khan from B. Riley Securities.

So a couple of questions from me. Maybe just to put a final point on this dealer count. It's great to hear that you expect the count to be up as we exit the year. But if I have to think about the trajectory, do you think that the count might start growing in the back half versus the first half, meaning second quarter? How should I think about that trajectory? So that's one. And then the other question is on Accu-Trade. Actually, I think I've seen the fastest sort of sequential addition in the last quarter versus in the any of the previous 3 quarters. I'm wondering what kind of is driving that acceleration? Is it just some seasonality, maybe the NADA show or something else? Or are you just kind of seeing increasing traction with Accu-Trade.

Well, maybe we can start -- thanks for the question, Naved, maybe we can start with your first one on dealer count. I think in our prepared remarks, we talked a little bit about how we saw really strong new sales in Q1, some of the strongest we've seen in the last couple of years. I think we're also pleased to see retention starting to improve. So for the month of April, in particular, marketplace was up from a dealer count perspective, which we think are promising green shoots as we think about the rest of the year and give us a lot of confidence in being able to deliver that full year dealer customer growth that we were referring to. So that -- hopefully, that helps give a little bit of context on what we're seeing right now. I think in terms of Accu-Trade. Last year, we spent quite a bit of time focused on our marketplace repackaging and expanding dealers access to the platform by adding more to our marketplace packages. That's behind us. That's allowed for a lot more focus and intentionality when it comes to the cross-sell. So I think you see some of that come through. And I think Accu-Trade was really one of our hits at NADA this year. So we're excited about the potential in front of us with that business. It's hugely accretive to EBITDA -- or EBITDA and ARPD and I think also provides dealers with a lot of value relative to other platforms out there. I don't know, Alex, if you want to?

No, I would say we're pleased with the progress there. As you recall, maybe we signaled in Q4 that we were going to focus much more this year on making sure current dealers are successful. So more cycle time was spent in the first quarter helping the dealers that bought Accu-Trade use it and be successful with it than there was really focused on growth. So the fact that our sales motions have been focused on dealer engagement and we're getting steady growth. As soon as we nail the onboarding and utilization experience, we should be able to scale this business to very healthy rates in the future.

Your next question comes from the line of Gary Prestopino from Barrington Research.

Several questions here. First of all, Alex, in terms of what happened with the dealers in Q1 where you had some attrition there, where was that attrition mainly related to, say, 1- to 2-point dealerships that were not in major metropolitan areas and independents as well. I'm just curious as to see where that attrition is coming from.

The segmentation wasn't vivid in any shape or size, Gary. Like I wouldn't say that the churn we experienced was dealer specific, either geo or size of store. And we really felt it was more reactionary pressure to macro cutbacks of the whole expense base, meaning our sales force was hit with a lot of just we're canceling everything right now to reassess. What's been good is that now that we're getting face-to-face time with those customers to show them the metrics that they're walking away from like website traffic, phone calls or even leads to their CRM. Dealers are starting to realize that this is oxygen for their business. And so we did have a nice start to Q2 in dealer count, but most of the cancels in Q1, we think were just knee-jerk reactions. That weren't specific to us, but more wanting to take out significant cost.

Okay. And then in terms of Accu-Trade, when you say it generated, as you said, 622,000 appraisals in the quarter, is that correct?

Correct.

How many of those appraisals in general, turn into an actual transaction or you do all of them?

Well, they don't all turn into transactions, Gary. I can assure you that because dealers are giving customers offers in their cars. And so a much smaller percentage of those actually convert to inventory. But it allows the consumer to know that this dealer or somebody they can trust. And if they do and when they do want to sell that car, the dealer is willing to give them a data-driven value that's market driven. So there's still value in even just conducting the appraisal and providing the consumer utility. Importantly, what we are starting to build is intelligence that allows us to see the inventory that's appraised. And where else in the dealer network, that vehicle appears. So if the dealer who appraise the car, doesn't buy the car, we can start to show that dealer who did and then -- and what retail price point they're now retailing that vehicle back in the open marketplace. So our use of data here is improving every day to help dealers understand opportunities won and lost. And -- but ultimately, dealers are showing that they're buying far more cars using Accu-Trade than anything else that they've done or used in the past.

Yes, it's still a big number. I mean, you're talking about -- you had 1,000 dealerships at the end of the quarter, right? So that 622 appraisals quarter for dealer that's still pretty big.

Right. And that includes that we've got dealers who haven't really appraised many vehicles at volume. And so our internal KPI is that we know if we can get a dealer to appraise their first 100 vehicles, their degree of satisfaction and success with the platform is dramatically higher and the retention is secure. So that's why we're focused on that first 100 days and that first 100 appraisals.

And then can you put any statistics or stats or anything about in Vin Performance Media. I think you mentioned it had a solid quarter of growth. Is there any statistics you can share with us there?

It's still fairly early innings. We're seeing, generally speaking, a lot more consumer engagement with dealers who use Vin Performance Media, and that typically manifests itself across search interaction with vehicle detail pages, transfers to the dealers website, and we see them showing up in their leads at a greater rate. But we'll probably come back as VIN Performance Media continues to grow and adoption continues to increase. We can come back with some more concrete information.

Okay. That's good. And then the marketplace repackaging initiative, at the end of the year, you had about 70% of the dealers had opted for upper tier packages. Has that changed -- that change precipitously by the end of this quarter?

No material change in the mix.

Okay. And then lastly, CreditIQ. How is that -- you had about 11,000 dealers beyond the 2023, has that increased at all?

I don't have the number off hand modestly because of softness in dealer count, which has been a key opportunity to grow dealers. The big focus there now is rolling out that technology on dealer websites, Gary, which will increase the volume. And what's been exciting about that is now lenders are wanting to talk to us more about things we can do directly for them. Now that they know we're able to put their offers not only in our marketplace, but in front of shoppers on dealer websites. And so now that the distributional strength of our platform is better understood by lenders. The level of conversations we're having with lenders about doing more is also increasing with their understanding of our broader capabilities. So stay tuned on that front. We hope to have some exciting developments there.

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

So can you unpack the 8% growth in the dealer business line in Q1? How much was -- if you generally speaking, was from D2C, which I think you closed in November and how much -- what was the growth rate at DI.

Yes. So I think we talked a little bit about D2C's impact at the time we bought them. So they're particularly in the beginning of this year before we lap the acquisition, they're going to be contributing a couple of points of our year-over-year revenue growth. We're moving a little bit away from our traditional Dealer Inspire year-over-year growth metric. Part of the reason for that is we are now a lot more focused on selling at a platform level as opposed to individual product -- sort of individual branded level. But I think if you went back and you tried to do an apples-to-apples comparison on that, you would find that the year-over-year growth is fairly consistent with what we've seen in prior years, which is basically a double-digit growth rate. So generally, one of the takeaways should be for Q1 and Q1 revenue growth as we saw improvement across all areas of the business, marketplace, the solution side of our business and the media side of our business.

Your next question comes from the line of Marvin Fong from BTIG.

Great. Sorry, I hopped on the call a little bit late, but I did see -- so ARPD was down sequentially and I understand that we only had a partial quarter of D2C contribution less in the fourth quarter. But could you just help us understand like what ARPD have been up sequentially if we exclude D2C. That's my first question.

No, it's a great question, Marvin. D2C is a bit of a -- while it's a great revenue growth and it's margin accretive, it is a little bit of a drag on ARPD, they don't -- it's a business that really isn't -- is selling websites and website upsells and increasingly now also our Accu-Trade product in Canada. If we pull the D2C out of the mix for Q1, we probably would have been flat to slightly up sequentially on ARPD.

Great, super helpful. And then just a question on Accu-Trade. I mean, I think when we last kind of talked about the nice win you guys got a Ford directly, you said it would take a couple of quarters to kind of get that all set up. So should we expect sort of the timing of that to sort of start hitting soon? And should we kind of think about the adoption and the dealer count for Accu-Trade kind of being a nice little bump? Or do you kind of expect to kind of see the same level of increases that we have been seeing?

Thanks for the question, Marvin. We have actually started to see the pickup with Ford dealers specifically, about 20% of our new sales were coming in our Ford dealers, which is disproportionate to the number of Ford stores in the total TAM. So we're seeing the first signs of that acceleration happened due to the OEM endorsement and we expect that to build not only with Ford dealers but hopefully other OEM endorsements as well.

Great. And if I could just maybe slip in one more here. Really great to see the strength in advertising or OEM and National. And I appreciate what you kind of said about the commitment from I know you guys did a great campaign with Tesla recently. I mean, how much of this is so tied to EVs, there's obviously a sales issue there and inventory turn issue or would you attribute it more to just kind of a broad-based demand from that customer base?

Specifically on the EV issue, we think it's a consumer education challenge, which is why digital platforms like Cars.com, we think are perfect for Elon and Tesla as well as other OEMs, right? The consumers have a lot of questions prior to purchase and they need information, which we have. And so we've added things like driving range and battery life to our content around EV so that consumers can see what each model can reliably generate in terms of time to recharge and distance and to reduce range anxiety. So we think the problem with EVs is largely educational. We think car companies need to invest in platforms that provide that independent third-party objectivity to help them develop confidence to go to the physical store and drive the product. So that's number one. I think number two, in general, we're pleased with the OEM progress. We're far from declaring victory. We think this opportunity is tremendous because the amount of time consumers are spending on our platform comparing makes and models. The OEMs that tap into that experience and talk to shoppers while they're in the active shopping are going to take outsized share because they're tapping into retail demand.

Operator, do we have any more questions on the line?

There are no further questions at this time. I will turn the call over back to you, Katherine Chen [ May 22 ].

Thanks for joining the call, and we look forward to seeing many of you soon.

Ladies and gentlemen, thank you for participating. You may now disconnect.