Q3 2020 CarGurus Inc Earnings Call
No no no.
Good morning.
Let's move on.
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2020.
Management's expectations for our future financial and operational performance, our business growth and international strategies.
The potential impact of the coated pandemic on our business and financial results and other statements regarding our plans prospects and expectations.
Employees have navigated work from home and often challenging circumstances and I want to thank them for their tremendous effort and dedication.
As a result of their hard work Arguers financial performance was well above both our revenue and profit guidance for the quarter driven by improve dealer retention versus queue to an outstanding audience acquisition deficiency.
Before I discuss the business results I also want to recognize our events marketing team for orchestrating our second annual automotive industry conference navigate needless to say this year. It was a virtual conference we had over 2000 registrants from across the U S, Canada and the United Kingdom.
Feedback has been extremely positive from attendees and I want to thank all the gurus, who supported this event.
For our dealer community.
I look forward to navigate 21 week, when we can hopefully convene in person again.
Now onto the business performance back.
The man coupled with a lingering bottleneck in the wholesale sector has reduced for many dealers the number of cars that they typically have on their lives.
This constrained supply amidst high demand environment, that's created a strong sales dynamic for dealers leave.
Leading some dealers, especially smaller dealers with more volatile inventory levels to reduce their marketing budgets or at a minimum refrain from entering new marketing channels.
Yielding profit that have significantly.
Exceeded our guidance.
Certainly covid has heightened consumer use of online sources and reinforced the value that a marketing that a market leading automotive shopping market places like ours offers consumers who may be reluctant to visit stores at the same time. This positive trend is the is the manifestation of years of ongoing investment to optimize our data driven <unk>.
More seamless by populating existing dealer systems for the consumers information before they enter the dealership.
We're delivering this through an integration with route one leading ethanizer technology provider, which simplifies the dealers ability to access pre qualified application submitted on Carter's and eliminates a consumers need to fill out a credit application in the dealership.
Non-GAAP operating expenses were 82.7 million down 33% year over year.
Non-GAAP sales and marketing expense fell 43% year over year to 55.2 million and represented 37% of revenue down from 65% of revenue in the year ago period.
The increased operating leverage from sales and marketing is the result of ongoing buoyancy of consumer Internet usage, coupled with efficiency gains in our consumer acquisition.
Our third quarter, non-GAAP product technology, and development expenses grew 13% versus the year ago period to $15.6 million.
As we've noted previously our product and engineering organization supports both our core business and emerging products, such as consumer financing trading and other digital retail initiatives, which are generating de minimis revenue today.
Which yielded positive cash generation.
We generated $73 $9 million in cash from operations in the third quarter and 72.4 million of non-GAAP free cash flow.
Which includes capital expenditures and capitalize website development costs of $1.5 million.
I closed my prepared remarks, with our outlook for the fourth quarter and full year 2020.
As good as we feel about our third quarter results, it's hard to deny the uncertainty looming with covid resurgence.
Some European countries are initiating lockdown and in Massachusetts, where the majority of our employees live the Governor just issued new Covid restrictions.
It continues to be difficult to look ahead with confidence while considering the potential impact of of Covid resurgence to consumers are dealer customers and our employees.
With these factors in mind as we look at the fourth quarter, we expect total revenue to be in the range of $146 121 hundred $49.1 million.
Non-GAAP operating income in the range of 38.7 to 47 million and.
And non-GAAP earnings per share in the range of 26 to 28 cents.
Please note that our guidance does not include the potential impact of widespread covid induced lockdowns and the potential impact on our dealers and consumers.
Incorporating our third quarter results in our fourth quarter guidance into our full year projection, we're raising our full year revenue outlook to arrange a 546 to 549 million, implying a roughly 7% year over year decline at the midpoint.
This compares to our prior guidance of 518 to 524 million.
We are raising our non-GAAP operating income to a range of $143 5 million to 145.5 million up from $89 million to $93 million.
Implying a 26% operating margin at the midpoint of our operating income and revenue guidance ranges.
We are raising our full year non-GAAP earnings per share guidance to a range of one dollar 110 to $1.03 per share.
From 66 to 69 previously.
Once again on behalf of Langley, Sam and our executive team I'd like to thank all of our employees for their exceptional dedication and hard work through these unusual and unprecedented circumstances.
We believe our business will emerge from this crisis stronger than ever as a result.
With that will open up the call for Q&A.
Thank you if you would like to register a question. Please press the one followed by the four on your telephone you will hear a prompt three times prompt to acknowledge a request. If your question has been answered and you would like to withdraw your registration. Please press the one followed by.
Three.
Again to register for a question that is the one followed by the four on your telephone one moment. Please for the first question.
Our first question.
It's been a line of Dan Chernoff with the benchmark Company. Please proceed your line or something.
Great. Thanks, good evening and thanks for mixing it up with the one for me it.
Different than normal just a quick question Navy for you know I don't know whoever wants to take this just on renewables, obviously, a kind of a big focal point right now given the tight inventory and you touched on it a little bit nice kind of growth in traffic, even without the incremental spend and the lead.
Commentary color you gave languages appreciate it I'm just curious as you go back to dealers you know.
Demand four leads at this point higher kind of viewing that evolve over the coming quarters and sort of the receptivity that you're getting understanding that you've been able to do some pretty good optimization work here any any thoughts there would be helpful. Thanks.
Hey, Dan its Sam Zale. Thanks for the question is thoughtful I think Langley really outline the combination of macro factors in the industry that are affecting dealers and I think we always have to look at these you know renewables and anything a customer acquisition and pricing on a base.
<unk> of customer segment, we we clearly outlined the what we call or your emerging independent segment, which is the smallest independent dealers facing the biggest challenges they can't acquire inventory as effectively as the the franchise in what we call in our media minute and large independent dealers the day ma'am.
<unk> four products on the vehicle side on the consumer and there's really a higher end products than the lower end, which reflects a lot of what's going on in the economy. We said that we were going back to full pricing in third quarter. In July as you know we were very thoughtful about listening to the market through the toughest months of the second quarter we were.
Get back to full pricing and we're being very thoughtful will always be deliberate looking at the markets that have the death elasticity and the best current market conditions, right now, which is the franchise and independent medium and large accounts versus the small independents. So we're gonna be thoughtful about that yes renewals.
We'll continue on as we go forward, but we're gonna be measured and thoughtful about that effort based on those macro factors based on what's going on with our lead volume. It's certainly been a significant volume of leads that were driven into that medic medium large independent enlarge franchise account. So we're gonna be thoughtful.
There will be smart about it and it will tell us on a segment by segment basis, Yes, we can start up renewable we'll do it in a thoughtful way if we go forward and we think those results are coming in exactly where we had expected we're gonna be thoughtful them and not push it in the tougher hit segments of our marketplace.
Got it that's that's really helpful. And then maybe just one on marketing you know you you've already called out obviously, a little bit less profitability in queue for we'd kind of heard that you know marketing starts to come back some incremental investment I'm sure you guys are keeping.
The state you wouldn't know what the situation is relatively fluid at this point right. So obviously, there's a lot of variability in that number but maybe you could just talk about where you think you have the opportunity to start you know pulling some letters here with an eye on increasing sort of traffic and lead volume growth heading into 21.
You know barring some kind of you know major covid return.
Hey, Dan It's a language. So I don't know I think we were we reference to them an orange transcript that a couple of things we feel so good about going forward. In addition to the corner that we just had number one just a general efficiency of our marketing work and I think we we highlighted in the earnings transcript that our focus really is not on unique visitors.
It's more on.
Driving traffic that generates leads an intern leads to paying deals and even within that segment of paying dealers trying where we can't drive leads to franchise cause. They generally have a have a bigger marketing budget and independent. So there's a lot of work our team has done to make our market.
Spend as efficient as possible and I think you've seen some of the you know burning or you know.
Some of.
The winds if you will from from that work in this last quarter and I think they're also does Simpson tailwind. So we we benefited from from you know organic traffics been strong our brand Traffics been strong. So you know I think you know Jason alluded to the fact that we're not sure that always macro factors will continue to hold so well in our favor going.
Leads to franchise dealers, because we think that's.
That generates the best economics for our business.
Thank you for your question.
As a reminder to register for a question. Please press the one followed by the four on your telephone.
One moment please for the next question.
And our next question comes from the line.
<unk> Khan with Trust. Please proceed your line is open.
Yeah, Hi, Thanks, a lot.
I don't know if I missed it but did you guys break out the the growth in traffic from organic sources and on the growth in Q2 organic sources and then I have a follow up.
Okay.
Hey, Nevada's Jason.
Thanks for the question no we did not break out excuse me break out traffic growth.
By channel, we did say that you know.
Organic.
And direct was much stronger.
Sort of I guess, obviously, because we spend less.
Still generated you know really nice traffic trends. So it would have to have come from those two but now we didnt get specific on numbers.
Okay and then.
Okay.
Maybe maybe a good a question on the on the others. Other line is OEM as well as financing how much of the.
This trend is from.
OEM and then financing how meaningful it hasn't become a in terms of a driver of growth give us some sense of that.
Nevada that same day I'll jump in first and OEM and I think Jason they take a consumer financing.
That line is strong for us I think on the on the OEM front, we saw very strong results in our advertising business.
I think that comes because where the largest endemic advertiser with down's bottle shoppers to take action and I think our OEM a at a time that they are now spending again are excited about working with.
With our business and doing more with us at the time, we were curious as to what the cobot environment would need to have a solid results and we're proud of what we're doing with the Oems and hope that continues Jason did you want to jump in on consumer finance.
Substantially dropped so I think that that is a huge plus for us as for the percentage of cars that are converting I think it's been pretty well documented in the press that.
That dealers are doing quite well, especially in the used car space because of a whole bunch of factors and again, we alluded to some of these in the earnings announcement around you know the flight to suburbs people buying cars at previously didn't own a car because they may have been living in the city People's aversion to for the foreseeable future taking public transportation. So.
Well, you're doing well and I think their close rates on and the leads we send them I think you'll continue to hold up quite well. So you know overall you know we as you know we alluded to earlier, we were quite pleased with where the business is tracking.
Great and then just one follow up what kind of a maybe an increased focus on franchise dealers I I think historically Congress has had.
More used car inventory on the site I mean should we expect that this shift is kind of the smaller dealers.
We are more constrained in their struggling to adapt and there's a increased focus on franchise. You know does the because you kind of that you didnt mix change on the site.
Oh, thank you.
It's.
Listen and as you know we want to have all dealers on our side because you know all dealers means more inventory more inventory means more choice for the consumer at all price points and in you know independent dealers have clearly you know lower price point cars in a franchise dealer will for the most part will having said that you know as a as a business.
We are skewing a lot of our efforts towards franchise dealers probably.
Recently more towards the franchisee only because they have larger budget they tend to acquire more additional add on products.
Like our RPM product I mean, some sending these do but a lot of independents don't have they just don't have the marketing budgets that a franchise dealer has so you know, it's a balancing act and we need to make sure that we don't.
Excluding the dealers at the detriment of our consumers with people that are using our site, but where appropriate if we can merchandise a car from a franchise dealer.
To a consumer ABS, we will probably do that because it generates a higher you know generally generates a higher paying customer for us.
Great. Thanks for taking the questions.
Thank you for your question.
Our next questions come from the line of Marvin phone with P.T.I.G. Please proceed your line is open.
Great. Thanks for taking my questions just two for me I'm, just curious I noticed again I think for the second quarter in a row that you know there was a sessions is diverging more than the user growth.
So that the sessions per user is trending down just curious if you can attribute that to any anything in particular with the website or just user behavior, what what what might be causing that.
Then second question just on the larger dealers that.
That did turn out in the past couple of quarters, What's your view on whats <unk>, what might be holding them back from returning to the platform that'd be great. Thanks.
Marvin Hyatt San <unk>.
The first part of your question on sessions per user I think our focus.
Continues to be on driving leads I think Langley and Jasons comments at the beginning of the.
The commentary really really set up how our business is focused we're looking to drive consumers in a down funnel way into a lead generation effort for our dealers. So our effort continues to be a focus there I I I, probably won't comment specifically on that front.
For user I think our effort is find the down final shopper. They the focus on the leads that we can drive to our dealers and that being the effort that we're focusing most on and so I hope that's answering the question for you specifically in sessions per user up I'll, probably take a look at that afterward, and see if there is a.
Any details on NAV, we still hold a phenomenal lead in the market place in terms of consumer a repeat usage there pine on site or the the damn funnel experience and I think that's what's driving our lead growth and so our effort will always be.
We look at the results on a lead basis as opposed to a specific visitor statistics that I think thats driven what we think is a big success for our dealer.
<unk>.
Great argued that the second half of the question Yeah I had a question just on unlike I. Appreciate the comments you heard about the emerging dealers having trouble just curious on if there were larger dealers that had turned out you know in the last quarter or two but.
That's still hadn't returned to the platform and what's your view on what their their main concerns.
Our for not returning to.
To the platform yet thanks.
Yeah, Thanks, Marvin or that the results for the franchise the what we call our independent medium and large segments are moving in all directions, we want him to partly driven by that consumer demand for higher end vehicles and their ability to acquire inventory in this area.
Difficult market. So both the acquisition and retention of those two segments has been terrific for us.
And we'll continue to focus there the independent small independent dealer segment is what that naturally churn or more than those other two segments I think in total good times, that's been hit worse, and we're making a deliberate effort to sort of be careful about that you know what we call. The one to 35.
Vehicle segment, and saying, let's be thoughtful about taking risks to acquire some of those customers, let's be smart about or the new customers. We bring on so both the new business and the retention of the franchise and independent medium large segment has been solid for us both because of the boost in the tail.
Ends of the market and macro factors and because we drive a great ROI to those dealers are the small independent is the one that we're being thoughtful about acquiring because of the risk factor and and they're difficult standing in today's market.
Thank you for your questions that does conclude the question and answer session I will turn it back to Mr. Stein for any closing remarks.
[laughter].
Mr. Steiner Langley nightly there.
Yeah, I just want to thank everyone for dialing into <unk> I also want to put in a especially thanks to Carter's employees for all their hard work. During these challenging times, so with that I'll say good night. Thanks.
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Welcome to the quarter.
Quarter Twentytwenty earnings results conference call as.
As a reminder, all participants are in listen only mode and the conference is being recorded after.
After the presentation, there will be an opportunity to ask questions.
During the question queue, you May press, the one oh by the four on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star and here I.
I would now like to turn the conference over to Scott Freddo Senior Vice President of financial planning and analysis. Please go ahead.
Thank you operator, good afternoon, and welcome to Carter's third quarter 2020 earnings call.
Well 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 language Steiner gardeners, founder and Chief Executive Officer, Jay Since Robinson, Chief Financial Officer, and President International.
Zale, President and Chief operating Officer.
During the call we will make statements regarding our business that may be considered forward looking within applicable securities laws, including statements concerning our outlook for the fourth quarter and full year 2020.
Managements expectations for future financial and operational performance.
Our business growth and international strategies.
The potential impact of the cobot pandemic, when our business and financial results and other statements regarding our plans prospects and expectations.
These statements are not promises or guarantees and are subject to risks and uncertainties, which could cause them to differ materially from actual results.
Information concerning those risks is available in our earnings press release distributed after the market close today and in our most recent reports on forms 10-K, and 10-Q, which along with other SEC filings can be found on the FCC is web site under 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 todays call.
I 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 will turn it over to Langley.
Thank you very much Scott. Thank you to all for joining US today I'm pleased to share the Carter's generated strong results in the third quarter.
I'd be ongoing uncertainty of Mr. Colvin pandemic, our performance demonstrates the durability of our market leadership position and the flexibility and resilience of our business model.
Since March our employees have navigated work from home and often challenging circumstances and I want to thank them for their tremendous effort and dedication.
Result of their hard work harder its financial performance was well above both our revenue and profit guidance for the quarter driven by improved dealer retention versus Q2 and outstanding audience acquisition deficiency.
Before I discuss the business results I also want to recognize our events marketing team for orchestrating or second any automotive industry conference navigate need.
Needless to say this year. It was a virtual conference we had over 2000 registrants from across the U.S., Canada and the United Kingdom.
Feedback has been extremely positive from attendees and I want to thank all the gurus, who supported this event.
For our dealer community.
I look forward to navigate 21 week, when we can hopefully convenient person again.
Now onto the business performance.
Back in Q2 consumer demand in the market was volatile and uncertain. So we led the way with proactive discounts for dealers and introduced.
Contactless services on our platform to enable consumers and dealers to connect in a safe manner.
We had over 8000 U.S. steel is offering contact with services in Q2, which grew to over 9500 dealers in Q3, plus over 2700 dealers in our international markets.
Through innovation like this in addition to our continued audience leadership seat count engagement and consistently high ROI.
We're able to retain deal was better during Q3 than we than we forecasted in our guidance for the quarter. As a result in Q3, we grew the count of our subscribing franchise and large medium independent dealers, while declines among our small molecule has created a slight overall decline.
At the same time in Q3, there were macro factors affecting the U.S. dealer market in unique ways and I'd like to take a moment to describe them.
Early in the year when Corbett Lockdowns went into effect sales for both new and used car decline by well over 50% year over year. Additionally, OEM production of new vehicle stalled at factories were shut down that's.
That's a cut as the country has emerged from Lockdowns in Q2, several factors contributed to heightened demand for cars, including pent up demand.
Version to public transportation suburban migration and government stimulus checks.
With new car inventory down used car demand in the U.S. rebounded quickly and has grown stronger in Q3.
Demand coupled with a lingering bottlenecks in the wholesale sector has reduced from any deal as the number of cars that they typically have on their lives.
Just constrained supply high demand environment has created a strong sales dynamic for dealers.
Leading some dealers, especially smaller dealers with more volatile inventory levels to reduce their marketing budgets or at a minimum refrain from entering new marketing channels.
We believe this is a temporary phenomenon that will abate when inventories returned to more normal levels and dealers will place a higher value on the scale and ROI of our platform.
Whether dealers are spending heavily on more for more modestly. During this time, we remain confident that we offer the best combination of scale and value we are delivering ready device shoppers.
Despite kobin related market volatility, we're driving increasing value to our paying dealers with U.S. leads to paying dealers up 10% sequentially from Q2 and up 15% versus Q3 2019.
Furthermore, our lead growth skew disproportionately more franchise and large medium independent segments, which grew over 21% year over year. These.
These are far more valuable to our dealer customers and audience alone. So we optimize our site experience and marketing efforts to acquire high quality leads.
With this focus on maximizing leads over audience. We are pleased with our lead growth. The law, but will also note that on a consolidated basis, we grew monthly uniques, 11% monthly sessions, 9% sequentially from Q2.
Monthly uniques were down 4% and sessions were down 13% year over year.
Perhaps the most favorable development Q3 has been our ability to drive this.
Strong lead growth to our deals while spending considerably less than forecast and then consumer marketing, where we aim to strike an appropriate balance between lead generation efficiency with lead quality with quality lead growth are paying dealers delivering low final high intent leads that drive high ROI for dealers.
The efficiency of our consumer marketing spend in both Q2 and Q Q3 has been outstanding and is the primary driver and yielding profits that have significantly.
Exceeded our guidance.
Certainly covance has heightened consumer use of online sources and reinforce the value that a marketing that a market leading automotive shopping marketplace like ours offers consumers who may be reluctant to visit stores at the same time. This positive trend is the is the manifestation of years of ongoing investment to optimize our data driven concern.
Our acquisition program brand investment and user experience.
We believe that well permit has accelerated some yield improvements many of these factors will continue to incur.
We will continue and contribute to a sustainable improvement in our business model efficiency, while our fourth quarter guidance indicates lower profitability in the third quarter as we expect some of the comp and related expense reductions to date, we're optimistic about continued consumer marketing efficiency moving forward.
We believe the continued improvement in user acquisition efficiency will allow us to accelerate our investment in our platform and enable more elements of the complicated car buying process to occur on our site and.
In the current environment. These digital retail oriented features are particularly valuable because they help consumers and dealers transact and safe and socially distance ways.
Our area, whose product formerly called delivery continues to gain traction evidenced by higher attach rates in Q3 than last quarter. Additionally, consumer financing allows consumers to connect with the dealer as an already pre qualified car buyer. This is a win win as the consumers convert at higher rates for dealers and the shopper saves time.
With the dealership.
More than 85% of our us paying dealer inventories covered with at least one of our lending partners and more than 9% of our email lease are now pre qualified.
The growing consumer adoption of online financing and total loan funding is evidenced is evidenced that both consumers and dealers value this capability.
So in Q3, we made the process, even more seamless by populating existing dealer systems for the consumers information before they enter the dealership.
We're delivering this through an integration with route one leading ethanizer technology provider, which simplifies the dealers ability to access pre qualified application submitted on partners and eliminates the consumers need to fill out a credit application in the dealership.
These are unprecedented times for the automotive industry in the world at large amidst this market volatility and uncertainty I'm. So proud of how well our business is executing its a testament to our people our passion of products the flexibility of our business model and the commitment we make to dealers and consumers alike to offer the most transparent on or whatever.
Someplace in the world through.
Through these uncertain times, we continue producing strong financial results on both the top and bottom lines.
Many efficiencies in our in our audience acquisition and user engagement are materializing or making strategic investments in digital retail and other product into Jason seas, we're continuing to prove our value to our paying dealers with innovation scale and superior return on investment with that I will turn the call over to Jason to discuss our financial results.
Thank you lastly.
I will provide a detailed overview of our third quarter performance, followed by our guidance for the fourth quarter and updated outlook for the full year 2020.
Total third quarter revenue was $147.5 million down 2% year over year, nearly 13 million ahead of the high end of our guidance range.
Our marketplace subscription revenue fell 4% versus the year ago period to 130 million, reflecting the impact of covert on our business and our dealers.
Advertising and other revenue grew 17% year over year to $17.5 million as OEM advertising rebounded after the second quarter, which reflected cobot induce cancellations.
The U.S. accounted for 94% of total revenue in the third quarter U.S. revenue declined 2% versus the year ago period to $138.4 million, while international revenue grew 3% year over year to $9.1 million.
The growth of our international revenue reflects the earlier stage of this segment, enabling faster backfill of lost revenue due to covance supported by strong execution from our increased focus in Canada and the UK.
Our us business generated $121.8 million in marketplace subscription revenue in the third quarter.
Our international business generated $8.1 million in marketplace subscription revenue.
Turning to paying dealer count we ended Q3 with 30162 total paying dealers representing a decrease of 96 dealers from Q2, and a decrease of 2924 versus the year ago period.
In the US we finished the quarter with 23659 paying dealers, which is a decrease of 147 from the end of the second quarter.
In our international business, we finished the third quarter with 6503 international paying dealers up 51 from the end of the second quarter.
Our us paying dealer count decline of 147 dealers from the prior quarter is primarily driven by cancellations within our smallest dealer segment, which we call emerging independent dealers defined as dealers with fewer than 35 units of inventory.
Even in normal economic times that segment exhibit higher churn than our franchise and large medium independent dealers and we believe the emerging independent segment has struggled disproportionately during cold bid for three primary reasons.
One.
The small dealers they were less able to quickly adapt to remote selling.
Smaller dealers were more dramatically affected by supply constraints lately described earlier.
Three emerging independent dealers typically carry lower priced inventory and has less affluent consumers have been hardest hit by the pandemic we've.
Weve seen demand for those cars rebound more slowly than other segments.
On an encouraging note both our franchise and large medium independent dealers segments saw positive net dealer growth for the quarter and show continued positive net momentum fueled by strong retention of existing dealers re acquisition of dealers, who churn during peak coven month and acquisition of new dealers.
In the third quarter Us quarterly average revenue per subscribing dealer is $5133, representing a 68% increase compared to the prior quarter and a 6% increase compared to the prior quarter on a non-GAAP pro forma basis net of Kobe related discounts, we offered to all dealers.
International quarterly average revenue per subscriber in dealer was $1256, representing a 95% increase compared to the prior quarter and a 22% increase compared to the prior quarter on a non-GAAP pro forma basis.
Our strong Carson results in particular compared to our Q2 non-GAAP pro forma.
Flex that since emerging from our discounting in Q2, we have maintained integrity and our packaging and unit pricing, which are underpinned by our strong ROI.
I will discuss our expenses and profitability on a non-GAAP basis, which backs out our stock based compensation expense.
Amortization of acquired intangible assets acquisition.
Acquisition related expenses and restructuring charges.
Third quarter non-GAAP gross margin was 93.4% down roughly 40 basis points versus the year ago quarter.
The contraction in gross margin percentage is primarily attributed to the increase in the cost associated with our offsite display products, including our social product RPM, which had a strong performance in the quarter.
Since these products have a lower gross margin as they scale they will create a modest headwind to our overall gross margins.
Second technology investments in our datacenter and cloud hosting expenses also contributed to the year over year gross margin contraction as those costs grew versus Q3 2019, but our revenue is lower than last year as noted.
Total third quarter non-GAAP operating expenses were $82.7 million down 33% year over year.
Non-GAAP sales and marketing expense fell 43% year over year to 55.2 million and represented 37% of revenue down from 65% of revenue in the year ago period.
The increased operating leverage from sales and marketing is the result of ongoing buoyancy of consumer Internet usage, coupled with efficiency gains in our consumer acquisition.
Our third quarter, non-GAAP product technology, and development expenses grew 13% versus the year ago period to $15.6 million.
As we've noted previously our product and engineering organization supports both our core business and emerging products, such as consumer financing trading and other digital retail initiatives, which are generating de minimis revenue today.
However, we believe these initiatives will unlock new revenue streams in large total addressable market and represent future growth levers to our business and we will invest prudently yet aggressively in pursuit of these growth opportunities.
We generated non-GAAP operating income of $55.1 million representing.
Representing a margin of 37% and roughly 24 million ahead of the high end of our guidance range.
Our strong operating income performance was driven by efficiency gains in traffic acquisition.
Non-GAAP diluted earnings per share were 37 cents for the third quarter 14 cents above the high end of our guidance range.
On a GAAP basis, we generated third quarter gross margin of 93% and incurred total operating expenses of $94.1 million down roughly 28% year over year.
The decline in operating expenses was primarily driven by a decrease in our variable consumer marketing expenses.
Third quarter, GAAP operating income increased 349% year over year to $43.6 million.
Third quarter GAAP net income attributable to common shareholders totaled $32.6 million.
Geographically third quarter U.S. GAAP operating income was $46.5 million up 133% year over year.
We had a GAAP operating loss of $2.9 million in our international business compared to a 10.3 million loss in the year ago quarter.
We ended the third quarter with $245.9 million in cash and investments an increase of $69.7 million from the end of the second quarter.
The increase in our cash balance was driven primarily by our continued reduction in our expenses during the quarter, which yielded positive cash generation.
We generated $73.9 million in cash from operations in the third quarter and 72.4 million of non-GAAP free cash flow.
Which includes capital expenditures and capitalized website development costs of 1.5 million.
I'll close my prepared remarks, with our outlook for the fourth quarter and full year 2020.
As good as we feel about our third quarter results, it's hard to deny the uncertainty looming with cobian resurgence.
Some European countries are initiating lockdown and in Massachusetts, where the majority of our employees live the Governor just issued new covert restrictions.
It continues to be difficult to look ahead with confidence while considering the potential impact of a code resurgence to consumers our dealer customers and our employees.
With these factors in mind as we look at the fourth quarter, we expect total revenue to be in the range of $146.1 million to $149.1 million.
Non-GAAP operating income in the range of $38.7 million to $40.7 million.
And non-GAAP earnings per share in the range of 26 to 28 cents.
Please note that our guidance does not include the potential impact of widespread cobot induced lockdowns and the potential impact on our dealers and consumers.
Incorporating our third quarter results and our fourth quarter guidance into our full year projection.
We are raising our full year revenue outlook to a range of $546 million to $549 million, implying a roughly 7% year over year decline at the midpoint.
This compares to our prior guidance of $518 million to $524 million.
We are raising our non-GAAP operating income to a range of 143.5 million to $145.5 million.
Up from 89 to 93 million implying.
Implying a 26% operating margin at the midpoint of our operating income and revenue guidance ranges.
We are raising our full year non-GAAP earnings per share guidance to a range of one dollar 110 to one dollar a three cents per share.
From 66 to 69 cents previously.
Once again on behalf of Langley sand and our executive team I'd like to thank all of our employees for their exceptional dedication and hard work through these unusual and unprecedented circumstances.
We believe our business will emerge from this crisis stronger than ever as a result.
With that we'll open up the call for Q and a.
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One moment please for the first question.
Our first question comes from the line of Dan Kurnos with the Benchmark Company. Please proceed your line is open.
Great. Thanks, good evening and.
Thanks for mixing it up with the one for me can to different than normal just a quick question maybe for right.
No liver wants to take this just on renewals, obviously, a kind of a big focal point right now given the tight inventory.
Just on it a little bit nice kind of growth in traffic, even without the incremental spend and the lead commentary color. You gave languages. Appreciate it I'm just curious how you go back to dealers you know didnt.
Demand.
For leads at this point higher kind of viewing that evolve over the coming quarters and sort of the receptivity that you're getting understanding that youve been able to do some pretty good optimization work here any thoughts there would be helpful. Thanks.
Hey, Dan its Sam Zale. Thanks for the question, it's thoughtful I think Langley really outline the combination of macro factors in the industry that are affecting dealers and I think we always have to look at these.
Renewals and anything in customer acquisition and pricing on a basis of customer segment.
We clearly outlined the what we call our emerging independent segment, which is the smallest independent dealers facing the biggest challenges they can't.
Acquire inventory as effectively as the the franchise in what we call our medium and large independent dealers that demand for products on the vehicle side on the consumer and its really a higher end product line than the lower end, which reflects a lot of what's going on in the economy. We said that we were going back to full pricing.
And third quarter in July as you know, we were very thoughtful about listening to the market through the toughest month of the second quarter. We went back to full pricing and we're being very thoughtful will always be deliberate look.
Looking at the markets that have the best Elasticities and the best concurrent market conditions, right now, which is the franchise and independent medium and large accounts versus the small independents. So we're going to be thoughtful about that yet renewals will continue on as we go forward, but we're going to be measured and thoughtful about that effort based on those.
Macro factors based on what's going on with our lead volume certainly been.
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A significant volume of leads that we've driven into that medic medium large independent and large franchise count.
So we're going to be thoughtful there will be smart about it and it will tell us on a segment by segment basis, Yes, we can start up renewal, but we'll do it in a thoughtful way as we go forward and we think those results are coming in exactly where we had expected we're going to be thoughtful and not push it in the tupper hit segments of our marketplace.
Got it that's really helpful. And then maybe just one on marketing you know yet you already called out obviously, a little bit less profitability in Q4, we kind of heard that.
Marketing starts to come back some incremental investment I'm sure you guys are keeping.
The situation that the situation is relatively fluid at this point right. So obviously, there's a lot of variability in that number but maybe you could just talk about where you think you have the opportunity to start.
Pulling some levers here with an eye on.
Increasing sort of traffic and lead volume growth heading into 21, barring some kind of major cobot return.
Hey, Dan its language so.
I think we're we referenced in the earnings transcript that a couple of things we feel good about going forward. In addition to the quarter that we just had number one just the general efficiency of our marketing work and I think we highlighted in the earnings transcript that our focus really is not on unique visitors that's more on.
Driving traffic to generate leads and in turn leads to paying dealers and even within that segment of paying dealers trying or where we can drive leads to franchise because they generally have a kind of a bigger marketing budget and independents. So.
There's a lot of work our team has done to make our marketing spend as efficient as possible and I think you've seen some of the bearing.
Some of.
The wins, if you will from from that work in this last quarter and I think there are also some some tailwinds that we benefited from from.
Organic traffic has been strong our brand traffic's been strong so I.
I think Jason alluded to the fact that we're not sure that that all these macro.
Macro factors will continue to hold so well in our favor going forward, but I do think that.
A significant portion of them will and so I think we we do think that our earnings well, we'll probably continue to be pretty strong going forward.
Can you just press you a little bit on that Langley just insert in terms of your thoughts around where you're at from a funnel optimization perspective, I'm, just obviously, it's a different environment and who knows how long the organic traffic tailwind stick around that I mean, you guys have clearly taken a pretty.
Aggressors, probably the wrong word, but a pretty effective and strong approach to focus on.
Putting leads in the right place and focusing on kind of higher LTV.
Customer acquisition. So I'm, just curious where you think you are in kind of that stage and when that starts to get those that profit starts to level out.
I know some of my prior life the trip advisor with Steve Kaufer, you know, we we were always surprised that we were always able to find continued efficiencies. It's.
As some of these efficiencies can be small numbers.
But small small ratios on big numbers can generate large bar turning so I would say that we think we will continue to find Uh huh.
Renewed wins and.
Conversion optimization merchandising on the site to try to drive as I said not necessarily unique visitors but.
Visitors that are going to generate leads and in fact leads to paying dealers and within that context leads to franchise dealers because we think thats.
That generates the best economics for our business.
Thank you for your question as a reminder to register for a question. Please press Star one followed by the four on your telephone.
One moment please for the next question.
And our next question comes from the line of.
David Kahn with Trust. Please proceed your line is open.
Hi, Thanks, a lot.
I don't know if I missed it but did you guys break out the or the growth in traffic from organic sources and on the go thing unusual events or since then I have a follow up.
Hey, Nevada's Jason.
Thanks for the question no we did not break out excuse me.
Breakout traffic growth by.
By channel, we did say that.
Organic.
And direct was much stronger.
Sort of I guess, obviously, because we spent less.
Still generated.
Really nice traffic trends so it would have to come from those two but now we didnt get specific on numbers.
Okay, and then Oh.
Maybe and maybe a question on the on the others. Other line is.
OEM as well as financing to the.
This trend is from.
OEM and then financing how meaningful it hasn't become and comes up and I would have growth give us some sense of that.
Nevada, Sam sales I'll jump in first and OEM and I think Jason they take a consumer financing.
That line is strong for us I think on the on the OEM front, we saw very strong results in our advertising business.
I think that comes because where the largest endemic advertiser with down funnel shoppers to take action and I think our OEM.
At a time that they are now spending again are excited about working with.
With our business and doing more with us at the time we were.
Curious as to what the cobot environment would mean to them. So.
I'll, let results and we're proud of what we're doing with the Oems and hope that continues Jason did you want to jump in on consumer finance.
Sure. So in consumer finance it was not a big lever in growth from Q3 to Q2, and we continue to do.
Do quite a bit of work on it and you heard about some of the developments that.
Like we mentioned in terms of making it even more seamless for the consumer when they walk into the dealer, making it even more seamless for the dealers. They have the information ahead of time.
But the consumer financing the auto financing industry started to face some macro kind of market level.
Issues, I guess around consumer credit and so the market itself was quite a bit softer in Q3 than it was in Q2, we are a a tiny tiny fraction of the total market. So.
We're.
It's not like a direct correlation because we're.
We believe optimizing and growing through a lot of that but nevertheless in a softer market. It didn't contribute a lot of growth.
Thank you for your question.
Our next question comes from the line of Nick Joseph with Citigroup. Please proceed your line is open.
Great. Thanks for taking the questions I guess first you know.
What's your focus on lead can you touch on.
How you're generating I guess, the leaves you're generating versus which leads are actually converting to actual car purchases, but I guess that leads to dealers paying or are the is the conversion of the lead to an actual purchase kind of stable or is the supply constraints kind of showing up where you're delivering lids, but the dealers CAD.
You don't really.
Really sell a car that a quick follow up.
Yeah next language I mean, I think there are there a confluence of issues going on and we tried to alluded to that in the earnings transcript everything you know.
One macro factor is in fact, a supply issue, but we think that abating quite well it's abating.
Oh, Yeah wins are ramping up production again.
Some of the wholesale auctions a lot of the wholesale auctions coming back online. So we believe the supply factor will kind of play itself out and that kind of being a temporary issue.
Do you think are.
Our benefit.
If I don't I don't want to make light of covert because come it's certainly been a horrible.
Horrible event for our entire country, if not the whole world, but dealers I do think I've seen or put a premium on online leads from partners like ourselves because of the fact that just the general walk in traffic has.
Substantially dropped so I think that that is a huge plus for us as far as the percentage of cars that are converting I think it's been pretty well documented in the press that.
That you guys are doing quite well, especially in the used car space because of a whole bunch of factors and again, we alluded to some of these in the earnings announcement around the flight to suburbs people buying cars that previously didn't own a car because I may have been living in the city.
People's aversion to for the foreseeable future taking public transportation so.
It wasn't doing well and I think their close rates on on the leads we found them I think you know continue to hold up quite well. So overall no. We as we alluded to earlier, we were quite pleased with where the business is tracking.
Great. Thanks, and then just one follow up what kind of a maybe an increased focus on franchise dealers I I think historically Carter's is hot.
More used car inventory on the site I mean should we expect that this shift as kind of the smaller dealers.
All are more constrained and they're struggling to adapt and there's increased focus on franchise.
Because the kind of the.
Unit mix change on the site.
Thank you.
It's.
Listen I know you know we want to have all dealers on our site because all dealers means more inventory more inventory means more choice for the consumer at all price points and independent dealers have clearly.
Lower price point cars, and a franchise dealer well for the most part will having said that as a as a business.
We are skewing a lot of our efforts towards franchise dealers probably.
Disproportionately more towards a franchisee or because they have larger budgets they.
They tend to acquire more additional add on products like our RPM product I mean, some seventys do but a lot of independents don't have they just don't have the marketing budgets that franchise dealer had so.
It's a balancing act and we need to make sure that we don't.
Excluding the dealers at the detriment of our consumers with people that are using our site.
Where appropriate if we can merchandise a car from a franchise dealer.
To a consumer ABS, we will probably do that because it generates a higher you know generally generates a higher paying customer for us.
Great. Thanks for taking the questions.
Thank you for your question.
Our next question comes from the line of Marvin phone with BT Ita. Please proceed your line is open.
Great. Thanks for taking my questions just two for me I'm, just curious I noticed again I think for the second quarter in a row that in.
Those sessions are diverging more than the user growth.
So that the sessions per user it's trending down just curious if you can attribute that to any anything in particular with the website or just user behavior or what but what might be causing that and then second question just on the larger dealers that.
You know that didn't turn out in the past couple of quarters, What's your view on what's what what might be holding them back from returning to the platform.
Great. Thanks.
Marvin highest sand sales.
The first part of your question on sessions per user I think our focus.
Continues to be on driving leads I think Langley and Jasons comments at the beginning of the.
The commentary really really set up how our business is focused we're looking to drive consumers in a down funnel way into a lead generation effort for our dealers. So our effort continues to be a focus there.
Probably won't comment specifically on sessions per user I think our effort is find the down funnel shopper. The focus on the leads that we can drive to our dealers and that being the effort that we're focusing most on and so I hope that's answering the question for you specifically asked sessions per user up.
I'll, probably take a look at that afterwards and see if there is any details on that on that we still hold a phenomenal lead in the marketplace in terms of.
Consumer repeat usage they are tied on site or the the down funnel experience and I think that's what's driving our lead growth and so our effort will always be look at the results on a lease basis as opposed to a specific visitor statistics and I think thats driven what we think is a big success.
For our dealers.
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Great sorry, I missed the second half of the question yes.
I had a question just on unlike I appreciate the comments you had about the emerging dealers having trouble just curious on if.
If there were larger dealers that had turned out you know in the last quarter or two.
Thats still hadn't returned to the platform whats your view on what their their main concerns.
Our for not returning to.
To the platform, yes. Thanks.
Yeah. Thanks, Marvin the results for the franchise, the what we call our independent medium and large segments are moving in all directions, we watch them to partly driven by that consumer demand for higher end vehicles and their ability to acquire inventory in this area.
Difficult markets. So both the acquisition and retention of those two segments has been terrific for us.
And we will continue to focus there the independent small independent dealer segment is what that naturally churns are more than those other two segments I think in co. Good times, that's been hit worse, and we're making a deliberate effort to sort of be careful about that you know what we call. The one to 35.
Vehicle segment, and saying, let's be thoughtful about taking risks to acquire some of those customers, let's be smart about.
The new customers, we bring on so both the new business and the retention of the franchise and independent medium large segment has been solid for us both because of the boost in the tailwinds of the market and macro factors and because we drive a great ROI to those dealers. This.
The small independent is the one that we're being thoughtful about acquiring because of the risk factor and and they are difficult standing in today's market.
Thank you for your questions that does conclude the question and answer session I'll turn it back to Mr. Schneider for any closing remarks.
Mr Steiner Larry lately there.
Yes, I just want to thank everyone for dialing in sight I also want to put in a.
A special thanks to Carter's employees for all their hard work during these challenging times, so with that I'll say good night. Thanks.
That does conclude today's conference call. We thank you for your participation and ask that you. Please disconnect your lines.