Q4 2020 CarGurus Inc Earnings Call
Greetings and welcome to a carton fourth quarter 'twenty and 'twenty earnings results Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now like to turn the conference over to your <unk>.
Josh Goldberg.
Corporate counsel for CT and Louis. Thank you you may begin.
Thank you operator, good afternoon, and welcome to the cargoes and fourth quarter 'twenty and 'twenty earnings call, we'll be discussing the results announced in a press release issued today after the market closed and posted on our Investor Relations website.
With me on the call today are Jason Troubleshooting, and Chief Executive Officer, Scott <unk>, Chief Financial Officer, and Sam Zales, 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 first quarter 'twenty and 'twenty, one management's expectations for a future financial and operational performance and innovation, a business and growth strategy. The.
And the value proposition of our car offer acquisition and the potential impact of the Covid pandemic and a 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 caused a differ materially from actual results information concerning those risks is available and our earnings press release distributed after market close today and and our most recent reports on forms 10-K, and 10-Q, which along with their other SEC filings can be found and the SEC's website and and the Investor Relations section.
Our web site.
We undertake no obligation to update forward looking statements, except as required by law.
Further during the course of today's call, we will refer to certain non-GAAP financial measures a reconciliation of GAAP to non-GAAP financial measures.
And a press release issued today.
Our updated Investor presentation can also be found on the Investor Relations section of our website and.
With that I'll turn it over to Jason.
Thank you very much Josh and thank you for all of those joining us today.
And both honored and incredibly energized to assume the CEO role and to continue to work closely with Langley The board of directors, our senior leadership team and a incredibly talented global team of gurus to drive the growth of our business in the coming years.
It's the strength of this team that gives me the utmost confidence we will continue to find new ways to stay at the forefront of innovation and a rapidly changing automotive industry.
How does the CEO I will use a he's a very simple framework to lead a growing business strategy people and operations.
Our leadership team has developed and will continue to define a thoughtful and innovative strategy.
We will continue to hire the best people and.
And we will arm, our gurus with the tools and technology to continue executing quickly and effectively.
While strategy people operations is simply a framework to support our evolution.
Like to touch briefly on some of the current priorities of each aspect today.
Our strategy has evolved from primarily a listings business to one that has three complementary elements listings digital retail and digital wholesale.
There is extraordinary innovation happening in each of those areas independently.
But it is establishing bridges between these historically disconnected domains, where our platform becomes highly differentiate it.
To deliver on our strategy, we need to continue hiring world class employees, who can execute innovate and inspire.
Within our operations, we have already begun investing meaningfully and the strength of our foundation by empowering our gurus with more flexible technology platforms and more robust data infrastructures to optimize efficient operations and innovation.
We'll deliver on this framework with a heightened lens on customer centricity.
Although we believe we already lead the U S listings market by delivering a consumer friendly experience and and unrivaled ROI to dealers and we're committed to amplifying a voice of our customers consumers and dealers and.
And the products, we develop markets, we serve and a company we are building.
With these focused priorities within card roofs, and as macro market conditions improve and the auto industry accelerates online adoption and digital transactions I could not be more excited to lead our incredible team a gurus around the world.
Now, let's discuss our latest results.
I'm pleased to share that cargo has generated strong results and the fourth quarter and throughout 2020, despite the ongoing uncertainty amidst the COVID-19 pandemic.
Our performance demonstrates durability of a market leadership position and the flexibility and resilience of our business model.
Our U S marketplace showed impressive resilience despite market volatility and.
And for the full year, 'twenty and 'twenty, we delivered over 63 million connections and over a 38 billion leaks and deliver.
Delivering more leads to paying dealers and in the prior year.
We continue to provide what we believe is industry, leading ROI for a paying dealers.
Despite dealers cutting their budgets across marketing channels are multi product attach rate held at 30% and the U S.
While our total U S leads generated and full year, 'twenty and 'twenty roughly equaled our U S lead volumes and full year 2019, the average paying dealers saw lead growth and our efficiency and generating leads and 'twenty and 'twenty was far greater which was a primary driver of our stronger operating margin in 2020.
Over the course of 'twenty 'twenty, one we intend to continue to grow leads per paying dealer through additional investment and our brand. While also benefiting from new efficiencies and our algorithmic algorithmic traffic acquisition and improved conversion rates on our site, which we expect to create durable efficiency gains.
We're excited about the momentum we have exiting 'twenty and 'twenty, especially in the U S, where we saw growth and net paying dealer ads and Q4.
With most forecast for 'twenty and 'twenty, one, indicating better year over year car sales, we believe dealers marketing spend will continue trending up eventually returning to pre COVID-19 spend levels and we remain confident that our advantaged ROI for dealers and our most engaged ready to buy audience will make us an attractive option as dealers are.
Zoom more robust marketing.
One sign of that increased marketing spend by dealers is the increase and our U S paying dealer count from Q3.
A retention rates are strong and our sales team is bringing both new and returning dealers from all segments back onto a paid platform.
Turning to our international business, we continue to efficiently attract consumers across our markets generating a high return on dealers' marketing investment and furthering our position as a trusted partner to dealers and what was a challenging business environment.
Including pits and heads our international marketplaces attracted over 7 million average monthly unique visitors, who logged $16 3 million average monthly unique sessions and the fourth quarter.
At the same time, we continue to see encouraging trends and our cost a consumer acquisition.
And the fourth quarter, our cost per lead fell 38 per cent year over year, and Canada, and 46% year over year, and our core U K business.
These trends are allowing us to maintain our investment strategy, while demonstrating rapidly improving unit economics.
Despite the impact of Covid, we delivered net dealer additions quarter over quarter, and our international business and we now count 6000, and 697 total international paying dealers.
As we look to build the most complete automotive shopping platform for both dealers and consumers, we are adding digital retail and digital wholesale as two complementary strategic pillars to our core listings business.
Digital retailers and evolution that we're building and close partnership with our dealer customers.
Our area boost product was our first step into a digital retail, allowing dealers to market their cars to consumers who may never entered their showroom.
We continue to see growth and a number of dealers offering delivery services on a platform, which increased choice for consumers and expands the market for dealers.
The second key development of our digital retail capabilities is consumer financing, where consumers can prequalify and cargo crews with our lending partners to benefit for more transparency uncertainty and a financing process and save time at the dealership.
This is a win win for both consumers and dealers as it moves more steps of the car purchase online and provides dealers with highly qualified consumer leads.
We're continuing to actively develop our digital retail offerings as represented by the route one integration, we launched last quarter, which provides the dealer with more information on a consumer and integrates a directly into their dealership systems, allowing for a seamless transition from online to in store.
We are currently in pilot with several dealer customers on a deal builder flow, where consumers can build a penny perfect price directly within the cargo is vehicle detail page.
The deal is based on actual prequalified lender interest rates and terms and dealer specific F&I products like warranty and wheel and tire packages.
The consumer can and schedule a time to pick up the car at the dealership.
Moving potentially hours of time and the dealership.
We're piloting with dealers additional capabilities, we've built with partners that allowed dealers to seamlessly handle out of state tax titling and registration and vehicle delivery.
A complete online auto transaction is complex yet we know that a growing portion of consumers are eager to complete more of their transactions online and.
We're committed to helping dealers of all types served as consumer demand.
We will continue to build partner and acquire the capabilities necessary to enable consumers and dealers to not only shop for cars and a platform, but ultimately conduct the entire transaction fully on line.
Digital wholesaling as our other strategic growth factor that will make us and even more robust platform for dealers to buy and sell cars wholesale the complement their retail selling with us.
We're thrilled to a completed the 51% acquisition a car off for last month and I want to publicly welcome to car off for team for the cargo whose family.
Since their launch and the third quarter a 2019 the team a car offer has built an incredible data driven platform and it is helping thousands of dealers buy and sell a wholesale vehicles intelligently and efficiently.
There's a technology platform, coupled with a robust inspection transportation and arbitration operations are driving impressive growth.
I'm excited about our momentum exiting 'twenty and 'twenty and heading into 'twenty and 'twenty one.
Listings business is more efficient coming out of COVID-19 than prior and we're successfully growing subscription spend with existing returning and new dealers.
We believe our investments and digital retail and wholesale will complement our listings platform and yield continued growth profitability and scale for years to come.
I'm truly grateful to Langley and the board for the opportunity to lead this amazing team of Gurus as we continue to build upon our solid foundation and grow the scale and scope of our business.
I look forward to updating you on a progress on future earnings calls.
With that I'll turn it over to Scott to discuss our financial results.
Thank you Jason I'll provide a detailed overview of our fourth quarter performance followed by a guidance for the first quarter of 2021.
Total fourth quarter revenue was 151 6 million.
Down 4% year over year, though nearly 3 million a head of the high end of our guidance range.
And marketplace subscription revenue fell 5% versus a year ago period to $133 $2 million.
And the impact of COVID-19 on our business and our dealer customers.
Advertising and other revenue grew 4% year over year to $18 $4 million, reflecting additional revenue from partnerships with financing service companies and OEM advertising continuing to recover from Covid induced pullback earlier in the year.
The U S accounted for 95 per cent, a total revenue and the fourth quarter.
U S revenue declined 3% versus a year ago period to $143 $7 million, while international revenue declined 23 per cent year over year to $7.9 billion the.
The decline and international revenue reflects the effect of lost revenue due to our decision to support a U K dealer customers with free services and December following the resurgence of a lockdowns and the United Kingdom.
Our U S and international businesses generated $126 $2 million and a 7.0 a million dollars, respectively and marketplace subscription revenue and a fourth quarter.
Turning to paying dealer count we ended Q4 with 30631 total paying dealers representing a decrease of 2987 dealers versus a year ago period, and an increase of 469 dealers and comparison to the prior quarter and the.
U S. We finished the quarter with 23930 for paying dealers, which is a decrease of 2000 and 355 dealers from a year ago period, and an increase of 275 dealers compared to the prior quarter and our international business. We finished the fourth quarter was 6000 and 697.
<unk> paying dealers down 632 from a year ago period, and an increase of 190 for dealers compared to the prior quarter.
We believe our U S and international paying dealer count increase from the prior quarter is an encouraging sign heading into 'twenty 'twenty one as.
As we exited the year, we saw momentum across all of our segments with strong dealer retention re acquisition of dealers, who churn during peak COVID-19 months and acquisition of new dealers.
And the fourth quarter U S quarterly average revenue per subscribing dealer or a carson was $5304, representing a 6% increase compared to a year ago period, and an increase of three per cent compared to the prior quarter.
International quarterly average revenue per subscribing dealer was $1060, representing a 16% decrease compared with a year ago period and the prior quarter.
The drop in our international car side versus the prior quarter is primarily due to the free services provided to U K paying dealers and December due to Lockdowns.
And the U S. We returned to a renewal process and was re price dealers to reflect the value we provided via incremental lead volume delivered over the course of the year.
I will now discuss our expenses and profitability on a non-GAAP basis, which backs out our stock based compensation expense and.
Amortization of acquired intangible assets acquisition related expenses and restructuring charges.
Fourth quarter non-GAAP gross margin was 92% down roughly 90 basis points versus a year ago quarter.
A contraction in gross margin percentage is attributed to the increased and our cost of revenue.
We recognize media costs associated with our off site display products and our cost of revenue as these products continue to scale. It will create a modest headwind to gross margins.
Technology spend and our datacenter and cloud hosting expenses also contributed to the year over year contraction.
Total fourth quarter non-GAAP operating expenses were $93 5 million down 25% year over year.
Non-GAAP sales and marketing expenses fell, 34% and year over year to $64 8 million and represented 43% a revenue down from 62% of revenue and a year ago period.
Leverage and sales and marketing spend as a result of efficiency gains and our traffic acquisition and reduction and our brand investments.
Yeah.
Our fourth quarter non-GAAP that's a.
Technology and development expenses grew 5% versus a year ago period to $15 1 million.
And the investments, we're making and our technology team impact multiple initiatives, including supporting our core marketplace subscription revenue business and both our domestic and international businesses.
As we've noted previously a product and engineering organization supports both core business and emerging products, which Jason discussed earlier.
We believe these initiatives will unlock new revenue streams, and large total addressable markets and represent future growth levers to our business. So we intend to invest prudently yet aggressively and pursuit of these growth opportunities.
We generated non-GAAP operating income of $46 7 million, representing a margin of 31% and roughly $6 million ahead of the high end of our guidance range or.
Our strong operating income performance was primarily driven by continued efficiency and our traffic acquisition.
This was offset by a one time increase of a tax reserve and the fourth quarter to hedge open routine tax audits.
Non-GAAP diluted earnings per share or 32 cents for the fourth quarter and for cents above the high end of our guidance range.
On a GAAP basis, we generated a fourth quarter gross margin of 92% and incurred a total operating expenses of $106 6 million down roughly 20% and year over year.
The decline and operating expenses was primarily driven by a decrease and our variable consumer marketing expenses.
Fourth quarter GAAP operating income increased 145 per cent year over year to $33 5 million for.
Quarter GAAP net income attributable to common shareholders totaled $25 2 million.
Geographically fourth quarter U S. GAAP operating income was $38 8 million up 73% year over year, we had a GAAP operating loss of $5 3 million and our international business compared to eight and $8 8 million loss and a year ago quarter.
We ended the fourth quarter with $290 3 million and cash and investments and an increase of $44 4 million from the end of the third quarter the.
The increase and our cash balance was driven primarily by a continued reduction and our expenses during the quarter, which yielded positive cash generation.
We generated a $47 9 million and cash from operations and a fourth quarter and $46 2 million of non-GAAP free cash flow, which includes capital expenditures and capitalized website development costs a $1.8 million.
Before I provide our outlook for the first quarter, a 'twenty 'twenty, one I want to provide some additional context for factors impacting our revenue and operating income guidance, which includes the 51% acquisition a car offer on January 14th.
While our fourth quarter results were strong and we have momentum heading into 'twenty and 'twenty one.
Still a macro level economic uncertainty due to the COVID-19 situation the.
The U K is again and locked down this months and we've given you case dealers free services for the month of February.
It continues to be difficult to look ahead with confidence while considering the potential impact of a COVID-19 resurgence to consumers our dealer customers and our employees.
As such we are only providing guidance for Q1, which includes the full impact of car offer and our consolidated financial results.
While we are not giving full year guidance at this time. It is likely a Q1 will be our most profitable quarter of a year as we invest and the business by growing our team, especially with technical resources and product and development and also invest in marketing to build a brand and generate traffic to our site and leads to our dealers.
With these factors and mine as we look at the first quarter, we expect total revenue to be and a range of $156 million to $160 million.
Non-GAAP operating income and a range of $33 5 million to $36 5 million.
And non-GAAP earnings per share and a range of 21 to 'twenty three.
Please note that our guidance for the first quarter 'twenty 'twenty. One includes the impact of known customer billings relief for such a period, namely the free services and the U K for February but does not include the potential impact a further lockdowns.
As Jason mentioned, we are excited about our momentum exiting 'twenty and 'twenty and entering 2021, and we look forward to sharing our progress and future earnings calls that concludes the financial prepared remarks, and now I'll turn it over to the operator to open it up for Q&A.
At this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad a confirmation so indicate your line is and a question queue.
Let me first start to a fuel that you're moving a question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Tom White with D. A Davidson. Please proceed with your question.
Good afternoon, guys. Thanks for taking my question and congrats on the new rules for both of you.
I just had a couple of questions on on guidance and I guess, maybe just first on encore offer and the extent to which that's and in the first quarter Guide I think at the time of the deal and the time the deal was announced my back of the envelope.
Maths suggested it was maybe doing something like 10 million, a and revenues per quarter. A curious if you can.
Give me any sense of a if I'm.
A base there and.
Curious, if that's going to show up and and other revenues or and subscription.
And and whether those dealers are b and dealer count and and then just a follow up on the guidance commentary about a.
Profitability.
And I guess margin is kind of being a peak in the first quarter can you can you help us maybe understand the range of margin outcomes that that might be.
Possibly a kind of in a and the and the and the balance of a year.
Okay.
Sure I can a Tom it's Jason.
Share comments.
In terms of all I'll take the first part and then I'll turn it over to Scott for the margin question.
Yeah, we have not broken out.
Car offer revenue or gotten too specific on it but I would say that debt.
And we're in the zone.
It is a transaction business and so I mentioned that because it has more.
It.
It is more affected by seasonality of auto industry than a subscription business would be.
And we're also not getting the benefit of a full quarter, because we hadn't closed the transaction by Jan one.
It will show up again, because it's not included or because it's not subscription revenue and won't be included and the subscription line it'll be and advertising and other.
And we'll talk more about you know, how we're handling and dealer count there.
And the next quarter, but.
We're going to try and keep it as simple as possible.
And so.
Well, yeah, we will give more detail there, but we'll be pretty explicit about it.
Scott you want to just touch on a margin question.
Sure Tom.
What we're looking at is is walking into Q1, you know we were still seeing a ton of efficiency for.
And for marketing spend you know a competitive spend hasn't has not picked up so we have you know.
You can see and our past quarters guidance, so a consent consistently beat on that bottom line.
We are being prudently cautious with what we'll need to spend going forward. That's the number one area that would likely pick up a bit overtime. We believe will be more efficient than we certainly were in 2019.
But getting maintaining the levels of efficiency that we saw and Q2 Q3 and Q4.
Is what we're just being cautious about it and we look to the out quarters and as mentioned and our guidance and we will.
We've got a lot of hiring to do to build a team back up.
Oh, great. Thanks, guys appreciate the color.
Yeah.
Our next question comes from the line of Ralph Shakur with William Blair. Please shoot a question.
Good evening, and a congrats to both Jason and Scott and the new roles as well, Jason just curious on your overall a vision for the company and now you'll be working pretty close for Langley, but you obviously have a very strong platform and core listings business, you're not today, you talked about digital retailing, a digital wholesale and which seems like a pretty big market opportunity, but maybe if you could just kind a give a perspective on your thoughts.
And a business so what it may look like a few years out in a post COVID-19 environment with some of these opportunities and new products that you're adding.
Sure Hey, Ralph Thank you for the comment.
A.
It's.
Well look we we think that these three elements complement each other nicely and.
No.
And our listings business is incredibly strong right now and leads and in most categories.
And that's a terrific.
You know sort of.
Launching off point to offer consumers and dealers more functionality and so a debt.
The.
The first type of functionality is as we talked about to allow them to do more elements of the transaction on our site to make it more efficient for both of them.
And Furthermore, we think that as they start to do that a.
Okay.
They're going to want to do more types of transactions.
And then just consumer buying from a dealer on a platform and so that's that's when you start to get into wholesale so thats dealers selling to other debt selling and buying and selling from other dealers.
And there are also you know.
And could be an element of a.
Consumers.
Moving to dealers and.
And the reason that these three are so powerful on a single platform is when you start to share the data across.
And so we talked about some of the examples of that and the script, but.
When you can start to give a wholesale dealers who are doing a wholesale transaction information about retail pricing that's very powerful likewise when a dealer is looking to sell a car retail for them to know in the same place what the wholesale a value of that might be is also a very powerful.
And in particular, when you layer on top of that.
And geographic.
Arbitrage or the breakdown of geographic constraints, then that data is even more powerful because odds are.
Dealer and a consumer are willing to value a car differently, and new England and a winter than they are and the south in the winter.
So the vision for the future is a as we laid out these three pillars and not only advancing and each of them discretely, but really and and stitching them together longer term using data across a number.
Okay. Thanks for that makes sense, maybe a little but more of a near term question and you talked about dealership marketing's done a trending up for the year I know, it's impossible to know the pace, but just curious what your thought is on the pace of that you know maybe how has that trended since the first and a year and we will dealers be spending in front of.
I guess easing of restrictions or a vaccine rollouts or is that something you anticipate sort of lag.
That activity. Thanks.
Hey, Ralph it's Sam Zales, Thanks for the question.
We're optimistic and seeing a.
Dealer spend move and the right direction I think because of a.
Restrictions and becoming a little bit easier a coming out of last year and a I believe that every dealer and looked at the Covid situation last year and said, we figured out a way to sell a smarter and sell more efficiently using contactless services, which we help them promote on they're on they're on our site.
And the we believe that continued a progression of dealers coming back on the platform you Saar or a net dealer adds increasing and you saw the carts at growth.
It's a it's a definition that as we grow our lead volume as we did so well the realization that consumers are still and the market and ready to purchase but just a purchase more safely that marketing spend is the highest highest ROI for a deal or so we're seeing positive trends and all those fronts and we believe it will continue on.
As well as this hopefully the health returns to our markets overall vaccines are out and consumers continue to purchase more.
Our next question comes from the line of debt kernels with a bunch of our company. Please see with your question.
Yeah.
Hello, Dan Your line is less.
Our next question comes from the line of Jed Kelly with Oppenheimer. Please share with your question.
Hey, great. Thanks, Thanks for taking my question a couple if I may just one.
One on just on back to car offer just given some of the investor enthusiasm. We saw after you announced a deal.
Are you how are you thinking of giving like Kpis in terms of dealer count and gross merchant volume or are you going to keep thing and why would you keep things close to the baskets, it's more transactional which the market a market clearly likes.
Hey, Jed, it's Scott I'll take that strength.
So we're still working through what we will do on Kpis as a there was an earlier question and a.
We have got a figure out how we account for dealer count as far as Kpis. Kyle if you think about how dealer accounts work today.
It's a specifically marketplace subscriptions right. That's what we we gave and then that aligns with a car said I as Jason mentioned.
A transactional nature of a.
And of car offer is not subscription so the dealer that's sort of a dozen Mary so we have to figure out what those kpis will be.
I should note that we obviously just acquired them officially mid month and January. So we are only getting two and a half months of what they're a their revenue would be in a quarter just from an accounting standpoint. So.
I just want to mention that because that is and our guidance accordingly that theres only two and a half months a quarter of revenue.
Got it and then just just going back to the guidance.
I mean is there any way you could parse parse out the difference between like what you're expecting for international revenue given you a given the U K.
Free subscriptions versus the U S.
For the quarter I'd say, it's you know, it's relatively flattish quarter over quarter and that in both quarters.
U K is getting a free month of services. So there's not much of a difference from Q4 for Q1, we obviously.
You know don't get too specific there with what a guidance, but relatively speaking.
Yeah, there's sort of disc.
Discounting level is the same right now we don't anticipate.
Needing to discount and March but we still are.
And if the market demands that we could go that way.
Our next question comes from the line of Dan Carlos with a benchmark company. Please see with a question.
Great. Thanks, you guys hear me now.
Yes.
Alright, great. Thanks, sorry about that earlier and what happened and then even congratulations.
I guess, maybe Jason.
Taking a step back for a second and just maybe give us some people color confidence. However, you want to address it just around obviously Langley is not going to walk up and to the Sunset. This does not and overnight decision, but just given that this is kind of probably the biggest and maybe that is a strong word but talking about kind of a three pronged approach relative to just having more of a really strong lift.
<unk> business and listings businesses under a salt or anything but.
A lot of a lot of question marks around just Google and Amazon and get in.
And kind of a timing of that just love to hear kind of a thought process behind that and then again just on a car off a really quickly.
And I know you guys will probably take a little bit trying to get some guideposts that maybe from a.
Initial feedback from dealers and it feels like it's something that's going to really help stickiness to the extent debt.
Already you are getting some positive feedback or what youre hearing in terms of a potential uplift here would.
And would be helpful. Thanks.
Sure Hey, Dan, it's Jason and so just to clarify and your first question you were asking about the timing of some of the strategic elements we laid out.
For the time, just really that's a whole for net of a management.
Okay.
Yeah.
So you're.
You're right, that's what's not and overnight decision thats something that a.
And <unk> and Sam and I have been and.
And the exact team had been working on.
And the back half a.
Better part of 2020. So this has been planned for a while it allows as you probably saw and the shareholder letter allows langley to focus on the areas that he enjoys focusing on long term product M&A and.
Particularly for Q2 of them in particular and and then.
And you know I'm going to continue to.
Collaborate with him.
As we manage the business.
At the same time.
Over that same time, we've been developing our strategy and so this.
The three pillars of this which which are the acquisition of car offer was really cementing us and the wholesale one.
And that's also been and the works for a while and so these are things that we've been been building toward and a.
And a lot a expect you know we think they do too.
Spanning our strategy and it's certainly a more ambitious strategy does two things one and it shows up.
Our listings business really nicely, we think but two it absolutely puts us into new markets and new arenas. So that we can better serve both the dealer and the consumer remember we're a.
We've long been a consumer first company and and we continue to want to provide for the consumer the best possible experience to to buy and sell their car. So.
It's a natural.
And we think this is a natural evolution for us.
And it is very exciting for us because it puts us on a much more ambitious path.
As it relates to two car offer.
Yeah, we.
We did a lot of dealer diligence and.
And and they are and that's.
And you know a proof is in a putting in terms of how quickly they are joining a car off a platform but.
This does.
And the dealers are very excited about our two respective platforms. They get really excited when they hear where we're headed in terms of sharing the data and so yes, we do think that it will make for a stickier.
Deeper relationship with dealers because you know in many ways wholesale and retail and the auto industry are starting to converge more than they have historically as markets are opened up by the transparency of online and so as those converge.
And the need and desire to share the data across a is growing among dealers and we're gonna be able to offer that to them.
Great. Thanks, guys.
Our next question comes from the line of John <unk> with Jefferies. Please share with your question.
Thanks for taking my questions.
First a as as more of the transaction process moves onto your site can you give us any insight into how youre thinking about sharing economics for dealerships.
Also do you see fully online transactions and in any way cannibalizing. Your lead generation business is dealership start to see less traffic driven to their showrooms.
And then second a.
And how was the reception maybe you could talk about reception for two renewals that you conducted during the fourth quarter and whether that yields any learnings about the capacity or a willingness for dealerships to absorb price increases during or after the pandemic.
Okay.
Hey, Jon It's Sam Zales, let me start with the last one first if I could.
We were really pleased with renewal performance I think.
Third quarter as you might've now and we were very careful that we.
We.
Knew we were coming out of the heart of the pandemic and wanted to be careful and our approach, we restarted that processed and the fourth quarter being thoughtful again that.
And with lead growth is at such a substantial rate we wanted to be thoughtful about unit economics, and and the margin for dealers and return on investment and.
But with a with that growth and lead volume and and dealers as I said earlier, becoming more aggressive about marketing spend and certainly seeing consumers ready to purchase a we felt it was the right time to start renewals again, and I think you'll you'll see that reflected in the car seat numbers growing and.
And we're optimistic that if we do it and a smart way and not be overly aggressive and deliberate and stat about a price increases that we do it based on value and based on the leads and a quantity, we're delivering and the quality that we're delivering to drive a return on investment. So we're bullish on where that came out.
I think you asked about potential economic models with.
Digital transactions I think our approach is to build a digital retail two sides of a consumer experience. One is a completely digital experience where a purchased can be made through our dealership community fully online and the vehicle delivered to the ER to the consumers' doorstep and we're enabling our.
Dealer partners to do so and some of these pilots as Jason mentioned in his prepared remarks, but we also believe there's a digital day in store experience and we're enabling that as well where a consumer goes through much of that per purchase process. The pre approval on financing a.
A valuation on a trade in a.
A F&I transactions all integrated but then if the consumer wants to touch and feel of a purchase with a test drive in the dealership. We wanted to enable that as well. So that's how we're thinking about the dual a opportunity to serve consumer needs as far as economic models goes it could be one of many.
<unk> approaches it could be a a SaaS subscription that sits on top of our core and listings business. We don't see a cannibalizing that business at all that if a consumer goes through the traditional connection a consumer to dealer through today's offline world will have a great opportunity to to reap and economic benefit out of that but also.
And that if it's it's digitized and we want a demonstrate for those consumers who want the digital experience here's a SaaS subscription to do that it might be a cost per transaction. When we take a piece of a transaction because we're running it fully through the dealerships.
A dealer management system it could be a concept of a combination of those will be working on that as we continue our pilot.
Developments over time, and we will keep you appraised of how we take that to market from a commercial perspective.
Thank you so much.
Our next question comes from a line of Daniel Powell with Goldman Sachs. Please go with your question.
Great. Thanks for taking my questions.
The first one and it looked like the sequential growth and U S cars to it was a little lighter this quarter than last is that related to dealer mix on a net add side and and is that something.
Can we take into consideration and the context of the coupon and guide for revenue kind of a follow.
Yeah.
Hey, Dan sorry, you cut out a little bit on that last part.
The first thing on a sequential.
Carr said what was the other part.
Yeah. It was just a.
Looking at your detail and.
And that sequential growth was a little lower this quarter that line.
And that was driven by dealer mix on a net add side and if that was a trend that was impacting our ore.
And the Q1 guide.
Okay. Yeah. So we had really strong dealer adds as you saw and actually the dealers coming on are coming on that at a.
Strong pricing relative to our install base so dealers are helping a.
Increased car said right now the new ones that are coming on a platform, we're still prudently renewing.
And in Q4 being a slow seasonal quarter.
We still held back a bit we did.
A push harder in Q4, and then we have and and other quarters on renewals, but are still.
And trying not to be tone deaf to the market situation that our dealers are going through we also had a tremendous a quarter in Q3 with regards to.
And our RPM products and in Q4 dealer.
Dealer adoption was still very strong a.
Throughout the core so that does help increase it but our P. M a.
Was.
A little bit.
You know sort of flattish so didn't uptick as much from and impact standpoint, So our secondary product, but we were up overall and Carson.
Got it got it that's really helpful and.
And then as it relates to lead growth on the platform any.
Next you, you've given and apologies if I, if I missed it but just relative to traffic growth and some of the comments you made last quarter, you know big or small on a lead growth side any details you provided there for Q4.
Hey, Daniel it's Jason.
No I mean, the details we provide are.
Still and a and a bit of a wonky comparison period and we.
We still.
Quite a significant value.
Leads over uniques and sessions.
And.
Excuse me and.
You've also heard us start to reference paying dealers lead growth. We're in an environment that we've been and it's even more important debt we are.
Feeding the dealers who are supporting our platform so.
And we become more efficient and how we acquire traffic and how we acquire leads in particular and we're going to continue to.
To focus on lead growth, there's a versus the others.
There is seasonality and so leads tend to be a.
Softer in Q4 and general.
But we're really.
And you sort of confident and comfortable and the leads that we're sending to our a tour subscribing dealers.
Got it makes sense I appreciate it guys.
Our next question comes from a line of Nick Jones with Citigroup. Please soon with a question.
Great. Thanks for taking my questions I guess, a kind of a wait to see more stimulus checks get issued a is there any trends you can call out Oh are you a call from FY 'twenty.
A positive or negative as those come out a.
Patanjali I'll throw a tax season.
And then one follow up by a car offer.
Hey, Nick it's Jason.
No I wouldn't say that it's been there's been a discernible.
And impact from it.
A car volumes are are again, it's where we're in some strange comps.
So it's hard to comp it but.
And there was pent up demand from the months, where nothing was happening a and it's starting to normalize now and most people think debt.
A car volumes and sort of normalize over the next couple a few months.
But no I wouldn't say, we're we're not at the tip of the sphere, a enough to feel the impact of stimulus checks.
Got it thanks, and then and then a car off for I guess, you know maybe it's kind of a two part question I guess, one like over time for this full than ticket for like the Carter's brand has kind of an integrated platform for dealers to kind of really.
For the deep relationship and then kind of a follow up as a you know if I recall car offers kind of more expensive cars and maybe you typically see and auctions, there and opportunity to kind of a cheaper for value cars and I know, there's you know a franchise some franchise dealers are looking.
And just kind of a high mileage cheaper cars.
And if they think they get more margin out thanks.
Hey, Nick it's Sam Zales, Thanks for the question.
We're really excited about what car offers done and such a short period of time and their history. I don't think we're going to do anything related to brand itself because I think they built a tremendous brand is a truly differentiated instantaneous trade platform and the wholesale arena.
I think we do want to do what you are saying, which is introduced the incredible capability for dealers to use a from a wholesale.
A purchase perspective and sale perspective.
Introducing every one of our customers to the platform and we're doing that and really excited about to take on that thus far.
And and it will be certainly as Jason talked about the use of our data with our instant market value and retail data that we've got match to wholesale data will provide just incredible liquidity in the marketplace. So we will certainly bring it in and fold it as a dual set of offerings for our for our dealers to both sell retail and <unk>.
Sell and buy and sell through wholesale so we're excited about that but and I don't think we're doing anything from a brand perspective right away they are a.
A focus more and their early stage on a relatively higher and vehicle I wouldn't put it at the highest and of the vehicle spectrum, but they certainly focused franchise first which has been a really valuable market to go after you're proving to the largest players and the marketplace that you have been incredibly differentia.
Hated and distinct technology platforms to enable transactions and the beauty is as we introduce our independent dealers to the car offer platform. It will broaden that spectrum a vehicles on the trading platform.
And a and broaden out the opportunity for our dealer community to both buy and sell and make it a one stop shop for that experience.
I think car off for brings a tool set.
And a very.
Low capital model to facilitate transactions efficiently not require a buyer to sit and look through an auction.
Model It works instantaneously and they light capital model to get that vehicle from one place and the country to another and we're excited to introduce that to a broad set of both franchise and independent dealers.
Yeah.
Our next question comes from the line of net income with true Securities. Please proceed with your question.
Hi, This is Robert seller, entre and a bed congrats and both of you guys and your new roles.
It was great to see the number of a paying dealers increase and three versus <unk> and both U S and international and you mentioned retention reactivation and acquisition a new dealers as drivers. So I'm. Just wondering has the momentum sustained so far into 'twenty and 'twenty, one and is there anything Carter's is doing in particular to bring dealers back or should we.
We just think of this purely as a function of the economy opening back up and then my second question is just around the pace of investments and what.
How should we view the pace of investments over the course of 2021, including advertising spend thanks.
Hey, Robert It's Sam Zales, Thanks for the first question.
I would just tell you that I think that the results of what we did in fourth quarter.
Reflect current gurus, providing two things a strong lead growth that Jason mentioned in his comments a Jason.
Jason and Scott mentioned, just very strong lead growth and we're doing that highly efficiently, but as we've always said, we think we have the highest return on investment product offering and the marketplace. The dealers recognize it's a it's a large quantity of consumers, but it's the down funnel shopper Youre, bringing me one who spent more time on your platform and any other.
For who is ready to purchase and a more of those who are at a reasonable price point drive a great ROI for the business and we're really excited about debt acceleration and where we go from there Jason and I'll turn it to you or Scott on the second part of the question.
Sure so on.
A pace of investments, Jason and pace of investment.
We are continuing to invest in the listings experience. We do still think there's quite a bit a of optimization and and more that we can deliver to both dealers and consumers there. So.
We're still investing and the technology and product there we are becoming much more efficient we have become much more efficient and marketing and we think a lot of that.
Efficiency is durable and will remain.
So we expect that to continue not at the same pace of 2020.
You've said a handful of times.
But certainly a far more efficient model than than pre COVID-19.
And then we will be growing our investments in a.
And the retail and wholesale efforts.
Those are you know.
And clearly more nascent than anything else, we're doing but.
They're complementary and we think are going to as I said before you know when you put the three pillars together and stitch them together they become extremely compelling in terms of the pace of it from a sort of a quarterly perspective, we won't get into a much comment there other than echo.
Scott's point that because of the seasonality of the business. If you look at one of our largest I.
And I guess variable cost expense items, its marketing and a and because of the way the seasonality works marketing does tend to go up and Qs two and three versus Q1.
Our next question comes from the line of Marvin Fong with BTG. Please proceed with your question.
Thanks for taking my questions and congratulations on a new roles for both of you. My first question just a just thought we can get a little more color I think last quarter, you know the smaller dealers 30 and under inventory units was a drag on the dealer count.
Just wondering if you could update us on how and where the franchise dealer additions versus the small independents trended in the fourth quarter and then I have a follow up.
Yeah.
Hey, Marvin Thanks, It's Scott Yeah. So a we mentioned in the prepared remarks, you know across all segments.
You know dealer a growth was strong and the quarter free.
<unk> franchise has you know what.
For the.
Initially the strongest coming out of sort of Covid Lockdowns and has remained so so.
The larger dealers have been the first return and and but we didnt highlight them. This time, because all segments were strong this quarter.
Great. Thanks for that and then my second question, just maybe a bit of a two parter on marketing spend. So I think you mentioned that she had a maybe a dialed back the brand marketing and the fourth quarter and plan to bring that back and and 'twenty 'twenty, one and so.
Maybe you could just help us think about.
Was it the market that kind of a guy that that decision about brand investment for for the fourth quarter and then and then just secondarily I think you also mentioned Scott.
Maybe some of the a pricing is not where where you expect it to wind up because the competitiveness of the bidding is it's perhaps not at full.
Alrighty, just curious given where a car sales are a pretty healthy all things considered why do you think it is that pricing is still a little soft home and terms of bidding.
Bidding and.
And competitive bidding for.
For for keywords, and so forth. Thanks.
So Jason here and I will take the brand spend question and then.
Scott maybe you can take the next one is for Sam.
And brand spend I mean, Q4 is not a not a a.
A very robust quarter of a car purchasing so.
And that and this.
This year the election and the holiday season.
It's more expensive and so it's just a less efficient time to be spending on brand.
It's still a really important driver and and.
We are a we recognize the value and both the way it can help differentiate us but also provide.
Air cover and sort of a tailwind for our.
Traffic acquisition and general.
So it remains as a central a piece of our growth strategy as it always has.
And Q for reduction and brand as is typical for us.
And maybe for my benefit, but I think for others to can you repeat the it sounded like you had sort of parts two and three of your question.
Yeah, sorry.
And just to be more concise, but just though you know.
In terms of marketing spend and I think you had said, maybe youre being a bit conservative thinking debt.
Pricing might come back up for where it is today that.
Our markets are still not as competitive as perhaps.
And they should be for just wanted to elaborate on that what do you think it would take them from a.
In terms of other pricing why is it not as strong as it could be considering a car sales are so about a 60 million saw a used car sales a pretty healthy just so for.
Any additional color on why pricing is weak and that'd be great.
And just so I'm clear you were talking about pricing our pricing or.
Like what's your where your spending.
And it took.
To drive and to drive traffic I guess.
We could take this off line of.
Yeah.
So I think a.
So I'm I'm interpreting it.
Spending among the market and our competitors and peers to drive traffic.
I think.
Look I think a lot of companies are.
And still sort of recovering from from Covid and.
I think the dealer universe.
And has done an extraordinary job adapting to more of an online world, but at the same time.
And you know, they're they're not back to where they were fully and even if even if Saar is is at levels that are sort of close to where they were a lot of dealerships missed out on.
A decent chunk of sales they normally would have had over the course of 'twenty and 'twenty. So I definitely.
Call It a hangover a call it a bad.
A steady return rather than a a rapid return to normalcy.
And so as long as that exists I think.
And there are partners like us.
Going to be thoughtful about how much we should spend.
To drive to them. So if we have a lower <unk>.
Lower paying dealer count than a.
And you know it.
It makes sense for us to be.
A little more efficient and and the volume of leads that we drive and then as they come back then we start to.
Dial up our spend so it becomes more of a virtuous cycle.
Yeah.
Great. Thanks for that very helpful. Thanks, Jason.
Yeah.
Our next.
Our next question comes from the line of Doug Arthur with Huber Research. Please proceed with your question.
A guys I've covered thank you very much.
Our final question comes from a line of Knickerbockers with Raymond James. Please proceed with your question.
Hey, guys. Thanks for taking my question.
And you can just give some more color on some of the new digital retailing initiatives.
And you discussed a.
Every a boost and and route one integration.
And just more on kind of the initial reception of these new product introductions and then any.
Any other areas within digital retailing that you view as kind of large white space opportunities for new product introductions going forward. Thanks.
A Nick Hi, it's Sam Zales.
I think you've caught most of the products that are and market as you know we've been and the consumer finance.
Arena for quite a while now and that has had a tremendous reception from dealers because youre, bringing a preapproved consumer through the sales cycle and they closed much more efficiently and effectively so a.
Pre approved consumer really is so much further down funnel that it creates incredible.
Close rate.
Number two is area boost has been and important part of the logistics capability and saying it.
Getting a dealer.
Two.
Market their vehicles to a much broader audience around the country, Jason and brought it up and in his earlier comments a vehicle.
And that is can be transported from.
The country has a much different value proposition and seasonal times in different parts of our country. So we've had great reception. There. These new pilots are focused on that digital and digital day in store.
<unk> fully digital to digital and in store and when you create that capability of bringing that consumer through the <unk>.
The sales cycle, both preapproval, a valuation for a trade in and the ability to do their financing and insurance capabilities online and the ability to schedule a test drive if theyre doing it in the store for a scheduled time to pick up that vehicle or a drop off a vehicle you're just bringing that much further through the sales cycle and <unk>.
<unk>, a great efficiency for our dealer partners. So.
We've been really pleased with the a reception of those pilots for those pilots are small and their newer in the market today, what we're gonna do from those is learn how effectively they work and so far the feedback from our dealers is it's a shopper who is purchasing as opposed to what our current business is as Jason talked about it when you do a lead generation business and the <unk>.
<unk> line world versus connecting a consumer to a dealer and the digital world you are creating transactions and what we're hearing from them is we're doing that for Ya effectively we're going to do that and then take that as a market fully and a commercialized fashion. Once we are sure that consumer and dealer experiences and as good as it possibly can be so you'll hear more from a.
On that and the future and thanks for asking about it.
Thanks, a lot appreciate it.
We have reached the end of our question and answer session and I would like to turn the call back over to Jason Thompson for any closing remarks.
I'd just like to thank everyone and give a sincere. Thank you to our dealer customers our consumers our shareholders and most of all our employees.
We're very excited about the momentum, we're building and and thrilled to have your support and dedication and thank you very much have a great evening.
With that this concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Yeah.
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