Q4 2021 CarGurus Inc Earnings Call
Greetings and welcome to the car Gurus, Inc, fourth quarter and full year 2021 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.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host current deep Qing Vice President of Investor Relations.
Thank you operator, good afternoon, I'm delighted to welcome you to congregate fourth quarter 2021 earnings call, we will be discussing the results announced in our press release issued today after the market close and posted on our Investor Relations website with me on the call today are Jason <unk>, Chief Executive Officer, Scott <unk>, Chief Financial Officer.
Sam Zales, President and Chief operating Officer, and Bruce Thompson, founder and Chief Executive Officer, Carl here during the call. We will make statements regarding our business that may be considered forward looking within the applicable securities laws, including statements concerning our outlook for the first quarter 2022 management's expectations for our future financial.
And operational performance and innovation, our business and growth strategy, our expectations for our car off our business and anticipated acquisition synergies our expectation for a car group instant cash offer the value proposition of our current product offerings and other product opportunities.
Pencil impact of the COVID-19 pandemic, the semiconductor chip shortage and other macro level industry issues on 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 market close today and in our most recent reports on Form 10-K , and 10-Q, which along with our other SEC filings.
Can be found on the SEC's website and in 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 today's call. We will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release issued today as well as in our updated investor presentation, which can be found on the Investor Relations section.
<unk> of our website with that I'll turn it over to Jason.
Thank you Sandy and thank you to all those joining us today.
It has been a year since I assumed the CEO role in 2021 was nothing short of revolutionary.
In 2006 cargo as set out on a mission to build the world's most trusted and transparent automotive marketplace.
Over the last 15 years <unk> has delivered on that mission and it has helped millions of consumers and our dealer partners connect and transact offline, while garnering trust and transparency.
Along this journey our business model has evolved to meet the growing and ever changing needs of consumers and our dealer partners.
As such we believe our mission statements should evolve as well to more accurately reflect our business today and where we're going.
That is why I am pleased to share our new mission statement with you today.
<unk> gives people the power to reach their destination.
For consumers this means empowering them with the tools and information necessary to confidently shop.
By finance and sell from the largest network of dealers and their inventory in the U S.
For dealers it means continuing to provide innovative forward looking solutions by giving them the resources and capabilities they need to grow their businesses efficiently and profitably.
It is through our consumer and dealer solutions and our combination of listing digital retail and digital wholesale that we are able to create a differentiated value proposition as the only full end to end transaction enabled marketplace.
2021 was a transformative year for Carter's as we evolved from a listings business to a transaction enabled marketplace, providing valuable cross platform synergies to both our dealer partners and our industry leading consumer audience.
This was made possible with the acquisition of car offer.
The launch of Carter's instant Max cash offer.
And the progression of our digital retail capabilities.
These milestones were integral to the development of our end to end transaction enabled marketplace.
I'm thrilled to share that with the sizable new growth vectors and through the remarkable resiliency of our foundational listings business.
<unk> achieved exceptional results and exceeded our forecasted guidance for the fourth quarter and full year 2021.
We formally closed on the acquisition of car offer on January 14th 2021, and could not be more pleased with this exceptional growth and performance this past year.
<unk> and the resulting semiconductor chip shortage created immense inventory challenges for dealers.
Fortunately car offer is the industry's first instant trading platform to help dealers navigate these unprecedented times.
The wholesale solution allows dealers to source and our sell inventory $24 seven without the need for time intensive auction.
The demand for inventory the innovative car offer solution.
And the integration with Carter's has resulted in remarkable growth.
In the fourth quarter car offer generated revenue of approximately $179 million growing over 1000% since the acquisition closed in Q1.
In the year, we acquired car offer not only became a profitable business, but also grew adjusted EBITDA, a non-GAAP metric to $33 million in Q4.
Our offers novel solution for wholesale inventory, coupled with cargo is largest consumer audiences vast dealer network create synergies that are unavailable elsewhere.
It is through our collective offerings that the combined cargo roose in car offer sales team enrolled another 2100 dealer rooftops in Q4 for approximately 9100 enrolled dealer rooftops on the platform by the end of the year.
Approximately 37% of these newly enrolled rooftops this quarter were attributable to the cargo whose sales team demonstrating the success of the cross functional partnerships between our combined sales force.
Moreover, as we announced last week, our offer reached 10000 enrolled dealer rooftops in the platform growing approximately 180% since Q1, an incredible achievement in a short period of time.
The benefits of car offer have attracted a broad array of dealers ranging from independent and franchise dealers to nationwide rental fleets, who require the same if not more access to inventory as it typical dealership.
As we enroll more dealers the car off for buying matrix continues to grow in both diversity and liquidity of vehicles transacting on our platform.
Industry wide supply and demand constraints are not the only challenges we faced this year.
Seasonality typically impacts the retail and wholesale business in the latter half of the year. We were pleased to see the car offer momentum continue and outpaced typical seasonality.
Carl for revenue from the dealer to dealer business was $94 million growing approximately 63% quarter over quarter and an incredible 506% since the acquisition closed in Q1.
Strong revenue growth this quarter was driven by record breaking transaction volumes month over month in Q4 further highlighting the power of the car off for matrix as more dealers enrolled on the platform and begin to transact at scale.
Gross merchandise sales increased quarter over quarter by 163% to $2 3 billion as a result of higher transaction volumes adoption of ancillary products and increased average selling prices as used vehicle demand remains at an all time high.
A key component to creating our end to end transaction enabled marketplace is the ability for consumers to not only shop for a vehicle on our site, but to trade in their existing vehicle as well.
The combination of car offer and cargo Roos allowed us to launch cargos instant Max cash offer or instant Max for short.
Well instant Max has been a part of the original vision for the platform the effects of COVID-19, pandemic and the semiconductor chip shortage caused inventory challenges for dealers, resulting in limited inventory.
And thus dealers, making compelling offers unused vehicles.
As a result consumers are eager to sell their used vehicles at significantly higher prices than where they were just a year ago.
As this dynamic persists, we will leverage this opportunity to capitalize on instant Max's growth and provide dealers a fresh new source of inventory, while simultaneously offering our vast consumer audience. The only platform of its kind with the most competitive real time offers from thousands of dealers.
This quarter, the remaining $84 million a car off revenue was associated with instant Max more than doubling the high end of our forecast and guidance.
Instant Mac saw tremendous growth with transaction volumes growing over 1300% quarter over quarter.
Growth in instant Max this quarter was driven by wider adoption in existing geographies as well as expansion into new geographies.
We ended the year, which was only five months after our initial launch covering 22 states and D C, which represented 58% coverage of the U S population.
Since then we've expanded into California, bringing our U S population coverage to approximately 70%.
With each expansion effort, we take our learnings to further improve and optimize our offering and the consumer experience.
In the fourth quarter, we launched onsite merchandising, enabling consumers visiting cargo, whose dot com and one of the 23 currently participating states to sell their vehicle right from our homepage, which has driven significant traffic.
With 60% of car shoppers looking to trade in or sell a vehicle or 29 million unique average monthly high intent visitors in the U S can both purchase and sale of vehicles seamlessly through our platform.
Moreover, we continue to take steps to enhance the user experience and post offer conversion rates. For example, we recently added online scheduling capabilities for vehicle pickups.
It is through a combination of our expansion efforts and continued conversion rate optimization that average saved offers per month increased 293% quarter over quarter and.
Monthly average seller's submitting complete document increased 489% quarter over quarter.
With each expansion effort, we are focused on ensuring we deliver an excellent customer experience and.
And intend to utilize our learnings to improve upon our existing capabilities before expanding our footprint further.
While critical improvements to our product in the form of dealer and consumer experience is only one component of our growth story in 2021.
Significant efficiency in our marketing efforts is complemented our product improvements and driving increased revenue.
For every dollar spent on marketing for instant Max. We also returned 17 and revenue for our listings business, representing remarkable cross product efficiency in our marketing spend.
Even more impressive greater than 20% of consumers, who save and offer utilizing instant Max also submit a lead for a new vehicle purchase.
Not only are we leveraging marketing efforts across the platform. We have also improved the efficiency and conversion rates in our paid search engine marketing, which has seen an approximate three five times improvement in efficiency with greater than five times growth in conversion volume since the launch of instant back.
As we plan for a national release increased marketing and brand awareness with consumers will be key areas of focus to drive growth capitalizing on the exceptional progress of instant Max to date.
In addition to our digital wholesale progress in 2021, we made tremendous progress on our digital retail product pipeline as well.
We not only improved upon our existing capabilities, but in October we announced three additional pilots for delivery deposits and hard pull financings that one piece together with CG coover creates a near complete digital experience for consumers.
Throughout the quarter, we continued to make progress on these pilots and are pleased with the early feedback from both consumers and dealers.
We're seeing consumers utilize multiple elements of the digital retail suite to locate vehicles outside of their geographic region using area boost.
To get to a near Penny perfect transaction using C. G convert.
Place a deposit to secure the vehicle indoor ultimately take delivery through the platform.
In an effort to further streamline and empower consumers we've begun to pilot a buy now function directly on our website.
Clicking this allows the consumer to place a 500 dollar deposit on the vehicle for 72 hours.
Holding their vehicle of choice as they complete final purchase steps, including financing with the dealership.
Dealers, who have enabled this functionality have seen a greater than 70% close rate from these high intent shoppers.
As a result of this increase the buy now feature has proven to generate our lowest funnel highest content leads to date.
Consumers, who are ready to take the final steps of purchasing their vehicle through our platform can do so by submitting a credit applications to receive a proved offers from a dealer's preferred lender group directly in the CG convert checkout process along.
Boeing consumers to feel confident in the total purchase price of the vehicle.
Since enabling this option in the fourth quarter submitted applications increased 100% from November to December and accepted loans increased 167% during the same period.
We serve a broad array of consumers with varying degrees of readiness to purchase their cards.
For those customers that want to see their financing options prior to performing hard critical we have a prequalified financing option within C. G convert as well.
This gives consumers the ability to get prequalified with participating lenders later.
Layer in any of the dealerships F&I products and get to a near Penny perfect offer.
With the ability to see these offers easily in early in the buying process and with little to no downside to the buyer, we've seen consumers become 77% more likely to submit hard credit pulls in dealerships within 60 days.
With easier financing options and deposits driving additional high quality consumers to dealers online dealers are looking to expand their geographic reach.
To meet the demands of the consumer beyond just their local reach dealers are utilizing features like area boost and adopting our delivery program.
Dealers participating in our delivery pilot are shipping vehicles on average 500 miles away highlight.
Highlighting both the need for delivery programs and the potential for geographic arbitrage.
This has enabled dealers to further tap into markets beyond the city and state line and attract cargo was 29 million average monthly unique visitors as of the fourth quarter to their local lots in inventory.
We're pleased with the feedback we're receiving from both consumers and dealers on our digital retail pilot.
Consumers prefer the optionality to do more digitally which is evidenced by NPS scores, increasing 24% on CG convert quarter over quarter.
We will continue to optimize and enhance the pilot programs before we fully commercialize the end to end platform, which we expect to do later this year.
Our solution will allow our vast network of dealers to conveniently offer consumers a self selective journey with a seamless online to offline transition.
All while providing trust transparency and freedom of choice when the largest selection of inventory in the U S.
We believe our digital retail capabilities will level, the playing field for our dealer partners, who are unable to provide these solutions to consumers on their own <unk> wish to utilize our largest consumer audience to sell additional inventory through the cargoes digital retail platform to drive greater profitability.
As we expand our capabilities and continue to offer our dealer partners more solutions through digital retail and digital wholesale are.
Our high margin listings business remains the foundation of our evolution supporting our growth initiatives.
Despite the semiconductor chip shortage weighing on the automotive industry are foundational listings business demonstrated remarkable resiliency in 2021.
Our listings business exceeded our forecasted marketplace revenue this quarter ending the quarter with 30630 paying dealers globally and remaining relatively flat year over year.
Additionally, our international business had a similarly positive year.
We ended the year with 6770 paying dealers up 1% year over year.
Canada became profitable this year and the U K continued to exceed our expectations.
In December inventory on piston heads across the 200000 unit Mark for the first time further highlighting the unified Carter's and piston head value proposition continues to resonate with dealers as we continue to further penetrate that market.
Internationally, we saw quarterly average revenue per subscribing dealer, where carson grow by 46% to $1546 year over year as a result of net new dealer AD mix revenue expansion and in part due to the free services provided to paying dealers in December of 2020 due to.
<unk> COVID-19 Lockdowns.
The U S ended the year with 23860 paying dealers down less than 1% year over year.
2021 marked a year of record profits for many dealers as demand and prices for vehicles remained at all time highs and inventory remained low.
These combined factors led dealers to pull back on marketing and advertising spend in aggregate.
To ease dealer wariness, we pause renewals earlier in the year.
While we have since resumed very select renewals, we remain thoughtful with our efforts recognizing dealers continue to face inventory challenges and the chip shortage has not yet abated.
This year U S car Sip grew 6% to $5633.
<unk> growth was primarily driven by product upgrade.
Increased product adoption as well as new enrollments from higher paying franchise dealers at the end of Q3.
As the chip shortage continues to weigh on the industry, we expect Carson growth to come from new product sales and upsell pricing or packaging.
With respect to paying dealers, we expect some new client acquisition, depending on market conditions.
This year, our listings business yielded strong profitability as we continue to recognize marketing efficiencies and added valuable new features to our listings experience, which contributed to strong dealer retention.
With increased demand and less inventory, we were able to pull back marketing spend along with the rest of the industry.
Despite a reduction in marketing this year, we delivered over 60 million connections and approximately 36 million leads in the U S representing only a modest decline year over year, which further demonstrates the stickiness of our platform with consumers while the market remains challenged with limited supply.
Similarly, despite the macroeconomic headwinds and inventory challenges faced by dealers. We delivered an equivalent number of average leads per inventory unit per paying dealers in the U S.
Q4 year over year further highlighting our ability to bring lower funnel high intent shoppers to our site and deliver what we believe is industry, leading ROI for our paying dealers.
As we enter 2022, we plan to increase marketing spend to bring high intent shoppers to our site and deliver the highest ROI to our dealer partners, who continue to navigate through the challenges that the semiconductor chip shortage.
We are pleased with our fourth quarter and full year results.
The automotive industry faced numerous challenges and unknowns in 2021 due to the semiconductor chip shortage, we remain nimble and quickly provided solutions to help combat the difficulties our dealer partners and consumers face.
We are thrilled that 2021 marked a year of evolution and allowed us to combine our foundational listings business with digital wholesale and digital retail to ultimately provide the industry an unmatched end to end automotive transaction enabled marketplace.
The synergies across our platforms, such as I am the pricing data and car offers wholesale matrix.
Retail prices next to wholesale offers in the Carter's dealer dashboard.
Access to a new source of inventory and fit Max cash offer.
And trade advisor competitive Intel are just a few early examples demonstrating that the sum of the parts is greater than the standalone components.
While we have come so far since our inception.
Still just the beginning of our journey.
And I am excited for cargo is to become the one stop shop for consumers to transparently shop by finance himself from the largest network of dealers in the U S and their inventory and for dealers to efficiently source market and sell to the largest and highest intent consumer audience in the U S.
In 2021, we achieved many significant milestones, which would not have been possible without our incredible employees globally, who throughout all the challenges continue to innovate and drive toward our evolution of an end to end transaction enabled marketplace.
Is their commitment and dedication for our vision that gets me excited about our next chapter.
With that I'll turn it over to Scott to discuss our financial results.
Thank you Jason.
As Jason mentioned 2021 has been a transformative year for our business and we believe that our financials should reflect the evolution of our business.
In the press release issued today and our 2021 and Form 10-K . The income statement has been disaggregated to reflect revenues and cost of sales between the marketplace wholesale and product components of our business.
We believe the disaggregation of our revenue and the associated cost of revenue provides greater transparency and more accurately reflects our revenue streams from our new growth vectors.
I'll provide further details regarding this approach as well as a detailed overview of our fourth quarter and full year performance followed by our guidance for the first quarter of 2022.
Total fourth quarter revenue was $339 3 million up 124% year over year and nearly $54 million ahead of the high end of our guidance range.
Marketplace revenue was $160 8 million for the fourth quarter up 6% from $151 6 million in the prior year.
For the full year of 2021 marketplace revenue was $636 9 million up 16% from $551 5 million in the prior year.
Marketplace revenue and its associated cost of revenue are inclusive of dealer subscription to our listings packages and real time performance marketing digital advertising suite, coupled with the addition of area boost.
Marketplace revenue also includes advertising and finance partnership figures that were previously disclosed within our wholesale and other or advertising and other line items in prior periods.
And our fourth quarter marketplace revenue year over year is primarily due to product upgrades within our foundational listings business as well as new dealers enrolled within the franchise dealer segment at the end of the previous quarter.
Product revenue was $96 million for the fourth quarter and $119 3 million for the full year 2021.
Product revenue encompasses certain revenue earned from our instant Max cash offer product offering specifically the revenue includes the price of the vehicle sold by consumers, which is accounted for on a gross basis as well as dealer biases.
Product revenue also includes revenue from vehicles that moved through car offers arbitration process, where we temporarily take back ownership of the vehicle and then subsequently sell the vehicle at auction. This revenue is recognized on a gross basis with the associated cost reflected in the product cost of revenue line items on the income statement.
Separately as it relates to the guidance, we provided on instant Max cash offer in the fourth quarter, we were thrilled to see the incredible growth with approximately $84 million of revenue outperforming the high end of our most recent guidance range by $44 million.
The outstanding growth compared to $5 million in the previous quarter is due to continued growth in existing markets as well as the geographic expansion that Jason previously mentioned.
Lastly, wholesale revenue was $82 6 million for the fourth quarter and $195 1 million for the full year of 2021.
<unk> to the previous quarter wholesale revenue grew 83% in the fourth quarter as a result of increased transactions and dealer adoption on the car off our platform.
Our wholesale revenue encompasses multiple components of the Colorado wholesale business.
Wholesale revenue is representative of transaction fees that are accounted for at the point of sale and net of costs. These transaction fees include buyer and seller fees for vehicles purchased between dealers and fees for vehicles sold that were purchased by car offers by center from other marketplaces.
Transaction fees from vehicles that are arbitrated and rematch are also included within the wholesale revenue line item.
Additionally, wholesale revenue includes revenue from all transportation and inspection services.
So Larry services, such as offer guard and 45 day guarantee bid and revenue generated from consumer land.
All of these services are recognized on a gross basis and their associated costs are within the wholesale cost of revenue line on the income statement.
In all we are thrilled with car for his contribution to the car gurus portfolio total fourth quarter revenue of $178 6 million for some of our wholesale and product revenue line items demonstrates the superb growth of our dealer to dealer and consumer to dealer businesses.
In the year since we acquired car for it became unprofitable business grew in rural dealers to approximately 9100 rooftops and grew revenue an astounding, 1047% since Q1, demonstrating in comparable growth and poised to acquire even greater market share in 2022.
Our business generated $327 9 million of revenue in the fourth quarter and our international business generated $11 5 million of revenue up 128% and 45% respectively compared to the prior year.
International revenue continues to increase as dealers in the U K and Canada returned to the platform. After a year of market constraints related to the pandemic, coupled with increased product offerings, leading to expansion of per dealer revenue.
Turning to paying dealer count we ended Q4 with 30630 total paying dealers representing a decrease of 124 dealers from Q3, and a decrease of one dealer versus the year ago period.
In the U S. We finished the quarter with 23860 paying dealers, which is a decrease of 119 dealers from the end of the third quarter and a decrease of 74 dealers from the year ago period.
The decrease in paying dealer count is primarily due to the continued impact of a semiconductor chip shortage as dealers continued to see strong consumer demand against limited inventory.
In our international business. We finished the fourth quarter was 6770 international paying dealers a decrease of five dealers from the end of the third quarter and an increase of 73 dealers from the year ago quarter.
The increase in international paying dealers from the prior year depicts continued recovery from the pandemic.
In the fourth quarter U S. Carson was $5633, representing a 1% increase compared to the prior quarter and a 6% increase compared to the year ago period International car said was 1546, representing a 1% increase compared to the prior quarter and a <unk>.
36% increase compared to the year ago period, the increase in our international car side versus the prior year in part due to the free services provided to U K paying dealers in December of 2020 due to continued COVID-19 lockdowns.
I will now discuss our expenses and profitability on a non-GAAP basis, which backs out our stock based compensation expense.
Amortization of acquired intangible assets.
Restructuring expenses acquisition.
[noise] related expenses and net loss or income attributable to redeemable noncontrolling interests.
Fourth quarter non-GAAP gross margin was 59% compared to 73% in the prior quarter and 92% in a year ago quarter.
The change in non-GAAP gross margin quarter over quarter is primarily due to the revenue recognition of instant Max cash offer transactions, which are accounted for on a gross revenue basis.
Total fourth quarter non-GAAP operating expenses were $124 3 million up 33% year over year.
non-GAAP sales and marketing expense increased 34% compared to the previous quarter, and 32% year over year to $85 $9 million non.
non-GAAP sales and marketing expense represented 25% of revenue down from 43% of revenue in the year ago period.
The 32% increase in marketing expense year over year speaks at the beginning of our strategic marketing plan to increase spend for our core business. In addition to increased spend as we look to gain market share and brand awareness and our new product offerings, such as instant Max cash offer.
Our fourth quarter, non-GAAP product technology, and development expenses grew 48% versus the year ago period to $22 4 million.
The increase is primarily due to an increase in employee related costs as a result of a 37% increase in head count during 2021 and continued investment in our technology teams to grow our new areas in digital wholesale and digital retail and the coming year. We expect this expense to continue to increase as we.
Continued to develop and grow our expanded product offerings.
We generated non-GAAP operating income of $76 3 million, representing an operating margin of 22% and.
And roughly $26 million ahead of the high end of our guidance range.
non-GAAP diluted earnings per share attributable to common shareholders was <unk> 43 for the fourth quarter.
13th.
The high end of our guidance range.
On a GAAP basis, we generated fourth quarter gross margin of 53% compared to 92% in the year ago period.
The contraction in GAAP gross margin is primarily due to the impact of incident, Max cash offer as well as an accounting reclassification of approximately $21 million for acquired developed technology amortization from operating expense to cost of goods sold.
This is a onetime reclassification every towards technology amortization in a manner similar to that of other revenue generating assets future amortization of the acquired technology will be recorded to cost of goods sold until the end of its useful life.
Total operating expenses were $135 8 million in the fourth quarter up roughly 27% year over year. The increase in operating expenses was primarily driven by increases in head count and other people related expenses pertaining to the car off for acquisition.
Fourth quarter GAAP operating income increased 31% year over year to $43 9 million.
Fourth quarter GAAP net income attributable to Carter's Inc totaled $29 6 million and fourth quarter GAAP net loss attributable to common shareholders totaled $79 8 million, primarily due to the accretion of redeemable noncontrolling interest to the redemption value of 109.
$10 4 million in the fourth quarter.
In the U S fourth quarter GAAP operating income was $47 million up 21% year over year.
Our international business had a GAAP operating loss of $3 1 million compared to a $5 3 million loss in the year ago quarter.
We ended the fourth quarter with $321 9 million in cash and investments a slight increase of <unk> 9 million from the end of the third quarter.
The increase in our cash balance was driven primarily by the profitability of the business offset by the increased receivable and inventory balances related to car offer during the quarter, we utilized $36 8 million in cash from operations in the fourth quarter and $41 6 million of non-GAAP free cash flow.
Which includes capital expenditures and capitalized website development costs of $4 8 million.
I'll close my prepared remarks, with our outlook for the first quarter of 2022.
We expect our first quarter revenue guidance to be in the range of $390 million to $410 million.
non-GAAP operating income in the range of 59 million to 65 million and non-GAAP earnings per share in the range of 31 to 33.
Further and keeping with the previous quarter. We are also providing first quarter revenue guidance for instant Max cash offer which we anticipate to be in the range of $133 million to $148 million.
Additionally, as stated in our 2021 Form 10-K effective in Q1, we plan to adjust our reporting segments from two reportable segments, the United States and international to one reportable segment.
Previously the financial profile of our international segment, we're showing material operating losses relative to its scale, which was very different from the U S business.
This past year, our business in Canada became profitable in the U K is not far behind.
As we continue to grow via digital wholesale and invest for growth in digital retail.
International business becomes a much smaller piece of our consolidated financials as such we believe it makes sense to report on a combined business going forward.
With that we'll open up the call for Q&A.
Thank you.
Ladies and gentlemen, we will now 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 tone will indicate the bigger ones in the queue.
Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
We also ask that you limit yourself to one question and one follow up question.
Our first question comes from Dan Kronos with Benchmark Company. Please proceed.
Great. Thanks, good evening.
First just on instant backs.
Like in the quarter versus the guide.
Obviously, Scott you gave some commentary just on it being a combination of both existing and new and.
Jason in your prepared remarks, you talked about.
Some significant efficiency that you were seeing because of iron whether it be being submitted for the search marketing benefit. So can you just kind of walk through.
What we suspect was there was clearly some marketing, but probably not to what you would consider full scale.
Why you got such traction where the sort of incremental outperformance came from a little bit more granular and as we look out next year clearly you want to advertise behind the whole product, but if youre getting some initial marketing efficiencies. It's how do we think about the balance between.
Those marketing efficiencies continuing to scale versus how much you'll spend against against that as you kind of ramp the whole product.
Sure.
Thanks for the question, Dan before I answer that and jump in.
Just like to mentioned that and take a moment to acknowledge that the.
And in a very apolitical way the danger in potential losses that people in the Ukraine are finding themselves facing right now we have colleagues and partners base, there and we want to emphasize that the safety of our colleagues is unequivocally our highest priority.
Hearts are with those who may be affected.
As to your question Dan.
Yes, there are.
I would think of a couple of different angles to what you asked the first is <unk>.
<unk> in the form of synergies with our dealer to dealer wholesale business and our listings business and then I would also think about efficiencies in the form of sort of ongoing optimization. So.
From a synergy efficiency perspective.
<unk> more instant Max volume is a huge benefit and differentiator to our dealer to dealer wholesale business.
As we scale volume there it becomes really the only channels that a lot of dealers.
We will be able to have access to to get consumer car. So we think that really helps the car off our wholesale business standout from a listings business. Many consumers who are selling their car need to buy a card. So we gave some statistics there that show that many of them become leads and digital retail.
Candidates.
And then using our marketplace to shop for inventory.
From a ongoing optimization perspective.
There is.
Think of it as maybe three different buckets theres ongoing optimization in the marketing that we're doing.
We have really only just begun this a few months ago.
And marketing for instant Max specifically has not scaled all that much it's starting to now as we.
The scale of that and get some scale benefits. We also just get a lot smarter and better at it and so our cost per acquisition is dropping pretty rapidly.
The second form is that we're using site real estate more intelligently.
And owned channels. So we have access to and relationships with tens of millions of consumers every month and how we use our site real estate, our email and other ways in which we're interacting with consumers to identify those who are relevant for instant Max and getting them to ensue.
Max keeps getting better and better and then the final one is just efficiency within the funnel.
The act of selling a car with us.
Is quite easy on a relative basis, but selling a car in and of itself requires collecting some documents answering questions and we.
We continue to get much better and much more efficient at both ensuring a high NPS, but also helping consumers convert more cost effectively.
So we continue to or we expect very much expect to continue to see efficiencies and we also certainly expect to see growing synergies across if.
If you think about it the three businesses instant Max to fueling DVD dealer to dealer as well as instant Max fueling or listening.
Got it that's helpful. And then maybe a follow up just for either you or families who's on the call just and I feel like I asked this is Sam almost every call, but just in terms of the go to market given the strength that <unk> started.
Finished the year and sort of the strength of your forecasting for Q1, just how do we think about.
Now going back out to the dealer base, where you've begun.
Jason I think selective renewables, Scott, but just how do we think about.
Going back to them and saying Hey look now we've got 70% pop coverage.
Obviously, you can work expanding.
Talk about pricing and bundling like business. How does this change at all if anything sort of your go to market and sort of your outlook for your ability to kind of up and cross sell.
Hey, Thanks, Dan It's Sam Zales.
I think it's the synergies that Jason talked about that we'll lean on first it's not it's not price increases it's getting the most out of the varied elements of our value proposition across the base and you saw how many customers were enrolled at car car offer from the car gurus platform in the last quarter, we're going to continue to do that.
<unk> as Jason says is just its unique value proposition, saying I'm getting access to inventory I couldnt find anywhere else, where the packaging and benefits.
Having our dealers get onto the car offer platform and get access to those vehicles. Likewise, there are some car offer customers that we havent signed to our listings package. So how do we do that with pricing and packaging as you just said.
I think we'll continue to look at products like consumer Lane, which is the instant Max cash offer in a box. If you will right on the dealer's website and Youll see us get more aggressive about that packaging and pull that together into our.
Into our roadmap. So I think it's less price increases it's more seeing this value as Jason mentioned in his prepared remarks seeing offers in your dashboard to be able to sell wholesale versus retail <unk> capabilities, where more and more car offer customers are now using instant <unk>.
Retail pricing to set their pricing in the wholesale arena you are just going to see more and more of that going forward I think the packaging will drive more and more.
<unk> adoption across our platform. The digital retail is just the next one when you think of a consumer being able to trade in and then buy and finance will have an entire package and to and then probably the only marketplace out there to give that end to end solution. So I think you'll see a lot more of that in our packaging going forward.
Our next question comes from Chris <unk> with Needham <unk> Company. Please proceed.
Hey, good afternoon following up on Dan's question, I think you mentioned, 37% as a specific figure of new car auto dealers that came from the car dealer community should we be thinking about that other 60% is somewhat low hanging fruit to come on the subscription platform I'm just kind of curious could you talk about the collective off.
And I see the benefits of having both sides. So just kind of talk me through why dealer would kind of only be on car offer and how you're kind of positioned both products for them.
Thanks, Chris It's Sam Zales.
<unk> mentioned in the remarks was that 37% of the newly enrolled rooftops. This last quarter were attributable were attributable to the car guru's sales team driving those themselves. So you've got a car grew sales team that they are selling our core listings package, obviously now selling digital retail as we have been.
More of these capabilities into the marketplace long term those worthy enrollments that came from our base from our sales team initiating those to the car off our sales team. So our effort will be to continue to take that large base of customers that are not yet on the car offer platform and continue to feed those over to the car offered.
Team, but I'm thrilled with the car offered team doing so on their own they are experts at selling that product and so the majority of their sales came from their terrific sales team selling to selling the customers on their own. So it wasn't about the customer base. They are bringing in some of those that car off ourselves are already on the car gurus platform, but.
We will be doing more of that as we integrate these packages and incentive dealers to say the more transactions you do on the car offer platform that's a benefit.
To our overall business, let's incent that likewise for any car offer customer that's not on the cargo is platform will be doing the same so that stat reflected how many of those enrollments came from the car grew sales for selling those directly I hope that answered your question.
Thank you for clarifying and then I.
I think Jason mentioned rental car companies and car offer can you talk to me about how is that kind of process comes together and where you're at as far as penetration and is it safe to assume these are mostly sellers on our platform.
Thanks for the question because I can start it and then.
Sam go ahead no go ahead Jason.
I was going to start it and then and then Bruce if you want to add color.
Yeah. So.
As rental car companies depleted their their stock their fleets during COVID-19 . They then.
We're looking to build them back up and absent the OEM channel producing a lot of new cars.
The rental car companies came into the used wholesale arena for the first time in.
The last quarter and the one of the many beauties of the car off our platform is its efficiency.
And its scalability and so any large buyer like a rental fleet.
I would just see tremendous value in our offer so we did have them as customers. We havent commented on.
Specific share numbers, but they were certainly.
Very compelled by the by the product and the platform.
Bruce.
I reiterate that Jason and also we had.
We see we see them coming to us both buyers and sellers.
I will say that 82% of our sales come from dealers that would be outside of our top 40.
We really have a lot of resiliency in a lot of.
Backup offers within the matrix.
Barry at this point in time, it's very resilient.
In terms of the number of buyers with the number of dealers that we have on it but yeah.
Yes, the rental car companies and fleet companies is very efficient probably the most efficient.
Platform.
I think in the country for them to source inventory and then also sell.
Our next question comes from Marvin Fong with BTG. Please proceed.
Good evening, Thanks for taking my questions I.
I guess I.
I guess I'll start with one that just puts you on the spot I mean, you saw the news that Carvana is acquiring a desktop phone from car.
Al do you have a initial thought on how this is Mike.
Help help or hurt.
Crawford's business I mean, it would seem to me that.
This with some dealers kind of looking elsewhere for inventory.
But we appreciate your thoughts on that and then also.
I'm, just a little more detail on encore offer in the quarter.
Average.
Purchase price or average transaction price fell about $20000 or better than $20000 always the AFP that youre seeing.
Changing.
On the dealer to dealer side and how it is on the on the instant cash offer side looking thanks.
Sure.
Sure happy to take that Hey, Marvin it's Jason.
So on the Carvana car transaction.
We continue to be focused on technology platforms and asset light services.
And.
As I think about or as we think about.
It's fresh news, but but the impact it may have for our dealer to dealer wholesale business I don't think it changes much to be honest if anything as you pointed out it could benefit us.
There's a there has been a consistent shift from physical offline auction to digital.
And we believe Furthermore, within digital that car offer continues to gain share.
And.
And so we think both of those trends certainly the physical to digital will continue.
And don't think that this would change it.
As a as a frontline retailer of cars at the dealer.
Carvana owning our wholesale platform because you pointed out.
Could create some channel conflict if they also own the auction piece of the value chain because they may have conflicting interest is both a wholesale buyer as well as a retailer, but that's not for us to decide.
In terms of the Asps.
Yes, they have held pretty steady.
They're both in the high 20000.
Both.
Dealer to dealer and into next year.
Got you that's great. Thanks, so much.
Our next question comes from Jed Kelly with Oppenheimer. Please proceed.
Hey, great great. Thanks for taking my question.
Circling back on car offer.
Just relative to other wholesale platforms that might further down the value chain or service.
Service lower priced cars.
Do you see yourself wanting to.
Service cars or for car offer that are below like that $120000 price how should we think about that.
I'll take this one this is Bruce.
We think we really found a niche with the.
20000 dollar vehicles that they're.
It really transact on our system.
The efficiency of our platform the reason that were profitable.
We don't have to have a staff of.
Seven sectors across the United States, we leverage third parties and so.
Our system works is it's automated it looks like the stock market.
Offers are available for sellers and on a continual basis. They go and they click the button when they accept an offer then we dispatch a third party inspector post that acceptance and.
A lot of our dealerships right now or I'd say 90, 90%, 85% 90% of franchise stores.
We like the niche we're very efficient at it we believe it.
Keeps our arbitration rates low and it also allows us to.
Feel that need for the branch.
Franchise store.
Got it.
And then just on the subscription.
Is there any way, how we should be thinking about.
Maybe subscription pricing as you Marion.
<unk> with the potential to from <unk> to <unk> dealers higher targeted leads.
Should we ever see a subscription bump from that or how should we think about that.
Yes, sorry repeat the question if you could sorry IMC.
Yep.
Yeah, just IMC, all driving higher targeted leads and how should we think about that benefiting potentially benefiting the subscription product.
I think what youre going to see is that more and more dealers want to get on the.
The listings platform in the car offer platform the <unk> platform to get access to those consumer purchases. So I think.
What youre going to see is that you are bringing unique inventory youre, bringing in an opportunity for those needless to say I've gotta beyond the car offer platform and it will drive further penetration of our base to get on both platforms. What we may see in the future I don't think you'll see anything from a subscription basis on the.
On the car offer platform the transaction fees of the core element of the revenue model there, but you may see us having opportunities to package and scale bundled programs and drive our lifting pricing long term.
We certainly want to.
To grow <unk> and if we do that it makes more difference for all of the thousands of dealers on our platform, giving them access to this program and we might see a bundled package longer term that says the more you do on both packages. The more access you get and that will be a way to drive the revenues up further as we go forward.
I think youre thinking correctly about where that business goes but to do that we're going to keep investing in this <unk> business to grow scale impact all of those dealers and have the synergies.
A car gurus listings package, the DDD wholesale platform and <unk> all working in concert to drive.
Overall revenue per dealer.
Thank you and if I if I can add thanks, Sam if I can add to that Jed because I think you hit on another concept thats an important one if I understood. The question correctly. It was defensive Max cash offer is driving higher quality leads to dealers.
And the answer is that it is just like many of our digital retail features are so if we're delivering a lead to a dealer and that consumer has put down a deposit where they've done a hardcore financing or they bought other F&I products from the dealer or we know they've just sold their car.
Those are all much lower funnel.
Leads and they are absolutely.
Higher value.
And so as we are able to fulfill more of these transaction elements for consumers, whether its steps towards buying a car or in this case the step of selling their car.
We know that we are delivering more value to dealers.
And then as Sam said as that starts to get bundled between instant Max cash offer and car offer with our listings business with our forthcoming digital retail components.
Youre hopefully seeing the picture of the incremental value that we're delivering to dealers.
Thank you.
You bet.
Our next question comes from Doug Arthur with Huber Research. Please proceed.
Yeah.
Yeah. Thanks, So I think I just answered my own question, but.
Scott you talked about the one time adjustment and amortization I think of.
Technology software.
That accounts for the.
GAAP negative $11 $5 million of DNA, but it looks like there was around a $13 million plus adjustment is that.
Oh.
Okay.
Yeah.
And the adjusted expenses, you've got $13 million item. There. So just trying to get a sense of what the what the actual run rate was in the fourth quarter.
So sort of a profile.
Yeah.
That was because.
There was a catch up that we re class from prior period. So we obviously didnt didnt restate prior periods, but did the catch up adjustment moving from Opex to come.
Cost of goods sold and I believe the run rate is in the 5 million zone.
$5 million, Okay, and then just.
You've made some comments on marketing expenditures for the rest as you roll out these products.
And ramped up marketing and product consumer awareness I mean, how should we think about the cadence of marketing in 2022 quarterly.
I'll take that.
If sandwich inc's wants to jump in so.
We've been talking about marketing expense for a while that we need to invest more and part of it being market driven.
And now we have the instant Max product in addition to the core listings business.
We're going to invest in marketing so on the core business.
We saw it in Q4.
Cost of traffic got a bit more expensive so bringing leads to dealers is getting more expensive than it was especially in Q2 and Q3 of last year.
We saw that in Q4 and expect that.
That to be similar rates of investment potentially more through the course of 'twenty two.
And then.
When the very early innings of starting to market and setbacks, we're leveraging.
I think Jason mentioned this earlier leveraging existing channels, we've got the $30 million in east coming looking for cars. So we're leveraging that as best as possible, but also we want to get active with brand and build more of an audience with consumers knowing that.
<unk>.
So two thirds of car shoppers are likely to trade in a car.
And so that's a huge opportunity so we can capture them when they come to our site, but we also wanted to create more brand awareness, where instant masks. So that's some additional part of our marketing spend for 2022.
Okay, Great Yeah, I think Thats well said Scott this is Jason in that one.
I would add to put a little more teeth into sort of reality of it is that.
Tumors have now been educated.
Either through experience or through popular press about the high prices of used cars right now so.
They know that the car prices are high and that is not a great time to buy a car.
Like for like price basis versus a year ago.
And inventories down so selections down prices are up and as a result.
Some of the factors that.
Give evidence to what Scott said before about the.
Cost of audience acquisition being higher today than it was say six months ago.
But just as a quick follow up on that I mean, you've commented in the past that.
The ability to sell.
Cars to <unk> is not that well known nationally yet so.
And you are having great success. So I guess the question is of the consumer brand awareness was greater.
That could.
Substantially increase the available Tam so to speak.
Oh, My Gosh of course, yeah, I'm talking about market, sorry, I should've been more specific I was talking about marketing for our listings.
Driving leads for our listings business, yes, 100% I mean, we to your point, we firmly believe that we have a better value proposition.
And a better mouse trap and a better business model for our instant Max cash offer than any single dealer, who is offering to buy a.
Our consumer's car.
Because the simple fact that we are presenting the consumer our consumer with the highest offer from hundreds or maybe thousands of dealers who are bidding on that car.
So we absolutely agree with you that.
As we get more brand awareness, both simply for the fact that you can sell your car on our site and then Furthermore.
Supported by the evidence that.
You're likely to get a better offer because of our business model that the Tam is and we've said we think the Tam for into Max is close to $500 billion market. There are 30 million cars sold by consumers every year. So.
Enormous Tam, we think we have a better a better mousetrap and so we're very eager to get the word out.
So I think I think that was it for questions. So.
Again, we'd just like to thank everyone very much for your interest and for for tuning in we are incredibly excited about how our business is evolving.
And we think the really strong performance this last quarter as evidence.
Of that both on a sound strategy as well as really strong execution and were equally if not more excited about 2022. So thanks.
Thanks, again, and we hope everyone has a great evening.
This does conclude today's conference you may now disconnect.
Goodbye.
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