Q1 2022 CarGurus Inc Earnings Call

May 9, 2022

Greetings and welcome to car Gurus, Inc. First quarter 2022 earnings results conference call.

At this time, all participants are in listen only mode.

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'd like to turn the conference over to your host Sandeep Singh Vice President of Investor Relations.

Go ahead.

Thank you operator, good afternoon I'm delighted to welcome you to Carter's first quarter 2022 earnings call, we will be discussing the results announced in our press release issued today after the market closed and posted on our Investor Relations website with me on the call today are Jason Robinson, Chief Executive Officer, Scott <unk>, Chief Financial Officer.

Sam Zell, President and Chief operating Officer, and Bruce Thompson, founder and Chief Executive Officer of car offer.

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 second quarter 2022, management's expectations for future financial and operational performance, our business and growth strategies, our expectation for car offers business and act.

Possession synergies the value proposition of our current product offerings and other product opportunities the impact of the semiconductor chip shortage and other macro level industry issues and other statements regarding our plans prospects and expectations.

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 forms 10-K, and 10-Q, which along with our other.

Our 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.

Conciliation 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 of our website with that I'll now turn it over to Jason.

Thank you very much Karen and thank you to all those joining us today too.

2022 is off to a terrific start while macroeconomic factors continue to challenge the automotive industry <unk> remains at the forefront of providing innovative solutions to both our dealer partners and consumer audience. During these dynamic times.

In 2021, we transformed our business by acquiring car offer launching cargo is instant cash offer and accelerating our digital retail capabilities.

2021 was Europe transformation for our business.

In 2022, as the year of activation and which we plan to execute on the potential built last year by activating digital deal on our platform.

Lighting up new geographies for Carter's instant Max cash offer.

Adding more dealers on car offers matrix and introducing new bundling options.

Across our different offerings.

As we initiate these new aspects of the business. We're also unlocking synergies that are made possible through the combined potential of our foundational listings business.

With the digital retail and digital wholesale businesses.

And end to end transaction enabled marketplace for.

Consumers and dealers alike.

For consumers this means a place to transparently shop finance buy and sell.

Largest collection of dealers' inventory in the U S and for dealers. It means the ability to efficiently source market and sell to the largest and highest intent consumer audiences.

As we continue to make this vision a reality I am pleased to share cargo has achieved exceptional results and exceeded our forecasted revenue guidance for the quarter.

Revenue for the quarter from our car off our business inclusive of our dealer to dealer business and instant cash offer was 267 million growing 50% quarter over quarter and over 600% year over year.

The industry's first instant trade platform per vehicle acquisition and disposition continues to garner dealer traction as indicated by the dealer base expanding to 10850 and enrolled dealer rooftops at the end of Q1.

The joint car offer and cargo whose sales teams added another 1750 rooftop this past quarter.

As we continue to grow the network, we're able to diversify the dealer base utilizing the matrix and further enhance the types of vehicles transacting on our platform.

Gross merchandise sales or gms for our dealer to dealer business and instant cash offer was approximately $2 billion.

Declining modestly quarter over quarter.

Each quarter since the acquisition of car offer we have gained a deeper understanding and appreciation for how fluctuation in wholesale and retail prices affect our dealer partners as they continue to navigate the ongoing semiconductor chip shortage.

Two factors drove relatively more subdued dealer wholesale behavior in Q1.

One dealers witnessed wholesale prices start to retreat throughout Q1, and two retail consumer demand continued to moderate as a result of historically high prices rising auto loan rates inflation and delayed tax refunds.

Nonetheless, our dealer to dealer business generated $105 million in revenue in the first quarter growing approximately 12% quarter over quarter and over 575% year over year.

The growth this quarter also included changes in our revenue mix.

You saw a slight decline in transaction, but an increase in fee revenue as we increased our buy and sell fees at the beginning of March from $275 to $325 and increased inspection cost to $110 from 90.

Additionally, we had an increase in transportation services revenue, which is low margin revenue relative to transaction.

Through the assumption of transportation for a large customer who is experiencing a material backlog of vehicle pick up.

In spite of continued unpredictability of the effects of the global pandemic and supply chain issues on the used and new car market I am pleased with the impressive growth in adoption of car offer to date.

There remains a long runway for growth as we continue to further penetrate the U S dealer market and provide them with our unique solution to meet their inventory needs.

Furthermore, the profitability of the car offer business during its infancy highlights the efficiency of the model.

Of the $267 million in car offer revenue are into Max cash off our business generated approximately 162 million exceeding the high end of our forecasted guidance for the quarter and growing 92% quarter over quarter.

In Q1, we expanded our coverage to five additional states now covering approximately 80% of the U S.

While expansion primarily took place towards the end of the quarter expansion into new markets accounted for 23% of the quarter over quarter growth while growth in existing geographies accounted for 77% of the growth largely driven by improved consumer conversion.

This quarter transactions more than doubled.

Much like the last two quarters, we continued to optimize Carter's instant Max cash offer for instant Max for short.

We've added more self service options as well as greater automation to further enhance the consumer experience.

Our virtual inspection intake pilot allows consumers to set up a video call where the car off our specialist to improve our condition assessments.

Our online appointment scheduling system allows consumers the flexibility to scheduled driveway pickups online and was utilized by 85% of consumers.

These enhancements provide users more optionality and convenience complement receiving the highest and most competitive offer thousands of dealers.

As we approach national coverage, we will continue to optimize and refine the instant Max experience for both our consumer and dealer partners.

We believe over the long run we are positioned to capture meaningful market share as Carter's is the only U S marketplace, where the largest network of dealers and the largest consumer audience can transact instantly and at scale using our instant trade technology.

Turning to our foundational listings business I'm thrilled to share we exceeded our forecasted marketplace revenue for the quarter.

This robust performance was driven by healthy dealer additions revenue expansion.

In the U S. Our listings business had strong paying dealer additions in the quarter up 359 from Q4 growing dealer counts across all our dealer segment.

Net dealer adds this quarter were evenly split between new dealer additions as well as dealers, who churned off our platform during the pandemic and the semiconductor chip shortage and has since we joined.

In addition to improving dealer counts, we saw growth in quarterly average revenue per subscribing dealer or Carson.

This quarter U S car said grew approximately 5% year over year to $5713.

<unk> growth was primarily driven by higher paying dealer additions greater upsells and increased adoption of RPM in area of boost.

In addition to growing and innovating our listings business. We're also focused on continuously providing exceptional customer service to our dealer partners with a strategic emphasis on retention and growth.

This focus has allowed us to grow our dealer base, while witnessing materially lower churn in Q1, when compared to historical averages since the beginning of the pandemic and chip shortage.

Internationally, we ended Q1 with 6648 paying dealers down modestly quarter over quarter we.

We saw Carson grow by 40% to one $556 year over year as a result of existing dealer revenue expansion and onetime discounts offered to select accounts during the lockdown last year.

In Q1, we launched digital display in both the UK and Canada also known as RPM in the U S.

The pilot demonstrated the dealers utilizing digital display we're able to target low funnel cargo, whose customers who have not only visited their own listing but viewed similar vehicles from other sellers and drive them back to their own web site.

Since launching digital display, we're seeing very strong click through rates to drive dealer adoption.

We are thrilled to see strong receptivity for digital display and are excited for international dealers to leverage the same capabilities that are available to our dealers in the U S.

It is through product innovation and outstanding service that will continue to drive growth in our listings business and provide our dealer base with the highest ROI in their market.

In the spirit of always innovating the core functionality of the listings business in the fourth quarter, we tested and launched new digital retail pilots for deposits and hard coal financing that allows consumers, even greater flexibility and optionality in completing their purchase.

These pilots and existing offerings allow our dealer partners to offer our 31 million unique monthly visitors a convenient self collective journey.

All while providing trust transparency and the best pricing from the largest selection of inventory in the U S.

Following the success of our pilot at this year's <unk> Conference, we shared a preview of our upcoming digital retail offering digital deal.

Digital deal as an evolution of our CG convert offering helping dealers close more business from the 60% of Carter's auto shoppers, who prefer to do more of the car buying process from home.

Our digital deal solution provides dealers with high quality sales opportunities by moving shoppers further down the purchase funnel before a dealership visit by allowing them to build a near Penny perfect deal online, including dealership finance and insurance offerings and scheduling an appointment to visit the dealership to finalize the sale.

It's enabled by the dealership shop.

Shoppers will also have the option to place a 500 dollar credit card deposit to reserve the vehicle for 72 hours.

Digital deal has been made available to select dealers that an anda and will be available for all dealers to opt into later this month.

This new product is designed to help dealers compete with online retailers.

It empowers dealers to close more business with less time and effort.

And digital deal leads are two times more likely to close in traditional lead.

Combined with area boost digital deal against dealers the ability to sell online and both their local market and as far outside as they would like.

Not only does digital deal provide tremendous value to dealers, but car shopper satisfaction is two five times higher than standard Carter easily create.

Creating a mutually beneficial offering for our consumer audience and dealer partners.

We're excited to launch digital deal later this month.

With this launch we're closer to creating a full end to end digital retail solution and providing a unique offering to serve our consumers and dealers who wish to have a digital to in store experience.

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 and or wish to utilize our largest consumer audience to sell additional inventories through the Carter's digital retail platform to drive greater profitability.

With innovative new solutions like digital deal and instead, Max cash offer we've been able to realize the full benefits of the efficiencies and synergies that exist when you create a transaction enabled marketplace.

Formerly the main value of each consumer came from their DDP lead submission.

Since expanding our business, we were able to increase the value of our shoppers as they interact with multiple products across our platform and thus increase our revenue per consumer.

This allows us to gain leverage in our marketing spend as we grow the contribution from our consumer across multiple products.

For example, approximately 50% of our instant Max offer savers view of Edp for a new purchase.

These consumers are high intent shoppers at the bottom of our funnel who are interested in both selling their car and purchasing a new one.

Increasingly we're able to target these types of consumers and help them engage with even more of our product offerings.

Heightened consumer activity creates leverage with our marketing, allowing us to capture synergies from a transaction enabled marketplace that did not exist previously.

Furthermore, as we create a stickier platform that services the full lifecycle for dealers as well as consumers were able to bundle our offerings to capture additional synergies and revenue.

This past quarter, we began to small pilot designed to increase dealer engagement and our full product suite.

The first is offering advantage pricing to non with things dealers, who are utilizing our core offer platform and the second is offering dealers that are on both Carter's and car offer favorable pricing on their listing subscriptions by meeting monthly car opera transaction volume thresholds.

Although we are in the early stages of tying our offerings into one cohesive product suite for our dealer partners bundling incentivize as dealers to utilize more than just one of our many offerings to improve their business.

All in all we are thrilled with our first quarter results were.

We're proud of the growth of our foundational listings business as well as the profitability of car offer.

Both driving incredibly strong top and bottom line results.

While the semiconductor chip shortage continues to cause near term inventory uncertainty and volatility we continue to deliver tremendous shareholder value all while pushing forward our vision of creating a full end to end transaction enabled marketplace.

We're combining our foundational listings business with digital wholesale and digital retail to create the only end to end automotive transaction enabled marketplace in the U S for consumers to transparently and confidently shop finance buy and sell from the largest network of dealers and for dealers to efficiently sort.

<unk> market and sell to the largest and highest intent consumer audience in the U S.

We are focused on increasing optionality and convenient for both dealers and consumers by providing consumers the flexibility to complete a sale or purchase in a manner that works best for them.

And offering dealers more choice to tailor their product suite that best serves their individual business.

Each transaction is unique we are committed to creating solutions that mutually benefit the various needs of consumers and dealers.

None of these incredible results or innovative ideas would be possible without each and every one of our team members. So I'd like to take a moment to express my gratitude and appreciation to our employees globally.

After a little over two years I'm excited to welcome our employees back to the office in June .

Pandemic created new challenges and disrupted not only our work lives, but our personal lives as well nonetheless.

Nonetheless over the past two years, our employees embody our core values and continue to innovate and drive our vision forward.

Its through their commitment and passion that we were able to turn our vision into a reality.

Now I'll turn it over to Scott to discuss our financial results.

Thank you Jason.

I'll provide a detailed overview of our first quarter performance followed by our guidance for the second quarter of 2022.

Total first quarter revenue was $430 6 million up 151% year over year and nearly $21 million ahead of the high end of our most recent guidance range.

<unk> revenue was $163 3 million for the first quarter up 2% from the prior quarter and up 5% from $155 8 million in the prior year.

The growth in marketplace revenue was primarily due to the increase in our foundational listings revenue driven mostly by an increase in our paying dealers in the U S quarter over quarter.

Wholesale revenue was $91 million for the first quarter of 2022 up 559% from $13 8 million in the prior year.

Compared to the previous quarter wholesale revenue grew 10% in the first quarter.

The increase in wholesale revenue compared to the prior quarter is mostly due to the increase in transportation revenue that Jason mentioned.

Lastly, our third and final revenue components product revenue was $176 3 million for the first quarter up 9896% from $1 8 million in the prior year and up 84% from the previous quarter.

The increase in revenue from the prior quarter is primarily due to transaction volume growth associated with instant Max cash offer.

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 acquisition related expenses and net income attributable to redeemable noncontrolling interests.

First quarter non-GAAP gross margin was 44% compared to 59% in the prior quarter and 86% in the year ago quarter.

The change in non-GAAP gross margin is primarily due to the growth of instant Max cash offer.

And its associated costs of acquiring vehicles directly from the consumer.

Additionally, the contraction was due to an increase in transportation and arbitration costs associated with the dealer to dealer services.

Total first quarter non-GAAP operating expenses were $125 2 million up 27% year over year non.

non-GAAP sales and marketing expense decreased 3% compared to the previous quarter and increased 28% year over year to $83 6 million.

non-GAAP sales and marketing expense represented 19% of revenue down from 38% of revenue in the year ago period.

Slight decrease in non-GAAP sales and marketing expense compared to the previous quarter is primarily due to the efficiencies in our paid traffic acquisition spend as we realized synergies that Jason previously mentioned.

Compared to the year ago quarter, and moving forward in 2022, while we would expect these efficiencies to remain we will have increased expense as we invest to market Ensign Max cash offer and seek to increase our brand awareness among consumers.

Our first quarter non-GAAP product technology, and development expenses grew 25% versus the year ago period to $24 3 million.

The increase was primarily due to an increase in employee related costs as a result of a 30% increase in head count and continued investment in our technology teams to grow our new areas and digital wholesale and digital retail as well as new features and enhancements to our marketplace subscription products.

We generated non-GAAP operating income of $62 2 million, representing a margin of 14% and in the middle of our guidance range.

non-GAAP diluted earnings per share attributable to Carter's Inc. Was <unk> 36 for the first quarter <unk> <unk> above the high end of our guidance range.

On a GAAP basis, we generated first quarter gross margin of 42% compared to 86% in the year ago period.

The contraction in gross margin is primarily due to the reasons previously discussed in addition to amortization of acquired intangibles of approximately $5 4 million that were previously reported in operating expenses and are now included within cost of revenue.

We incurred total operating expenses of $155 2 million up roughly 28% year over year.

Increase in operating expenses was primarily driven by an increase in payroll and employee related benefit expenses as we increased our head count supporting our core business over the last year by 13% as well as increased head count as a result of the car offer acquisition.

First quarter GAAP operating income increased 3% year over year to $26 7 million.

First quarter GAAP net income attributable to cargo was inc. Totaled $19 9 million in first quarter GAAP net loss attributable to common shareholders totaled $62 1 million, primarily due to the accretion of redeemable non controlling interests to redemption value of $82 million in the first quarter.

We ended the first quarter was $375 million in cash and investments an increase of $53 1 million from the end of the fourth quarter the.

The increase was driven by a $40 million decrease in our accounts receivable balance.

A $30 1 million increase in accrued expenses offset by $23 6 million in payments made to our third party processor related to car offer.

We generated $93 1 million in cash from operations in the first quarter and $89 3 million of non-GAAP free cash flow, which includes capital expenditures and capitalized website development costs of $3 7 million.

I'll close my prepared remarks, with our outlook for the second quarter of 2022.

We expect our second quarter revenue to be in the range of $480 million to $510 million.

Similar to previous quarters, we are providing second quarter revenue guidance for instant Max cash offer which we anticipate to be in the range of $219 million to $239 million.

We are estimating non-GAAP operating income in the range of $44 million to $52 million.

non-GAAP earnings per share in the range of 26 to 29.

We expect non-GAAP operating income to contract in Q2 compared to Q1, as we increase our marketing spend to drive consumer awareness and continue to invest in technology and building our team to drive long term growth.

With that we look forward to seeing some of you at our upcoming Investor Day, and now we will open up the call for Q&A.

Thank you.

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.

Confirmation tone will indicate your line is and the question for you.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

As a reminder.

We request you limit to one question and one follow up.

Our first question is from the line of Joe.

John Cullen Tony with Jefferies. Please go ahead.

Just looking at car offer it looks like average gross merchandise sales per dealership moderated at about 30% sequentially in the first quarter and about double digits year on year can you just talk to how this compare to.

To your expectations and whether any recent moderation in consumer demand for used cars is impacting.

Dealerships willingness to buy programmatically.

And then also how has engagement maybe you could talk about how engagement.

A car offer has trended in recent months I have a follow up.

Sure Sam.

Sam you want to take a shot at this and if.

Bruce you want to add anything.

Happy to start John Thanks, Sam Zales, and I'll turn it to Bruce the expert on this in a minute.

Youre talking about the sequential fourth quarter to first quarter and I would say.

The industry as a whole was impacted by wholesale pricing when wholesale pricing drops.

That is a volatile time and it makes dealers cautious about buying and selling and Thats a factor we talked about last third quarter of last year. So those that dynamic impacts the business second comment as consumer demand as you. Just said is soft right now in the market and that does also.

Impact our dealers think about.

Transactions and how much inventory they need as you've said it and we look at second quarter, starting to kick off that wholesale pricing.

Model changes wholesale pricing is starting to head up again and that is always good news for confidence and dealers.

Transacting, both on the buy and sell side. So that is the impact as you think about it from a macro perspective, let me turn it to you Bruce if you have any more to share on that front.

I would just basically really reiterate what youre, saying for them also.

We have incredible.

<unk> in January speaking to your point I think wholesale prices came down six 4% since the first of the year that being said.

We have today more and more programmatic buyers on the system as of today than we've ever had so we've seen a rapid expansion of that.

Kind of momentum going into this quarter and.

Given the the headwinds are in particularly.

February .

<unk>.

Aggressiveness to and is the Max cash offer I mean, we're learning every day.

Basically yes.

In about six months or so or set up a $1 billion business and we wanted to get aggressive there but.

As we are buying these cars were finding out.

Looking up these cars from consumers paying these consumers on the spot we're learning a lot.

And really getting it dialed in selling feeling very very good about that.

As we move into this month and next.

Great and I wanted to wanted to ask one about the marketplace.

With dealership seeing a moderation in used car demand could you see that benefiting cargoes as dealerships look to boost sales by leveraging more digital advertising I guess I'm trying to figure out the counterbalance between dealerships trying to offset a drop in demand.

And you know maybe being a little bit more careful about how much inventory that they keep at their dealerships. So maybe you could just talk a little bit about how you see that dynamic impacting cargo was marketplace business. Thanks.

Alright, Thanks, John This is Jason yes.

Yes, I mean, I think you've probably heard us talk in the past about how.

Now that we have a.

A broader and more complete platform that covers.

Dealers sourcing marketing and selling and full lifecycle for consumers as well it does balance our business more and in a lot of respects. When there are <unk> in one area, there may be headwinds and another and vice versa.

And so as consumer demand does Wayne and you've heard us say that but you've probably seen that in other market data points as well, we do feel that dealers are going to have to market more aggressively and that that will help our marketplace business and you're starting to see some of that momentum already in Q1 as we added 100.

<unk> of dealers as long as inventory.

Does remain constrained though.

That is the factor that even if consumer demand goes up.

I'm, sorry, even if consumer demand goes down and dealer marketing has tended to go up.

I don't have a lot of cars on their on their lot then.

They may not be as aggressive as they were say pre COVID-19, but.

But we think that.

The.

The inventory situation while remaining.

<unk> for the foreseeable future.

Probably improving from where it was and if consumer demand is less ramping that it was in the end of last year second half of last year and that bodes well for our listings business as well as RPM.

And some of the digital retail products or introducing as well.

I appreciate the color.

Thanks for the question.

Thank you we have next question from the line of Chris <unk> with Needham. Please go ahead.

Hey, How're you doing.

It sort of hit on it but I kind of wanted to go deeper I'm looking at slide 29 can you just walk me through car offer non-GAAP gross profit margin.

Heading lower and does it relate to into next cash outflow. Bruce that you are learning every day or I guess, what are the inputs as a contra revenue and that is causing gross pricing to be lower from arbitration Tv's kind of.

Could you Brian that I appreciate it.

Yes.

Scott you want to take a shot at that.

You're on mute.

Hey, Chris how are you doing Scott.

So on slide 29, non guests I'm, sorry, non-GAAP gross gross profit Thats, what youre looking at.

Or what.

Yes, so I mean, we.

We got a huge benefit from the.

The amortization item right. So you can see that on the slide.

So that that trended.

Very high in Q4 because of that onetime pickup with regards to overall I mean, if you look at the GAAP gross profit line you can see that there's.

A difference from Q4 to Q1 and that is just a mix issue some of the points that were mentioned on the call.

<unk>.

There was price volatility so we got more aggressive on instant Max with regards to pricing and we compress gross margins, they're a bit we had more transportation costs associated that carried over from Q4 to Q1. So we mentioned that on the call. So all of that led to some compression in gross margin quarter over quarter.

Okay, and then bigger picture kind of what are your dealers, telling you as we get closer to the ADESA deal sunsetting of closing and kind of how our dealers thinking about their sourcing of.

And they are selling in the wholesale market.

I can take this Bruce I can tell you from my perspective, I think it benefits us.

We are already seeing some some momentum there and I think that will keep translating.

As dealers decide whether or not they're going to.

Dissipate with the with the.

A desk.

Brick and mortar auctions with a robot at brick and mortar auctions moving forward.

I think it bodes well for Dieter davita or moving forward for sure.

Okay.

There's nothing specific yet.

Well this is Jason we continue to see.

Share shift from.

Physical to digital.

And that is in the Grand scheme of things still.

And it's early days, but it's a pretty steep transition now.

We think thats going to continue for quite some time, so there's a lot of share.

Sure to be gained from that I think the added element added benefit.

Bruce is referencing is that we have heard dealers, specifically say that they are less inclined to work with.

Group, that's owned by a competitor of theirs and they otherwise might have been.

Thank you.

Thank you we have next question from the line of Tom White with D. A Davidson. Please go ahead.

Oh, great. Thanks for taking my question, maybe just a follow up on the comments about the sensitivity of the volumes in the wholesale.

Dealer to dealer business to to the wholesale prices.

Jason if you looked out like I don't know three or four quarters or whenever we think new inventory is going to come back online in a meaningful way.

Do you expect that car off that part of the car off for business to be.

Sensitive to that as well.

And I'm curious, whether you guys have given any thought to adding a subscription based element to that business.

Sure. So I can Jason I'll take both of those.

On your second question.

We have a couple of smaller products that are more subscription in nature in the wholesale arena, but it's not the bulk of the business and from as you know in from our wholesale.

Sort of.

Sure Middle of the Fairway day to day perspective, we think the transaction model is much more sensible there.

And on your first question.

It's going to be a while for new car production to ramp up and have.

Really meaningful impact in sort of a macro and unused car pricing, but we did see used car pricing at the retail.

Level.

Decline in Q1 and in the wholesale as well as somebody earlier I mentioned some of the stats there.

It's not so much that there is a decline per se, it's more that theres uncertainty among dealers.

In the form of volatility and so.

So if.

If dealers had a sense for what they felt was going to be say a steady decline in pricing over time, they would still need to source cars and they would still need to sell cars.

It's more when there is.

Uncertainty in.

Concern that they have that there might be sharp changes in the near term or unexpected changes in the near term.

And we've.

We've had such a.

Frothy rising market and wholesale unit prices over the course of the last call. It two years with two periods where prices flattened in decline and I think both times it was unexpected.

And I think it was that uncertainty and that volatility that drove a little hesitancy among them.

Sort of Skittishness, if you will.

But I think most people who look at.

Wholesale unit pricing in general expected over the next couple of years, it's going to return to some lower level than where it is right now and dealers know that theyre going to need to source cars during that so.

That's that's how I would characterize the sensitivity it's more around volatility than it is around whether it's a decline or an increase.

That's great.

Okay.

Sorry go ahead go ahead.

Oh, Yes, I just had a quick follow up.

Even in all finished.

Even in that.

Even in the moments of Skittishness, I mean, we think that.

A digital model still makes more sense and be an instant trade platform, where you can control your bidding and youre selling in a much more.

<unk>.

Sort of controlled and technical way actually provides comfort in periods of skittishness youre not as reliant on the outcome of one or one set of auctions.

Got it that's really helpful quick follow up I remember last quarter, you guys talked about the rental car companies as being.

An active part of that.

Sell dealer to dealer business can you talk about kind of their level of activity in the second quarter and just generally do you view those that segment is kind of a durable customer base or are they just kind of more opportunistic given that they needed to kind of ramp up their fleets.

This is Bruce my discussion with the.

The fleet basically we think it is a durable channel for us.

And.

For quarters and quarters to come if not indefinitely.

As they basically had a migration or shift in the buying from the Oems to nearly new.

The channel is actually very very well for them and we're seeing that.

In the second quarter as obviously as you see.

Transportation and travel across the country our ramp up.

It's doing well.

We anticipate that will continue for us.

And.

Quarter over quarter, I think even from the fourth quarter to the first quarter.

We're up nearly nearly $100 million. So we're pleased with the performance in the first quarter in.

As Jason indicated when markets go up and down just like the stock market today, you get when you get a rapid decline.

It creates some skittishness, but ultimately those.

Wade themselves out and you get normalization stabilization and we feel very good about where we are today.

Great. Thanks, guys.

Thank you we have next question from the line of Brad Erickson with RBC capital markets. Please go ahead.

Okay.

Hi, Thank you.

Just on the margin guidance, you mentioned, the sales and marketing expense.

Can you just unpack the size of that marketing investment will give us some guardrails as to how to think about much how much you intend to spend and I was just curious also if there was any contribution there from higher transport Rev. Like there was in Q1 or is that or is that not a factor.

Hey, Brian It's Scott I'll take this one.

So there's a couple of pieces there.

Not going to get too specific on marketing spend but there's really I would say two underlying elements something that we've talked about for <unk>.

A year with regards to needing to spend more on the core business and that started to happen a bit in Q4, and Q1 a bit more than we saw in Q2 and Q3 last year, we didn't have to spend.

Spent a fraction of what we spent in Q1 of last year.

So we're spending more on the core business to drive traffic to the site.

Good engagement with consumers on a site and convert those to value leads for the dealers.

But what we're also investing more heavily in marketing in sandbox and that is sort of the other dimension of marketing that has been minimal spend so far on a relative basis, and that's where we're.

Spending a lot more in Q2 and expect to beyond Q2 as well so.

The guidance with regards to earnings.

Ah.

It represents an investment in more marketing spend but also we are continuing to ramp up the team we've got a lot of.

Head count that we're trying to fill across the organization.

Especially in tech, but really.

Across all teams as well in car for us growing their team tremendously so.

It's really people and marketing primarily the investment areas and then.

We're market, we're investing a lot in digital retail as well.

Got it thanks for that and then just on the <unk>.

Buy button beyond what you kind of gave in the prepared remarks, just any updated learnings you can provide there sort of.

Evidence of success and just any update as you continue to pilot that.

Happy to take it Brad thanks.

We can't be more excited about the incident Max cash offer product I think.

Our conversion rates from our site for consumers saving offers conversions from saved offers too.

Transactions are all moving in the right direction, which we're we're excited about.

Oh, I'm, sorry, and maybe I'm jumping offer that's instant cash offer on the buy button, sorry, I'm getting too excited about that one.

Digital so that keeps moving in the right direction sorry, Brad.

Digital deal how excited we are for the next phase of that one.

As Jason talked about it's a next expansion of what.

The convert product is.

And what.

What we're where we're adding capabilities there is an opportunity for dealers to utilize and see the down funnel shopper, we're getting data on the.

The interest of that consumer to purchase and we talked about the close rate on those leads being two times the already terrific close rate, we get on our general leads that we get in the business and that's because we've now added this.

The soft pull financing now to hard pole getting consumers into the dealers transaction process were fully integrated into the CRM at the dealership.

And that process of starting the shop finance and buy process for consumer. We just think is where the industry is going 60% of our consumers.

Are interested in doing something digitally they can do that fully digitally or in store to test drive that vehicle. We think we have an advantaged product in the marketplace. So excited to launch digital deal you've heard at NAV.

Announced it we're moving out more formally this quarter and we're so excited to bring that to market in a much bigger way to get more consumers connected to dealers through a digital purchase.

Got it thank you.

Thank you. The next question from the line of Chad Kelly with Oppenheimer. Please go ahead.

Great.

I may just one can you talk about sort of the.

Catalysts behind some of the price increases for <unk>.

Car offer.

How big of a pricing ramp.

Do you have and then.

Just for I guess, the product or instant cash offer.

How should we think about the gross margin going forward I mean, do you intend to run that business at.

Breakeven margins to drive consumer engagement, just just how should we view the strategy around the product. Thank you.

Okay.

I'll take a crack at studying these and others can add.

Thanks for the questions Jed on the price increase is a car offer.

We were we're in continue to be a price advantaged offer for dealers.

Lower price from just a pure transaction fee basis than most if not all of their digital offerings and certainly on the physical side as well coupled with all of the convenience element that we add relative to the to the physical side, which I think if you looked at total cost of transaction, we would certainly shine there.

And so between that and dealer satisfaction, we saw an opportunity to increase prices to reflect more of how dealers.

Value it in the market.

And is there more in there I mean.

We haven't.

Spoken about that we just did this one in March but we.

We feel good about that decision and we think dealers have been incredibly supportive.

And I think as there are a lot of.

Competing alternatives out there that continue to burn capital.

They're going to feel more pressure to raise prices, which will only rise the tide in the market for us if we wanted to to follow suit, but we're pretty committed to delivering a ton of value to two dealers in that respect.

On.

Actually before.

Before I go to Ensign Max Sam Bruce anything or did I cover.

I think you covered it okay, great on instant Max Jed.

We are I mean, it is a.

It is a massive massive market opportunity and so like we've done in other areas of our business and at earlier stages of our business, we're really focused on the unit economics.

To make sure that we've got them right enough before we really blow it out.

And so we're focused on on the gross margin.

And that's why we've put in some extra work to show that.

This quarter we were.

At the.

Mid low to mid single digit gross margin that we were and the months we had even.

Even higher than that and other months, where it was lower it was because we were getting more competitive with our offers and so we were consciously bringing our spreads down a little bit.

Testing things in these early days, where we.

We're we're.

We tested.

Sort of a special offer period, where we.

Compressed our spreads again by design even more.

And we can toggle that up and down so in this early stage, we're focused on positive gross margins at the unit level.

Don't see a scenario, where we take that to negative.

And then it's a matter of when we think we have a writing up how much do we want to invest in marketing to tell the world about it.

We continue to think that from a business model perspective.

The fact that we get dealers to offer get hundreds or thousands of dealers to offer a bid on a car that is just a fundamentally better consumer value prop then a consumer having to deal with just one dealer and we need to tell the world in the market about that better value prop that we have so as.

Scott said, we are going to ramp the marketing for it we do want to get the word out into the into the user base. We are seeing sort of cross pollination between instant Mackie Max users and those who are shopping in submitting leads and using consumer finance and vice versa. So we're also seeing the virtuous cycle of it.

And our platform more generally.

So.

Positive gross margin as far as we can tell or plan to do forever and but we are going to invest more aggressively in marketing because of how great. The product is.

And this is Bruce I would just say these are very very early days to write and we stood up a business that didn't exist here with the company six months ago, and I would tell you I think.

Taken the probably grew this bind from consumer business receded business quite faster than any other company out there and we are learning and as we learn.

A car from a consumer in buying a car is decided scene. We are now just really starting to dial in the <unk>.

Algorithms and.

Picking up the car from the consumer and the processes in those type of things so.

I would say that we're going to get better and better at it every month, we are already seeing those improvements and couldn't be more excited about instant Max schedule.

Thank you.

Thank you we have expressed in from the line of <unk> Khan with twist. Please go ahead.

Yeah, Thanks, a lot.

Couple of questions, maybe just on the on car offer.

Can you talk about what are you seeing in terms of your.

Alder dealer cohorts dealers, who came on board maybe two.

Three to four quarters ago are you seeing them.

He was the platform more and more to buy cars are you seeing them.

<unk> share from other channels too to clarify I was curious about the trends in that and then.

On the.

In your prepared commentary, Jason I think you mentioned.

Some backlog in vehicle pick up was that on the <unk> side or was that.

The current companies.

Yeah.

Now that I can jump in first it's Sam Zales.

And Jason add more detailer, Bruce if you'd like to.

The.

Cohorts are going in the right direction and I want to be.

Careful about that they're all moving in the right direction.

Diversity of dealers getting on the platform and participating in either a buyer itself fashion and the cohorts themselves moving up into the right is a really great sign.

<unk> for us, but I want to mention that the macro environment that we talked about earlier on the call as it relates to wholesale pricing volatility impacts that in a quarter, where we didn't see that.

And like the fourth quarter, you saw everything go up into the right again, the cohorts going up into the right, but it mute a little bit when all dealers get skittish. If that's the right word used earlier on the <unk>.

Factors that just whats going on in the market, but those cohorts are going in the right direction. They are moving up into the right and we're proud of that and we see that expanding as we sign more and more dealers to the platform and initiate their matrices to your question on transportation and the backlog was from.

From the dealer to dealer a large partner there we took over their transportation for them that was the one time change that happened in the first quarter. If that was the question you asked.

Anything is that does that.

I think youre correct, yes.

Maybe can you expand a little bit when you said you. So you did the transportation versus them doing it themselves does that.

Right.

Got it.

Yes, so typically we handle the transportation for all of our clients we had one large fleet.

<unk> client in particular that handle their own.

We've since.

And they've got a bit behind so we said we took taken that.

Are there transportation on cleaned up all of that and so thats. What you saw there in the first quarter, which is the cleanup of really fourth quarter units.

Got it so maybe just maybe just to dig a little bit more into that so is that something that might have affected.

Q1 volumes are.

That wasn't really a factor.

It didn't affect volumes so much but it did it this is Jason it did affect the margin profile because it was.

Sort of disproportionately higher revenue that was transportation.

Related which as you know has lower margins certainly lower margin than our fee revenue and this was a unique situation I mean, we do we do the transportation and the vast vast majority of transactions, but in this case they had historically done it.

Dealer experience is really important to us it's a key focus of ours.

When when that became an issue for them, we offered to help to.

Make sure it was a great experience for everyone.

Thank you we have next question from the line of Marvin Fong with <unk>. Please go ahead.

Great. Thanks for taking my question just one for me I think everything else has been asked but.

For second quarter guidance.

Just curious on.

On the dealer to dealer side for car off where it looks like gross margin was 30% in the first quarter.

With the price increases.

Any thought about what they might be in the second quarter that youre employing in guidance should we expect it to be a little bit higher.

Both both in second quarter, and maybe just on a on a structural basis. Thanks.

So structurally.

This is Jason.

We talked about sort of this one time event related transportation, we talked about some of the dynamics related to arbitration.

And then youre right it'll be a full quarter of <unk>.

See the new fee structure and so for all three of those reasons.

If you were to consider on sort of.

Apples to apples in terms of transaction volume, yes, you'd certainly see.

Higher margin in Q2.

Okay, great. Thanks, Jason.

Thank you we have next question from the lineup Doug Arthur with Huber Research. Please go ahead.

I think my questions have been answered I mean, I'm I'm I'm not.

Not quite totally understanding why the product gross profit mortgage margin went negative, but you've certainly cited a lot of issues I would assume over time.

The kind of stable to growing margin there is more low to mid single digit overtime is that still a fair.

You know cut at it.

Yes, 100%.

And Scott maybe you can give a little more detail as it relates to Q4 to Q1.

Yeah, so keep in mind the.

Doug the product.

Section of the P&L, Okay category or segment of the P&L.

Is not exactly instant cash offer.

It involves it does not involve.

<unk> inspection related to instant Max it does involve due to the arbitration et cetera.

And it's.

It's more related to those other things.

That it was negative so and in fact, if you look in our investor deck, we do have a different cut at it shows that.

Instant Max cash offer on more of sort of.

Of our pure basis, if you will from a from a business perspective was 3% non-GAAP gross margin.

And we had like I'd mentioned, a few minutes ago, we had months, where it was higher than that.

And then we had months, where we consciously brought it down because we brought down spreads too to test competitiveness of our offers.

So.

That's the specifics related to Q1 longer term I referenced some of the comments made earlier too which is we are getting smarter about our bidding algorithm in pricing, we're always improving our conversion funnel.

And then the pick up in Atlanta dealer concept I mean, those are all things that are still.

Six to eight months since we began them.

So we have a.

Total confidence that the gross margin there has.

Room for upside in the longer term, it's absolutely mid single digits.

And.

And we're even seeing that in periods now.

But we're also testing a lot of other things that brought Q1 down to 3%.

Great that's really helpful. Thank you.

Sure.

Thank you next question is from the line up Alex Potter with Piper Sandler. Please go ahead.

Yeah.

Great. Thanks, just one for me it's related to arbitration you mentioned, some arbitration costs had an impact on margins in the quarter as well as well as confidence that that should improve.

If you could just give a little bit more I guess qualitative commentary are these is this an inspection.

Inspection quality issue and.

I guess, what levers are you pulling to try to make sure that those inspection.

It was an inspection reports and more accurate I don't know I don't want to put words in your mouth, but anything that you could talk about with regard to arbitration and inspection accuracy would be helpful. Thanks.

Yeah.

Alex I'll jump in first and turn it to Bruce who is an expert at this but from our perspective and couldn't be more excited about what the car off our business is doing for us.

From an arbitration perspective.

When prices decline in the market. That's a sign first of all I should just say our arbitration numbers are a very very small percentage of our gross merchandise sales and that is a critical measure of our business.

But as prices drop or get fluctuating as Jason said, a dealer will look at that and say well I'm going to push back in some cases when the prices are going down on buying a vehicle, but the price continues to drop we have a no questions asked return policy, where really defaulting to dealer satisfaction.

Faction and our approach is to say let's.

Let's watch the.

<unk> broadened our inspection process and we've done that adding more inspectors, we talked about adding virtual inspection to our seed a D cars as well and that's a huge advantage to our process.

And as Bruce keep saying, we're learning in the process when the.

The price point in the wholesale market is dropping or fluctuating theyre going to be more of those situations that come up we said that revenue mix went up for us overall.

We've looked at that process of inspection and said, let's double down on that and let's also look at our dealer processes. Our dealer results to say if some of them are pushing back on results we are.

<unk> back on vehicles, because the macro environments lowering prices, we're going to be careful about.

Balancing customer satisfaction with the right kind of business decision, but overall as I said the arbitration number is a very very small percentage of our gross merchandise sales and where we.

We've made those adjustments as we head into the second quarter to do that Bruce anything more you want to add.

To your point I think is arbitrations were about 1% right.

GSM in.

You came off a really good December and January .

Youre going to get any type of arbitration volume.

Subsequent write to the February where we did you did see the drops were very disciplined.

In terms of units that we take so we can liquidate those and make sure. We're prudent in that regard, but we are also adding a lot of other tools that.

It will help us moving forward.

To mitigate that but.

Yes, it was a unique situation I think.

Coming off of December .

In January .

We have a liquidation primarily in February .

Have a good handle on it and I think moving forward.

Okay understood. Thanks, Scott.

Thank you ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back to Jason <unk> CEO .

For closing remarks over to you Sir.

Thank you very much so thanks, everyone for tuning in today, thanks for your questions.

You know as I said in my prepared remarks, we're really excited about about how we performed in Q1, but also about what we have.

Coming up in Q2, and the rest of the year.

I think what it shows is that we have really.

Transform the business to be transaction enabled in all types of transactions on top of our marketplace.

And there we're now capturing sort of full lifecycle needs of both dealers and consumers and what that does is it opens up new markets for us.

Allows us to operate a profitable very profitable business.

To fund all of that investment in growth.

Really excited to see all of you in person if you can join us at our Investor day on May 25th.

And to dive deeper into our story.

And again, thanks very much appreciate it I appreciate all the questions have a great evening.

Thank you ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.

Goodbye.

[music].

Okay.

[music].

Greetings and welcome to car Gurus, Inc. First quarter 2022 earnings results conference call.

At this time, all participants are in listen only mode.

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'd like to turn the conference over to your host Ken Deep Singh, Vice President of Investor Relations.

Please go ahead.

Sam Bell, President and Chief operating Officer, and Bruce Thompson, founder and Chief Executive Officer of car author.

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 second quarter 2022, management's expectations for future financial and operational performance, our business and growth strategies, our expectation for a car offers business and.

Acquisition synergies the value proposition of our current product offerings and other product opportunities the impact of the semiconductor chip shortage and other macro level industry issues 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 of our website with that I'll now turn it over to Jason.

Thank you very much Karen and thank you to all those joining us today.

In 2021, we transformed our business by acquiring car offer launching cargo is instant Max cash offer and accelerating our digital retail capabilities.

2021 was a year of transformation for our business in 2022, as the year of activation and which we plan to execute on the potential built last year by activating digital deal on our platform.

Lighting up new geographies for cargo is infant Max cash offer.

Adding more dealers on car offers matrix and introducing new bundling options.

Across our different offerings.

As we initiate these new aspects of the business. We are also unlocking synergies that are made possible through the combined potential of our foundational listings business with.

With the digital retail and digital wholesale businesses.

And end to end transaction enabled marketplace for consumers and dealers alike.

For consumers. This means a place to transparently shop finance buy and sell and the largest collection of dealer inventory in the U S and for dealers. It means the ability to efficiently source market and sell to the largest and highest intent consumer audiences in the U S.

As we continue to make this vision a reality I am pleased to share Carter's achieved exceptional results and exceeded our forecasted revenue guidance for the quarter.

Revenue for the quarter from our car offer business inclusive of our dealer to dealer business and instant cash offer was $267 million growing 50% quarter over quarter and over 16, 100% year over year.

The joint car offer and cargo whose sales teams added another 1750 rooftop this past quarter.

As we continue to grow the network, we're able to diversify the dealer base utilizing the matrix and further enhance the types of vehicles transacting on our platform.

Gross merchandise sales or gms for our dealer to dealer business and instant cash offer was approximately $2 billion does.

Declining modestly quarter over quarter.

Each quarter since the acquisition of car offer we have gained a deeper understanding and appreciation for how fluctuations in wholesale and retail prices affect our dealer partners as they continue to navigate the ongoing semiconductor chip shortage.

Two factors drove relatively more subdued dealer wholesale behavior in Q1.

Nonetheless, our dealer to dealer business generated $105 million in revenue in the first quarter growing approximately 12% quarter over quarter and over 575% year over year.

The growth this quarter also included changes in our revenue mix.

We saw a slight decline in transaction, but an increase in fee revenue as we increased our buy and sell fees at the beginning of March from $275 to $325 and increased inspection cost to $110 from 90.

Additionally, we had an increase in transportation services revenue, which is low margin revenue relative to transaction.

Through the assumption of transportation for a large customer who is experiencing a material backlog of vehicle pick up.

There remains a long runway for growth as we continue to further penetrate the U S dealer market and provide them with our unique solution to meet their inventory needs.

Furthermore, the profitability of the car off our business during its infancy highlights the efficiency of the model.

Of the $267 million in car offer revenue our instant cash offer business generated approximately 162 million exceeding the high end of our forecasted guidance for the quarter and growing 92% quarter over quarter.

In Q1, we expanded our coverage to five additional states now covering approximately 80% of the U S.

This quarter transactions more than doubled.

Much like the last two quarters, we continue to optimize Carter's instant cash offer for instant Max for short.

We have added more self service options as well as greater automation to further enhance the consumer experience.

Our virtual inspection intake pilot allows consumers to set up a video call with a car offer specialist to improve our condition assessments.

Our online appointment scheduling system allows consumers the flexibility to schedule driveway pickups online and was utilized by 85% of consumers.

These enhancements provide users more optionality and convenience complement receiving the highest and most competitive offer thousands of dealers.

As we approach national coverage, we will continue to optimize and refine the infant Max experience for both our consumer and dealer partners.

Turning to our foundational listings business I'm thrilled to share we exceeded our forecasted marketplace revenue for the quarter.

This robust performance was driven by healthy dealer additions and revenue expansion.

In the U S. Our listings business had strong paying dealer additions in the quarter of 359% in Q4 growing dealer counts across all our dealer segment.

In addition to improving dealer accounts, we saw growth in quarterly average revenue per subscribing dealer or Carson.

This quarter U S. <unk> grew approximately 5% year over year to $5713.

<unk> growth was primarily driven by higher paying dealer additions greater upsells and increased adoption of RPM in area of boost.

This focus has allowed us to grow our dealer base, while witnessing materially lower churn in Q1, when compared to historical averages since the beginning of the pandemic and chip shortage.

Internationally, we ended Q1 with 6648 paying dealers down modestly quarter over quarter we.

We saw Carson grow by 40% to $1556 year over year as a result of existing dealer revenue expansion and onetime discounts offered to select accounts during the lockdown last year.

In Q1, we launched digital display in both the UK and Canada also known as RPM in the U S.

The pilot demonstrated the dealers utilizing digital display we're able to target low funnel cargo, whose customers we have not only visited their own listing but viewed similar vehicles from other sellers and drive them back to their own website.

Since launching digital display, we're seeing very strong click through rates to drive dealer adoption.

We are thrilled to see strong receptivity for digital display and are excited for our international dealers to leverage the same capabilities that are available to our dealers in the U S.

It is through product innovation and outstanding service that will continue to drive growth in our listings business and provide our dealer base with the highest ROI in their markets.

In the spirit of always innovating the core functionality of the listings business in the fourth quarter, we tested and launched new digital retail pilots for deposit and hard coal financing that allowed consumers, even greater flexibility and optionality in completing their purchase.

These pilots and existing offerings allow our dealer partners to offer our 31 million unique monthly visitors a convenient self selective journey.

All while providing trust transparency and the best pricing from the largest selection of inventory in the U S.

Following the success of our pilot at this year's <unk> Conference, we shared a preview of our upcoming digital retail offering digital deal.

Digital deal as an evolution of our CG convert offering helping dealers close more business from the 60% in Carter's auto shoppers, who prefer to do more of the car buying process from home.

Our digital deal solution provides dealers with high quality sales opportunity by moving shoppers further down the purchase funnel before a dealership visit by allowing them to build a near Penny perfect deal online, including dealership finance and insurance offerings and scheduling an appointment to visit the dealership to finalize the sale.

It's enabled by the dealership shop.

Shoppers will also have the option to place a 500 dollar credit card deposit to reserve the vehicle for 72 hours.

Digital deal has been made available to select dealer that NAV.

And will be available for all dealers to opt into later this month.

This new product is designed to help dealers compete with online retailers.

It empowers dealers to close more business with less time and effort.

And digital deal leads are two times more likely to close and traditionally.

Combined with area booths digital deal against dealers the ability to sell online and both their local market and as far outside as they would like.

Not only does digital deal will provide tremendous value to dealers when car shopper satisfaction is two five times higher than standard Carter easily create.

Creating a mutually beneficial offering for our consumer audience and dealer partners.

We're excited to launch digital deal later this month.

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>.

<unk> or wish to utilize our largest consumer audience to sell additional inventory through the cargo, whose digital retail platform to drive greater profitability.

With innovative new solutions like digital deal and instead, Max cash offer we've been able to realize the full benefits of the efficiencies and synergies that exist.

The transaction enabled marketplace.

Formerly the main value of each consumer obtained from their DDP lead submission. However.

However, since expanding our business, we were able to increase the value of our shoppers as they interact with multiple products across our platform and not increase our revenue per consumer.

This allows us to gain leverage in our marketing spend as we grow the contribution from our consumer across multiple products.

For example, approximately 50% of our instant Max offer savers view of Edp for a new purchase.

These consumers are high intent shoppers at the bottom of our funnel who are interested in both selling their car and purchasing a new one.

Increasingly we're able to target these types of consumers and help them engage with even more of our product offerings.

Heightened consumer activity creates leverage with our marketing, allowing us to capture synergies from a transaction enabled marketplace that did not exist previously.

Furthermore, as we create a stickier platform that services the full lifecycle for dealers as well as consumers were able to bundle our offerings to capture additional synergies and revenue.

This past quarter, we began to small pilot designed to increase dealer engagement and our full product suite.

The first is offering advantage pricing to non listings dealers, who are utilizing our car off our platform and the second is offering dealers that are on both cargo routes and car offer favorable pricing on their listing subscription by meeting monthly car opera transaction volume thresholds.

Although we are in the early stages of tying our offerings into one cohesive product suite for our dealer partners bundling incentivize these dealers to utilize more than just one of our many offerings to improve their business.

All in all we are thrilled with our first quarter results.

We're proud of the growth of our foundational listings business as well as the profitability of car offer.

Driving incredibly strong top and bottom line results.

<unk> market and sell to the largest and highest intent consumer audience in the U S.

We are focused on increasing optionality and convenience for both dealers and consumers by providing consumers the flexibility to complete a sale or purchase in a manner that works best for them.

And offering dealers more choice to tailor their product suite that best serves their individual business.

Each transaction is unique we are committed to creating solutions that mutually benefit the various needs of consumers and dealers.

None of these incredible results or innovative ideas would be possible without each and every one of our team members. So I would like to take a moment to express my gratitude and appreciation to our employees globally.

After a little over two years I'm excited to welcome our employees back to the office in June .

Pandemic created new challenges and disruptive not only our work lives, but our personal lives as well nonetheless.

Nonetheless over the past two years, our employees embody our core values and continue to innovate and drive our vision forward.

Its through their commitment and passion that we were able to turn our vision into a reality.

Now I'll turn it over to Scott to discuss our financial results.

Thank you Jason.

I'll provide a detailed overview of our first quarter performance followed by our guidance for the second quarter of 2022.

Total first quarter revenue was $430 6 million up 151% year over year and nearly $21 million ahead of the high end of our most recent guidance range.

<unk> revenue was $163 3 million for the first quarter up 2% from the prior quarter and up 5% from $155 8 million in the prior year.

The growth in marketplace revenue was primarily due to the increase in our foundational listings revenue driven mostly by an increase in our paying dealers in the U S quarter over quarter.

Wholesale revenue was 91 million for the first quarter of 2022 up 559%.

$13 8 million in the prior year.

Compared to the previous quarter wholesale revenue grew 10% in the first quarter.

The increase in wholesale revenue compared to the prior quarter is mostly due to the increase in transportation revenue that Jason mentioned.

Lastly, our third and final revenue components product revenue was $176 3 million for the first quarter up 9896% from $1 8 million in the prior year and up 84% from the previous quarter.

The increase in revenue from the prior quarter is primarily due to transaction volume growth associated with instant Max cash offer.

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 acquisition related expenses and net income attributable to redeemable noncontrolling interests.

First quarter non-GAAP gross margin was 44% compared to 59% in the prior quarter and 86% in the year ago quarter.

Change in non-GAAP gross margin is primarily due to the growth of instant Max cash offer and its associated costs of acquiring vehicles directly from the consumer.

Additionally, the contraction was due to an increase in transportation and arbitration costs associated with the dealer to dealer services.

Total first quarter non-GAAP operating expenses were $125 2 million up 27% year over year non.

non-GAAP sales and marketing expense decreased 3% compared to the previous quarter and increased 28% year over year to $83 6 million.

non-GAAP sales and marketing expense represented 19% of revenue down from 38% of revenue in the year ago period.

Our first quarter non-GAAP product technology, and development expenses grew 25% versus the year ago period to $24 3 million.

We generated non-GAAP operating income of $62 2 million, representing a margin of 14% and in the middle of our guidance range.

non-GAAP diluted earnings per share attributable to cargo as Inc. With 36 for the first quarter <unk> <unk> above the high end of our guidance range.

On a GAAP basis, we generated first quarter gross margin of 42% compared to 86% in a year ago period.

The contraction in gross margin is primarily due to the reasons previously discussed in addition to amortization of acquired intangibles of approximately $5 4 million that were previously recorded in operating expenses and are now included within cost of revenue.

We incurred total operating expenses of $155 2 million up roughly 28% year over year.

First quarter GAAP operating income increased 3% year over year to $26 7 million.

First quarter GAAP net income attributable to cargo was inc. Totaled $19 9 million in first quarter GAAP net loss attributable to common shareholders totaled $62 1 billion, primarily due to the accretion of redeemable non controlling interests to redemption value of $82 million in the first quarter.

We ended the first quarter with $375 million in cash and investments an increase of $53 1 million from the end of the fourth quarter the.

The increase was driven by a $40 million decrease in our accounts receivable balance.

A $30 1 million increase in accrued expenses offset by $23 6 million in payments made to our third party processor related to car offer.

I'll close my prepared remarks, with our outlook for the second quarter of 2022.

We expect our second quarter revenue to be in the range of $480 million to $510 million.

Similar to previous quarters, we are providing second quarter revenue guidance for instant Max cash offer which we anticipate to be in the range of $219 million to $239 million.

We are estimating non-GAAP operating income in the range of $44 million to $52 million and non-GAAP earnings per share in the range of 26 to 29.

With that we look forward to seeing some of you at our upcoming Investor Day, and now we will open up the call for Q&A.

Thank you.

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One moment please poll for questions.

As a reminder, we did.

A question limit to one question and one follow up.

Our first question is from the line up.

John Cullen Tony with Jefferies. Please go ahead.

Just looking at car offer it looks like average gross merchandise sales per dealership.

Moderate at about 30% sequentially in the first quarter and about double digits year on year can you just talk to how this compare to your expectations and whether any recent moderation in consumer demand for used cars is impacting.

Dealerships willingness to buy programmatically.

And then also how has engagement maybe you could talk about how engagement.

A car offer has trended in recent months I have a follow up.

Sure.

Sam you want to take a shot at this and if.

Bruce you want add anything.

Happy to start John Thanks, Sam Zales and alternative Bruce the expert on this in a minute.

Youre talking about the sequential fourth quarter to first quarter and I would say.

The industry as a whole was impacted by wholesale pricing when wholesale pricing drops.

That is a volatile time and it makes dealers cautious about buying and selling and Thats a factor we talked about last third quarter of last year. So those that dynamic.

<unk> impacts the business second comment as consumer demand as you just said is soft right now in the market and that does also impact how dealers think about.

Transactions and how much inventory they need as you said it and we look at second quarter, starting to kick off that wholesale pricing.

Model changes wholesale pricing is starting to head up again and that is always good news for confidence and dealers.

Transacting, both on the buy and sell side. So that is the impact as you think about it from a macro perspective, let me turn it to you Bruce if you have any more to share on that front.

I would just basically really reiterate what youre, saying for them also.

We have incredible.

December and January speaking to your point I think wholesale prices came down six 4% since the first of the year that being said.

We have today more and more programmatic buyers on the system as of today than we've ever had so we've seen a rapid expansion of that.

Kind of momentum going into this quarter and.

Given the the headwinds there and particularly.

February .

<unk>.

Aggressiveness to and is the Max cash offer I mean, we're learning every day.

Basically.

In about six months or so set up a $1 billion business and we wanted to get aggressive there but.

As we are buying these cars were finding out.

These cars from consumers paying these consumers on the spot we're learning a lot.

Really getting it dialed in filling feeling very very good about that.

As we move into this month and next.

Great and I wanted to wanted to ask one about the marketplace.

With dealership seeing a moderation in used car demand could you see that benefiting car groos as dealerships look to boost sales by leveraging more digital advertising I guess I'm trying to figure out the counterbalance between dealerships trying to offset a drop in demand.

And maybe being a little bit more careful about how much inventory that they keep at their dealerships. So maybe you could just talk a little bit about how you see that dynamic impacting cargo was marketplace business. Thanks.

Alright, Thanks, John This is Jason yes.

Yes, I mean, I think you've probably heard us talk in the past about how.

Now that we have a.

A broader and more complete platform that covers.

Dealers sourcing marketing and selling and full lifecycle for consumers as well.

Does balance our business more and in a lot of respects when there are <unk> in one area, there may be headwinds and another and vice versa.

And so as consumer demand does Wayne and you've heard us say that but you've probably seen that in other market data points as well, we do feel that dealers are going to have to market more aggressively and that that will help our marketplace business and you started to see some of that momentum already in Q1 as we added 100.

<unk> of dealers as long as inventory.

Does remain constrained though.

That is a factor that even if consumer demand goes up.

Yeah.

I am sorry, even if consumer demand goes down and dealer marketing has tended to go up.

They don't have a lot of cars on their on their lot then.

May not be as aggressive as they were say pre COVID-19.

But we think that the.

The inventory situation while remaining.

<unk> for the foreseeable future.

Probably improving from where it was and if consumer demand is less rampant than it was in the end of last year second half of last year and that bodes well for our listings business as well as RPM.

And some of the digital retail products that were introducing as well.

I appreciate the color.

Thanks for the question.

Thank you we have next question from the line of Chris <unk> with Needham. Please go ahead.

Hey, How're you doing.

I think we've sort of hit on it but I kind of wanted to go deeper I'm looking at slide 29 can you just walk me through current offer non-GAAP gross profit margin.

Heading lower and does it relate to into next cash outflow. Bruce said, we're learning every day or I guess, what are the inputs as a contra revenue and that is causing gross pricing to be lower from arbitration Tv's kind of cookie.

Because we brought on that I appreciate it.

Yes.

Scott you want to take a shot at that.

Youre on mute.

Hey, Chris how are you doing it's Scott.

So on slide 29, non gas Im sorry, non-GAAP gross gross profit Thats, what youre looking out.

Or what.

Yes, so I mean, we.

We got a huge benefit from the.

The amortization item. So you can see that on the slide.

So that that trended.

Very high in Q4 because of that onetime pickup with regards to overall I mean, if you look at the GAAP gross profit line you can see that there is.

A difference from Q4 to Q1 and that is just a mix issue some of the points that were mentioned on the call.

<unk>.

Okay, and then bigger picture kind of what are your dealers, telling you as we get closer to the adjusted deal sunsetting of closing and kind of how our dealers thinking about their sourcing of now.

And they are selling in the wholesale market.

I can tell you. This is Bruce I can tell you from my perspective, I think it benefits us.

We are already seeing some some momentum there and I think that will keep translating.

As dealers decide whether or not they're going to.

Paid with the with the <unk>.

Yes.

Brick and mortar auctions of the cobalt, our brick and mortar auctions moving forward.

I think it bodes well for Dieter did either moving forward for sure.

Okay.

There's nothing specific yet.

Well this is Jason we continue to see.

Shift from.

Physical to digital.

And that is in the Grand scheme of things still.

And it's early days, but it's a pretty steep transition now and we think thats going to continue for quite some time. So there is a lot of.

Sure to begin from that I think the added element added benefit Bruce is referencing is that we have heard dealers, specifically say that they are less inclined to work with.

Group, that's owned by a competitor of theirs and they otherwise might have been.

Thank you.

Thank you we have next question from the lineup Tom White with D. A Davidson. Please go ahead.

Oh, great. Thanks for taking my question, maybe just a follow up on the comments about the sensitivity of the volumes in the wholesale.

Dealer to dealer business to to the wholesale prices.

Jason if you looked at like I don't know three or four quarters or whenever we think new inventory is going to come back online in a meaningful way.

Do you expect that car off that part of the car off for business to be.

Sensitive to that as well.

And I'm curious, whether you guys have given any thought to adding a subscription based element to that business.

Sure. So I can Jason I'll take both of those.

On your second question.

We have a couple of smaller products that are more subscription in nature in the wholesale arena, but it's not the bulk of the business and from as you know in from our wholesale.

<unk>.

Sure Middle of the Fairway day to day perspective, we.

Think a transaction model is much more sensible there.

And on your first question.

The and.

It's going to be a while for new car production to ramp up and have.

Really meaningful impact in sort of a macro and unused car pricing, but we did see used car pricing at the retail.

Level.

Decline in Q1.

And in the wholesale as well as somebody earlier I mentioned some of the stats there.

It's not so much that there is a decline per se. It's more that there is uncertainty among dealers.

And in the form of volatility and so.

If dealers had a sense for what they felt was going to be say a steady decline in pricing over time, they would still need to source cars and they would still need to sell cars.

It's more when there is.

Uncertainty in.

Concern that they have that there might be sharp changes in the near term or unexpected changes in the near term.

We've had some.

Frothy rising market and wholesale unit prices over the course of the last call. It two years with two periods, where prices flattened and declined and I think both times it was unexpected.

And I think it was that uncertainty and that volatility that drove a little hesitancy among them.

Sort of Skittishness, if you will.

But I think most people who look at.

That's that's how I would characterize the sensitivity it's more around volatility than it is around whether it's a decline or an increase.

That's great.

Alright good.

Oh, Yes, I, just I was just going to say.

Even in all finished already even in that.

Even in the moments of Skittishness, I mean, we think that.

A digital model still makes more sense and be an instant trade platform, where you can control your bidding and youre selling in a much more.

Sort of controlled and technical way actually provides comfort in periods of skittishness youre not as reliant on the outcome of one or one set of options.

Got it that's really helpful quick follow up I remember last quarter, you guys talked about the rental car companies as being.

An active part of that.

The wholesale dealer to dealer business can you talk about kind of their level of activity in the second quarter and just generally do you view those that segment is kind of a durable customer base or are they just kind of more opportunistic given that they needed to kind of ramp up.

Their fleets.

This is Bruce my discussion with the flu.

Basically we think it is a durable channel for us.

For quarters and quarters to come if not indefinitely.

<unk>.

Basically had a migration or shift in the buying from the Oems to nearly do.

The channels actually worked out very very well for them and we're seeing that.

On the second quarter as obviously as you see.

Transportation and travel across the country ramp up.

It's doing.

We anticipate that will continue for us.

<unk>.

Quarter over quarter, I think even from the fourth quarter to the first quarter.

Nearly nearly $100 million. So we're pleased with the performance in the first quarter.

As Jason indicated when markets go up and down just like the stock market today.

When you get a rapid decline.

Create some skittishness, but ultimately those.

Wait themselves out and you get normalization stabilization and we feel very good about where we are today.

Great. Thanks, guys.

Thank you we have next question from the line of Brad Erickson with RBC capital markets. Please go ahead.

Yes.

I think.

Just on the margin guidance, you mentioned, the sales and marketing expense.

Can you just unpack the size of that marketing investment will give us some guardrails as to how to think about much how much you intend to spend and just curious also if theres any contribution there from higher transport Rev. Like there was in Q1 or is that or is that not a factor.

Hey, Brian It's Scott I'll take this one.

So there's a couple of pieces there.

Not going to get too specific on marketing spend but there is really I would say two underlying elements.

That we've talked about for <unk>.

About a year with regards to needing to spend more on the core business and that started to happen a bit in Q4, and Q1 a bit more than we saw in Q2 and Q3 last year, we didn't have to spend.

It's been a fraction of what we spent in Q1 of last year. So we're spending more on the core business to drive traffic to the site.

Good engagement with consumers on a site and convert those to value leads for dealers.

But what we're also investing more heavily in marketing and setbacks and that is sort of the other dimension of marketing that has been minimal spend so far on a relative basis and that sort of where.

Spending a lot more in Q2 and expect to beyond Q2 as well so.

The guidance with regards to earnings.

Ah.

Represents an investment in some of our marketing spend but also we are continuing to ramp up the team we've got a lot of.

Head count that we're trying to fill across the organization.

Especially in tech, but really across all teams as well on car for its growing their team tremendously so.

It's really people and marketing primarily the investment areas and then or.

Our market, we're investing a lot in digital retail as well.

Got it thanks for that and then just on the.

Buy button beyond what you kind of gave in the prepared remarks, just any updated learnings you can provide there sort of.

Evidence of success and just any update as you continue to pilot that.

Happy to take it Brad thanks.

We can't be more excited about the incident Max cash offer product I think our conversion rates from our site for consumers saving offers conversions from saved offers to <unk>.

Transactions are all moving in the right direction, which we're excited about.

Oh, I'm, sorry, and maybe I'm jumping offer that's instant cash offer on the buy button, sorry, I'm getting too excited about that one.

Digital so that keeps moving in the right direction sorry, Brad.

Digital deal how excited we are for the next phase of that one.

As Jason talked about it's a next expansion of what the.

The convert product is.

And what.

What we're where we're adding capabilities there is an opportunity for dealers to utilize and see the down funnel shopper, we're getting data on the.

The soft pull financing now to hard pole getting in consumer into the dealers transaction process were fully integrated into the CRM at the dealership.

And that process of starting the shop finance and buy process for our consumer we just think is where the industry's going to 60% of our consumers.

Announced it we're moving out more formally this quarter and we're so excited to bring that to market in a much bigger way to get more consumers connected to dealers through a digital purchase.

Got it thank you.

Thank you. The next question from the line of Chad Kelly with Oppenheimer. Please go ahead.

Great.

I may just one can you talk about sort of the.

Catalysts behind some of the price increases for <unk>.

Car offer.

How big of a pricing ramp do you have and then.

Just for I guess, the product or instant cash offer.

How should we think about the gross margin going forward I mean, do you intend to run that business.

Breakeven margins to drive consumer engagement, just just how should we view the strategy around the <unk>.

Thank you.

Okay.

I'll take a crack at studying these and others can add.

Thanks for the questions Jed on the price increases a car offer.

We were we're in continue to be a price advantaged offer for dealers.

Lower price from just a pure transaction fee basis than most if not all other digital offerings and certainly on the physical side as well coupled with all of the convenience element that we add relative to the to the physical side, which I think if you looked at total cost of transaction, we would certainly shine there.

And so between that and dealer satisfaction, we saw an opportunity to increase prices to reflect more of how dealers.

Value it in the market.

And is there more in there I mean.

We haven't.

Spoken about that we just did this one in March but we.

We feel good about that decision and we think dealers have been incredibly supportive.

And I think as there are a lot of <unk>.

Competing alternatives out there that continue to burn capital.

Respect.

On.

Actually before.

Sure I go to Ensign Max Sam Bruce anything or did I cover.

I think you covered it okay, great on instant Max Jed.

We are I mean, it is a.

It is a massive massive market opportunity.

So like we've done in other areas of our business and at earlier stages of our business, we're really focused on the unit economics.

To make sure that we've got them right enough before we really blow it out.

And and.

So we're focused on on the gross margin.

And that's why we've put in some extra work to show that.

This quarter we were.

At the <unk>.

Mid low to mid single digit gross margin that we were and the months we had.

Even higher than that and other months, where it was lower it was because we were getting more competitive with our offers and so we were consciously bringing our spreads down a little bit.

We're testing things in these early days where.

Sure.

We tested.

Sort of a special offer period, where we.

Compressed our spreads again by design even more.

And we can toggle that up and down so in this early stage, we're focused on positive gross margins at the unit level.

Don't see a scenario, where we take that to negative.

And then it's a matter of when we think we have a writing up how much do we want to invest in marketing to tell the world about it.

We continue to think that from a business model perspective.

The fact that we get dealers to offer hundreds or thousands of dealers to offer a bid on a car that is just a fundamentally better consumer value prop then a consumer having to deal with just one dealer and we need to tell the world in the market about that better value prop that we have so as.

And our platform more generally.

So positive gross margin as far as we can tell are planned to do forever and but we are going to invest more aggressively in marketing because of how great. The product is.

And this is Bruce I would just say these are very very early days to write and we stood up a business that didn't exist here with the company six months ago, and I would tell you I think.

Taken the probably grew this buying from consumer business with <unk> E business quite faster than any other company out there and we are learning and as we learn buying a car from a consumer in buying a car is decided scene. We are now just really starting to dial in.

The algorithms and.

Picking up the car from the consumer and the processes in those type of things so.

I would say that we're going to get better and better at it every month, we are already seeing those improvements and couldn't be more excited about instant Max cash offer.

Thank you.

Thank you we have an expression from the line of <unk> Khan with <unk>. Please go ahead.

Yeah, Thanks, a lot.

Couple of questions, maybe just on the on car offer.

Can you talk about what are you seeing in terms of your.

Older dealer cohorts dealers, who came on board.

Three to four quarters ago are you seeing them.

He was the platform more and more to buy cars are you seeing them shift share from other channels to cut off.

Curious about the trends in that and then.

On the.

In your prepared commentary, Jason I think you mentioned.

Some backlog in vehicle could pick up was that on the <unk> side or was that would be.

Current companies.

Okay.

Now that I can jump in first it's Sam zales adjacent.

Jason add more detailer, Bruce if you'd like to.

The the.

The cohorts are going in the right direction and I want to be.

Im careful about that they're all moving in the right direction.

Diversity of dealers getting on the platform and participating in either a buyer itself fashion and the cohorts themselves moving up into the right is a really great sign.

The factors that just whats going on in the market, but those cohorts are going in the right direction. They are moving up into the right and we're proud of that and we see that expanding as we sign more and more dealers to the platform and initiate their matrices to your question on transportation to backlog was.

From the dealer to dealer a large partner there we took over their transportation for them that was the one time change that happened in the first quarter. If that was the question you asked.

Bruce anything is that at that time.

You are correct yes.

Maybe can you expand a little bit when you said you. So you did the transportation versus them doing it themselves is that the right kind of.

Yes, so typically we handle the transportation for all of our clients we had one large.

<unk> client in particular that handle their own.

We.

And they've got a bit behind so we said we took taken that.

Are there transportation on cleaned up all of that and so that's what you saw there in the first quarter, which is the cleanup of really fourth quarter units.

Got it so maybe just maybe just to dig a little bit more into that is that something that might have affected <unk>.

<unk> volumes are.

That wasn't really a factor.

It didn't affect volumes, so much but it did Jason it did affect the margin profile because it was.

Sort of disproportionately higher revenue that was transportation.

Related which as you know is lower margin certainly lower margin than our fee revenue and this was a unique situation I mean, we do we do the transportation and the vast vast majority of transactions, but in this case they had historically done it.

Dealer experience.

Important to us it's a key focus of ours.

When when that became an issue for them, we offered to help to make.

<unk> was a great experience for everyone.

Thank you we have next question from the line of Marvin Fong with <unk>. Please go ahead.

Great. Thanks for taking my question just one for me I think everything else I've been asked but.

For second quarter your guidance.

Just curious.

On the dealer to dealer side for car off or it looks like gross margin was 30% in the first quarter.

With the price increases.

Any thought about what they might be in the second quarter that youre employing in guidance should we expect it to be a little bit higher.

Both both in second quarter, and maybe just on a on a structural basis. Thanks.

So structurally.

This is Jason.

We talked about sort of this one time event related transportation and we've talked about some of the dynamics related to arbitration.

And then youre right it'll be a full quarter of <unk>.

See the new fee structure and so for all three of those reasons.

If you were to consider on sort of.

Apples to apples in terms of transaction volume, yes, you'd certainly see.

Higher margin in Q2.

Okay, great. Thanks, Jason.

Thank you we have next question from the lineup Doug Arthur with Huber Research. Please go ahead.

I think my questions have been answered.

Not.

Not quite totally understanding why the product gross profit mortgage margin went negative, but you've certainly cited a lot of issues.

Assume over time.

The kind of stable to growing margin there is more low to mid single digit over time is that still a fair.

Cut out.

Yes, 100%.

And Scott maybe you can give a little more detail as it relates to Q4 to Q1.

Yeah, so keep in mind the.

Doug the product.

Section of the P&L category or segment of the P&L.

Is not exactly instant Max cash offer.

It involves it does not involve.

Transportation and inspection related to instant Max It does involve due to the arbitration et cetera.

And it's it's.

It's more related to those other things.

That it was negative so and in fact, if you look in our investor deck, we do have a different cut at it shows that.

Instant Max cash offer on more of sort of.

Of our pure basis, if you will from a from a business perspective was 3% non-GAAP gross margin.

And we had like I've mentioned, a few minutes ago, we had months, where it was higher than that.

And then we had months, where we consciously brought it down because we brought down spreads too to test competitiveness of our offers.

So.

And then the pick up in Atlanta dealer concept I mean, those are all things that are still.

Six to eight months since we began them.

So we have.

Total confidence that the gross margin there has.

Room for upside in the longer term, it's absolutely mid single digits.

And.

And we're even seeing that in periods now.

But we're also testing a lot of other things that brought Q1 down to 3%.

Great that's really helpful. Thank you.

Sure.

Thank you Graham next question is from the lineup Alex Potter with Piper Sandler. Please go ahead.

Great. Thanks, just one for me it's related to arbitration you mentioned, some arbitration costs had an impact on margins in the quarter as well as both confidence that that should improve.

If you could just give a little bit more I guess qualitative commentary.

Is this an inspection quality issue and I.

I guess, what levers are you pulling to try to make sure that those inspection.

Those inspection reports and more accurate.

No I don't want to put words in your mouth, but anything that you could talk about with regard to arbitration and inspection accuracy would be helpful.

Yeah.

Alex I'll jump in first and turn it to Bruce who is an expert at this but from our perspective and couldnt be more excited about what the car offer business is doing for us.

The from an arbitration perspective.

When prices decline in the market. That's a sign first of all I should just say our arbitration numbers are a very very small percentage of our gross merchandise sales.

And Thats, a critical measure of our business.

But as prices drop or get fluctuating as Jason said.

<unk> will look at that and say well I'm going to push back in some cases when the prices are going down on buying a vehicle, but the price continues to drop we have a no questions asked return policy, where really defaulting to dealer satisfaction and our approach is to say let's.

Let's watch the.

Broadened our inspection process and we've done that adding more inspectors, we talked about adding virtual inspection to our CVD cars as well and that's a huge advantage to our process.

As Bruce keeps saying, we're learning in the process when the price point in the wholesale market is dropping or fluctuating theyre going to be more of those situations that come up we said that revenue mix went up for us overall.

<unk>.

We've looked at that process of inspection and said, let's double down on that and let's also look at our dealer and processes. Our dealer results to say if some of them are pushing back on results we are.

Pushing back on vehicles, because the macro environment lowering prices, we're going to be careful about balancing customer satisfaction with the right kind of business decision, but overall as I said the arbitration number is a very very small percentage of our gross merchandise sales and were.

We've made those adjustments as we head into the second quarter to do that Bruce anything more you wanted to add to.

To your point I think arbitrations were about 1% right.

<unk> in.

You came off really good December and January .

You're going to get any type of arbitration volume.

Subsequent write to the February where we did see the drops were very disciplined.

In terms of units that we take so we can liquidate those and make sure. We're prudent in that regard, but we are also adding a lot of other tools that.

It will help us moving forward.

To mitigate that but.

Yes, it was a unique situation I think.

Coming off of December .

In January .

We gave them a liquidation primarily in February but.

Have a good handle on it I think moving forward.

Okay understood. Thanks, guys.

Thank you.

And gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back to Jason Jason.

CEO for closing remarks over to you Sir.

Thank you very much so thanks, everyone for tuning in today, thanks for your questions.

As I said in my prepared remarks, we're really excited about about how we performed in Q1, but also about what we have.

Coming up in Q2, and the rest of the year.

I think what it shows is that we have really.

Transform the business to be transaction enabled in all types of transactions on top of our marketplace.

And there we're now capturing sort of full lifecycle needs of both dealers and consumers and what that does is it opens up new markets for us.

Allows us to operate a profitable very profitable business.

To fund all of that investment in growth.

Really excited to see all of you in person if you can join us at our Investor day on May 25th.

And to dive deeper into our story.

And again, thanks very much I appreciate it I appreciate all the questions have a great evening.

Thank you ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.

Q1 2022 CarGurus Inc Earnings Call

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