Q3 2022 Cars.com Inc Earnings Call
Adjusted EBITDA margin adjusted operating expenses and free cash flow.
Reconciliation of these non-GAAP measures to the most directly comparable GAAP measure can be found in the financial tables included with our earnings press release and in the appendix of our presentation.
Any forward looking statements are subject to risks and uncertainties.
For more information please refer to the risk factors included in our SEC filings, including those in our most recently filed 10-K.
Which is available on the IR section of our website.
We assume no obligation to update any forward looking statements now ill turn the call over to Alex.
Thank you Robin and welcome to our third quarter 2022 earnings call.
Pleased to report that we delivered another quarter of solid results in line with our guidance, we are well positioned to drive long term sustainable growth as we empower the auto industry to shift to end market digital solutions to better compete for auto sales increased transaction efficiency and optimize for profitability.
Our third quarter revenue grew 5% year over year, and our adjusted EBITDA margin was 30%.
This momentum was driven by growth in traffic dealer customers and increased adoption of our dealer inspire and accu trade solutions.
These drivers combined with our strong free cash flow conversion demonstrate the strength of our integrated platform strategy.
We're particularly pleased with our steady and sustained performance in an operating environment that has been challenging for so many in our industry.
Our dealer customer base remains healthy and our retention rates and value delivery remained strong.
Inventory levels are starting to recover with daily average listings on our marketplace growing 11% year over year for new cars and 9% for us.
Despite increasing inventory new card prices in our marketplace remain elevated at 14% higher than a year ago.
Used car prices also remain high but has declined 1% sequentially.
With nearly 70, new card releases anticipated for 2023, we remain the optimal partner to support dealers and Oems as they will need to invest more in digital marketing to target in market shoppers and sell more cars.
While inflationary pressures will continue to impact consumer spending.
Vehicle ownership as durable as car owners rely on their vehicles to transport their families commute to work or for holiday travel whatever the reason cars remain vital to the transportation needs of individuals as they go about their daily lives.
Even as the country experienced as a recessionary environment, we know the auto industry to be resilient most.
Most recently in 2020, when the U S economy came to a halt for several months car sales in the U S was still $52 million against the 30 year average of $54 million a year.
<unk> dot com marketplace is essential for the buying and selling of cars.
Over 27 million monthly unique visitors, we have an audience to match buyers and sellers at scale. We are pleased that this quarter. We continued to extend our audience with 12% growth in unique visitors and 6% growth in total visits on a year over year basis.
Dealers derive value not only from the strength of our traffic, but also from our portfolio of solutions. We grew our customer base to 19585, an increase of $5 56 compared to last year and an increase of <unk> 68 for the second quarter supported by strong retention.
Even in a challenging advertising environment <unk> was strong at $2334.
We continue to expand our website business is nearly every OEM has selected us as a certified partner, which enables us to further add new dealers to our platform.
As a result, our website customers grew to 5900 at quarter end.
We are also expanding our solution strategy with additional end to end platform capabilities.
With our acquisition of credit IQ, we are expanding into the multibillion dollar auto finance market, which enhances our platform as car shoppers can now better understand what they can afford and have the ability to complete more of the transaction online.
Our solution also provides dealers and lenders with a source of high quality financing leads while strengthening attribution to our marketplace.
Our large end market audience and low funnel shoppers are attracting leading financial institutions into our network. These additions coupled with our increasing dealer adoption are key to driving our flywheel and furthering our platform advantage.
One of the highlights of the quarter with a significant ramp up and rollout of accu trade.
This solution drives operational efficiency in the vehicle acquisition process for dealers, while also delivering a more transparent vehicle valuation process for consumers I.
I am pleased to report that the end of the quarter, we had over 400 dealers on our connected platform and we continue to sell and scale this offering.
There are approximately 25 million vehicle acquisition opportunities that we can help dealerships facilitate each year, our accu trade technology enables dealers to efficiently value and acquire inventory and both are abundant or lean inventory environment trading.
Trade ins are complicated yet critical process for dealers as nearly half of all vehicle sales have a trade and attached to the sale.
However, the physical appraisal processes outdated and inconsistent, resulting in long wait times and highly subjective valuation.
Typically the dealership is an individual who is in charge of the phrasing all trade ins, which on average can take up to an hour per vehicle, creating a bottleneck in the store and slowing the transaction process for both consumers and dealers.
Accu Trade's proprietary Vin specific valuation and appraisal technology provides full transparency on vehicle valuation and delivers highly accurate appraisal reports leveraging real time market data and just minutes.
Because the accu trade is so easy to use it empowers more of the dealership staff to provide accurate appraisals, improving the overall dealership operation, while creating a better and more efficient experience for the consumer.
This is the experience for Joel Basam President of Eastern's Automotive group based in Washington D. C. He leverages, our accu trade trade appraisal technology and appreciates the efficiency it provides.
Joel says and I quote before using accu trade would take up to an hour to appraise each vehicle and now it takes as little as 15 minutes with more than 800 vehicles appraise. This quarter. This is a meaningful savings cutting into our time spent by 75%. We recently adjusted our trade in process on the Accu trade 100.
[noise] percent expanding our technology to all eight of our stores.
As evidenced by Joel using our digital solutions is a game changer.
To strengthen our platform advantage in August we rolled out instant offer on cars dot com, which empowers private sellers to constantly receive a competitive cash offer based on real time data in minutes.
This gives the dealers additional access to buying opportunities from private sellers via cars Dot com that can also give consumers guaranteed offers from their own website using accu trade.
We are just getting started and we're finding more ways to help dealers buy cars and are excited about the disruption, we're driving as the auto industry shifts towards speed accuracy and efficiency through tech.
In summary, our industry, leading brand our high value organic traffic and our integrated platform of dealer friendly solutions.
Coupled with the resilience of the auto industry position us to drive growth and generate strong free cash flow.
Now I'd like to officially welcome back Sonya and thank Jamie for her leadership as interim CFO I'm thrilled that both will continue to play integral roles in our organization Janney will first discuss our third quarter financial results in greater detail and then Sonya will provide details on our capital allocation priorities and review our fourth quarter expectations.
Jamie Thank you Alex.
Alex I'm pleased with our steady and sustained performance for the quarter, we delivered strong revenue adjusted EBITDA and operating cash flow, we continue to drive profitable growth, even admit challenging economic headwinds.
A testament to the benefits of our diversified set of tourism.
Revenue for the quarter totaled 165 million, a 5% increase compared to the prior year.
Our performance was driven by continued growth in dealer revenue, which grew 4% year over year to $145 million, although new car inventory and production remain low our OEM and national revenue with only 2% lower compared to a year ago.
As a percent sequentially.
Turning to expenses for the quarter adjusted operating expenses, excluding depreciation and amortization were 113 million $2 million higher than a year ago. As a result of the addition of the credit IQ and trade acquisition and other investments to drive growth.
Compared to the second quarter, our adjusted operating expenses were 3 million more driven by lower marketing and as a result of our strong growth in traffic and unique visitors, which enabled us to pull back on marketing investments during the third quarter.
Is it a revised performance expectations associated with our recent acquisition the fair value of the earnings increased by 13 million, which drove a net loss of $2 9 million or four cents per diluted share compared to net income of $2 4 million a year ago.
This increase in our earn out estimates is indicative of the progress we've made in integrating our recent acquisitions we.
We delivered adjusted EBITDA of $50 million or 30% of revenue at the midpoint of our guidance sequentially margin expanded 250 basis points.
Now turning to our key metrics, which underlie these solid quarterly results.
Driven by sustained strong retention rates, Anthony hopefully go customer by 556 dealers or 3% year over year, putting us at 19585 at quarter end.
<unk> customers increased by 68.
Monthly <unk> increased by $2 year over year to 2000, and 334 for the quarter and by $8 compared to the second quarter.
Our performance resulted from growth in our digital solutions, largely offset by softness in fuel sales and marketplace inventory downgrades due to the inventory level.
Website customers continued to grow reaching 5900 at the end of the quarter up 700 from a year ago and 250 sequentially.
Player revenue in total grew 16% compared to the prior year.
Carr Sheppards continue to rely on our marketplace to help them find the right vehicle, we consistently generate high quality traffic and an engaged audiences at scale, which our dealer and OEM customers value for the quarter traffic increased 6% to 150 million visits and monthly unique visitors, which best represent in market.
<unk> increased 12% to $27 million.
And now I'll turn the call over to Sonya, who will discuss our capital allocation priorities and provide our fourth quarter outlook.
Thank you Sandy.
Cash provided by operating activities for the nine months period, ending September 32022, with $91 million and free cash flow was $77 million cash flow in the current year period, but down year over year for two primary reasons first last year, we had a $9 million income tax refund associated with the care.
And second the unfavorable impact from changes in working capital as Jimmy mentioned, given the revised performance expectations for our recent acquisition, we recorded a net $13 $4 million increase in the fair value of the earn out this reflects our momentum and driving market acceptance and our integration efforts with <unk>.
This adoption, we expect to pay $10 million related to these earn outs over the next 12 months overall, we believe the earn out structures associated with these acquisitions are an effective way to align incentives and provide us upside as we continue to integrate scale and southeast Felicia.
Net leverage at quarter end with two six times down compared to two eight times last quarter and approaching our target range of two to two five times.
But we are temporarily above our target range due to incremental borrowings in the first quarter from the Accu trade acquisition, given our strong consistent cash generation. We are comfortable at this level and anticipate getting back into our target range in the coming quarters.
I'd also like to remind you that our floating rate debt is only 21% of our total outstanding limiting our exposure to rising interest rates.
We continue to maintain ample liquidity with $195 million of cash available on our revolver to supplement our $32 million of cash on hand or <unk>.
<unk> balance sheet provides us with the financial flexibility to return capital to shareholders. During the quarter, we repurchased one 4 million shares for $17 million, bringing our total shares repurchased this year to $3 $5 million, representing 5% of our shares outstanding.
Overall, our performance and strong execution enabled us to deliver a balanced capital allocation strategy that is focused on creating shareholder value by investing in the business for growth and delevering, our balance sheet and buying back shares.
Now turning to our guidance for the fourth quarter of 2022, we expect to deliver revenue of approximately $165 million to $167 million.
Representing both sequential and year over year growth in what remains a challenging macro environment. Our outlook is balanced with continued growth in our digital solutions and recent acquisition and while we are seeing signs of improvement when it comes to inventory our views are tempered by the current economic environment inflation and rising interest rates.
Turning to the fourth quarter adjusted EBITDA margin, we expect to be between 28, five and 30%. This outlook reflects our anticipated revenue mix and modest increases in marketing and sales and product and technology investments to drive growth, we have a demonstrated ability to generate attractive margins and deliver solid cash.
Slow even as we invest in the business.
And in this challenging economic environment, our diversified set of solution positions us well to continue delivering profitable growth with that I'd like to turn the call back over to Alan.
Thank you Sonya our asset light business model is proven both resilient and sustainable in many market conditions.
Revenue is growing and diversifying across multiple solutions, while margins remained strong.
We're confident in our ability to continue to grow revenue as we execute our differentiated platform strategy operator, we're ready to begin Q&A.
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<unk> Press Star one.
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Our first question comes from the line of Tom White with D. A Davidson Tom Your line is now open.
Great Good morning.
For taking my questions and welcome back sooner.
First on the guidance I think last quarter. The guide was for 6% to 8% year over year growth for the second half.
The <unk> range that you gave today implies a second half growth will be closer to 5% can you maybe just peel back a bit on maybe what parts of the business, you're either seeing a little bit of softening or.
Maybe feeling a little bit more conservative about and then I've got a follow up.
Sure Tom Good to hear you well listen I think we're on one hand, we're pleased with the midpoint of the range, but internally, we would have aspired to deliver on the high end of the range and on a subscription business.
That.
The mid point, obviously impacts the full year, albeit only for the three months remaining and so I think that's number one I think number two we pulled back in our marketing in Q3, a bit we're seeing strength in traffic, both organic and value delivery, but really what the key.
Differences is that.
We're seeing strengthen our solution sales, which takes it takes a little bit longer to enable dealerships set them up and make them billable.
And at the same time, some softness in advertising as we finish up the year. So those are the factors I don't know what else you'd add to that.
No I think just maybe a little bit more color at least on the on the revenue range, though Alex spoke a little bit about about the Q3 numbers.
We're we're feeling confident about the strength of diversified platform as Alex mentioned, a lot of strength in the solutions side of our business, which is offsetting a little bit of the softness that we saw also in Q3 on components of that advertising business like fuel.
And one other really strong bright spot has been the improvement we've seen in dealer customers in Q3, a lot of that momentum we're seeing continue into October and.
We're pleased with the ability to add dealers and grow our PD, even if modestly.
Okay.
That's helpful. Thanks.
Maybe just a follow up on the National AD revenue line.
Alex I think I heard you mentioned that.
I think it was 11% growth in new new vehicle listings on the platform it sounds like.
That kind of rising inventory.
Maybe bodes well for.
Eventually Oems.
Starting to spend a bit more to support their local dealers just curious like.
Have you had any discussions with Oems do you have any general visibility.
And when that line might might pick up or if you haven't had discussions.
Maybe what your best kind of Crystal ball type guesses about how that might evolve in 2023.
Sure Tom will look I think first and foremost we're maintaining a really what I consider a conservative outlook on OEM and national just because of the current environment and climate and while inventory levels are improving they really vary across Oems and so there are many Oems that are still having material production.
<unk> challenges I think.
When I look ahead to 2023, what I'm excited about is the volume of new product launches coming into the market.
And Oems typically you need to invest to promote those new model launches with events.
Incentives, which have been greatly reduced over the past call. It two years.
And so.
Fourth quarter, not really expecting to see a lift in that and we'll be back to you more with the 2023 outlook, but the conversations we're having are productive very positive I think dealer or Oems like dealers recognize they have to shift towards more digital solutions.
A lot of other investments over the last few years have gone to the social media platforms that I think.
I haven't really done much to convert to vehicle sales and that's our bread and butter, where retail media network and <unk>.
<unk> wanted to move units at the retail level, we can aid them in that effort.
And maybe just one additional point to add.
Really pleased to see kind of the lifting uptick.
And it is a really promising green shoot, especially coupled with the model launches that are expected for next year that being said inventory came down pretty dramatically, especially on the new car side. So we are growing off of.
A lower base and this is the beginning I think of that ramp up that we will see evolve over a number of quarters and that's right.
Got it makes sense, thanks, guys I'll get back in the queue.
Thanks, Tom.
Thank you for your question. Our next question comes from the line of <unk> Khan with <unk> Securities.
Line is now open.
Alright, Thanks, a lot.
Just wanted to maybe.
Peel back the dealer retention metrics, so the dealer count increase but maybe.
Give us some more color on.
The listing side.
Okay and.
Did you see reduced customer there or what are the trends that youre seeing into October .
Also on the dealer inspire is Subaru is starting to contribute there or do they still have to be is innovating Peter there before they started onboarding the dealerships over there.
Yes, it's related to your dealer customer question.
The increase that we saw in Q3 was really driven by our solution.
<unk>.
One of the things we're transparently Super focused on is just the ability to continue to cross sell our solutions products into our marketplace customers.
For October where we have seen a continuation of that dealer customer growth we're seeing.
Okay.
It's both editions in marketplace as well as as well as the solution side of the business and retention rates, we have visibility looking forward and retention rates.
Look look strong.
Yes, I think also on the.
I think that can be buoyed also going into next year with the addition of credit IQ, we're seeing really strong excitement by progressive dealers to do online financing, which will help on.
Retention for next year, but on your question on Subaru.
Yes, those launches have begun and we see good optimism there in terms of our ability to continue to grow that dealer base.
Okay.
Thank you for your question. Our next question comes from the line of Marvin Fong with BT I T. Marvin Your line is now open.
Good morning, Thanks for taking my questions and welcome back Sonya My first question's on Accu trade.
Sequentially very very impressive growth.
Obviously small compared to the total number of dealers you have just wondering how did that perform against your internal expectations could you just provide us some guideposts on how we should evaluate your progress there maybe a year from now or two or three like where do you where do you think or how should investors.
Think about your path of growth there and then I have a follow up.
Well look I think we've been very pleased with the initial reception and market reaction to accu trade I think dealers overwhelmingly are looking to source.
Sales directly from the public.
It is a more cost effective way to not only acquire inventory, but also new customers and so response has been extremely positive there as well as on our appraisal technology I think.
We sit here today I think is in the very early innings of a doubleheader game.
We are working feverishly on dealer enrollments right training dealerships unlike marketplace.
All of which we can turn on in 48 hours Accu trade has a longer onboarding cycle and so we are investing there to help.
Improve the dealer Onboarding experience to train the staff and get them up and running and using the technology.
I think the progress we've made this year is like every product we've ever introduced which has an initial wave of dealers working through then the enrollment issues and then we move towards scale and so this time next year I think we'd like to see not only are our subscription numbers more than double.
But I think.
The early.
Progress around dealer to dealer trading we'd like to get that launched sometime next year, where dealers can now start to trade inventory using cars dot coms retail demand data to help inform.
Time to sale and informing them when they should get rid of a car and perhaps sell it to a dealer in another region. So we'll give you more guidepost as we get further along this initial enrollment period, but.
Needless to say the industry interest here is widespread.
Thanks, so much for that color and my follow up just on fuel I think you mentioned.
A little bit.
Incremental softness there would you could you just help decompose that I mean, I think inventories have improved a little bit but would you say thats still mostly because dealers are inventory constrained or is it the macro environment that is kind of creeping into some of the headwinds there.
Yes, most of our softness in fuel in Q3 was the former right which is dealer said this I don't have enough inventory I've got multiple buyers on every piece of inventory I don't need to spend more promotional dollars to exhaust what is already.
No.
Healthy turn rate for my inventory.
What I see now happening, though is new car inventory levels are starting to rise again to <unk> point, it's early but as dealers take on more new car inventory. In addition to having more used cars in the ground. They will need to return to in market spending to help exhaust that inventory and move that volume.
And so I think the slowdown in fuel as more inventory related in the most recent period and I see a bigger opportunity brewing there for 2023 for sure yes.
Yeah, No I would just echo everything Alex that we are still currently sitting I think somewhere around 600000.
On the new vehicle side relative to highs of over $2 million. So we are getting back where sort of climbing up the tail from an inventory perspective, and I think positive signs, but not quite there yet and I'll also just add fuel not only does it give dealers access to an end market audience, but it also does.
So far more efficiently than any other product that's out there so as they're thinking about their portfolio and their marketing mix.
We provide benefit and the targeting side, but also just from a pure cost effectiveness.
Yeah.
Thanks, that's great. Thanks, Alex component.
Yeah.
Thank you for your question as a brief reminder, star one on your telephone keypad to register your question.
Our next question comes from the line of Doug Arthur with Huber Research.
Your line is now open.
Yes, thanks, Sonya local back now.
Alex just sort of big picture obviously.
Pricing in used cars has broken somewhat I wouldn't say, it's plunging, but it's rolling over.
Sort of.
Miss the first couple of minutes of your of your presentation.
Just sort of broadly how is that impacting dealer and customer behavior as prices start to come down or hesitancy in the market to transact because people want to see where prices land or is it not having much of an impact.
Yes.
Doug I think as you know I've seen other marketplaces or other players.
Report that used car values are falling at a greater level as you know cars dot com and our entire business model tends to skew up market with the larger franchise dealers and there has been slight softening in used car pricing, but it's largely driven by the increase in new car inventory supply as I believe as opposed to a macro.
Zero.
Consumer.
Issue the luxury market remains healthy in all economic cycles.
And we're not as.
Impacted by the long tail or the sub $10000 vehicle market, we tend to skew more to the higher end of the market there I think.
As you know the new and used car markets ultimately battle for share and so Oems are seeing youre going to be coming back hard in 2023 trying to move new product. There's a record number of EV launches scheduled for next year, which is exciting because users are flocking to cars dot com to learn about evs.
And we're well positioned in that market, but but.
The used car softness in the market.
I think is a little premature because consumer demand is persisting if you look at our traffic levels.
Relatively strong in Q3, and we see that same consumer demand persist into Q4.
Okay, great. Thank you.
Yeah.
Thank you for your question there are no more questions meeting at this time, so I will pass the call back to Alex Vetter for closing remarks. Thank you.
Thank you for your interest in cars and joining us today and that concludes our call.
Yeah.
This concludes today's conference call. Thank you for your participation you may now disconnect your lines.