Q1 2023 CarGurus Inc Earnings Call
[noise] <unk> and welcome to <unk> Q1, 2020 at the conference call. At this time, all participants are in a listen only mode <unk>.
Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host <unk> Vice President head of investment.
Thank you <unk> you may begin.
Thank you operator, good afternoon I'm delighted to welcome you to Carter is first quarter of 2023 earnings call. We will be discussing the results announced in a press release issued today after the market closed and posted Investor Relations website.
With me on the call today are Jason <unk>, Chief Executive Officer, and Sam <unk>, President and Chief operating officer. During the call. We will make statements regarding our business that may be considered forward looking within applicable securities laws, including statements concerning our outlook for the second quarter of 2023 management's expectations for future financial.
Operational performance, our business and growth strategies, our expectations for our car off our business and acquisition synergies the value proposition of our current product offerings and other product opportunities the impact of the semiconductor chip shortage in other macro level industry issues and other statements regarding our plans prospects in expectation.
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 and uncertainties is available in our earnings press release, just your everyday after the market closed today and in our most recent report on Form 10-K, and 10-Q, which along with our other S. A C. Finally can be found on the SEC's website, and and the Investor Relations section of our website, we undertake no obligation to update <unk>.
<unk> forward looking statements, except as required by law.
Further during the course of our call today, we will refer to certain non-GAAP financial measures.
Reconciliation of gap to comparable non-GAAP measures is included in our press release issue today as well as in or updated investor presentation, which can also be found on the investor Relations section of our website.
With that I will now turn it over to Jason. Thank you <unk> and thanks to everyone joining us today.
Every year I begin with a theme that aligns to our strategic objectives for 2023 is no exception.
2021, we focused on the transformation of our business in 2022, we activated substantial new products across the platform.
And now in 2023 are Northstar monetization through transaction enablement.
During our evolution from our listings business to a transaction enabled platform. We remained acutely focused on providing our dealer partners with the highest R. O Y a comprehensive product suite and continued innovation to meet the revolving needs.
As we build on the previous years themes by maturing our end to end offerings. The better serves our largest consumer audience dealer partners. We are now beginning to concentrate our efforts on monetizable transaction activities for both dealers and consumers across the platform.
Transaction enablement allows dealers to further monetize a retail sale.
Instant Max cash offer allows consumers to monetize the transaction through the direct sale of their own vehicle and a cargo cruise we were able to monetize high value digital deal leaves.
Innovation in our growth factors of digital wholesale and digital retail and more robust transaction enablement. We aim to provide increased value to our customers, while striving to achieve a balance between capturing that value and driving greater adoption.
We've made tremendous progress in becoming the number one digital destination for consumers and dealers to constantly inconveniently buy and sell any vehicle anywhere with the best selection and price.
Although the macro environment continues to create volatility in inventory pricing trends are foundational listings business continues to exhibit resiliency strong profitability.
While we recently faced operational challenges with her car off for business progress this quarter demonstrates our agility and responding promptly and effectively to navigate the year ahead.
We are proud that are strong execution allowed us to exceed our forecasted guidance for the quarter, while maintaining a balance among pursuing innovation fueling growth and ensuring scalable profitability.
We entered the quarter with expectations that OEM advertising and consumer financing with service headwinds and offset our subscription revenue growth.
That was certainly true during the first quarter, we also witnessed reduce dealer inventory levels due to economic projections, indicating a potential deceleration or recession.
These factors resulted in a further tightening of inventory and marketing dollars as dealers look to preserve healthy profit margins.
Despite these compounding factors I'm pleased to share we exceeded our forecasted marketplace revenue for the quarter.
One key driver of our marketplace results. This quarter was the scaling and Overperformance of monthly recurring revenue, resulting from annual business reviews or a D r's.
Through the AVR process, we're renewing a cohort of meaningfully underpriced dealers each quarter and we have made significant improvements to a renewal process by streamlining our packaging and enhancing the value proposition for our dealers through the addition of new features and benefits to our listings tears the best support our dealers needs you.
Even during a period of historically low inventory or improved AVR process demonstrated the strength of our platform to effectively scale and recognize more appropriate value delivered while simultaneously, enabling us to be more consultative and introducing cross product adoption opportunities that best support our customers business needs.
In fact in Q1.
Our process was two and a half times more successfully converting area boost dealers into a new offering known as digital deal with geographic expansion.
I'll provide further details about this new operating later in my remarks.
While a P r's yielded positive revenue expansion as expected the elevated in voluntary dealer attrition as we held firmer on what we're confident is highly attractive pricing and dealer or a lot.
We ended the quarter with 24394 pain dealers in the U S up 175 dealers from the year ago period, but down 173 dealers from the prior quarter.
Excluding AVR related churn, we had positive dealer ads quarter over quarter.
Although we observed healthy dealer acquisitions earlier in the quarter, we noticed a rise in voluntary cancellations across all dealer types. We believe primarily due to the aforementioned lower inventory levels and margin preservation during a period of economic uncertainty.
Despite the quarter over quarter decline, we're pleased with the results of the AVR process and remain confident that we are delivering to our dealers are very compelling value proposition.
In Q1 U S quarterly average revenue per subscribing dealer or Carson was $5943 growing 4% year over year.
Performance was primarily due to revenue expansion through listings upgrades and product adoption.
Signing on new dealers with higher average monthly recurring revenue and unit price increases.
By consistently investing in and enhancing our product offerings, we are capable of innovating quicker and more frequently than any other marketplace, which in turn brings more value to both our dealer partners and largest consumer audience, while driving longterm car said gross.
Is it part of our continued product development, we launched digital deal in May of 2022.
A critical step in our ability to create an end to end platform.
Digital deal provides consumers with the flexibility to customize our car shopping experience by allowing them to do more on line.
Shoppers can receive trade in estimates prequalification or heartfelt financing.
Purchase dealer or vehicle specific finance and insurance products and even place a deposit on their preferred vehicle.
This offering provides our customers with the flexibility to transact in a way that best suits their needs.
At the end of the first quarter. This new capability has been adopted by 2251 dealers, adding 663 dealers quarter over quarter.
Although there were a price increases at the beginning of the year, we were able to boost our sales velocity, which also included the addition, large national players with 100 to 200 rooftops.
Digital deal continues to gain dealer sure is it attracts high value leaves from highly engage consumers who are ready to purchase saving dealers time and money.
Digital deal leaves are over two to three times more likely to close and standard Carter's email leaves.
Moreover, consumers, who go farther down the final and complete a heartfelt are five times more likely to close.
Our most successful dealers utilizing digital deal are now seeing an average of 25% of their car greuze online lead come from digital deal for dealers. This adds tremendous value and Rois 25 per cent of their shoppers are high value leads making the dealership more efficient and closing a deal and moving on to their next sale fat.
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A representative at del Ford in Oxford, Toyota said digital deal leaves that have prequalified financing are almost guaranteed to convert.
There are another indicator of their high quality and are easier to reach with a guaranteed phone number.
Our digital retail capabilities do not stop there.
Coupled with area boost dealers now have the ability to sell vehicles online to consumers outside of their immediate geographic reach.
We've seen healthy cross product digital retail adoption with 57% of digital deal users also enrolling in area booze.
Area of boost helps dealers expand their reach by displaying their deliverable listings to shoppers outside the local market.
Capitalizing on the synergies between these two offerings, we recently launched a newly bundled offering called digital deal with geographic expansion.
It allows dealers to leverage a high quality lead flow, while attracting a wider audience outside the physical reach of a dealership.
This new offering has increased clothes rates by two times when compared to standard area boost Lee.
Because of the exponentially higher value of these two products provide in tandem instead of separately.
[noise] boost will now be an exclusive feature through digital deal with geographic expansion.
Together, they provide a dealer with both more volume and higher lead quality.
Are early stage digital retail capabilities provide flexibility inconvenience for both our dealers and consumer customers.
We're leveling the playing field for our dealer partners, who are unable to provide these solutions on their own and or want to leverage our largest consumer audience to sell additional inventory through the Carter is platform to drive greater profitability.
As we progress towards our ultimate goal of creating an end to end solution. The power of this vision becomes even more clear giving.
Giving art dealer partners, a cohesive experience that provides the value whether it is through an expanded customer base data driven decision, making into our high value lead generation.
And at the same time these capabilities provide us an opportunity to not only create a stick your platform, but the ability to capture greater market share and dealer wallet sure.
And our digital wholesale segment, we entered Q1 with plans to intentionally reduced volume sequentially, while we optimize several operational aspects of the business to better handle the market price volatility.
Over the last five months, we are aggressively address these issues to build a stronger more stable and more predictable business that can thrive in all market conditions.
In doing so we remain committed to building a sustainable business that produces a path to profitability.
As we developed our strategy to improve car offers operations. It became apparent that a significant number of our challenges were rooted in our need to enhance an upgrade our inspection capabilities and our corresponding policies and procedures.
Increased arbitrations re matches and transportation inefficiencies were largely the result of our inspection quality.
For this reason, we intensified our efforts to bolster inspections processes and policies to improve our quality and reduce nonrevenue generating costs.
These efforts have resulted in a 70% reduction in arbitration cases from their peak in the fourth quarter.
During the same period, we also witnessed a 55 per cent decrease in rematch rates.
A rematch as the active moving in arbitrators vehicle to the next highest bidder on the platform potentially causing higher transportation losses and risk of further delayed arbitration from unsatisfactory vehicle quality.
By prioritizing positive unit economic transactions and minimizing problematic ones. We also achieved positive transportation margins in the first quarter as well improving approximately 3500 basis points quarter over quarter.
As a reminder, transportation margin is largely pass through these.
He's improved margins stemmed from a combination of a favorable price environment for dealers as well as a drop in arbitrations unwind and rematch rates whichever reduce the occurrence of dead legs instances, where we incur the cost of transportation, but received no revenue.
Our efforts resulted in in approximately 55% reduction quarter over quarter of dead Lakes.
K P is continued a trend in the right direction, we're creating a sustainable path to profitability.
This quarter, we meaningfully exceeded our forecasted revenue and EBITDA plans for our digital wholesale cycling.
We generated $64.8 million in revenue and had an EBITDA loss of $1.7 million.
Outperformance this quarter was driven by operational improvements and higher than forecast the dealer to dealer transaction volume is buying conditions improved in February and March.
While tight dealer inventory and declining wholesale and retail prices to begin the year helped us keep volumes low we did see greater dealer confidence in the back half of the quarter seasonally strong consumer demand and rising wholesale prices following a seven month decline.
These factors along with modest reengagement from some rental fleet customers, albeit a controlled volumes cause dealer to dealer transactions to rise quarter over quarter, while we deliberately reduced instant Max cash offer or instant Max for short transactions by over 50% from the prior quarter.
We ended the quarter with 17505 transactions down approximately five per cent quarter over quarter.
The overall reduction in volumes resulted in gross merchandise sales or G. M S a $445 million.
Although we are pleased with our results we are aware that external factors and played a meaningful role.
That is why our decision making continues to prioritize establishing a profitable platform that can thrive in any environment.
We are concentrating on operational improvements over volume growth to ensure our platform is dependable for dealers to conduct transactions with confidence.
Doing so earlier in Q1, we launched a new option for dealers called 24 hour approval.
This capability allows dealers to review vehicle details photos and vehicle history before making a purchasing decision which provides dealers additional comfort in a volatile price environment.
And the first quarter 24 hour approval facilitated a significant number of transactions, while simultaneously improving dealer confidence and satisfaction.
Moreover, as we continue to improve our operations, we remain committed to ensuring that all transactions are executed with the highest level of quality.
This focus on quality and improvement is showing signs of positive traction with our customers as we have seen dealers reengage our platform.
By implementing operational enhancements and taking a meticulous approach, we're establishing a stronger foundation for a car off for business and they trusted platform for dealers buying and selling means.
Across the business. We are very pleased with our first quarter results. We made significant strides on the path towards Realising, our vision of creating a profitable end to end transaction enabled platform that provides consumers with the trust transparency and choice they need to confident Lee shop, finance buy and sell a vehicle and a.
Powered dealers with innovative tools to source market and sell vehicles.
So unique combination of our resilient foundational listings business differentiated digital wholesale business and innovative digital retail offerings create a unique value proposition as an automotive ecosystem that serves our customers lifecycle needs.
The year began on a positive note or achievement this quarter showcase our resilience in overcoming both internal and external challenges to create a more robust and profitable foundation for the future.
We were excited for the opportunities that lie ahead in 2023, and we were focused on creating unique value proposition for a consumer and dealer customers and delivering longterm value for our shareholders.
Now, let me walk through our financial results.
I'll provide a detailed overview of our first quarter performance followed by our guidance for the second quarter.
Total first quarter revenue was $232 million $17 million above the high end of our most recent guidance range.
Total revenue was down 46% from the year ago period.
Marketplace revenue was 167.1 million for the first quarter of 2% from $163.3 million in the prior year and up 1% from $166.2 million in the prior quarter.
The increase in marketplace revenue compared to the prior year was primarily due to signing on new dealers with higher average monthly recurring revenue and expansion through product upgrades and add ons for existing dealers on our high margin listings business.
As anticipated growth in subscription revenue was largely offset by a decline in advertising and consumer finance revenues.
Wholesale revenue was 25.2 million for the first quarter down 72% from $91 million in the prior year, but up 6% from $23.7 million in the prior quarter.
The year over year decline in wholesale revenue is due to the self imposed slowdown to ensure that the right processes and policies are in place to enable scalable and predictable growth.
Quarter over quarter. However, we saw a slight increase in dealer to dealer transactions, Judith seasonally strong consumer demand rising wholesale prices and modest rental fleet participation.
Lastly product revenue was 39.7 million for the first quarter $8.7 million above the high end of our most recent guidance range.
Product revenue was down 78% from $176.3 million in the prior year and down 59% from $96 $8 million in the prior quarter.
The year over year and quarter over quarter declines are due to our purpose will slow down and transaction volumes this quarter for instant Max cash offer with a greater emphasis on operational rigor.
Through higher quality inspections, we saw meaningful reduction in arbitration rates and consequently arbitration revenue during the first quarter as well.
Together or wholesale and product revenue line items make up our car offer business otherwise known as the digital wholesale segment.
Total revenue for digital wholesale in the first quarter was $64.8 million down 76 per cent from the prior year and down 46% in the prior quarter.
I will now discuss our expenses and profitability on a non-GAAP basis, which backed out our stock based compensation expense amortization of acquired intangible assets and net income or loss attributable to redeemable noncontrolling interest.
First quarter non-GAAP gross margin was 69% compared to 44% in the year ago quarter.
The change in non-GAAP gross margin year over year is primarily due to the shifting revenue mix to our high margin marketplace business.
Total first quarter non-GAAP operating expenses were $123.8 million down 1% year over year.
non-GAAP sales and marketing expense was down 13% year over year to $72.5 million.
The decrease in marketing expense reflects our decision to limit marketing investment for instant Max cash offer.
Partly offset by a slight increase in brand spend related to the launch of our new brand campaign at the beginning of the year.
Our first quarter non-GAAP product technology, and development expenses grew twenty-five percent versus the year ago period to $30.3 million.
Similar to previous quarters increases primarily due to an increase in employee related costs. As a result of a 6% increase in headcount from the year ago period, coupled with the commencement of our lease in February for our new corporate headquarters in Boston.
We expect product technology and development expenses to remain at these levels as we continued to develop and grow our expanded digital retail product offerings to build our end to end transaction enabled platform.
We generated non-GAAP operating income of 36.6 million in the first quarter, reflecting operating margin of 16%.
Consolidated adjusted EBITDA was $40.8 million in the first quarter $13.8 million above the high end of our most recent guidance range.
This was due to continued strong marketplace subscription performance prudent and effective expense management.
Favorable wholesale market dynamics and improved car upper operations.
non-GAAP diluted earnings per share attributable to common shareholders was 26 cents for the first quarter seven cents above the high end of our most recent guidance range.
On a gap basis, we generated first quarter gross margin of 67 per cent compared to 42% a year ago period.
The expansion in gross margin versus the prior year period is due to the shift in revenue mixed at a higher margin marketplace business.
And the first quarter, we incurred total operating expenses of $140.9 million down 9% year over year.
As I mentioned earlier the decrease in operating expenses reflects the strategic reduction in sales and marketing expense. In addition to a 46% year over year decrease in stock based compensation expense due to the revaluation of certain liability based stock awards.
First quarter gap operating income decreased 47% year over year to $14.1 million for.
First quarter gap consolidated net income was $11.9 million.
Net income attributable to Carter's totaled $16.1 million and first quarter GAAP net loss attributable to redeemable noncontrolling interests was negative $4.3 million.
We ended the first quarter with $456.7 million in cash and cash equivalents, a decrease of $12.8 million from the end of the fourth quarter.
We generated $66.3 million in cash from operations in the first quarter and 60.5 million of non-GAAP free cash flow.
Which includes capitalized website development and capital expenditure costs of 5.9 million.
Cash provided by operations in the first quarter is primarily driven by our results and at 38 million dollar cash increase and are working capital accounts.
During the first quarter, we repurchased 4 million shares for an aggregate purchase price of $65.2 million.
As of March 31st we had approximately 166.2 million available for additional share repurchases.
I'll conclude with your outlook for the second quarter.
We expect our second quarter revenue to be in the range of $220 million to $240 million. We once again expect strong marketplace subscription revenue to be offset by headwinds from consumer financing and OEM advertisement.
And our digital wholesale segment, we continue to Prioritise operational excellence over volumes and.
Q too we are forecasting a softening in the wholesale market along with a continued decline in arbitration revenue driven by improved operational performance.
As a result, we expect second quarter revenue for our product line item to be in the range of $26 million to $36 million.
We expect our second quarter non-cash consolidated adjusted EBITDA to be in the range of $34 million to $42 million and non-GAAP earnings per share in the range of 22 cents to 25 cents.
As we continue to make operational improvements that are sustainable for a car for business, we expect to reach EBITDA break even to profitable for our digital wholesale segment during the second quarter.
Moreover, as it relates to our operating expenses, we expect marketplace EBITDA to be lower quarter over quarter. As we will have a full quarter of our least expensive and increased marketing spend related to our brand campaign.
However, as we've previously mentioned we remain prudent in our marketing spend for the full year and expect it to be modestly below 2022 spent due to a reduction in instant Max cash offer marketing.
And the first quarter, we significantly exceeded our expectations.
We're proud of our results in our team's ability to react quickly to overcome challenges.
Alright, <unk> and advancements would not have been feasible if it weren't for our incredible employees globally, whose unwavering commitment and hard work had been instrumental in driving our progress in achieving our results.
With that I'll open up the call for Q&A.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation code indicate your line is in the question queue you.
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Thank you I first question comes from Marvin Fong, we'd be T. I D. Please proceed with your question.
Oh good evening, thanks for taking my questions.
I'd just like to.
On car offer you know recognize a lot of progress is made there and.
I did hear about your commentary for the second quarter, but I guess you know.
And just sort of b and market conditions I mean, how are you feeling.
In general about the progress you've made there and about your you know the timing and willingness you have to you know.
Really start.
Leaning back into that business and and putting some volume back through you know the channel, particularly on the instant backside.
Marvin I'll take it at Sam Zales Nice to talk to you. Thanks for the question I I think I had said the first as a straightforward answer we couldn't be more pleased with the car off our business and its turnaround over the last couple of quarters and I think we had said to you that that.
We want to run a profitable business, that's predictable and drives a happy path, a great customer experience and more profitable transactions than less and you can see the progress we've made it's been remarkable.
I'll highlight a couple of reasons why that's been such a such a success and I want to thank the car offered team in Dallas and really are are sets of many business unit teams and <unk> have traveled to Dallas to do a lot of work over the last couple of quarters to focus on people processes systems and products to really call what I would say.
<unk> 2.0 for the business.
The it started with data and getting our access to all of the information on the parts of our transaction process that we're working and need to be improved and needed to be improved and those those results and the data that we access allowed us to really attack every part of the transaction flow to improve our performance.
It started with inspections.
And as we talked about creating mechanical electrical frame damage every kind of system check that we needed to we improved our opportunity to understand which transactions or which vehicles should fail and we failed many more of those transactions and it avoided.
Duration and turned around her entire arbitration process to create confidence in the buyers and sellers using the platform arbitration rates are down dramatically as you heard in the in the comments 70 per cent reduction or arbitration losses, obviously go down because we're working with partners and removed a lot of that inventory that was sitting in there.
Appreciating and that's been the success of a very low arbitration right going forward a rematch rate has been phenomenally better that rematch right. As you know is finding the next dealer in the platform to use to try to create a transaction we've reduced that process because of the inspection quality that we've done upfront with her.
Our partners.
And finally, turning transportation, which was a negative gross margin business into a positive one has been a phenomenal turnaround all of that driving the path to profitability for this business as I mentioned, a couple of quarters ago will take us a few quarters and we're not done with all of that work. It's a remarkable turnaround it's a.
<unk> confidence building for our customers on both sides of the buy and sell transaction, but we have more work to do and so we're not going to take the reins off and run a scale volume through that to see if it pressure tests are our profitability path. We feel very strongly we can run a profitable business.
At lower volumes and we're gonna do that our priority is to run a profitable business. There and then scale up the business with much more volume and so I think you'll see us continue to push forward on volumes, but we're gonna continue on this path to running a profitable business and very proud of the results. We have I hope that answered your question.
It did and getting kudos on all the progress. These guys have made if I could do a follow up question. You know you've mentioned that the rental agencies I've come back I think you're you're controlling their participation and actually I think it's interesting to hear they came back since I've been hearing that now the orients I've been getting sleep.
A good allocation in terms of production volume. So just curious how does your thinking of wall done on the rental agencies b how much about <unk>.
Part of the mixed they're gonna be sort of a ongoing basis and as things stand now you know are they being more rational in terms of bidding than they were this time last year. You know just kind of give us some additional color there would be would be terrific. Thank you.
Yep. Thanks, Marvin it's Sam again, our our processes is the same in being this predictable and profitable business that we want to create a car offer which is to be thoughtful about any one partner taking on more of the market place than any other I think when you have an instant.
Grade platform that works as well as it does with our technology, but you add to it the incredible improvement and inspections and the quality of the vehicles going through the the platform. The players like the rental agencies will say I am getting more distribution from the <unk>, but if I got to fulfill volume as the.
Market continues to grow and we have an opportunity in the summertime to fill up my rental fleets I'm gonna do that with the best partners out there. So we control their activity coming in they were watching their impact on the other players in the marketplace and use our overall <unk>.
Success of having more and more buyers and sellers succeeding on the platform because of our operational work, we're gonna bring them in and bring them in an attempt level, where we control the volume and make sure that we are still a lap marketplace, that's creating that confidence build in all of our customers customers as we go forward. So we'll bring them in.
But watch and control how much we let them participate and we hope that we're fulfilling that need as a secondary source beyond the oem's in the new car distributions that they get in there, saying you've got quality vehicles that are you know late model vehicles that I want to put on my rental fleets then we're gonna service those but.
Do it in a controlled way with this tremendous operational improvement that we've created.
Great. Thank you so much I appreciate it.
Thank you. Our next question comes from John <unk>.
<unk>. Please proceed with your question.
Hey, Thanks for taking my questions. What does it start with you know pricing. It's been it's been up nicely. Although U S. Paying dealers has declined marginally in the past two quarters, you know how much of that would you attribute to seasonality in the challenging macro environment burst your efforts to take some.
Pricing.
And the second question is it looks like in the second quarter.
Your outlook implies sort of <unk>.
Moderately lower revenue in product and maybe you can just add a little color around that thanks.
Sure. Thanks for the question Janice J syndrome isn't here. So we as you've heard we have been focused on capturing the value that we're confident we deliver to dealers we consistently here through <unk>.
Survey and research work as well as through third parties then we.
In most cases are delivering not only the highest volume, but also the best ROI as well and so we have focused their as well as on package levels and cross selling other products are not just on pricing, but pricing is one.
I think we may have said in the prepared remarks that.
In our annual business reviews, we've held firmer on price and so by doing so that certainly instigated more churn than otherwise would have and if you were to strip out what we call the <unk>.
<unk>, which is in voluntary return than we would have actually seen dealer and and so you know we're not quantifying it to an exact number but I would say that we are making a conscious decision to stand firm or on capturing the value and if that means near term churn then we're comfortable.
With that as we focus on M. R. R really rather than dealer count per se and we also don't believe that over time and we need to you know <unk> are in the business back, but then over time dealers will recognize N R. A lion and returned to us.
Mm dealers admittedly are very focused on their own margins they <unk> they.
Enjoyed a period of I think probably record setting dealer net income margins and operating margins and so as they come off of that high that they've experienced in in Covid and in the back half of Covid here. We certainly are seeing some dealers in some small segments.
Who are focused on cutting costs in order to try to maintain that margin.
<unk>.
To be determined if that is sustainable strategy or not but then did contribute a little bit in Q1.
And I apologize could you restate the second question.
Yeah, just a second one just a quick one about products Avenue and your outlook looks like you're looking for a sequential moderation in the second quarter just.
So he could add a little bit of color around like why not why that's going to happen.
Sure. We we are forecasting that and it's partly driven by our marketing spend are expected marketing spend levels. It's also influenced by our forecast on market conditions.
And consumer sentiment too or appetite to sell.
And then you know also within the corner there are dynamics that occur then.
You know.
Are not you know it's not like.
For each month of Q1 and flat for each month of Q2. So there's just some small gyrations in there as well.
You know at least some of them much like savings as much like Sam's comments were just focused on making sure that we have a consistent repeatable way to generate profitable transactions and not get.
Not get surprised with too many negative transactions server bad transactions.
We're proud of the gross margin that we experienced in Q1 <unk>.
Thank you. Our next question comes from Tom Light with D. A Davidson. Please proceed with your question.
Oh, great maybe just following up on on the last question there, Jason I guess reading through the tea leaves on on the product segment got it sounds like you guys are maybe anticipating that that used vehicle pricing or wholesale pricing kind of declines here or maybe.
It becomes more volatile can you just talk a little bit about how you know that the recent volatility that we've seen there is impacting dealer.
Tighter or how you expect it to do in fact dealer appetite to to to do transactions Ah in the second quarter and then just a follow up that sounds like encouraging news on how the a P r's or going could.
Could you maybe just parse out a little bit like you know when you take these cohorts that we're sort of undermonetized, a new kind of expand revenue for them is it is it mostly from just hire unit pricing for for listings or like maybe just help us understand like the you know how much of it is higher unit for listings versus crossover up so.
Thanks.
Sure. Thanks time I'll take the first one and then may be Sam can can take the AVR. The question on Avr's, so dealer appetite for dealer appetite.
Changes from unit pricing changes in wholesale.
Has typically been that we've seen if prices are dropping there's less dealer appetite to transact and while you know for every obviously buyer for every seller there's a buyer.
We have seen volumes in the industry, but also an apartment for platform tracks fairly closely with that and you know I think that logic is if a dealer sees pricing has dropped in the last week or two near expectation largely has been prices may.
Continued to drop for the subsequent weak and so they are less inclined to take on an asset that may lose value before they've even preparing it for sale.
I think it's a little different for consumers and the instant Max model, where there consumers are less tuned into one car prices are done in the last week or two and they're more tuned into just the absolute dollar value their offered and if dollar values are higher.
When they you know versus when they may be last checked it and they're gonna be more inclined to transact. So there is less about the trend and more about the absolute.
Price levels at that time relative to where they may have been three months ago, when they happen to check it.
So now that doesn't mean that transaction stop it just means that dealers take a different lens to it and a lot of what we've done in the last.
Three months or six months of car offer is build the business.
To be healthy and profitable when prices over that time had really been consistently declining.
With an.
Except in period in Q1 for a little bit versus what we had been building for them for the prior call at two years when prices and pretty much increase through that hold time.
Nathan I'll jump in Tom question was on the a P. R's annual business review reviews and the success of that were really really proud of the results that are going on in that front, you'll recall, having known us for years that we moved away for the last couple of years from that old renewal process.
First of all the timing wasn't great with market conditions coming out of Covid, but second of all that we'd wanted to become much more consultative in this process to actually provide dealers with insights about their merchandising and their success. We we think we bring the largest we know we bring the largest audience than we think we bring the most down final shoppers we bring.
The highest return on investment for their marketing dollars. So we'd been much more consultative with them in providing these insights to help them get the most out of their package and so what we've done is is seen you asked about the car said growth and the pricing grow that comes in two <unk> two forms the first is getting D.
Dollars to a higher paying package, a premium package or subscribing to a new product. The success of digital deal has been phenomenal our fastest growing product out of the gates for the company and the reason we're doing that as we're bringing tremendous R. O Y those clothes rates of two to five times the clothes rates of our regular.
Email leads it tells you that you're bringing a product to market that we can continue to increase price on but package. It up for a dealer to say Oh I've got that plus area boost I can broaden my share of market that I'm selling to outside of my local market and get those great digital deal and digitally initiated consumers.
To close with me I'm going to spend more on that product, we're selling the premium packages that we have or in some cases, we mentioned we're going after underprice Steelers, we know they're far below where they should be paying in the wrong. They're deriving is not a fair balance with our R Y from the program. So we're gonna.
<unk> increase unit price on some of those dealers, who can say I'm staying at the same package, but my price goes up that's good enough for us as well. So we're very very pleased with where we are in the a P. R's will continue to grow those as we go forward.
That's great Super quick follow up on the voluntary churn you highlighted in my in my right to presume that that's mostly like smaller independents and so it may be it impacts dealer count, but but less of an impact on M. R.
Voluntary churn, we I think we mentioned and was sort of across the board I think following where the market is right now uhm inventory is down margin preservation coming out of the really positive results. Jason just mentioned for the dealer community in 2022, so we.
Saw that across the board, where we saw the change though in our net dealer ads was pushing the a P r's and saying we're knock on wood, except that a dealer who's underpriced not paying a fair and reasonable price for the program. So involuntary is where we saw that impact our our net dealer ads the voluntary hit across the board as as it always.
Has in our business at a very low level, but one across the different segments.
Thank you.
Thank you. Our next question comes from Rod Josie The city. Please proceed with your question.
Great. Thanks for taking the call Jason I wanted us taking the question I wanted to ask you a bit more about Carter was brand AD campaign now that you're seeing you know demand and and newer tools drive greater overall results and just awareness. We're seeing you know the fact, the traffic went up touch us more about the brand can paint campaign and the efficacy of it as we see top line growing thank you.
Sure. Thanks for the question run so as a reminder for folks that really kicked off at the beginning of this corner. So we're at.
At the beginning of Q1, rather so we're only a few months in it is it's it's goal is we've shared is <unk>.
One to really how the fact that we have so much more capability and options on our site for consumers to shop financed by himself and so we wanted to share that we also are expecting to grow our unaided brand awareness and broader brand awareness and just make more of an emotional.
Connection rather than what historically had been oriented toward a very pragmatic sort of functional approach to branding and we're doing all of that in an environment, where some of the large spenders that existed in our category a year ago or two years ago are spending much less.
Yes, so we see an opportunity to capture much more sure of voice, it's still honestly it to be honest early [noise] excuse me early were a.
A few months in we've certainly started to do research and read what's happening and we're excited by it.
It's still early to see the needle moving.
Ordinarily on say unaided awareness or even aided awareness, but we absolutely believe that it is laying the groundwork to establish more trust, which is really important as we as consumers to do a lot more on our website.
You know historically, we ask them to do and enter email information or a phone number in and that was the extent of it and now we're asking them to consider putting down a deposit we're getting harmful financing with us and so it's an imperative foundation to our strategy.
And we are you know I would say we're excited by the early research, but I would also say, it's really pretty early still in terms of you know spend expectations for the year I mean, we've given a lot of guidance around that broadly speaking.
But it's also you know advertising in brand in particular was one of those things where if if it's working right and if it's you know producing the results that remains one of the more fungible and variable elements of anybody's piano and so if things are going well. We you know we may.
Decided to get more aggressive and if not we may decide to get more conservative. So we tried to give guidance, but we also try to remain nimble as a company.
Understood. Thank you Jason.
Thank you as a reminder, press star one to ask a question at this time.
There are no further questions at this time I would like to turn the floor back of Richard C O.
Oh I'm sorry.
There's a question.
Next question is from Nick Jones J P.
J M. P Securities. Please proceed with your question.
Great. Thanks for for a minute here I guess, just taking a big step back what kind of wholesale prices are increasing your the dead I think.
More than people expected, how is kind of industry normalization changing in your minds and how how Mike out of the rest of your progress and do we ever kind of get back to Ah Ah pre pandemic normal. Thanks.
Sure I can I can take that Nick thanks for the question.
When talking about wholesale pricing, there's a relative.
There's a conversation around relative pricing and then there's a conversation around sort of.
Longer term sort of absolute pricing from a longer term absolute pricing perspective, we're still well above where we were pre COVID-19 and so if you know if we're in 2025, 30% above where we were pre Covid then I think the question remains if.
There is a reversion to the pre Covid mean, and I think most people would say well simply due to inflation or probably not going back to pre COVID-19, because a chimp issues were not going back to pre COVID-19.
And so then the question becomes okay.
Do we have five points 10 points more to get to a new post COVID-19 level normalized level and I think that's the you know that's that's the debate. That's happening now is is this a new water level or or does it still have a little bit more to drop but I don't think anybody's thinking it drops all the way back to.
Parody with pre Covid.
When you look at the relative lens and on the relative lens, which is when I referenced earlier is what dealers can be very sensitive to if it's dropping for two weeks in a row they may be more reluctant to.
You know keep activity levels high in wholesale.
And there we saw we had seen a a pretty steady decline in the second half of last year in in Q1, we started to see some increasing of unit pricing and then you also heard us talk about forecasting some softness and we've seen that.
And a number of other companies reports as well and so expectation for wholesale and retail is to.
Certainly for wholesales.
You know have peaked in Q2 or to peek in queue to and then you know, perhaps a flattening or a steady decline <unk>.
Right now the market's coming I think most third party metrics would say that the prices are coming down and sales activity is a little bit lower with lower inventory and declining prices.
But you also then need to start to go from sort of microeconomics macro and say, okay, but at the same time, we m's are pumping a lot more new cars into the market and when that starts to happen. It's only a matter of time, because before those become wholesale trade ins as well so.
There's no question, it's a unit pricing and inventory levels in wholesale had been more volatile in the past two years than probably ever but it does seem as though there's.
More stabilization now than there was last year, but there might still be some price declines in aggregate to occur yet.
Right. Thank you.
You bet.
There are no further questions at this time I would like to turn the floor back over to C. L. T Center to reason for closing comments.
I would just like to think thank everyone on the call today. Thank you for your thoughtful questions in particular want to thank all of our employees. We just finished talking about volatility and and there's certainly a lot of activity around our industry and in many industries.
<unk>, but we're really excited about our results from Q1 as you've heard in our remarks today and we're excited about all the activity that we have going on in our business in May we will be at the Jeffries and J P. Morgan conferences, and so we look forward to seeing investors that those events. Thank you very much.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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