Cars.com Inc. Q1 2023 Earnings Call
Live webcast and the accompanying slides can be found at investor that cars Dot com.
An archive of the webcast will be available at cars Investor Relations website.
I'd now like to turn the call over to Robyn more Randolph director of Investor Relations.
Good morning, everyone and thank you for joining us.
It's my pleasure to welcome you to the first quarter 2023 conference call.
With me. This morning are Alex Vetter, CEO and Sonya Jane CFO .
Alex will start by discussing the business highlights from our first quarter, then Sonya will discuss our financial results in greater detail along with our 2023 outlook, we'll finish the call with Q&A.
Before I turn the call over to Alex I'd like to draw your attention to our forward looking statements and the description and definition of non-GAAP financial measures, which can be found in our presentation.
We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA adjusted EBITDA margin adjusted operating expenses and free cash flow.
Reconciliations 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 first quarter 2023 earnings call.
We continue to deliver on our key performance indicators revenue grew 6% year over year to $167 million and adjusted EBITDA totaled $44 million.
Representing a 27% margin all comfortably within our guidance range.
We achieved these solid results through continued marketplace strength website growth. The addition of accu trade immediate product upsells growing AARP D, 4% year over year.
Although the industry remains dynamic with fluctuating vehicle prices and low inventory levels, our customers consistently rely on our marketplace for its ability to attract a significant audience of shoppers and remain dependent on our digital solutions, regardless of inventory level.
We remain an industry enabler and do not take possession of inventory empowering our customers with digital solutions, allowing them to own the last mile and retail.
Our audience engagement and traffic trends also remained strong for the quarter traffic increased 11% and monthly unique visitors were up 7% year over year.
Strength of our brand strong editorial content and best in class App resulted in a 7% year over year growth in organic traffic, enabling us to preserve marketing dollars as we continue to focus on product innovation.
Building upon our strong value proposition during the first quarter, we introduced new marketplace subscription packages that seamlessly combined new tools like search expansion that extends the customer sales radius as well as credit IQ and dealer Rater features these.
These packages enable customers to better leverage our platform capabilities.
We also aligned our subscription pricing with the enhanced value offered as part of these new packages overall reception has been positive with strong demand from dealers opting for our premium tier.
As discussed in prior quarters digital dealers began scaling back their operations last year. Despite this we still ended the quarter with 19186 dealer customers 320, lower compared to the prior quarter and 314 fewer than the previous year.
Excluding the loss of digital dealers customers would have been up on a year over year basis.
In addition to our marketplaces strength dealers continue to adopt our website solutions as website customers grew to more than 6100 at quarter end, a 630 customer increase year over year.
Accu trade appraisal and vehicle acquisition solution is also seeing strong engagement from dealers and consumers.
<unk> Love Accu trade, given our proprietary Vin specific valuations that helped pinpoint accurate trade in values using real time supply and demand data.
Consumers also appreciate more accurate vehicle values, which reduces the need for negotiation and enables shoppers and sellers to transact with greater trust and transparency.
Appraisals increased by 70% sequentially and we now have more than 600 accu trade connected customers on our platform.
In closing we continued to deliver strong results with operating momentum cars dot com as a trusted brand for consumers, who overwhelmingly use our platform and our subscription business, coupled with upsell opportunities to deliver strong stable revenue growth.
These solid fundamentals position us well to deliver on our continued growth outlook for the balance of the year.
<unk>.
Thank you Alex our year is off to a strong start revenue for the first quarter totaled $167 million.
Up 6% year over year dealer revenue grew 7% or $9 million year over year, driven by web site media sales and <unk>. We also saw strength in revenue from OEM customers. This quarter. However, national revenue, which includes our insurance customers was down as a result dealer revenue growth.
Partially offset by an 11% decrease in our OEM and national revenue line.
Moving to expenses, our operating expenses for the first quarter were $155 million.
Compared to $147 million in the prior year on an adjusted basis operating expenses increased $5 million or 4% compared to the prior year. The increase is due in part to higher product and technology expenses related to the acquisition integration and launch of Accu trade.
Also we continue to invest in our sales and support staff to increase new product sales and fulfillment. This is reflected in our cost of revenue and operations and marketing and sales line.
While marketing and sales was up year over year, you spent less than originally planned on marketing this quarter due to the strong growth in our audience metrics traffic was up 11% year over year, driven by momentum in organic traffic, which was up 7% year over year, we continually evaluate our marketing spend and identify opportunities for efficiencies.
<unk> and lean into the channels that provide the highest return we capitalized on increased consumer demand this quarter with shifts in our paid user acquisition strategy and enhancements to our App and website experiences.
Net income for the quarter totaled $11 million or.
Or <unk> 17 per diluted share.
This quarter's results reflect the $8 million change in the fair value of earn outs related to our recent acquisitions.
Adjusted EBITDA was $44 million.
Up 6% compared to the prior year and adjusted EBITDA margin was 26, 5% of revenue margin for the quarter reflects revenue growth, partially offset by investments to support our growth initiatives.
As Alex mentioned, we recently started to rollout new marketplace packages.
These new packages simplify our go to market efforts and allow us to deliver more of our platform value to our customers.
They also afford us opportunity to better align our pricing and value delivery.
Early results are showing increased adoption of our higher tiered packages somewhat tempered by unexpected but modest increase in cancels.
We expect these packages to drive incremental revenue and adjusted EBITDA, which will accumulate as the year progresses.
Now turning to our key metrics that are the foundation for our solid quarterly results as discussed dealer customers would have been up year over year, if not for the additional digital dealer Pullbacks. This was not a surprise and reflects their continued operational challenges.
Our customer base remains healthy and strong and we ended the quarter with 19186 dealer customers.
And we continue to be focused on cross selling our customers new solutions year over year. We grew website customers by 632, a total of 6100 customers, although sequential growth in website customers was more muted due to elevated cancels in the quarter website and dealer inspire digirad business combined to drive 29%.
On year over year growth.
First quarter <unk> grew $95 year over year to $2386 driven by growth in digital solutions web site and the benefit of a full quarter of Accu trade. We expect continued <unk> growth through cross sell opportunities and our marketplace repackaging efforts.
Our subscription business delivered strong and consistent cash flow, enabling us to continue to delever, our business, while maintaining a balanced capital allocation strategy.
During the quarter, we paid down $19 million of debt, including the $15 million remaining on our revolving loan, which we used to fund the accu trade acquisition in 2022 that.
Debt outstanding decreased to $463 million.
Of which nearly 90% is related to our six and three eight senior unsecured notes maturing in 2028.
The combination of adjusted EBITDA growth and debt Paydown resulted in a net leverage ratio of two three times down from two seven times a year ago. We also returned $7 million of capital to shareholders via share repurchases.
Our liquidity is strong at approximately $249 million between our Undrawn revolver and cash on hand, this provides us with significant strategic flexibility going forward.
Our strong financial performance and integrated platform position us well for continued profitable growth looking ahead to the second quarter, we expect to deliver revenue between 168 and $170 million, reflecting continued dealer revenue growth.
While the marketplace repackaging rollout will accelerate in the second quarter. The full benefit will be realized over the course of the second half of the year and despite OEM green shoots in the first quarter, we remain cautious on OEM and national revenue largely due to the pullback by our insurance customers and historically lean inventory levels.
It is important to note that in the second quarter, we will fully lap the acquisition of Accu trade and we will be comping to a period not yet impacted by the digital dealer pullback. Despite this difficult comp, we anticipate growing second quarter revenue by 3% to 4% year over year.
Second quarter adjusted EBITA margin is expected to be 26% to 28% our margin outlook contemplates lower OEM in national advertising revenue relative to the first quarter as well as increased investment in brand marketing to drive growth in the business and awareness of new products.
Building on that we reaffirm our 2023 full year revenue growth expectations of 3% to 6%. We also anticipate exiting the fourth quarter of 2023 with margins approaching 30%.
We are well positioned to deliver on our goals.
The strength of our customer relationships efficiency of our traffic generation and asset light business model will continue to translate into growth and profitability.
And with that operator wed like to open the call for questions.
I would like to ask a question. Please press star one on your telephone keypad now.
You will be placed into the queue and the order receipt.
Please be prepared to ask a question when prompted.
Once again, if you have a question. Please press star one on your phone now.
Yes.
And our first question comes from Thomas White from D. A Davidson.
Your line is open.
Great. Thank you. Good morning, Thanks for taking my questions. A couple if I could I guess, just first on the OEM and National line.
You said Oems may be perking up a little bit in the quarter, but overall no that line is still open.
Depressed a bit.
I guess, it's largely tied to new vehicle inventories and production schedules, which.
I guess are improving a bit or still kind of.
Well off kind of pre pandemic levels.
I guess, what I'm trying to understand is whether you think this kind of the current level of new inventory and sort of the pace of the ramp is this sort of like the new normal.
For the industry that we should expect kind of for the foreseeable future.
Franchise dealers just kind of engine.
Enjoyed the last couple of years of tight inventory and high prices in there.
That's kind of factoring into.
How Oems are.
<unk> I.
I guess.
Put new vehicles out there I guess, that's my first question and then I've got a follow up.
Tom Thanks for the question look I don't think it's the new normal and that what youre seeing in the marketplace is that certainly certain Oems are trying to better balance.
Production towards demand.
And that's admirable to want to have perfect yield and no over production.
<unk> side as you've got other car companies that are building ahead of market demand and seeing market share gains at faster levels. If you look at the Korean automakers.
Hyundai and Kia most recently they are taking market share because they've got product on the street for consumers to drive and to experience and they are taking market share and so.
Well everyone in a certain segment of the market may know exactly what they want and be able to preordered online. The vast majority of car buying does have a degree of impulse and.
Fitting market need and so I do believe the industry is going to get back to having more product on the shelf.
They cannot possibly anticipate the changing consumer expectations and needs that far ahead of our lifecycle schedule.
Okay, that's helpful and it makes sense. Thanks.
I guess, a follow up on accu trade.
Could you, maybe just talk a little bit about the product roadmap for that.
I guess I'm under the impression that.
They are sort of like the.
Sort of.
Beefed up our sort of Fuller version of the solution, maybe that you guys sort of have in the works just kind of trying to understand.
What we should expect from.
From that.
Technology, and maybe just comment on how you feel it's kind of differentiated versus some of the other.
Offerings in the marketplace.
Sure well first of all we're really excited about the growth we're seeing in accu trade not just for dealerships, but consumers as well in that.
We're elevating the industry away from the legacy Black box mystical pricing, what's your traded and worth to a data driven assessment, that's based on real time supply and demand data as well as the intrinsic health of a car.
And so ultimately what that does is it eliminates friction between dealerships and their customers.
That users don't have to drive to three to four stores to know what their car truly is worth they can do it on their mobile phone. They can used cars dot com to get accurate vehicle values, I think and we're seeing that in our appraisal volume up 70% in the quarter. So not only dealers are appraising more vehicles using our tech.
But consumers are getting more vehicle valuations through cars Dot com I think when you look at the roadmap ahead, we've really got an opportunity here to extend consumers' relationship with cars Dot com, because while you may not need a trading value today. The more we can get consumers to register their cars with cars.
Dot com long term, that's going to reduce our marketing expense because we're going to have an ongoing relationship with consumers to present them values throughout their vehicle ownership journey. So thats in the pipeline in the works.
You're also seeing us move more into helping dealer groups trade inventory within themselves. So large dealer groups have told us that they love accu trade, but I'd love to be able to move cars amongst dealerships, which puts in the foundation for where we really ultimately want to go which is enabling a dealer collective to <unk>.
<unk> be a dealer to dealer exchange something that is far more efficient than the physical auction and dealerships can can trade vehicles, both within their groups and within our peer group.
Far more reduce cost than the legacy auction model, which we think can be disrupted with technology.
Great. Thank you very much.
Thank you Tom.
Our next question. Our next question comes from Gary Presta Pinot.
<unk> Barrington research.
Your line is open.
Hey, good morning, all.
Okay.
In terms of the dealers.
Have you or most of the digital dealers now out of the equation as far as clients.
Or could we anticipate continued grips in that segment of the dealer space for you guys.
No. Thanks for the question Gary.
At this point there are largely out of our balance of the year view. So we shouldn't we shouldn't really have any meaningful additional additional drops on that front.
Alright, and then.
You mentioned that dealers would be up with the exception of these digital deal is pulling out could you.
You just give us a frame of what that percentage change would have been do you have that handy.
Yeah.
It's a year over year. So I think what we mentioned is that if you look year over year adjusting for digital dealers or excluding the digital dealer cancellations. We would've been we would have been up and I would tell you that's it.
On a percentage basis low single digits, but I think the point I think the point for US is that the base. The core of the business continues to be healthy.
We see a lot of strength with our traditional dealers and I think as you may have.
Hurt us note on the call.
We're actively out in market.
With new packages.
For our marketplace that actually.
Add additional products to our packages.
That is being well received.
And that will lead into the next question could you kind of go into a little more details.
Tail on what these new packages are what they are.
What they include.
And why would that be an attractive.
Yeah.
Situation for a dealer to want to take these new packages.
Sure Gary first of all dealerships love options and presenting them.
Optionality is core to our strategy to meet dealers, where they are and what they are looking for a need and so we have a base program of preferred program and our premium program and classic packaging <unk> Theres more features available to hire in the food chain you go things like including your own.
One private lender network.
Having basically more dealership branding in the vehicle detail pages and search result pages that drives more traffic to the dealer's website, the ability to embed dealer rater salesperson connect so that you can connect directly to an individual as opposed to generically to the store and search expansion, which will optimize dealers.
Inventory and slightly more geographies than they are.
Natural search radius. So we clearly have put a lot into the premium tier and into the preferred tier and we're excited because most dealers are gravitating to the higher end, which is going to continue to stimulate ARPG growth. It also shows dealerships that look we're not just raising rates, we're adding val.
And while we have seen some churn with dealers on the initial presentation of our price increase once we engage with them and show them. All the features that are coming with the higher packages. We're seeing good take rate. So it's early but I think as you know any actions we take years not only adds to.
Nicely to the top but can flow through to the bottom line as well and so with our strong traffic trends, we feel very front footed on our packaging initiative.
So in this packaging initiative.
You said you have base preferred and premier.
Can we safely assume that.
All of the prices went up for each of those tiers.
What youre showing the dealer.
Yes, that's right.
Okay. Okay, alright, thank you.
Thank you Gary.
Our next question comes from Marvin Fong from <unk>.
Your line is open.
Great. Good morning, Thanks for taking my question so.
Yes, maybe to put another finer point on the on the new package marketplace packages in the RTD lifts up just curious so youre reiterating your full year guidance.
<unk>.
<unk>.
Lift the ARPG.
Contemplated in your guidance from last quarter or is that new and as just being kind of offset by the weakness the incremental weakness in OEM just to kind of maybe disaggregate.
There's been any change in the full year.
Buildup to your to your guidance.
Thanks, Thanks for the question Marvin so.
We began the repackaging effort really towards the end of Q1. So as you are aware right in a subscription business. It just takes time for the incremental revenue to start queuing and really flowing through the numbers and we're very early in the process at this point in time, but again with that.
<unk> have been as Alex was alluding to you reception has been positive with a lot of folks opting for kind of our premium tier and effectively upgrading themselves.
The price increase or the repackaging efforts are included in our Q2 revenue is already baked into our Q2 guidance and I think at this point just given where we are in the process. We think it's prudent to kind of reaffirm.
Our full year revenue revenue guidance.
Okay and then.
Maybe just move on I think for dealer inspire.
Delighted that maybe there was a bit of elevated churn there I'm just curious hill websites to loosen.
I'd think of typically pretty sticky.
Given a dealer need the website right.
Just curious what's happening there was there was there any share loss dealers migrating to another solution.
Hi.
Would you characterize what's going on there.
Yes. So we did we did experienced slightly higher cancels in dealer inspire website for the quarter we.
We do think it's somewhat.
One time in nature in part for some other reasons that you talked about there were a couple of competitors in market, who are offering I think fairly steep promotions that we just didn't want to partake in and then I think I may have mentioned the other quarter. We've also been working on some of our legacy OEM agreements and just working.
They're both on repackaging and beef pricing and as you can imagine there is some degree of churn that can come from going through that process. When you then go back to the dealer, but I think we're pretty confident in the value delivery, we're providing we're pretty pleased with the year over year growth number from a topline perspective.
That we saw in the quarter or so.
I think I think we're really happy with where we are and Marvin I'd add one other thing we have seen this competitive action before and I think it's obviously a more desperation on their part what we usually see as dealers.
Quickly learned that they are dissatisfied with the lack of service and Thats one of our value props that we really standby, which is dealerships we service and support them. So we do not feel the need to lower price.
In fact feel the opposite we feel that our values.
Lower because of the value we provide and then I'll also note that mostly in Q1, we focused on cross selling our customers. So we didn't have the new sales volume to outlet lapsed some of the churn.
But yes, no we feel good about where we are and the growth that we're seeing in our solution strategy.
That's terrific. Thanks, so much for the color Alex.
Appreciate it.
Thank you Marvin.
As a reminder, if you do have a question. Please press star one on your Touchtone keypad now.
And our next question comes from Doug Arthur Huber Research.
Your line is open.
Yes. Good morning can you hear me.
Yes Hello.
Just sticking with dealer inspire for a second so you kind of ran through the numbers quickly did you say that the sequentially the <unk>.
Dealer Count was up 30 is that what you said.
I think what we shared is that we were up 630 year over year.
Okay. So 630 year over year, Okay. So it's so the dealer count from the Q4 is up slightly is that is it.
Based on looking at the chart it looks that way.
Yeah, it's up about 50 on a sequential basis.
Okay, that's website customers.
Okay.
And there can be multiple customers for dealer.
And did you say the revenue growth was 29%.
That's right, Okay and are there any other I mean, I know you've been onboarding, some Oems growth last year.
You expect more momentum there more penetration to kind of bulk up the growth is.
I know you referred to the churn of the competitive backdrop.
So I think I think we have secured the vast majority of all the OEM endorsement.
And that that was a big step for Gi with that under our belt. The real focus is on continuing now to go to those individual dealership and win business and we're pleased with our ability to win what we consider to be our fair share and I think there is opportunity for us to continue to grow.
So I think what I would tell you is I think the Q1 net adds number.
Definitely muted relative to what we would expect to be able to deliver for the balance of the.
For the year.
Okay, great. Thank you very much.
And is there any final questions. Please press star one on your phone now.
Seeing no further questions I'll turn the call back over to Alex Vetter CEO .
Thank you and just before we wrap the call I want to call. It a few upcoming IR engagements on May 10 to Sony and I will host investor meetings with da Davidson and New York City on May 18th we're going to participate in the Barrington Virtual conference and May 23rd we're going to participate in a fireside chat in Boston at the J P.
Morgan annual Global Technology Media and communications applications conference. So details about these will be available in the events section of our IR website. This concludes our call on May the fourth be with you and thank you very much.
The meeting has now concluded.
Thank you for joining and have a pleasant day.
Okay.