Q2 2023 CarGurus Inc Earnings Call
Good day and welcome to the car Gurus second quarter 2023 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
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Please note. This event is being recorded I would now like to turn the conference over to current deep thing Vice President and head of Investor Relations. Please go ahead.
Thank you operator, good afternoon I'm delighted to welcome you to car group second quarter 2023 earnings call with me on the call today are Jason Robinson, Chief Executive Officer, and Danville, President and Chief operating officer. During the call we will be making forward looking statements, which are based on our current expectations.
Belief.
These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those reflected in such statements.
Information concerning those risks and uncertainties is discussed in our SEC filings, which can be found on the SEC's website and in the Investor Relations section of our website.
We undertake no obligation to update or revise forward looking statements, except as required by law.
Further during the course of our call today, we will refer to certain non-GAAP financial measure and a reconciliation of GAAP to comparable non-GAAP measures is included in our press release issued today as well as in our updated investor presentation, which can be found on the Investor Relations section of our website.
We believe that these non-GAAP financial measures provide useful information about our operating results enhance the overall understanding of past financial performance and future prospects and allow for greater transparency as it relates to metrics.
By our management in its financial and operational decision, making with that I'll now turn the call over to Jason.
Thank you candy and thank you to all those joining us today.
Many of you are aware, we delayed our originally planned earnings call in order to complete our normal quarterly close process for the quarter ended June 32023, and apologize for the last minute change. We appreciate your understanding and flexibility and are excited to discuss the results announced in our press release issued today.
Now, let me turn to our results.
We are extremely pleased with our second quarter results as we exceeded our forecasted consolidated adjusted EBITDA guidance for the quarter.
The strength of our results came from growth in our marketplace business, which was fueled by product adoption and enhanced monetization strategies targeting both new and existing dealers.
Concurrently we took measures to improve our digital wholesale operations to ensure the long term viability of the advancements made in the first half of this year.
We're pleased that our diligent efforts led to segment profitability and higher operating efficiency this quarter.
Our progress this quarter underscores our ability to respond to dynamic conditions internally and externally all while remaining steadfast in building an online platform that supports both consumer and dealer customers at every stage of the buying and selling journey.
Underpinning our strong performance was our resilient marketplace business, which met our forecast for the quarter.
Our annual business review or ABR process continued to make significant progress in our subscription revenue base.
The renewal process simplifies our offerings and enhances the value, we deliver to our dealers to repackaging and bundling.
We expect our ABR process will renew approximately 20% of the dealer base. This year with a focus on renewing disproportionately underpriced dealers to be more in line with market rates.
Since the commencement of our renewals, we have seen strong double digit percentage price increases for underpriced dealers, who have not seen renewals since pre pandemic.
As we continue to provide dealers with the highest ROI, we believe theres an opportunity to expand dealer wallet share through multiple levers one of them being unit price increases through a be ours.
We ended the quarter with 24220 paying dealers in the U S down 1% from the year ago period.
Excluding attrition related to a be ours, we would've had net dealer adds for the quarter.
As we previously mentioned we are comfortable with the ABR related attrition is the net result is positive monthly recurring revenue.
Nevertheless, when analyzing ABR related attrition from the first quarter, we won back approximately 40% of the involuntary churn cohort in the subsequent quarter and brought back those dealers at more appropriately priced listings rates and higher spend which is the primary objective of our ABR process.
In Q2 U S quarterly average revenue per subscribing dealer or Carson with $6110 growing 6% year over year.
<unk> growth was driven by package upgrades, new product adoption signing on new dealers at higher average monthly recurring revenue and unit price increases through our a b ours.
Through continuous investments and improvements in our product offerings, we generate greater value for both our dealer partners and our largest consumer audience.
Strong growth in cars, it underscores our ability to monetize offerings and lead volume beyond just the AVR process to align with the value we provide.
As a result of our history as a data focused business, we are growing our investment in artificial intelligence or AI.
As we strive to be the most trusted partner for our dealer and consumer customers our ability to provide valuable data insights to customers stands out as a key differentiator.
For instance, our fair share report empowers dealers to maximize their competitive share of local market leads in the price analysis tool enables dealers to assess whether they are enduring price cuts or turn times that are more severe compared to their local market competitors.
Our sales team Leverages. These insights to assist dealers in selecting the most effective products and packages aligned with their business objectives, helping them to gain a competitive advantage in their market.
Moreover, the rapid advancements in consumer facing AI have transformed the way consumers search and gather information.
Recently, we introduced a pilot that allows shoppers to search for vehicles using conversational language matching their preferences to relevant listings and in June we released the chat G. P. T plugging that generates vehicle description pages based on the shopper specific criteria.
The way consumers shop for vehicles continues to evolve and at Carter as we're evolving to best meet their needs by offering new ways to shop.
Our latest dealer product offering digital deal transforms the car shopping experience for consumers by leveraging advanced online capabilities to offer a seamless online to in store purchase.
This includes providing trading estimates offering prequalification or hardball financing options facilitating the purchase of dealer or vehicle specific finance and insurance products.
And deposit and scheduling an appointment.
Adoption has grown significantly with 2900 dealers onboard representing a 29% sequential increase.
We are delivering dealers more value through digital deal with higher quality leads that.
They're growing as a share of our total knees.
In the past year digital deal dealers have seen greater than 4000 basis point increase in leads originating from high intent ready to purchase shoppers that are up to five times more likely to close when compared to standard email leads making the dealership more efficient and closing a deal and moving onto their next sail faster.
Moreover, customers, whose schedule an appointment have up to a 50% increase in close rates compared to digital deal needs without appointments and this quarter appointments increased 112% quarter over quarter.
When coupled with delivery capabilities digital deal with geographic expansion enables dealers to reach a wider audience outside the physical reach of their lives.
This offering now has 100% coverage in the contiguous 48 states and has seen adoption increase 107% quarter over quarter.
Notably 64% of our digital deal listings have geographic expansion enabled which has the added benefit of providing consumers with the greatest selection of deliverable inventory.
These factors drive both more volume and higher lead quality for our partners.
Dealers are not the only ones benefiting from these innovative offerings with a vast selection of over 250000 digitally enabled listings, we provide consumers with unparalleled inventory selection competitive prices convenience and a sense of trust throughout their car shopping journey.
Our focus on empowering customers to take control of their shopping experience has yielded impressive results as indicated by net promoter scores that are up to two times higher for customers, who use digital deal.
As we think about the future of digital retail our objective is to not only tailor the shopping journey for our consumer customers, but to also level the playing field for our dealer partners may be unable to develop these solutions independently or who wish to take full advantage of the breadth of our consumer audience.
By utilizing the cargo whose platform dealers can efficiently sell additional inventory to a wider audience and ultimately grow dealership profits.
Digital retail it makes attribution easier for dealers, which in turn allows us to demonstrate our superior rois and further monetize the value we bring to our partners.
This year, we have excelled in striking a balance between our commitment to innovation and our drive for operational improvements.
As we expected car offer achieve profitability and exceeded our forecast for the quarter.
We're pleased with the team's ability to identify operational challenges in the latter part of last year and take action to implement processes policies and systems to promptly remediate these issues.
We experienced a softening in the wholesale market in the back half of the second quarter with declining prices and sales conversion rates.
Which presented us with an opportunity to thoroughly evaluate and pressure test the efficacy of our operational improvements.
Despite an increase in volume during the quarter.
Observe sustained or further improvements in our kpis.
Arbitration and rematch rates declined sequentially by 71%, which resulted in further improvements in downstream kpis, such as dead legs of transportation, which improved by 13%.
Our transportation logistics have improved materially from the back half of last year with an average of approximately seven days to deliver a vehicle.
Additionally, we have materially improved our titling process and when compared to last year, we observed a 30% reduction in the time it takes to obtain and subsequently process of title.
Improvements in our titling process stem from greater operational rigor and bolstering the titling team.
Shorter titling turnaround time is also resulted in improved accounts receivables and inventory balance.
Although we saw the wholesale market soften in Q2, we did see greater transactions on the car offer platform.
We ended the quarter with 20793 transactions up approximately 19% quarter over quarter.
The increase in dealer to dealer volumes. Despite a softening market was in part driven by rental fleet customers buying ahead of summer travel.
We have had rental companies leverage our platform in the past to meet their fleet requirements, but we are closely monitoring their use of our platform to ensure we are maintaining a healthy buying and selling environment for our dealer partners and building a platform for the long term.
Instant Max cash offer on the other hand remained flat quarter over quarter as we continued to limit volume.
The net overall increase in transactions resulted in gross merchandise sales or G. M S. A $575 million for the second quarter.
Although we are proud of the progress we have made and remain confident in our ability to maintain a stronger business. There is still more work to be done.
With our operations now functioning at a higher caliber our attention turns towards garnering dealer trust and confidence to scale the business in a challenging macro environment.
Over the past two quarters, we bolstered the car off our technology platform by incorporating new tool sets designed to enhance dealer confidence and boost conversion rates.
While sight unseen matrix buying and selling has proven successful and it's stable or positive wholesale environment.
We are now enhancing our matrix tooling with additional features.
These additions aimed to provide dealers with the assurance and comfort they need to purchase a vehicle in a price declining market.
To establish a sense of confidence in their matrix transactions. These tools act as a stepping stone leveraging the matrix technology, while introducing optionality.
For example, 24 hour approval increases dealer confidence by allowing them buying dealer, who has matrix rules for vehicles with 24 hour approval Optionality to review vehicle details history and photos before making a purchasing decision.
We've also enhanced our use of mobile app and click through providing dealers access at their fingertips to efficiently browse unapproved inventory.
Through this matrix tooling and operational improvements we are building a stronger more reliable platform for our customers to drive dealer confidence and engagement.
Across our business, we are pleased with our results and progress.
Great strides this quarter toward our ultimate vision of an end to end transaction enabled platform.
We continue to innovate for our customers in all areas of our business. Our foundational listings business is leveraging unique data insights and AI to better empower our valued dealer partners and our largest consumer audience.
And digital wholesale we are enhancing our matrix technology with new tool sets to instill dealer confidence and engagement.
With digital retail we're rapidly growing the adoption of digital deal empowering dealers to cater to customers in a way that aligns with their business objectives and consumers to shop in a manner that best suits their needs and preferences.
As we continue to invest in these opportunities we aim to drive greater value for our customers and shareholders and to bring our vision to life.
As we continue to build toward that exciting vision, we remain prudent in managing our operating expenses with greater efficiency in our marketplace business and operational improvements that have yielded a healthier digital wholesale business.
Now, let me walk through our financial results.
I'll provide a detailed overview of our second quarter performance, followed by our guidance for the third quarter.
Total second quarter revenue was $239 7 million down 53% from the year ago period.
Our total revenue for the second quarter was at the high end of our guidance range.
Marketplace revenue was $171 million for the second quarter up 4% from $163 9 million in the prior year and up 2% from $167 1 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.
Similar to the first quarter subscription revenue growth was partly offset by headwinds to consumer financing and OEM advertising revenue.
Wholesale revenue was $32 million for the second quarter of 2023 down 58% from $75 9 million in the prior year and up 27% from $25 2 million in the prior quarter.
The year over year decrease in wholesale revenue is due to our continued prioritization of operational improvements on the platform coupled with less favorable market conditions.
Quarter over quarter. However, we saw a slight increase in dealer to dealer transactions in part due to increased participation from rental fleets ahead of summer travel.
Lastly, product revenue was $36 8 million for the second quarter.
Point 8 million above our most recent guidance range.
Product revenue was down 86% from $271 4 million in the prior year and down 7% from $39 7 million in the prior quarter.
The year over year decline is due to our decision to limit transactions for instant Max cash offer while we focus on operational improvements. Additionally.
Additionally, through our enhanced inspection capabilities and arbitration policies, we have seen a meaningful reduction in arbitration rates and subsequently arbitration revenue.
Instant Max cash offer generated $35 8 million in revenue.
Together, our 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 second quarter was $68 8 million down 80% versus the prior year.
I'll now discuss our expenses and profitability on a non-GAAP basis.
Second quarter non-GAAP gross margin was 71% compared to 38% in the year ago quarter.
The change in non-GAAP gross margin year over year is primarily due to the shift in revenue mix to our high margin marketplace business.
Total second quarter non-GAAP operating expenses were $128 5 million down 5% year over year.
non-GAAP sales and marketing expense was down 18% year over year to $75 million.
The decrease in marketing expense compared to the prior year reflects our decision to limit marketing investment for instant Max cash offer.
non-GAAP sales and marketing expense represented 31% of revenue up from 18% of revenue in the year ago period.
Our second quarter, non-GAAP product technology, and development expenses grew 24% versus the year ago period to $31 4 million.
Similar to previous quarters. The increase is primarily due to an increase in salaries and employee related costs. As a result of a 10% increase in head count from the year ago period.
We expect this expense to remain elevated as we continue to develop and grow our expanded product offerings to build our end to end transaction enabled platform.
Consolidated adjusted EBITDA of $45 2 million in the second quarter was $3 2 million above the high end of our most recent guidance range.
This was due to prudent expense management digital wholesale operational improvements and increased participation from rental fleets.
non-GAAP diluted earnings per share attributable to common shareholders was 29 for the second quarter four cents above the high end of our most recent guidance range.
On a GAAP basis, we generated a second quarter gross margin of 68% compared to 37% from a year ago period.
In the second quarter, we incurred total operating expenses of $146 4 million down 11% year over year.
As I had mentioned earlier.
The decrease in operating expenses reflects the strategic decision to pause marketing for instant Max cash offer in addition to a 40% year over year decrease in stock based compensation expense due to the revaluation of certain liability based stock awards.
Second quarter, GAAP operating income decreased 25% year over year to $17 7 million.
Second quarter GAAP consolidated net income was $13 8 million.
Net income attributable to cargo routes totaled $16 4 million in second quarter GAAP net income attributable to common shareholders was $16 4 million.
We ended the second quarter with $453 6 million in cash cash equivalents and short term investments a decrease of $3 1 million from the end of the first quarter.
We generated $29 3 million in cash from operations in the second quarter and $23 5 million of non-GAAP free cash flow, which includes capitalized website development and capital expenditure costs of $5 8 million.
Cash provided by operations in the second quarter was primarily driven by our results, partly offset by a $9 5 million cash decrease in our working capital accounts.
During the second quarter, we repurchased one 3 million shares for an aggregate purchase price of $22 million.
As of June 30th we had repurchased a total of $105 8 million in shares and had approximately $144 2 million remaining available for additional share repurchases.
I'll close my prepared remarks, with our outlook for the third quarter.
We expect our third quarter revenue to be in the range of $201 million to $221 million, we expect to see improved year over year marketplace revenue growth driven by continued strength in our listings business.
And our digital wholesale segment, we expect lower revenue sequentially due to typical wholesale seasonality in the back half of the year.
Coupled with cautious buying as dealers face uncertainty following the fourth and fifth largest non seasonally adjusted month over month price decline in June and July since 1997 and.
And the seasonal pullback in rental fleet buying.
We anticipate third quarter revenue for our product line item to be in the range of $15 million to $25 million.
As it relates to our operating expenses, we expect lease expense and marketing spend to be relatively flat sequentially.
However, as we've previously mentioned we remain prudent in our marketing spend for the full year and still expect it to be below 2022 spend primarily due to a reduction in instant Max cash off our marketing.
As a result, we expect marketplace EBITDA to see growth sequentially.
However for digital wholesale with record wholesale price drops and lower conversion rates, we expect car offer to be impacted despite our operational improvements.
While our efficiency remains we expect unprofitable EBITDA until market conditions and customer buying activity pick up.
We expect our third quarter non-GAAP consolidated adjusted EBITDA to be in the range of 36 million to $44 million and non-GAAP earnings per share in the range of 24 to 27 cents.
In the second quarter, we exceeded our expectations and in the second half of 2023, we plan to continue to make progress on our vision of being the only end to end automotive transaction enabled platform and service in both our dealer and consumer customers.
None of our progress or results would have been possible without the hard work and unwavering dedication of our incredible employees, who have been instrumental in making our vision a reality.
With that I'll open up the call for Q&A.
We will now begin the question and answer session.
A question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the can.
To withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to one question and one follow up at this time, we will pause momentarily to assemble our roster.
Today's first question comes from Chris Harris with Needham. Please go ahead.
Hey, good afternoon, everybody I'm just go a little deeper our ABR four please especially the comment you made around 20% of dealers are up for review I'm trying to get a sense does that mean that the other dealers will be approved in 24 or 25 or certain dealers arent up for review because they.
They're already at kind of where you see US go pricing and then on cars D growth could you kind of bucket. You know you gave some buckets is what drove the growth could you give us some range as far as how much of the growth came from.
E V or modifications in the other buckets that you gave.
Okay.
Hey, Chris It's Sam Zales. Thanks for the question, we're really pleased with the a b our performance.
We target is really as we said previously our sharply underpriced our dealers in the market and went after them first that's what represents our 20% that we are focused on the <unk>.
The the severely underpriced dealers, who we've we've managed and done very well renewing increasing the price point that double digit.
Percentages.
For those who say we're not accepting the price renewals you heard we are bringing them back on in the next quarter at a significant rate and so we're really really pleased with the a b our performance that doesn't mean that we're not increasing prices across the organization or selling more packages, which ties to your car seat question new.
New customers are coming on at much higher prices than we had previously so we don't have that need to go after and reprice because the new customers coming on are coming on at increased price points. We're also transacting with customers throughout the year. So.
Customers, who are upgrading to new products new packages.
Customers, who are adding on some stores that they might be doing so.
All of that is happening so that the 20% is really focused on those more severely underpriced dealers those have gone very very well for us. It tells us we can do more of that as we go forward and we will be continuing that process as we head to a later 2023 and into 2024 all of this designed to bring customers up to a higher price.
Pointing all within the mean, if you will then over time, it's adding packaging and repricing as we go forward and continue to deliver the ROI, we're delivering those customers.
Hope that answers. The first question. The second one was related to car Sid.
And I think it's the mix of those sets of things. We described in the script it is significantly.
We're really pleased with the car seat growth for the business.
Dealers upgrading to higher level products, adding a product feature new dealers coming in at the higher price points.
And then renewing accounts are getting a significant new MRI monthly recurring revenue from those accounts were being repriced. So it's a combination of unit price.
Our lead quantity continuing to grow and our quality of those driving high ROI, the new products and the upgrade to package. It it's really a combination I couldnt say one is outperforming another one at this point, they're all working in concert to grow that car said hope that answered. Your question. Okay. Yeah. Thanks for the detail. Thank you.
The next question comes from Jed Kelly with Oppenheimer. Please go ahead.
Hey, great. Thanks for taking my questions, just just flowing them back about pricing it looks like you're you're obviously targeting.
Underpriced dealers some of the low hanging fruit and then going to add on the packages.
I mean, just can you talk about the pricing environment, given all that's going on in the auto market. You know we have lower approval rates. Our wholesale pricing is going down can you talk about some of the stability around pricing and then can you just talk about where we are for rock in terms of car offer in terms of when you.
You start getting comfortable around beginning to play offense.
Lower arbitration and it seemed like you know you've got that business back to profitability. So that's where all the time, but just where we are in terms of getting back to growth mode.
Hey, Jed it's Jason here. Thanks for the question so on the pricing environment.
Yes.
We've all probably seen very similar.
And directionally consistent data at a macro level that.
Inventory is lower than it has been in years past.
Saar and an estimated volumes are lower than where they've been in years past and consumer demand is also lower.
A lot of times that makes dealers.
Especially the more sophisticated ones realize that right.
You need to you know market more aggressively in order to move the cars that you have to keep your days online at a reasonable level.
So you're right that we are targeting the most underpriced, where there a be ours, but as Sam just said.
We interface interact with and often.
<unk> are making amendments to and positive changes to the subscription the totality of the subscription with a much higher percent of dealers in any given year.
We as you know and as I think most research shows have always been a.
They very strong ROI for dealers and on a relative basis, we are still a very strong ROI for dealers and when you combine the that great ROI with really strong volume and improving quality of leads which leads to an improving conversion rates to sale.
It puts us in a place where we're comfortable making a lot of these.
Efforts on pricing and so despite the fact that the market does look different than it did dealers still do need to market and dealers are smart and know that theyre going to.
Sort of aggregate and concentrate in the highest ROI.
Sam do you want to speak to car offers the question.
Sure. Thanks, Jason Jed Thanks for the question.
We are really really pleased with the operational improvements at car offer it was a joint effort with their great leadership and our teams heading down there to retool the business and refocus on Kpis and operational discipline.
I said it would be a couple of quarters and we delivered on.
Now turning that to profitable well run business. The challenges right now as you talk about offense is the state of the market that we're in the macro environment. We're in we talked to the price drops in the wholesale market.
Not seen since 1990, 7% in June and July .
The it's a seasonal downturn typically in in buying activity you talked about the the wholesale pricing in the market dealers are hanging onto more inventory conversion rates in the auction arena are down in the wholesale arena are down significantly and fleets, who we've allowed to come in in a very in a very.
Controlled way are not either de fleeting right now they've gone past the summer season, and not doing as much buying activity.
And I'll add to that that quite honestly over those three quarters, we lost some dealer confidence in in the platform until we changed our inspection work, we had changed our arbitration process, we changed our fail rates, we changed our re matches our transportation has gotten tremendously better are titled time to get tight.
<unk> to dealers buying has been phenomenally better. So we're now building back that confidence in our customers and doing something more than that which is building new tools to focus on gaining confidence in a system and instant trade platform that works perfectly in a price rising environment and has more caution in a.
Rice declining market for any of these dealers in the market. So we're building things like the 24 hour with a look capability, which gives dealers the opportunity to be sure before they approve that transaction I'm looking at the vehicle photos I'm looking at the vehicle history I'm checking the condition report to make sure I want to purchase.
We're adding a buy now capability, which many auction players use today with just saying I've got unsold inventory would that be something that a dealer wants to buy so adding that capability to add more confidence to the purchases that don't just happen in an instant method, we're adding mobile tooling to allow buyers and sellers to approve transactions more efficiently and effective.
So you'll hear from me that one I'm thrilled with the operational improvements we now have to fight a macro environment to gain our volume going forward.
And doing that by building and rebuilding the confidence the dealers having this platform almost a car off a 2.0 and building that back up to get the volumes, we want and play offense and run a growing and profitable business as we go forward.
Thanks, and then you have the staff to get dealers trained up on all the new tools for car offer.
Okay.
We do Chad.
A lot of this is technology and AI to improve the capabilities of dealers.
And what they may have known previously.
It's using mobile tools to find the buy or the buyer and seller when they're out on the lot and seeing that they have a bid that's higher than they would have expected for that vehicle.
And and helping them transact and we've converted the team that I mentioned last couple of quarters from selling new customers to actually helping them use their matrix more effectively helping them use the tooling that we have and focus on making those customers more and more successful on the platform before we say, let's go run out and.
<unk> talked to a lot of new customers about buying into the platform. So it's reconditioning us to the.
Confidence building and re utilization of a new platform with new tools and a much better operating environment with discipline that allows us to run it profitably as we go forward.
Thank you.
The next question comes from Brad Erickson with RBC capital markets. Please go ahead.
Yeah. Thanks, sorry to burst Sam you were just talking about the enhanced features with car offer I guess a couple there how quickly do you expect some of those enhancements matter and drive noticeable volume and would you ever I guess looked to go a step further and offering more like the traditional timed auctions just as another way to gain.
Sure without steel everything, but sort of on anyone's mental whiteboard anywhere.
The first one and then the second one.
Probably for Jason on the EBITDA outlook commentary you mentioned marketplaces.
It sounds like up sequentially from here, but car off or maybe still being a headwind negative until the market turns around because the implication there that kind of quarter to quarter, it's a little hard to necessarily count on overall EBITDA being up is that how we should take the outlook there kind of on a net basis. Thanks.
Jason You want me to go first I didn't know if you were going to take the second one I'll take the first one thanks Brad.
We're having we're having some success with these new tools that you're seeing as added capability to an instant trade platform.
We're doing it because the matrix drives all of that capability you can't have the 24 hour capability or the buy it now capability without utilizing the matrix to get you. There. So it's just a it's it's you know tool.
Tooling added to the to the very distinct and complex capabilities that we've built over the years to help dealers use it and it is actually leading to more transaction volume that we don't believe we would have had in a completely downward.
You know price cycle in the market. So those things are working and they're just next set of features that are working for our dealers to transact.
I think as you take it further to thinking about timed auctions, we think there's a different model and instant trade. It doesn't require a buyer and a seller to be sitting on a screen watching or going to auction physically and approving a transaction. That's why when you say if I'm hitting somebody with a a mobile message that says.
You've got a price point, that's higher than you were thinking you could sell this for that's terrific.
It can be used very quickly at the time of somebody doing other activities as we know many of our dealer dealer executives are doing so.
We don't think we're going to that direction, we're saying how do we enhance the 24 hour you know how do we enhance the instant trade platform with things like 24 hour that give them a chance to just be comfortable I'm, making the right purchase decision all of that happening know Brad in an environment, where the market is dropping record price.
Drops in the market and.
Customers holding on to vehicles, it's going to be a slow period as we head through the third quarter and our eye.
Happy to see that these tool sets, we'll build more of that confidence for when the market keeps going in the right direction, we will have more capabilities to serve our customers with.
Yeah.
And yes, I can I can find within EBITDA so yeah.
Yeah, Brian I think you're thinking about it directionally right, which is we've said marketplace EBITDA.
Sequentially is strong given growth in marketplace.
You've heard our commentary on some of the Opex trends and.
In marketplace and car offer as you.
You know it.
Well as you've heard from the Guy at the low end of the guidance.
Offsetting that and even a little bit more than offsetting the high end of the guidance.
You know pretty flat flattish so.
It's just harder to predict with car offer for all the reasons, you've heard us say in the past and but you've heard Sam's commentary and.
Where there is.
The much bigger not so to speak is in the marketplace EBITDA, where the trends are good.
Got it thanks.
The next question comes from <unk> Khan with B Riley Securities. Please go ahead.
Yeah, Hi, Thanks, a lot a couple of questions maybe just on the on the car offers out of the business.
Got it and campaigns.
Ken back.
Just curious what are your thoughts out about their continued participation I know, there's seasonality and they try to Oh.
The vehicles before the peak season, it starts with them, but do we expect them to continue to come back in future periods or are they just reacting to.
Smart allocations from Oems and therefore, they may not need car off without as much.
In future years. So that's one and then secondarily, maybe just talk about the macro and maybe get your thoughts on.
When the price decline in Smiths start to normalize or do you think that might happen in corn when he corridor.
Any color there would be helpful.
Yeah.
Never had I'll take the first one.
And and.
It's a good question on the rental fleets we.
We have always been the.
Just to the last question the instant trade platform is a phenomenal tool set for a bigger scale buyer for somebody who knows what they want they know the volume they want to get and our tool set has worked phenomenally for the the higher end vehicles that rental fleets have been looking for to supplant what hasnt come from the new car inventory.
And frankly, I think that could be a longer lasting trend in the market that fleets have come back to say, we will need these higher end more quality vehicles, and our inspections and helping them get more and more of those so we're just limiting how much participation there involved in either on our platform from a buy perspective right now the message in the market for <unk>.
Third quarter is they are either de fleeting or stopping some buying activity I don't expect that to change in the near term. This is their post travel season. So we don't see them needing to supply aggressively but every indication we have gotten from partners like that is our tool set works phenomenally for them.
They will come back in when their cycles change, they're looking at our platform remember that we're talking about buying they they also look at this and say this could be a selling platform for them as well and so we will participate with them in a controlled way as we go forward, but signs indicate right now that they have bought up and they are going to stay slow in the next year.
At a time from a transaction perspective, Jason do you want to take the macro question.
Sure on the macro.
Said I think it was last quarter, where we shared that we think used car prices will probably end the year little bit below where they are now.
I think you know we still have a reason to think that that forecast is is directionally accurate. It's very hard thing to predict but I think to two things I would add that our important layers on top of that one.
Not so much if there is a steady trend down or a steady trend up it's when it's when there is volatility and so that's why you heard us reference.
The severity of the price declines in June and July .
It's because the reason that volatility matters a lot more as a dealer can price in an expectation of a price increase or a price decline if it's steady and it's expected. It's when there are surprises that they get skittish understandably.
So if if we enter an environment, where we just see more stabilization than whether it's stabilization slightly up or slightly down I think that's a far better scenario and when there's a lot of volatility and the second thing is just.
To double click or plus one on what Sam said, which is that the team has really bolstered the platform.
To make it a far better platform for buying and all types of environments and instilling confidence in all types of environments and certainly they're hoping that it does that even in volatile environments and I think at a minimum it's done and done and is doing a better job.
And instilling confidence when prices are declining.
Thank you Jason Thank you Sam.
The next question comes from John calling 'twenty with Jefferies. Please go ahead.
Great. Thanks for taking my questions I wanted to start with the sequential decrease in instant Max cash should we take that as any indication that youre less sort of focused.
Focused on growing that offering into long term versus some near term macro impacts like a softening in the wholesale market and second with the significantly higher lead conversion and digital deal. It seems like there's a huge opportunity to increase increased Carson over time talk about your expectations for expand.
That offering across the dealership that work in the coming years, and if there's any barriers to integrating that product into dealerships workflows.
Sure. Thanks, John I'll actually take the second one burst and saying if you can speak to is the Max after I can.
But yeah.
Yeah, I mean, we agree with you John .
What digital deal is doing is allowed.
Allowing users who are inclined to.
You know bring themselves further down the funnel to do so in a really seamless way and that's just adding a ton more value to dealers.
Dealers are understanding that like they they they get it and as you know there the proof of that is that they are focusing on those leads first and foremost versus others.
And so they know that they are higher quality and so we've also said that digital deal does not.
Harm conversion rate and so it really is a win win the consumers love It and then dealers who adopted.
They're not decreasing their lead volume at all and now a percentage of a growing percentage of their leads are converting much better than or higher quality.
I do think there is a there's a mindset of this cut.
Segment, where they.
Arent always thinking and full complete ROI and our thinking in terms of and expect expected range of what they'll pay for a lead and so you know because these are not your average lead these can convert at up to five times.
We need to help really tried to bring them along and show them the added value because while they may be getting the same lead they were getting you know a year ago before digital deal or a quarter ago, they're clearly selling many more cars as a result of it and they would they would agree with that too so.
I do think there's an education process. Because this is not something that has existed in the market before.
There is not much.
Friction in terms of getting into their workflow.
Onboarding into digital deal is pretty simple straightforward. There's a couple of features like hard pool that require a little bit more effort, but dealers are seeing the fruits of that.
Once it's in.
They then have a little bit of you.
Training and we hope with this to make sure that their sales team is utilizing the value from digital deal, it's all going into the CRM.
We've made it very simple with integrations.
But they just need to make sure that they're leveraging that so that's not it's not a workflow change it's just making sure that there's total awareness and education and then when we see this win lets say a large dealer group has some stores where it just click sooner they're seeing much higher cars sold as a result, and they're helping.
To educate and train the other stores as well.
So we agree with you we think it's a huge opportunity to basically take.
You know you can think of it as taking the same flow that's coming through our site and going to dealers and just Supercharging X percent of it to be worth multiples of what it was before.
So I'll take it Jason on the IMC, how John Thanks for asking the question.
We remain very bullish on I M C O for the long term.
We think we bring a unique capability to the marketplace something totally differentiated and with our 40 million visitors were.
Finding something that is truly.
Market, leading for them as evidenced by our NPS scores in the Ninety's. We're just thrilled with what we're doing on that one. However, you asked the perfect question, which is the macro environment leads to a lot of things happening number one prices drop overall, so our AOS for that business as it drops you know when you think about the app.
Selling price if you will of the vehicle competitive bids in the market because macro environment is going to make it very harder to win because you're competing on very small margins on that front, we've been through the situation of price declines not quite what's happened in June and July as we said fourth largest price declines.
Since 1997 that can lead to more arbitrations, we don't want to go back to that market and where we were six nine months ago and consumers are hanging on to their vehicles more they're just saying my equity in that vehicle is such that I'd probably have to hang on to market is not rewarding me as it was in first half of 2022, when the prices were as high as they've ever been in wholesale.
So with them hanging on we're saying marketing low keep it low let's run a breakeven business, let's keep it running well we couldn't be more excited though to build some new capabilities there to fire it up as the market gets better as we hope to hopefully come out of third quarter and look to a bigger bigger growth going forward. Thanks for the question.
Thanks, so much.
The next question comes from Marvin Fong with D. T. I G. Please go ahead.
Oh, great. Good evening, Thanks for taking my questions. So two for me I guess.
Pick up maybe a different lens on.
Wholesale can you just talk about you know the number of dealers that you're like how was the.
Signing up new dealers been going have you did you also pause that the past few quarters as you kind of improved operations and not just kind of talk about when you might get more aggressive with signing up dealers and just in general how that's been progressing and then second question just another one on the a b R. I think <unk> I know you said 20.
Sent this year could you just kind of speak about you know are we basically at 10%. So far this year since we're at the midpoint and.
Are the remaining people the remaining 20% this year are they as far off market pricing is.
As the ones that you've already been addressing I just wanted to get a sense of you know.
How the tailwind of a b or should that'd be.
That's great as we've seen so far this year. Thanks.
Thanks, Marvin and I'll take the first one related to.
The car offer business, we did pause going out to the market I think I mentioned that we converted a sales team into a focus on account management, we just had two.
Rebuild and we still have more work to do to rebuild operational procedures and customer confidence. So it wouldn't really make sense when the operations warrant.
Maximized and and working as efficiently or running profitable businesses, we got to.
It wouldn't make sense to go bring on a lot of new customers. We were in the middle of retooling the operations of the business. So we did convert those folks.
And have have taken on new business only really more on an inbound process. So there are large national accounts, who buy a lot and an incident trade platform is perfect for them and they've sparked in interest and said Hey, I've heard you got cut off for 2.0. The operations are working really really well.
Come in and join up again and build a matrix. There's a set of dealers, where we're approaching who stop buying for a period of time, where former buyers and we're bringing them back on with all of the new highlights of the inspections, improving so dramatically our arbitration rates down tremendously our transportation quicker.
Our title transfer time, moving so quickly so we are.
Re winning business, but we're not out pitching in enrolling customers who've never been on the platform before that will happen once we get through this period of saying you Max.
Macro environment improves and we're fully there on the operational improvements to say, let's go out and start pitching car offer to point out we're not there yet and we're not guiding to that in third quarter right now Jason you want to talk about a be ours and I can follow on if there's anything.
Sure.
Yes, Marvin we said about 20% in <unk> for the year, so halfway through it.
The ballpark if they were at 10%, although we really just started doing them a couple of quarters ago, and so we're ramping up.
As we just get more reps at it and get better at them and have more people trained on them but.
I really want to reemphasize and yes also fair to reiterate that we are starting with the most the most underpriced dealers, but I think the really important point is the one that you made a couple of times Tonight, which is.
But ABR is just one that is just one use case, where it's a dealer that.
<unk> is under priced and is not doing one of several other things that we do with our dealers and those include things like the package upgrade buying a new product. They are lead volumes may have increased.
Or are they they may be a group that's adding.
Stores and.
So all of those results.
Often if not almost always result in more you.
You know more subscriptions spend it's just not in the form of what is really kind of a simple ABR of a repricing of an underprice dealer.
The percentage of dealers that go through all of those other things plus the a b ours is as you would expect a much greater sense.
Yeah.
Got it thanks, so much guys I appreciate it.
The next question comes from Florida, Tennessee with Citi. Please go ahead.
Thanks for taking the question guys. Appreciate it Jason I wanted to stick with the ADR commentary and Sam on the ABL commentary I think I heard on the call you mentioned, a 40% wind back rate post <unk> talk to us about what led these dealers to come back to the platform or are these the lead that they're missing that traffic any insights there would be helpful and those that came.
Back are they buying more products like digital deals are trialing. It at least as you as you.
Look the increase overall usage or are they just primarily single can find where we're going to pay higher prices and just on the a b are sort of like up so when you enter the AVR process well.
I'm curious what percentage of the a b ours is often just greater adoption of the products that cargo is offering thanks guys.
Hey, Ron Jason So.
I mean, what's bringing them back is that they are realizing I think that they you know.
We're very.
You know that we were offering them terrific lead volume that was helping them sell a lot more cars.
And we were doing it at unbelievably good prices before and even our new proposed prices are still a great ROI for them and so while they may not.
You know like paying more they have realized that it's still money very well spent for them and so they've come back. We've we've shared studies in the past with with you all and our dealers.
Show that if a dealer it comes off our platform they lose a significant amount of volume much more so than if they were to drop another platform and.
So I think it's just the reality is in a in a way there is sort of.
Creating their own AB test to say well what happens if I'm not on carters and 40% of them are saying well, even though I didn't like the price that was now proposed to me I realize it's still money well spent I can't live without it.
The yeah when they come back they are paying the higher prices that we were proposing so we're not you know that's not a negotiating tactic by us or them.
Theyre coming back and what we suggested.
Sometimes they're coming back with more products and of course, we're sometimes it might be coming back with them with a new package.
Level, but I wouldn't say and in most cases these tend to be dealers that were paying extremely low prices before their subscription rate increase is was you know.
Has become appealing to them or become acceptable to them sooner than add on more spend is not something that they do right away.
You then asked sorry, your second what was the second point about when they come back.
Just curious was it wonder about whether they take a new product.
Yeah, when they take on new products, and maybe I'll since I think you've sort of answered that I'll just add a third one in there or.
Or are these dealers you know understood that they're spending you know terrific lead volumes unbelievably low prices. That's why you're focused on them. First are these are dealers who had been on the platform. The longest is that one of the longest in the older call. It.
Better pricing or or is just it's a mix of cohorts.
Yes.
Yes.
It's a mix.
It's a mix.
<unk> had three years have been strained right and so as you know lead volumes may have changed.
I mean, theres, certainly change, but may have changed more materially some dealers and others.
And we really weren't doing much sort of true unit repricing during COVID-19.
And and.
And so they could have joined a year ago and may have more inventory now.
And they're getting more leads now and we.
We haven't touched their price so it's a mix.
Thanks, Jason we still believe yeah of course, just to reiterate I mean in all of our research.
And research that we have seen from third parties.
We still have the best Rois.
When you look at what when dealers.
On page four our leads the quality of the leads in the cars that they sell as a result.
We offer a great ROI and so a lot of these a be ours or bringing dealers that are so far below the average.
In some cases, not even to the average and so the ROI is still very strong.
The next question comes from Nick Jones with JMP Securities. Please go ahead.
Great. Thanks for taking the question I guess, maybe to follow up on <unk>, and it's probably a little bit more I mean, it sounds like you're still offering really strong return on investments I mean does that do we take that as an indicator that there's still room to take price up maybe in future years relative.
Relative to the competition and the returns are driving or how should we think about.
Maybe this AVR process.
In out years in terms of where you are today with the adjustments. Thanks.
Yeah.
So.
You know the some of my comments from the last questioner that we still believe and have.
You know every evidence seems a lot of evidence seems to support that were the strongest in our online which means our pricing is good but we're improving our quality with things like digital deal.
And we still think we're priced below the market and so those two factors alone wouldn't say that there's room, there's quite a bit of room to go. We have said that we are starting these earlier a be ours.
With the.
Now the most under price dealers and so if we're successful at this <unk> aggressive with this from a volume perspective than the ABR sort of just unit price alone.
<unk> will lose steam over time.
But we're also really.
Focused on continuing to add value to our product at each pack.
Package tier.
And we're doing I think we talked about some of this in the script I mean, we're doing that with some of our the ways in which we're packaging data and driving insights for dealers that we're delivering to them now and so and those are just a couple of examples of many more that are constantly adding value that is not just in the form of leads.
And so you know.
<unk>.
Customer can always divide what they pay us the number of leads by what they pay us in saying that the cost per lead but I think the reality is is that we're delivering a lot of other types of value.
And so that leads to an overall on a line that is not just a well you know what's my tolerance for a cost per lead.
I guess, maybe just a follow up I guess, what I'm trying to trying to triangulate a little bit is I mean and within kind of the competitive landscape of the market play subscription I mean, our competitors still taking price up are they mostly stock and theres still kind of a gap.
And it sounds like dealers, maybe don't necessarily.
I understand the value right away, which is why they churn and then they have to kind of run this a b test to come back.
I mean are you improving kind of the attributions. So maybe that doesn't happen as you maybe revisit this next year.
And then I guess I'm really just trying to understand kind of maybe the gap between where you are today versus some of the competitors. Thanks.
Yep.
We still believe there's a gap.
Uh Huh I cant speak to competitors, though.
I believe they have Senate and we hear from dealers that they also were trying to.
Take price.
In terms of.
We are always trying to improve attribution and we've actually made some some.
Strides there.
And in leveraging third parties that help dealers understand.
What you know.
With the sold cars were from our platform.
So the conversion rate from lead to sale.
And then we're adding these other.
Dealer data insight type products like we've talked about with fair share and price analysis and market analysis tools.
Other forms of leveraging data science to give them more insight into.
How to price and merchandize their cars.
Let's keep in mind, though to that.
The bulk of dealers that we talk to who are underpriced another under priced in.
We discussed through with them why they're raising their price they they get there around it and then it's.
We've also shared that it's of this remainder who does decide to churn that's where the 40% come back in the first months and so.
This is not.
We're now talking about sort of fractions of fractions.
And those are the ones that have.
Realized through running their own test.
How valuable we are.
This concludes our question and answer session I would now.
Like to turn the conference back over to Jason <unk> CEO for any closing remarks.
Thank you so would just like to thank everyone for your time today and your thoughtful questions on the call and your interest and support in our company and of course, we want to reiterate our thanks to all of our <unk> employees and current employees.
I know it's been.
Great quarter, and a lot of hard work and we're very grateful for that so thanks, everyone.
The conference is now concluded. Thank you for your participation you may now disconnect your lines.
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