Good afternoon. My name is Kunal Madhukar. I'm the SMID Cap tech analyst at UBS. Thank you all for joining us, and we're here to talk to Jason Trevisan, CEO of CarGurus. Jason, thank you- Thank you for having us. for doing this. One of the big surprises from this quarter was the... you're advancing the acquisition of the remaining stake in CarOffer. Mm-hmm. Can you talk about, like, you know, what, what led into, into that decision, and how are you going to kind of take it forward? Sure. So as a reminder, for folks, we originally had a transaction structure with them where we would complete the acquisition in the summer of next year, and we took the opportunity to accelerate that and to completing the acquisition now. A few reasons we did that. One, we really wanted to accelerate the collaboration between our two product platforms. We just think there's so much opportunity in bringing together data and technology end-to-end, from the wholesale to the retail parts of the value chain, and we wanted to accelerate that. In an arm's length relationship, where they were very focused on EBITDA, because that was the metric for the final valuation, we were not able to invest in product in the way that we wanted. Second reason is we now have sort of full 100% operational control, and that is an opportunity for us to continue to improve the operations, the inspection, the arbitration, the logistics, the platform itself, the technology itself, to run just a much tighter business in different market cycles. And then the third is we hired a gentleman named Zach Hallowell to ultimately run CarOffer. He has built two other digital wholesale platforms before at OPENLANE and Manheim Digital, and he's on board and can just start executing sooner. Great. Before we go to the next one, if you have any questions, you know how to submit them. Hopefully, I will get it on my iPad, which is right over there, but please submit your questions. Next one would be, you know, the Sell My Car Top Dealer Offer. That is a new thing that you just launched. Mm-hmm. You talked about how it could potentially cannibalize IMCO. Mm-hmm. And it's supposed to be a subscription business offering. Yes. So are you going to report that as a separate line item on the revenue side? Especially because that can be different and maybe possibly less volatile than the other revenue line items that you have. The gross margins could be different too. It will certainly be less volatile, more predictable, more stable, and much higher margin. So, again, to level set for folks, So consumers selling their cars to dealers is a $multi-hundred billion market. We, a couple of years ago, launched a product called Instant Max Cash Offer, which would allow a consumer on our site to enter information on their car, and they would then get the highest offer from a CarOffer bidding dealer on their car. And inherent in the price offered on their car would be that we would come to their home, with partners, come to their home, do the inspection there, pick it up and take it away, and wire them the money. It was very convenient. It was like a white glove service. We've now complemented that with something called Top Dealer Offer. So now a consumer will get two offers: one, what I just described, the second is the highest offer from a local dealer, where the consumer will need to bring the car to that local dealer. That Top Dealer Offer, local offer, is typically a couple few thousand dollars higher than the white glove service. And so, yes, there may be some cannibalization insomuch as some who may have chosen the Instant Max Cash Offer will now choose the Top Dealer Offer, but in aggregate, the conversion rate will be much higher. The revenue recognition of Instant Max Cash Offer is gross revenue of the car, and it is a transaction-based business model. The revenue model of Top Dealer Offer is a subscription, where dealers can buy blocks of leads for consumers selling their cars, and that is, think of it, very similar to our marketplace model, where they're paying us for blocks of leads in a subscription-like format that's very high margin, lead-like revenue. Got it. So as you think of, like, the Top Dealer Offer, the subscription, so when you think of your Digital Deal customers- Mm-hmm. This would probably be something which is very attractive for, for them. How do you think the adoption... So it's still nascent, but how has the adoption been for Digital Deal customers versus non-Digital Deal customers? For Top Dealer Offer? For Top Dealer Offer. It's very early. So, we have about 24-25 thousand paying dealers in the U.S. on our listings marketplace. We have about 3,400 dealers who are subscribers to our Digital Deal product. That's about an 18-month-old product. Top Dealer Offer, we launched a few weeks ago, and it's only in 18 metro areas, a little less than half the coverage, half the country covered. And it's not necessarily a product where you need an extraordinary number of dealers. If you have one, say, regional dealer group that tends to bid aggressively on consumer cars, they might be the top dealer offer often. And so you want some competition to ensure that the consumer is getting the best outcome. But if you have one group that's aggressive, then you may be sufficient with only 10 rooftops in a city. It does, though. They will soak up all the leads. So if we, as a business, as CarGurus, can drive more leads in that metro, then we'll continue to grow the revenue. So that's a very nice feature of it, which is, unlike our pure subscription business, if we drive more leads to Top Dealer Offer, they buy blocks of leads, and they would need to buy more blocks of leads. It does fit nicely with Digital Deal in the sense that Digital Deal customers are digital transaction-oriented. But in our Digital Deal product, as a reminder, Digital Deal allows consumers to do many aspects of the transaction on our site, so by the time they get to the dealer, they are as much as five times more likely to convert. They have oftentimes given information around gotten into a loan, given information about a trade-in, maybe put down a deposit, set up an appointment. And so Digital Deal customers can enjoy all the benefits of trade-in as part of Digital Deal. They don't also need Top Dealer Offer. But the dealers who are in the mindset of being forward-thinking of digital retail are very likely to embrace both. Got it. One of the advantages of using the CarOffer platform was that you could enable deals on a long-distance basis. So, like you were talking about earlier today, in terms of you buying a car which was available in California only- Mm-hmm. and having it transported all the way to Boston. What percentage of transactions kind of fall into this long-distance deals? And how has consumer adoption been with these transactions? Is the rejection rate kind of higher with that? Or how should we think of, like, the adoption, and how should we think of, like, the consumers kind of accepting this as, "Hey, this is the way deals will be done in the future? There's definitely a growth in acceptance of that and an eagerness of it, frankly. I mean, I think historically, the auto industry has been one that has been constrained by geography. People used to just shop at the dealers to whom they could drive to themselves, and now that's just not the case. So there's CarOffer on the wholesale side and then CarGurus on the retail side. And on the retail side, we've had a product that is currently called Geo Expansion, which allows dealers to market their cars to a much wider radius, geographic radius, if they have the ability to ship that car to the consumer. That has had good adoption on our site, and you see a growing interest among consumers to be willing to purchase a car that they may or may not be able to test drive beforehand. Digital retail, in general, lends itself to the consumer who doesn't even want to go into the dealership. And so if that consumer doesn't want to go into the dealership or doesn't feel the need to go into the dealership, they're literally agnostic as to whether the dealer is nearby or far away. So 100%, there is a growing acceptance of farther distance retail transactions. On the wholesale side, one of the benefits of a digital platform versus the traditional physical auction-based is exactly that. You don't need to all go to a central auction and look at the cars come down the lane. And on average, we've shared in the past that cars travel about 600 or 700 miles in the CarOffer wholesale network. So when you provide transparency and technology and the data to help dealers know which are the right cars to buy or sell, and you can benefit from geographic arbitrage, then distance matters much less. The final piece I'd say is the ecosystem and infrastructure of service providers to help with those long-distance transactions, whether it's logistics or inspection, has also blossomed in the past few years, and so it's much easier to ship a car from Miami to New England than it was five years ago. True. And so then when you think of, you know, long distance, there's one other element that comes into play, and that is the cost of transportation. Mm-hmm. How are you resolving for that? Is that potentially a revenue opportunity for you down the future? So the way it's solved for, I guess, in CarOffer, is that we work with third-party providers to do the transportation, and that is effectively a pass-through cost, as part of the transaction fees, in this case, of the buyer. As it relates to digital retail, for geographic expansion that happens today on our site, where the dealer is shipping the car, they're typically adding a transportation fee that they clearly state as part of the price of the car. As we move into digital retail, and are supporting more complete transactions on our site on behalf of dealers, to enable dealers to sell cars out of markets that they otherwise wouldn't have been able to sell, we will be... The consumer will be bearing some of that cost, and we will be bearing some of that cost. Okay. Okay. And dealers likely will remain part of, you know, any auto transaction in the near future. When do you think- when you think digital retail, what is your vision of digital retail? What do you think needs to happen for that vision to kind of come true? ... Digital retail is a term that means many different things to different people in the industry. The way we define it is a transaction that takes place without a physical presence. So that means online and over the phone. And digital retail in the sense of, say, Instant Cash Offer, or Instant Max Cash Offer, is one type of a retail transaction that happens online. The other is dealers selling to consumers. And that's where we have been investing a lot of money to help empower dealers to compete with other virtual dealer groups or the national groups that have invested in their own homegrown systems. And so we're building a platform that will allow single one-store rooftop dealers to sell a car to someone who wants a digital-only experience. They don't want to go into the store. They're out of market from that dealer, so they otherwise wouldn't have found that customer, and that customer wouldn't have found that dealer. We're creating two things, I think. One is the trust for that consumer to feel comfortable buying a car from a dealer that they don't know about in a different state. And two, the capabilities to help that dealer sell that car and create a great experience. So that's delivery, logistics, tax, title, registration. When we look at the word dealer, part of it is deal. How does deal work in a digital world? The whole concept of, like, negotiating and, you know, dealers coming up with, like, "This is the best deal for you. Mm-hmm. You know, multiple different times. How will that work in a digital future? It's a good question because... While I haven't seen research on this, in a digital retail transaction, the expectation is that price is the price. Now, there is often, as I said, often, if not always, phone calls involved, and so I'm sure there are situations where there is a transaction that occurs principally or almost exclusively online, where there is some negotiation, but I think there's much less expectation of negotiation when it's done virtually. True. And when you think about this, there are cars is typically the second biggest transaction for most, most consumers- Mm-hmm. Buying a house, being the first. In both of them, there is a lot of negotiation that happens typically, whether it is the house or the car. How do you think the consumer behavior to or the consumer orientation towards doing deals needs to change? Because this is... You're not buying a, you know, a USB cable from Amazon. Mm-hmm. It's a, you know, it's a much bigger thing, much more involved, and a lot of personal statement that comes into play. Mm-hmm. How do you think the consumer thinking needs to change to be able to kind of go and transact completely digitally? Well, the consumer is saying they want to transact much more digitally, if not completely. So rough, rough numbers from our consumer research is. Well, actually, rough numbers from the market is a single-digit% today of transactions are done fully virtually, of car purchases. The rest are done with with some element of online. But what you are hearing from consumers is that, you know, 30%-40% are saying they're willing to do a transaction fully online. So we think online transactions will grow as a% off their small base today. The vast majority of the market, the fat part of the market, is saying, "I want to do more of the transaction online." That might mean getting funded for a loan, agreeing on a price, getting a trade-in estimate, putting down a deposit, signing some of the paperwork. They just want to do more of that online so that when they go to the store, at the end, they can test drive and finalize it, and that might take an hour instead of five hours. So consumers don't really need to change their behavior or mindset because they're in that respect, they're already going down that path. I think the one change that they may need to get comfortable with is what you mentioned, which is. But in exchange for that convenience, and there's a lot of benefits of that convenience, they get more selection, more price, more financing selections, more transparency. In exchange for that, they might give up the ability to negotiate. But I think most consumers would say, "That is a trade-off I will take often." Because while there's some competitive spirit in negotiating, I think consumers... Research has showed that consumers typically don't enjoy that. They just have thought it was part of the process. Agreed. Let's turn to business reviews. That has been in focus all year through. You know, you reported 9% QARSD growth in the recent quarter, and you said it's going to be higher in the fourth quarter. As we think about the difference- We said it'll be similar in the fourth quarter. Okay. I think we have a double digit. There is a significant difference in the QARSD or the, you know, average revenue per dealer that you report versus, you know, the publicly traded competitor that you have. How much of that difference is because of the, the difference in dealer mix versus a, a lower price that you kind of charge- Mm-hmm ... for most services? It's a combination. So because we have a freemium model and that's where we started our business. And by that, I mean, we accept inventory from any dealer, whether they pay us or not. If they subscribe and begin paying us, they get many more features and tremendous amount more value. But we're a much more ubiquitous platform, and as a result, we have more inventory than any other platform, more audience, more time spent, more dealers, et cetera. Because of that, the makeup of our dealer base is pretty representative of the market, and representative of the market is about two-thirds are independents and one-third franchise. Franchise tend to be more price elastic and have a higher price tolerance for listings, and so will pay more, typically on average. And as a result, our platform is more representative of the whole market. Some of our competitors have historically focused more on franchise dealers, and so there's just a mix issue. I can't quantify what that is in terms of representing, representative of the delta, but that's certainly one element. The other element is that because we were the, I suppose, late entrant into the market, we needed to price very competitively in order to earn our seat at the table. And so when we began really scaling the business 10 years ago, we priced very aggressively and have slowly pushed on price. I would say in the last, you know, beginning a couple of years before COVID, we then paused it all during COVID for a few years, and now we've started to do it again. But I think today on average, every dealer research I have seen shows that we are lower price than our competitors. And so what we're proud about and feel confident about is that means we're typically the we are the largest audience and typically the largest volume of leads to a dealer. We have very low funnel, high quality shoppers. Consumers are three times more likely to use our site last before they purchase the car than any other site, because we're giving them more information than anyone else and more transparency, and we charge less. That results in us selling on the basis of being the best ROI, and most dealer research would show that as well. That's interesting. So with prices going up and you're not the only one in the market who's doing it- Mm-hmm. So, you know, and again, consumers had been shopping for automobiles in a big way for the past couple of years. As things kind of start to normalize and there is more inventory out there, dealers start looking at different ways in which they can rationalize their expense and maximize profits. How do you think that is going to impact their choice of which platforms they want to be on? Well, I think there's a number of dynamics going on in the auto industry for dealers right now. Inventory is rising, so their lots are starting to fill up. Inventory is rising much faster for new car than it is for used car, but it's rising for both. The cost of holding that inventory is significantly higher because floor plan financing rates are much higher. Consumer demand is not terribly strong because auto finance rates for the consumers are also high, and fears of a recession continue. Prices are dropping a little bit, but not enough to create significant demand yet. And so I think the smart dealers are saying, "We need to market to keep turnover high, among our units on our lot." So I actually think now is a pretty strong time for a platform like ours. So then the question, to your question of: well, how do they choose platforms? I think about it in sort of a tiered way. There's total marketing that a dealer can do that includes offline marketing, TV, radio, billboards. As you all would think, that's very hard to track, hard to determine the ROI on that. They spend about $23-$24 billion in total. About 12 or 13 of that is in digital, much, much more trackable, much more performance-oriented. And within that 13, about 3.5 is in marketplaces. And from what we've seen, marketplaces versus Google, Facebook, or just other advertising online tends to be one of the strongest ROIs. So I think about it as digital is measurable and a strong ROI relative to offline. Within digital, marketplaces are relatively quite strong, and within marketplaces, I just explained, we're one of the strongest ROIs. So of course, we have dealers that, you know, are that leave us, but I think when you look at that hierarchy, I think you will typically hear that we're one of the last groups that they would wanna one of the last partners they would wanna leave. Final thing I'd say is, we're doing a lot more now. In addition to all the transaction capability that we're building, we're doing a lot more in just giving them more giving dealers more data and insights. So we have tools now that can help them price their cars and help give them literally unit-level advice on how to lower the price as little as possible to get to a higher deal rating to generate more leads on the car. Which is a really effective tool to increase their speed of turnover while maximizing margins still or optimizing margins still. We have another tool which shows them their relative market share of lead volume in the market. We have a tool that shows them if they are dropping their prices faster or more significantly than their competitors. We have tools to show them retail demand trends, and now we're incorporating all of our wholesale data into that, too. So we're telling them, increasingly which cars they should source based on which cars we think they'd be able to sell. In addition to all of the merits of our marketplace, we're giving them just a lot more intelligence and tying that to wholesale so that they can just be smarter operators and focus on margin with them. How difficult is it to develop that technology where you have so much information on both the wholesale, the retail markets, essentially your CarOffer platform? How difficult is the technology to replicate, if somebody else wanted to do that? Well, the technology on our marketplace is not trivial at all, because at the core, among the many things our site does, at the core is our Instant Market Value, which tells consumers if how good the deal is. And in order to do that, you need to be able to ingest tens of thousands of hundreds of thousands of leads from tens of thousands of dealers on millions of permutations of a car and determine the value. That's difficult to do, and it took us many years to get there. But then on top of that, in order to have full visibility of the retail environment, you need to have liquidity in the market. And so with the most dealers and the most consumers, we have the most liquidity. We see the most data points of consumers shopping for and submitting leads on cars. So that's not a technology thing as much as it is a scale moat, I think. On the wholesale side, again, there's technology associated with the Matrix, which is not easily replicable and is very sophisticated in so much as... If you think about it, if it's an auction model, then you are running X number of auctions a day. In the Instant Trade Model, there are millions of effective offers that are being made every day. Now, they don't all get accepted, but there is a constant, offer process occurring. So that's a high velocity, high scale, and pretty sophisticated technology. I think to get to, and then you've got the scale aspect, and CarOffer is not the largest right now, but growing and a very good footprint, and I think has enough scale that it can develop all the data sets that it needs. It will just now be refining them. Then when you put them together and combine wholesale with retail, I really do think we're the only ones that have that. One of the things that you've talked about, I mean, right since the IPO, is increasing dealer count to, like, 30,000 dealers. You, of course, have the largest set of dealers already. What has been the challenge in terms of, like, growing to that 30,000 level? Especially because if consumers are coming to the marketplaces, you know, for information, for review, for getting pricing, getting financing, and things like that, why are the other dealers, there's so many thousands of dealers, why aren't they subscribing to your services or, you know, doing something else with you? Mm-hmm. I think they should be, but some reasons why they may not. If a dealer has, for instance, a high margin, high price strategy, then our site that is unbiased in declaring whether a car is overpriced or a great deal, their inventory will not show well on our site. They will show as overpriced, and so they will not be inclined to do it. There are buy here, pay here sellers that require financing through them at non-market rates, and we don't think that's a consumer-centric approach, and so we don't we won't allow dealers like that on our site. So there are a certain number of segments, or certain segments of dealers that it won't make sense for. I think there are other dealers that, you know, may have budget constraints and may have existing relationships, and it's our job to go and convince them that we would be the best ROI for them. One of the things is, as we look at like 2044 and beyond, your business reviews for this year targeted the dealers, where the prices were like the most underpriced- Mm-hmm ... of the lot. So as we look at like, you know, next year and going forward, the QARSD improvement that one should expect, that should be more modest than the 9%-10% levels that you've been doing. So how can you talk about upsell opportunities that would help kind of make up? And so even if dealer count remains modest or dealer growth remains modest, you can still deliver double-digit growth on the core business. So annual business reviews are just one element of one lever of QARSD. Signing up new dealers at market rates relative to our install base is the biggest driver of QARSD expansion. The second is bringing dealers onto higher packages. The third would be all types of renewals, which, where pricing, unit pricing is an element. And then the fourth is additional products that we can sell them. So, and a fifth is, as we grow lead volume or lead quality, there's upside there too. So we have about 20% of revenue share in the marketplace sector, and we have over 40% of consumer time spent on site. And so we think there's still a lot of headroom in dealer revenue and QARSD growth. That's great. Thank you. On that note, thank you so much, Jason. This has been very, very helpful. Thank you all. Onto the next one.