CARG - NASDAQ

Good day and welcome to the CarGurus' Second Quarter 2023 Earnings Conference Call. All lines participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kirndeep Singh, Vice President and Head of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon. I'm delighted to welcome you to CarGurus' second quarter 2023 earnings call. With me on the call today are Jason Trevisan, Chief Executive Officer; and Sam

Thank you, Kirndeep and thank you to all those joining us today. As 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 30th, 2023, 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 are 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 through 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 there is an opportunity to expand dealer wallet share through multiple levers, one of them being unit price increases through ABRs. We ended the quarter with 24,220 paying dealers in the US, down 1% from the year-ago period. Excluding attrition related to ABRs, we would have had net dealer adds for the quarter. As we previously mentioned, we are comfortable with the ABR-related attrition as 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, US Quarterly Average Revenue per Subscribing Dealer or QARSD was $6,110, growing 6% year-over-year. QARSD 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 ABRs. Through continuous investments and improvements in our product offerings, we generate greater value for both our dealer partners and our largest consumer audience. The strong growth in QARSD underscores our ability to monetize offerings and lead volume beyond just the ABR 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. And the price analysis tool enables dealers to assess whether they are enduring price cuts or churn 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 a ChatGPT plug-in that generates vehicle description pages based on the shopper's specific criteria. The way consumers shop for vehicles continues to evolve. And at CarGurus, we are 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 trade-in estimates, offering prequalification or hard pull financing options, facilitating the purchase of dealer- or vehicle-specific finance and insurance products, placing a deposit and scheduling an appointment. Adoption has grown significantly with 2,900 dealers onboard, representing a 29% sequential increase. We are delivering dealers more value through Digital Deal with higher quality leads that are growing as a share of our total leads. In the past year, Digital Deal dealers have seen greater than 4,000 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 e-mail leads, making the dealership more efficient in closing a deal and moving on to their next sales faster. Moreover, customers who schedule an appointment have up to a 50% increase in close rates compared to Digital Deal leads 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 lots. 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 250,000 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, who 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 CarGurus' platform, dealers can efficiently sell additional inventory to a wider audience and ultimately grow dealership profits. Digital Retail makes attribution easier for dealers, which in turn allows us to demonstrate our superior ROI 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, CarOffer achieved profitability and exceeded our forecast for the quarter. We are 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, we observed 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 a title. Improvements in our titling process stem from greater operational rigor and bolstering the titling team. A shorter titling turnaround time has 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 CarOffer platform. We ended the quarter with 20,793 transactions, up approximately 19% quarter-over-quarter. The increase in dealer-to-dealer volume 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. And 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 continue to limit volume. The net overall increase in transactions resulted in gross merchandise sales or GMS of $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's 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 CarOffer 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 in a stable or positive wholesale environment, we are now enhancing our matrix tooling with additional features. These additions aim 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 steppingstone, leveraging the matrix technology while introducing optionality. For example, 24-hour approval increases dealer confidence by allowing the 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 have also enhanced our use of mobile app and click through, providing dealers access at their fingertips to efficiently browse and approve 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. We've made 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. In Digital Wholesale, we are enhancing our matrix technology with new tool sets to instill dealer confidence and engagement. And with Digital Retail, we are 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 have remained 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, $0.8 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, 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 CarOffer 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 headcount 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 $0.29 for the second quarter, $0.04 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% in the year-ago period. In the second quarter, we incurred total operating expenses of $146.4 million, down 11% year-over-year. As I mentioned earlier, the decrease in operating expenses reflects a 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 CarGurus totaled $16.4 million, and 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 1.3 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 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. In 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 fourth and fifth largest non-seasonally adjusted month-over-month price decline in June and July since 1997 and a 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 our reduction in Instant Max Cash Offer 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 CarOffer 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 $0.24 to $0.27. 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, in service of 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. [Operator Instructions] Today's first question comes from Chris Pierce with Needham. Please go ahead.

Hey, good afternoon everybody. Just go a little deeper on ABR for us, please, especially the comment you made around 20% of dealers are up for review. I just want to get a sense, does that mean that the other dealers will be up for review in 2024 or 2025 or certain dealers aren't up for review because they have -- they're already at kind of where you see at scale pricing? And then on QARSD growth, could you kind of bucket -- you gave some buckets as what drove the growth. Could you give us some range as far as how much of the growth came from ABR modifications and other buckets that you gave?

Hey Chris, it's Sam

Yes, thanks for the detail. Thank you.

The next question comes from Jed Kelly with Oppenheimer. Please go ahead.

Hey, great. Thanks for taking my question. Just going back about pricing, it looks like you're obviously targeting the underpriced dealers, some of the low-hanging fruit and then going to add on the packages next. I mean, just can you talk about the pricing environment, given all that's going on in the auto market? We have lower approval rates. Wholesale pricing is going down. Just can you talk about some of the stability around pricing? And then can you just talk about where we are for -- in terms of CarOffer, in terms of when you start getting comfortable around beginning to play offense, seeing lower arbitration? And it seems like you've got that business back to profitability. So, that's well done, but just where we are on -- in terms of getting back to growth mode? Thanks.

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 estimated volumes are lower than where they've been in years past, and consumer demand is also lower. But a lot of times, that makes dealers, especially the more sophisticated ones, realize that you need to market more aggressively in order to move the cars that you have to keep your days on lot at a reasonable level. So, you're right that we are targeting the most underpriced with our ABRs. But as Sam just said, we interact with and often are making amendments to and positive changes to the subscription, 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 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 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 they're going to sort of aggregate and concentrate in the highest ROI. Sam, do you want to speak to CarOffer, the question of CarOffer?

Sure. Thanks, Jason. Jed, thanks for the question. We are really, really pleased with the operational improvements at CarOffer. 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 turning that to a 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 drop-ups in the Wholesale market not seen since 1997 in June and July. The -- it's a seasonal downturn typically in buying activity. You talked about the wholesale pricing in the market. Dealers are hanging on to more inventory. Conversion rates in the auction arena are down -- 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 -- they're 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 the platform until we changed our inspection work. We changed our arbitration process. We changed our sale rates. We changed our rematches. Our transportation has gotten tremendously better. Our title time to get titles 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 price 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, which is 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 effectively. 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 that dealers have in this platform, almost a CarOffer 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 CarOffer?

We do, Jed. A lot of this is technology and AI to improve the capabilities of dealers in 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 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 talk to a lot of new customers about buying into the platform. So, it's reconditioning us to the confidence building and reutilization of new platform with new tools and a much better operating environment 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.

Yes. Thanks. I have two. First, Sam, you were just talking about the enhanced features with CarOffer. I guess a couple there. How quickly do you expect some of those enhancements to matter and drive noticeable volume? And would you ever, I guess, look to go a step further and offering more like the traditional time to auctions just as another way to gain share with those dealers? Is that sort of on anyone's mental whiteboard anywhere? That's the first one. And then the second one, probably for Jason, on the EBITDA outlook commentary. You mentioned Marketplace EBITDA sounds like up sequentially from here, but CarOffer maybe still being a headwind negative until the market turns around. Is 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, do 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 some success with these new tools that you're seeing as added capability to an instant trade form. 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 -- it's tooling added to the very distinct and complex capabilities that we've built over the years to help dealers use it. And it's actually leading to more transaction volume that we don't believe we would have had in a completely downward 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 if you take it further to thinking about time to auctions, we think there's a different model in 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 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 and can be used very quickly at the time of somebody doing other activities as we know many of our 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 -- how do we enhance the instant trade platform with things like 24-hour that gives them a chance to just be comfortable on making the right purchase decision. All of that happening, though, 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 I'm happy to see that these tool sets will build more of that confidence for when the market keeps on in the right direction, we'll have more capabilities to serve our customers with. Jason, would you take the EBITDA?

Yes, I can chime in on EBITDA. So, yes, Brad, I think you're thinking about it directionally right, which is we've said Marketplace EBITDA sequentially is strong, given growth in Marketplace. And you've heard our commentary on some of the OpEx trends in Marketplace. And CarOffer is as you've heard from the guide, at the low end of the guide, it's offsetting that and even a little bit more than offsetting it. At the high end of the guidance, pretty flat, flattish. So, it's just harder to predict with CarOffer for all the reasons you've heard us say in the past. And -- but you've heard Sam's commentary and where there's the much bigger nut, so to speak, is in the Marketplace EBITDA where the trends are good.

Got it. Thanks.

The next question comes from Naved Khan with B. Riley Securities. Please go ahead.

Hi thanks a lot. A couple of questions. Maybe just on the CarOffer side of the business. Car rental companies came back. Just curious what your thoughts are about their continued participation? I know there's seasonality, and they try to obviously get the vehicles before the peak season starts for them. But do you expect them to continue to come back in future periods? Or are they just reacting to small allocations from OEMs and therefore, they may not need CarOffer as much in future years? So that's one. And then secondarily, maybe just talk about the macro and maybe your thoughts on when the price declines may started to normalize? Do you think that might happen in 2024 or any thoughts there would be helpful?

Naved, I'll take the first one. And I think it's a good question on the rental fleets. We have always been -- 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 higher-end vehicles that rental fleets have been looking for to supplant what can 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 inspection is helping them get more and more of those. So, we're just limiting how much participation they're involved in on our platform from a buy perspective. Right now, the message in the market for the 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've 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 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 period of time from a buy transaction perspective. Jason, do you want to take the macro question?

Sure. On the macro, we've said -- I think it was last quarter where we shared that we think used car prices will probably end the year a little bit below where they are now. I think we still have reason to think that that forecast is directionally accurate. It's a very hard thing to predict. But I think two things I would add that are important layers on top of that. One, it's not so much if there's a steady trend down or a steady trend up. It's whether there's 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 is 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. And so if we enter an environment where we just see more stabilization then whether it's stabilization slightly up or slightly down, I think that's a far better scenario than 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 in 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. But I think at a minimum, it's 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 Colantuoni 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 you're less sort of focused on growing that offering in the long-term versus some near-term macro impacts like softening in the wholesale market? And second, with the significantly higher lead conversion in Digital Deal, it seems like there's a huge opportunity to increase QARSD over time. Talk about your expectations for expanding that offering across the dealership network in the coming years and if there's any barriers to integrating that product into dealership's workflows?

Sure. Thanks John. I'll actually take the second one first. And Sam, if you can speak to the Max after I can -- but yes, I mean, we agree with you, John, that the -- what Digital Deal is doing is allowing users who are inclined to 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 get it. And as a -- the proof of that is that they're focusing on those leads first and foremost versus others. And so they know that they're 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 adopt it are -- they're not decreasing their lead volume at all. And now a percentage of -- a growing percentage of their leads are converting much better and are higher quality. I do think there's a mindset of this customer segment where they aren't always thinking in full complete ROI and are thinking in terms of an expected range of what they'll pay for a lead. And so because these are not your average lead, these can convert it up to five times, we need to help really try to bring them along and show them the added value because while they may be getting the same leads they were getting 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 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's not much friction in terms of getting into their workflow. I mean, onboarding into Digital Deal is pretty simple, straightforward. There's a couple of features like hard pull 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 training. And we help 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 we see this when, let's say, a large dealer group has some stores where it just clicks sooner, they're seeing much higher cars sold as a result. And they are 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 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 what it was before.

I'll take it, Jason, on the IMCO. John, thanks for asking the question. We remain very bullish on IMCO for the long-term. We think we bring a unique capability to the marketplace, something totally differentiated. And with our 40 million visitors, we're finding something that is truly market leading for them as evidenced by our NPS scores in the 90s. 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 drops when you think about the average selling price, if you will, of the vehicle. Competitive bids in the market because macro environment is going down, 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 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 probably have to hang on. The 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 hopefully come out of third quarter and look to bigger growth going forward. Thanks for the question.

Thanks so much.

The next question comes from Marvin Fong with BTIG. Please go ahead.

Great. Good evening. Thanks for taking my questions. So, two for me. I guess to take up maybe a different lens on Digital Wholesale. Can you just talk about the number of dealers that you're -- like how is 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 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 ABR. I think -- I know you said 20% this year. Could you just kind of speak about 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 as the ones you've already been addressing? I just want to get a sense of how the tailwind of ABR, should that be as great as we've seen so far this year? Thanks.

Thanks Marvin. I'll take the first one related to the CarOffer business. We did pause going out to the market. I think I mentioned that we converted a sales team into a focused on account management. We just had to 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 weren't maximized and working as efficiently or running profitable business as we got to. It wouldn't make sense to go bring on a lot of new customers when we're in the middle of retooling the operations of the business. So, we did convert those folks and have taken on new business only really more on an inbound process. So, there are large national accounts who buy a lot, and an instant trade platform is perfect for them. And they've sparked in interest and said, hey, I heard you got CarOffer 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 stopped buying for a period of time or 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 and enrolling customers who've never been on the platform before. That will happen once we get through this period of saying macro environment improves, and we're fully there on the operational improvements to say, let's go out and start pitching CarOffer 2.0. We're not there yet. We're not guiding to that in third quarter right now. Jason, you want to talk about ABRs, and I can follow on if there's anything?

Sure. So yes, Marvin, we said about 20% in ABRs for the year. So, halfway through. It's in the ballpark to say we're 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're starting with the most underpriced dealers. But I think the really important point is the one that's made a couple of times tonight, which is -- but ABR is just one -- that's just one use case where it's a dealer that is underpriced and is not doing one of several other things that we do with our dealers. And those include things like a package upgrade, buying a new product, their lead volumes may have increased or they may be a group that's adding stores. And so all of those results often, if not almost always, result in more subscription spend. It's just not in the form of what is really kind of a simple ABR of a repricing of an underpriced dealer. And the percent of dealers that go through all of those other things plus the ABRs is, as you would expect, a much greater percent.

Got it. Thanks so much guys. I appreciate it.

The next question comes from Ron Josey with Citi. Please go ahead.

Great. Thanks for taking the question guys. Appreciate it. Jason, I wanted to stick with the ABR commentary and Sam, on the ABR commentary. I think I heard on the call, you mentioned a 40% win back rate post 1Q ABRs. Talk to us about what led these dealers to come back to the platform. Are these the leads that they're missing, the traffic? Any insights there would be helpful. And those that came back, are they buying more products like Digital Deals or trialing it at least as you look to increase overall usage? Or are they just primarily saying, okay, fine, we're going to pay higher prices. And just on the ABR sort of like upsell, when you enter the ABR process, I'm curious what percentage of the ABR is often just greater adoption of the products that CarGurus is offering? Thanks guys.

Hey Ron, it's Jason. So, I mean, what's bringing them back is that they are realizing, I think, that they were very -- 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 like paying more, they have realized that it's still money very well spent for them, and so they've come back. We've shared studies in the past with you all and our dealers that show that if a dealer 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. In a way, they're sort of creating their own A/B test to say, well, what happens if I'm not on CarGurus? And 40% of them are saying, well, even though I didn't like the price that was now proposed to me, I realize I -- it's still money well spent. I can't live without it. The -- yes, when they come back, they are paying the higher prices that we were proposing. So we're not -- that's not a negotiating tactic by us or them. They're coming back at what we suggested. Sometimes they're coming back with more products, of course, or sometimes they might be coming back with a new package level. But I would say in most cases, these tend to be dealers that were paying extremely low prices before. Their subscription rate increase is -- was -- has become appealing to them or become acceptable to them. So, to then add on more spend is not something that they'd do right away. You then asked -- sorry, your second -- what was the second point about when they come back?

Just curious--

Was it will they on take new products?

Yes, will they take on new products. And maybe since I think you sort of answered that, I'll just add a third one in there. Are these dealers understood that they're spending terrifically volumes, unbelievably low prices, that's why you're focused on them first? Are these the dealers that have been on the platform the longest? Is that what they -- the longest, the old, call it, better pricing? Or is just it's a mix of cohorts? Thanks Jason.

It's a mix. It's a mix. I mean, the past three years have been strained, right? And so as lead volumes may have changed at a -- I mean, they certainly changed, but may have changed more materially at some dealers than others. And we really weren't doing much sort of true unit repricing during COVID. And so they could have joined a year ago and may have more inventory now. And they're getting more leads now, and they hadn't -- we hadn't touched their price. So it's a mix.

Thanks Jason.

We still believe -- yes, of course, just to reiterate, I mean, in all of our research and research that we've seen from third parties that we still have the best ROI. When you look at what dealers pay for our leads, the quality of the leads and the cars that they sell as a result that we offer a great ROI. And so a lot of these ABRs are 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 the ABRs and just belabor a 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 to the competition and the returns you're driving? Or how should we think about maybe this ABR process in out years in terms of where you are today with the adjustments? Thanks.

Yes, I mean, we -- so some of my comments from the last question are that we still believe and have every evidence seems -- a lot of evidence seems to support that we're the strongest ROI, 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 would say that there's room -- there's quite a bit of room to go. We have said that we're starting these earlier ABRs with the most underpriced dealers. And so if we're successful at this and are aggressive with this from a volume perspective, then the ABR sort of just unit price alone push will lose steam over time. But we're also really focused on continuing to add value to our product at each package tier. And we're -- 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 a lot -- 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 a customer could always divide what they pay us -- the number of leads by what they pay us and say it's a cost per lead. But I think the reality is that we're delivering a lot of other types of value. And so that leads to an overall ROI that is not just a -- well, what's my tolerance for a cost per lead.

I guess maybe just a follow-up. I guess what I'm trying to triangulate a little bit is, I mean, within kind of the competitive landscape of the Marketplace subscription, I mean, are competitors still taking price up? Are they mostly stuck, and there's still kind of a gap? And it sounds like dealers maybe don't necessarily understand the value right away, which is why they churn, and they have to kind of run this A/B test to come back. I mean, are you improving kind of the attribution so maybe that doesn't happen as you maybe revisit this next year? And 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.

Yes. So, we still believe there's a gap, full stop. I can't speak to competitors though I believe they have said and we hear from dealers that they also are trying to take price. In terms of -- we are always trying to improve attribution. And we've actually made some strides there in leveraging third parties that help dealers understand what the sold cars were from our platform. So, conversion rate from lead to sale. And then we're adding these other sort of dealer data insight-type products like we've talked about with fair share and price analysis and market analysis tools and other forms of leveraging data science to give them more insight into how to price and merchandise their cars. Let's keep in mind though too that, I mean, the bulk of dealers that we talk to who are underpriced and know they're underpriced, and we discussed through with them why they're raising their price, they get there on 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 month. And so this is not -- we're now talking about sort of fractions and fractions. And those are the ones that, yes, have realized through running their own test just how valuable we are.

This concludes our question-and-answer session. I would like to turn the conference back over to Jason Trevisan, CEO for any closing remarks.

Thank you. So, I'd 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, I want to reiterate our thanks to all of our CarGurus employees and CarOffer employees. I know it's been a great quarter, a lot of hard work and we're very grateful for that. So, thanks everyone.