CARG - NASDAQ

Good day, and welcome to the CarGurus Earnings Conference Call. 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 2025 Earnings Call. With me on the call today are Jason Trevisan, Chief Executive Officer; and Sam

Thank you, Kirndeep, and thanks to everyone joining us today. We delivered outstanding financial results in the second quarter, led by double-digit year-over-year revenue growth and expanding profitability in our U.S. and International Marketplace businesses, reflecting strong execution across our strategic priorities. We are innovating at a greater scale for our customers, delivering data- driven differentiated solutions that help dealers run smarter, more profitable businesses and make the car buying journey more seamless for consumers. These efforts have continued to drive better engagement and outcomes for our customers, which has translated into stronger financial performance for our business and has reinforced our market leadership. We ended the second quarter above the midpoint of our forecasted guidance range for total revenue and adjusted EBITDA. Marketplace performance was a key contributor. Revenue grew 14% year-over-year, adding $27 million, driven by the addition of 1,743 net new dealers globally, continued wallet share expansion among existing customers and improved retention. Marketplace adjusted EBITDA grew 31% year-over-year, underscoring continued strong operating leverage. Our international business sustained outstanding revenue growth, up 28% year-over-year with momentum in both Canada and the U.K. We added 711 net new dealers year-over-year across the regions, while driving greater adoption of add-on products and listings upgrades. We delivered substantial year-over-year lead volume growth in both markets, driven by higher intent consumer traffic that further reinforced our ROI advantage and strengthened our competitive position. In the U.K., we were the #1 most downloaded automotive app in Q2, underscoring rising consumer engagement and brand traction. In Canada, our significant and growing scale was further reinforced by a multiyear deal with AutoCanada, one of the country's largest multi-location dealership groups, which named CarGurus its preferred digital retail and listings partner. Their commitment reflects the value of our performance-driven marketing, proprietary insights and hands-on dealer support. Last quarter, we announced a strategic reassessment at CarOffer. That effort was prompted by the fact that rising market volatility continued to expose structural limitations in the CarOffer instant trade transaction model despite the advancements we've made with predictive analytics, AI-driven insights and the many operational improvements. After that thorough assessment of strategic alternatives, we've made the decision to wind down the CarOffer transactions business. Through CarOffer's Wholesale focus, we built intelligent AI-driven technology and predictive analytics that empower dealers to make smarter sourcing decisions. And we saw that dealers who leverage our insights enjoy disproportionately better performance. Going forward, while we will no longer operate the CarOffer transactions business, we will retain and continue to build on the underlying technology we created for it, capabilities that we believe remain central to CarGurus sourcing strategy. Our priority at CarGurus remains providing dealers with data-driven, scalable solutions that not only help them manage their businesses more intelligently, but also have strong unit economics and clear competitive advantages. Therefore, our focus going forward will be to provide our dealers with technology and analytics that enable smarter sourcing, appraisal, stocking and pricing, but not facilitating the transactions themselves. We believe this will continue to position us as a valuable partner to our dealers, serving an increasing set of their needs and focus us on the types of products we have a strong track record of delivering. This decision follows extensive effort and a thoughtful evaluation of alternatives by our team, and we're grateful to the CarOffer and CarGurus teams who built and supported these capabilities. We're working closely with the dealers who relied on CarOffer to ensure a smooth transition. And more importantly, we're excited about the opportunity to partner with them on the next chapter of our sourcing strategy. With this foundational decision behind us and solid execution in Q2, we have continued to advance our 3 drivers of value creation. I'll now walk through our progress in each. Driver one, expanding our suite of data-driven solutions across dealers' workflows to help them drive more profitable businesses. A core focus of our platform strategy is giving dealers more granular control over how they manage, price and promote inventory to help them run more profitable businesses. One of the clearest signals of that is the strong sustained engagement with our dealer data insights suite. Dealers are not just accessing this data frequently, they're actioning our insights across pricing, inventory mix and marketing strategy. As of the end of Q2, nearly 18,500 dealers were subscribed to Next Best Deal Rating, our most widely adopted report. Our more specialized reports are scaling even faster, in part driven by successful international launches. Merchandising health rose nearly 30% quarter-over-quarter to 8,175 dealers and max margin grew approximately 70% quarter-over-quarter to 4,300 dealers. Just as importantly, we saw a notable uptick in actions taken per dealer with usage intensity rising across every report type. That growing engagement has translated into stronger dealer performance. Historically, dealers using these insights have seen higher audience reach via VDPs, more prospects from leads and faster turn times, leading to higher profit potential. We believe this kind of measurable impact is driving more dealer engagement and higher retention by giving our listings customers a competitive advantage in their markets. An actionable example of giving dealers more sophisticated control of their marketing is our introduction of VIN level targeting for both our highlight and real-time performance marketing products, giving dealers greater precision over how they promote inventory. This added level of recommendations, coupled with granular control is driving results. Highlight adoption is up 33% year-over-year and real-time performance marketing is seeing stronger engagement and improved retention. While still early, we believe the momentum underscores clear demand for precision marketing tools. Building even further on giving greater control to dealers is our launch of New Car Advantage in Q2, our first product specifically designed for new inventory. While the majority of our leads still go to used cars, we have the largest inventory of new vehicles when compared to other marketplaces with over 2 million listings. This market-leading new car inventory asset matters because 53% of shoppers begin their search undecided between new and used. And according to a 2024 Clarivoy study of U.S.-based new car shoppers, over half of all new car shoppers visited CarGurus during their shopping journey. New Car Advantage gives dealers precise control to promote new inventory in the most relevant high-traffic used searches, while also surfacing monthly payments to spotlight affordability, a key factor among used car shoppers. Early results show a 34% increase in VDP views, a double-digit lift in new car leads and 33% more new car searches from shoppers who engage with the title. As we advance our existing dealer products and introduce new ones, we're also making it much easier for dealers to access the growing value our platform offers via major upgrades to our dealer mobile app, a key workflow tool designed to support dealers wherever they work, whether pricing cars on the lot or monitoring performance off-site. In addition to core dealer app functionality such as monthly connections data, pricing notifications, VIN scanning and real-time lead alerts, in Q2, we added 2 more capabilities, barcode IMV scanning to facilitate pricing vehicles at auction and access to Top Dealer Offers to enable mobile inventory intake. Our rapid expansion of dealer app functionality has driven impressive dealer adoption with daily active users up 71% year-over-year, illustrating the CarGurus app's role as a go-to workflow tool. Together, these innovations are deepening dealer engagement across our platform. By giving dealers more control, intelligence and flexibility in how they manage and market inventory, we're helping them run more efficient, more profitable businesses. That value has translated into higher usage, stronger customer acquisition and retention and a growing reliance on CarGurus tools as part of their day-to-day workflow. Driver 2, meeting the evolving needs of car shoppers by powering a more intelligent and seamless journey. We continued extending our reach across more stages of the car shopping journey from early research to post lead engagement. In Q1, we launched CG Discover, our AI-driven conversational experience designed to guide consumers toward more confident decisions. Users who engage with Discover now spend 3x more time on site compared to those who do not, and usage has grown over 70% month-over-month in the second quarter. Building on that momentum, we integrated CarGurus produced video reviews into CG Discover in Q2, giving shoppers richer content to move from consideration to decision with greater confidence. To further support early-stage research, we launched our first sponsored content hub in partnership with a major OEM. The hub provides trusted resources to demystify the car buying process from model comparisons and financing insights to broader automotive trends. We believe this format builds trust and influences brand consideration at the point when consumers begin exploring their options. As we've expanded research tools like CG Discover and the sponsored content hub to support shoppers across more stages of their journey, traffic to our research content has grown 170-fold year-over-year. We also continue to invest in high-impact user experience product enhancements that make the shopping experience more intuitive and personalized. In Q2, we launched multi-make and model search on web, enabling broader exploration without narrowing the search too early, which drove a measurable increase in mobile conversion. On the app, which now drives 1/3 of our leads, we introduced several usability improvements, including a full design and performance overhaul, a redesigned save cars and searches experience and the launch of dark mode, one of our most requested features. We are innovating across the consumer journey, and it has translated into deeper engagement and higher intent. CarGurus remained the #1 most visited listing site in the U.S. and had nearly 85 million average monthly sessions and 34 million monthly unique visitors. But our advantage goes beyond scale. Consumers now spend 74% more total minutes on our site than our closest competitor and 47% of our monthly unique visitors do not visit our competitor sites. That engagement has driven performance. CarGurus-led sales continued to grow year-over-year, supported by lead growth and sustained close rates. These gains reflect progress in addressing more consumer needs from discovery through transaction and earning their time and trust as a result. Driver 3, enabling dealers and consumers to complete more of the transaction online, streamlining the final steps of the deal. In Q2, Digital Deal reinforced its role as a high-impact online to off-line solution, enabling consumers to complete more of the transaction online before visiting the dealership. This creates a more seamless shopping experience for consumers and delivers more efficient, higher intent opportunities for dealers. Adoption has grown to approximately 12,000 dealers globally. And today, Digital Deal leads account for over 27% of the dealer's e-mail leads. By embedding high-intent actions such as applying for financing, placing a deposit or scheduling an appointment directly into the core site experience, we're driving a higher volume of quality leads. This growth reflects rising consumer demand to do more online and dealer preference for leads that signal stronger down funnel intent. Appointments are up 60% year-over-year. 47% of Digital Deal leads now include at least one high-value action, and we've seen a 68% year-over-year increase in shoppers that complete the full Digital Deal submission flow. To build on this momentum, we introduced a prequalified finance-based shopping experience that helps consumers discover vehicles that are already approved to finance. This allows shoppers to stay within budget and move forward with greater confidence. Combined with our recently built capability, allowing dealers to receive full shopper credit applications directly in their finance management, these features are driving higher financing activity. Nearly 30% of Digital Deal leads now include financing. Collectively, by embedding more financing, scheduling and decision-making tools directly into the shopping flow, we're driving stronger intent signals, higher quality leads and improved close rates for dealers. Supporting more comprehensive transaction enablement in Q2 involves significantly bolstering Digital Deals role in powering online to off-line transactions as well as assessing how we support dealers' Wholesale sourcing and fulfillment. That latter focus is what led to our decision to wind down the CarOffer transactions business, including both dealer-to-dealer Wholesale and Instant Max Cash Offer, but still support their sourcing through technology, analytics and insights. The CarOffer instant trade transaction platform performed exceptionally well during the price rising chip shortage period. However, it has struggled in today's more volatile and unpredictable pricing environment, where dealers require more flexibility and broader automation to streamline fulfillment. We believe the underlying technology, analytics and intelligence developed to support those transactions remain valuable capabilities. Sourcing is a foundational part of the dealer workflow, deeply linked to a dealer's retail success and one where we believe CarGurus can deliver a competitively advantaged solution by continuing to provide the data connectivity and predictive intelligence that is only made possible by connecting retail and sourcing activities. We plan to concentrate our future sourcing offerings in 2 key areas, which together, we believe, offer a differentiated market solution and the opportunity to create long-term value. One, we'll continue to deliver AI-powered inventory intelligence through our sourcing insights platform, backed by the industry's largest retail data and consumer insights mode, delivered in ways that will make it easy for dealers to act on those recommendations. These insights drove the highest usage and customer satisfaction across the CarOffer platform. And two, we will continue to enable consumer vehicle sourcing at scale through Top Dealer Offers, the preferred channel for both consumers and dealers. These decisions will allow us to leverage our retail and wholesale data to provide differentiated sourcing offerings to dealers that we believe have proven product market fit and clear alignment with our platform capabilities. In Q2, we delivered strong performance, while realigning our focus around our core capabilities and ability to differentiate, where our data, technology and audience enable us to deliver tremendous value to customers, which we believe will help drive predictable and growing financial results. We are building with greater precision across the platform to help dealers operate more efficiently across their workflows and empower consumers to navigate their journey with greater clarity and control. As we enter the second half of the year, we plan to execute against a clear set of priorities, align capital to our strongest product foundations and invest in the parts of the platform positioned to drive durable, profitable growth. Now let me walk through our second quarter financial results, followed by our guidance for the third quarter of 2025. Second quarter total revenue was $234 million, up 7% year-over-year, just above the midpoint of our guidance range as double-digit year-over-year growth in our Marketplace business was partly offset by declining wholesale and product volumes. Marketplace revenue was $222 million for the second quarter, up 14% year-over-year, in line with the midpoint of our guidance range. Marketplace revenue growth was driven by strength in our subscription-based listings revenue. In Q2, U.S. QARSD grew 9% year-over-year. We added 1,032 paying U.S. dealers year-over-year, marking 6 straight quarters of positive net dealer adds as well as the second consecutive quarter of the highest year-over-year dealer growth since before the pandemic. While this rapid dealer growth can moderate the pace of QARSD expansion, these trends underscore our ability to grow our footprint while increasing wallet share across our expanding base, driven by upgrades, broader adoption of add-on products, like-for- like price increases and higher lead quantity and quality. Our international business continued to demonstrate strong growth in the second quarter with revenue up 28% year-over-year and international QARSD up 19% year-over-year. Wholesale revenue was approximately $6 million for the second quarter, down 52% year-over-year, and product revenue was roughly $6 million for the second quarter, down 45% year-over-year. These declines were driven by transaction volume decreasing 55% year-over-year. I will now discuss our profitability and expenses on a non-GAAP basis. Second quarter non-GAAP gross profit was $207 million, up 14% year-over-year. Non-GAAP gross margin was 89%, up approximately 510 basis points year-over-year. The year-over- year margin expansion continued to be driven primarily by the revenue mix shift toward our higher-margin Marketplace business. Marketplace non-GAAP gross profit was up 13% year-over-year, and non-GAAP gross margin was roughly flat at 93%. In our Digital Wholesale segment, non-GAAP gross margin was up about 460 basis points year-over-year. On a consolidated basis, adjusted EBITDA was above the midpoint of our guidance range at approximately $77 million, up 39% year-over-year. Adjusted EBITDA margin was 33%, up about 760 basis points year-over-year, reflecting the strong revenue growth and operating leverage. Marketplace adjusted EBITDA grew 31% year-over-year to approximately $80 million, with margin up about 470 basis points year-over-year. The higher margins were driven by leverage across our operating cost base. Digital Wholesale adjusted EBITDA loss was approximately $3 million. The decline was driven by the year-over-year decline in transaction volumes and deteriorating unit margins. Moving to OpEx. Our second quarter consolidated non-GAAP operating expenses totaled $136 million, up 3% year-over-year. The year-over-year change primarily reflects higher general and administrative and sales and marketing expenses, partly offset by modestly lower product and technology expense. During the second quarter, we recorded $32.6 million in total impairment charges associated with our CarOffer business. The impairment charge included $2.9 million booked in cost of revenue and $29.6 million in operating expenses in the Digital Wholesale segment. Non-GAAP diluted earnings per share attributable to common stockholders was $0.57 for the second quarter, up $0.18 or 46% year- over-year, reflecting primarily the increase in adjusted EBITDA and lower diluted share count. We ended the second quarter with $231 million in cash and cash equivalents, an increase of $58 million from the end of the first quarter. The higher cash balance was primarily driven by higher adjusted EBITDA as well as working capital inflows of about $4 million, partly offset by $8 million in CapEx and capitalized website development costs. I will now close my prepared remarks with our guidance and outlook for the third quarter 2025. Due to the wind down of CarOffer, we will no longer be guiding to consolidated revenue and consolidated adjusted EBITDA. Instead, we are guiding to Marketplace revenue and Marketplace adjusted EBITDA as that is representative of our go-forward operations. We expect third quarter Marketplace revenue to be in the range of $228 million to $233 million, up between 12% and 14% year-over-year, respectively. Last quarter, we guided to exit the year at a low double-digit growth rate. We are now tracking modestly ahead of where we previously expected we'd be. For the third quarter, we expect our non-GAAP Marketplace adjusted EBITDA to be in the range of $76.5 million to $84.5 million, up between 9% and 20% year-over-year, respectively. Our guide reflects Marketplace absorbing approximately $1 million in ongoing quarterly CarOffer expenses as a result of the wind down. At the midpoint of the EBITDA range, we expect margins to contract modestly on a sequential basis. As we explained last quarter, Q3 will include sequentially higher investments in sales and marketing, international and product innovation. We still expect annualized margin expansion in 2025 relative to 2024. We expect to substantially complete the wind-down activities related to the CarOffer transactions business in the second half of 2025. We expect to incur total wind-down related charges in the range of $14 million to $19 million. We expect third quarter non-GAAP consolidated earnings per share to be in the range of $0.50 to $0.58, up between 14% and 32% year-over-year, respectively, and diluted weighted average common shares outstanding to be approximately 101 million. Finally, I'm pleased to share that with only $15.5 million remaining under our $200 million 2025 share repurchase authorization, the Board has approved a $150 million increase to the existing program, reinforcing our commitment to returning capital to stockholders and our confidence in the strength of our performance, balance sheet and disciplined capital allocation strategy. The authorization is available through July 31, 2026. Since the fourth quarter of 2022, we have repurchased nearly 25 million shares at an average price of $22.39 for a total of about $553 million. With that, let's open the call for Q&A.

Our first question comes from Chris Pierce with Needham & Company.

I was just curious, how should we think about dealer count or revenue per dealer, the way it lines up into Marketplace revenue growth with your existing product suite or the need to kind of drive adoption of yet to be introduced products? Like I just want to get a sense of the white space available. And you sort of hit on it with Digital Deal being uptake of 12,000 dealers versus 33,000 total, but I just kind of want to get a sense of white space with your current product suite.

Sure. Chris, it's Jason. So there's a lot of opportunity and runway for our existing products. We have given some cross-sell penetration data around some of our products, but among our core -- and not for others. And so among our core 26-ish thousand paying dealers in the U.S., there's certainly runway for that among the 42 or so thousand total rooftops in the country just on a core product basis. And then among our other products, our other a la carte monetizable products, we have a lot of runway. I mean, over 50% runway on most of our cross-sell products. From a DDI perspective and just getting dealers to use and engage with and get addicted to our insights and analytics, we gave some of those numbers in the call today, and that best deal rating is the highest at 18,000 and the others are much lower. So you have a good sense of runway there. And then as we introduce new -- both product and features, but also new data and insights, that we feel good about the pipeline of those. We've shown that we can gain adoption. And so we're excited about the product pipeline, coupled with just how much engagement we're seeing from dealers now. I think in this market, they are very eager and hungry for things that can help them navigate the market. So predictive analytics, which we're delivering to them and things like VIN-level targeting and new cars. So all of these are very welcome opportunities for them.

Okay. Perfect. And then just one on macro. You can kind of -- I appreciate -- no one has a crystal ball, but what's the right way to think about increasing used supply as off-lease units come back and sort of -- it's definitely gotten more competitive out there for dealers, but how do you think about what the future might look like as you have these products to help dealers get smarter and there's an overall pool of -- growing pool of vehicles for them to finally sell.

Yes, totally. I mean used inventory is up year-over-year, but it's not where it was pre-COVID. And so we think there's still runway for it. And as you've heard us often say, the best way to make money selling a car is to buy it right. And so that's why we're so excited about the sourcing intelligence that we talked about having built the CarOffer because the CarOffer dealers that used it there showed how much they appreciated it and how well it worked for them. And so if we can parlay that into the much broader base of the 26,000 paying dealers, then we think there's huge upside there.

Our next question comes from Rajat Gupta with JPMorgan.

I just wanted to ask one. Just following up on Chris' question, just a little more broader macro-type question. Given we have a little more certainty around the tariffs, the manufacturers have some certainty, the dealers perhaps have more certainty. Are you seeing some easing in terms of anxiety when it comes to how your customers are viewing the backdrop going forward? Are they more willing to open up their budgets and have more clarity on those budgets? And are you starting to see that with your sales force on the ground that they're more willing to have those conversations and just go ahead with the subscriptions? Just curious to get your thoughts on like what your customers are telling you? And I have a quick follow-up.

Thanks, Rajat, for the question. There might be a little more certainty on tariffs that might ease some anxiety, but I wouldn't say that it's gone by any means. I mean -- so tariffs have played a little bit with consumer demand. They have -- they created a pull forward in March and April. They're creating another and then that abated. There's another bit of a pull forward now with consumers being concerned about tariffs. Tariffs have not really translated into new car price increases, except you're also hearing the OEMs in their earnings talk about the magnitude of the losses that they're incurring as a result of tariffs. And so we do think that at some point, something will need to get absorbed somewhere. And so I think consumers are feeling uncertain. But on top of that, you still have really high interest rates. You have used car prices that are higher than they were a year ago. You've got elevated inventory. Our days on market are pretty steady. And so dealers certainly feel as though there's still remaining uncertainty in new and they've got a lot of used and they're priced high and so they need to move those. And so I think that's -- those are some of the macro factors that are driving some of the adoption of DDI. And then as we've talked about here, when dealers feel that it will be hard to sell cars, they will work with marketing partners like us. And we think we're in a good spot as the market leader as we're growing engagement in our insight with our insights, and we continue to base our -- the core of our value proposition on ROI that we're in a really good spot for dealers given the macro. And I think the macro will remain somewhat uncertain for a while.

Got it. Got it. That's helpful. And just again, zooming out even more, I wanted to talk about agentic AI, GPT 5 launch today. Just with the rise of these tools that can search and transact on behalf of users, I mean, how do you see this affecting your Marketplace model? Are there plans to integrate or partner with such tools just to stay central in the car buying journey. Just curious to get your thoughts on how you see yourself participating, navigating as this evolves.

Sure. So a lot of thoughts on this. I would say, first of all, that our CG Discover, that we talked about and you can use on our site, is certainly a step in that direction. It is far more than taking freeform search and applying it to SRP filters. I mean our AI Discover or CG Discover rather is truly autonomous. It's conversational. It uses reasoning. It sticks with the user across multiple steps. And so that is starting to get to more of an adviser to a consumer doing a search. More broadly speaking, how AI plays into what we're doing, in particular, say, with audience acquisition. So we're using AI, embracing it deeply on our existing channels, and that's leading to terrific efficiency for us. We're honing our generative engine optimization, and that involves both tactical and mechanical things as well as making our data more accessible. And then AI on our site and coupled with direct traffic is, we think, all about the consumer experience. And an important part about the consumer experience, which includes having content for upper funnel and AI discover as well as improving the point of decision and reaching out to a dealer. An important part of that is actually engagement from dealers. And so the trust that dealers have with us and the engagement they have with us, the data they provide us that we wrap into our whole user experience creates a lot of trust with consumers -- and that's really important that it's hard to get in horizontal, even agentic AI. And then the last piece I'd say is that there is an important human layer to shopping for something, like a car. There is emotion to it. There is bespoke opinions and feelings about cars and houses and things like that, that is hard to capture in an AI experience. And we've seen that on VLAs and Google for a while. It serves a certain purpose, but the really deep embedded emotional experience that a consumer goes through on our site is tough to replicate.

Our next question comes from Joe Spak with UBS.

Just first one, just a clarification. The -- so all the costs related to the wind down of CarOffer are excluded. And not to parse words, but I think you said $14 million to $19 million of expense in the second half, and there's language about a significant portion of the cash payments. But are the cash payments equal to that expense? Or are there also some noncash write-downs in that number? And then that $1 million quarterly you talked about being absorbed into the remaining business, is that -- can that be brought down over time?

So I'll take the latter part first. The $1 million per month -- sorry, per quarter estimate is our estimate of recurring expenses that will be absorbed in the Marketplace business. And so think of that as recurring. I mean, there are some things in there that have an end date in the future, but for now, think of them as recurring. In terms of the breakdown of the estimated $14 million to $19 million, approximately $5 million to $7 million of that is onetime restructuring costs, severance and other related costs. Another $8 million to $10 million is actual wind-down operations. So think of that as near-term burn that we've said we expect to be substantially wrapped up in the second half of this year. And then the final $1 million to $2 million is in noncash charges like brand amortization, cap debt, inventory, et cetera.

Okay. Super helpful. And then Jason, when I first asked about Amazon, I think all the way back on your fourth quarter '24 call, you said you would never underestimate them as a formal competitor, but that you found it understandable that they'd focus on new vehicles to start and that's a cleaner market value chain that use is quite different. And so with the recent news that they're moving into used and CPO, just wondering if we can get your updated thoughts there on them as a competitive threat or change the competitive landscape and maybe if you have any feedback you can share from dealers or customers that you've heard from on their initiatives.

Sure. I'll take the start of this. And then, Sam, if you want to share what we've heard from some of our dealer partners. So yes, I will continue to say that we, nor anyone else should underestimate Amazon ever. We do, though, think that we have some really strong moats, and we're clearly watching what they're doing and are aware that they've launched used cars in the L.A. region. We do think that we have some really strong moats in a 2-sided marketplace that include our selection, our data and as I was talking about in the last question, just trust from dealers and engagement from dealers. And that creates really sort of a mutually beneficial experience in both dealers and consumers feeling as though it's trusted and what they're getting is quality and high-quality leads and high-quality introductions to dealers. So building up the dealer ecosystem is not insignificant, and it requires them to want to buy in and to be willing to trust. For consumers, vehicle purchase is, as I also just said, a very emotional and time-intensive iterative process. And we think we have done a really good job of that with practical things like selection and transparency and data, but also having been doing this for a long time, we know how consumers shop. And so we're increasingly personalizing the experience, personalizing the journey and just making it a good overall experience with really high NPS. And so while we would never discount any competitor, we also think that by leaning into that experience and the 2 sides, the trust between the 2 sides that we feel good about where we stand today. But we will continue to watch them and every other consumer. And we've long known that they're going to -- they've said they're going to move into used. And so we were expecting this. Sam, do you want to talk much about what we've heard from dealers? Or I'm going to keep going?

I would only -- Joe, I'd only add that we do obviously are very vigilant about the competition. We're really proud of where we are in the Marketplace right now. Jason said it well, the liquidity of our Marketplace because of that consumer and dealer trust that we've created and the constant use of data to make each side more effective and efficient in this purchase process is what makes us different. Customers that we've talked to and we keep very tight to the Hyundai community that is working with Amazon have said it's low volume, and that's the feedback we're getting so far, but we'll remain vigilant to watch out for it. Reminder, too, that consumers want both online and in-store experiences. So the push to partnering with dealers is what we've honed over the years, and you see the Digital Deal effort in our business, it drives the consumer down funnel, but then into the dealership more ready for the purchase. I think that's the typical process we've honed to feel very strong about our competitive position in the Marketplace.

The next question comes from Marvin Fong with BTIG.

I apologize, I hopped on a little bit late, but I understand that you're winding down CarOffer and the limitations of that platform. Just would love to know though, how do you plan to kind of continue to attack the dealer-to-dealer side of the business? I understand you still have Top Dealer Offer. But in terms of sort of addressing the D2D space, is that something you will be finding an alternative way to do? That's my first question. And I have a follow-up.

Marvin, thanks. It's Sam

Got it. And I think I actually asked you, Jason, this a couple of years ago. But now that you're seeing so much success in the international business, I mean, would you ever reconsider going into beyond just Canada and U.K.? Or is that kind of remain the focus of your international efforts?

That remains the focus for now, Marvin. We are doing, as you heard, really well in those markets. We think we're at pretty interesting points in time in those markets in terms of our lead volume relative to some of our competitors, our lead quality, our dealer satisfaction, our consumer NPS. And so we want to stay focused there because those are big markets and have a lot of enterprise value to go get, and we feel extremely good about those countries for now.

The next question comes from Andrew Boone with JMP Securities.

I wanted to go back to AI search. But instead of talking about agentic, I just wanted to talk more about today. As we do transition to AI overviews and eventually AI mode, what are you guys seeing in terms of the change in traffic? Is there anything that we should be aware of as Google makes that transition?

Sure. Thanks for the question, Andrew. Nice to connect. So we are seeing -- there's still low -- relatively low adoption of AI search among our target audience base. And -- but it's growing quickly, but it's a very low base. And we know -- and you know this, too, that on Google, when Google provides the AI response, there's a much lower click rate on it because it's typically a user getting the answer in that response and they don't need to go further. With auto, it's different. They do need to and are demonstrating they typically -- even if they're engaging with VLAs for AI, they want to go to a destination where they can compare and contrast, they can do research, they can truly shop in a pretty deep environment. So -- but we're seeing growth of that with Google. We're seeing growth of that with ChatGPT and other AI-based platforms, but not in a way that is impacting our audience acquisition yet. That -- regardless of that, though, we are continuing to invest pretty heavily, as I mentioned earlier, in creating the best leverage of AI in our own experience. And the other dimension, too, is that Google, in particular, as well as Meta and Amazon to some extent, have built some really incredible AI tools for their, what you would call traditional search. And so that is helping us get more efficient, where we still have 98% plus or so of the search activity that's relevant to our audience, which tends to be people who are mid- to low funnel. They're in the market for a car, and they are getting a pretty good sense of what they want.

And then just as a follow-up, you guys highlighted retention rates that improved last quarter. Can you just double-click on that and just update us for this quarter? How is retention with dealers? Are you guys seeing any changes there?

Sure. I'll maybe give a disappointing start, which is to say we don't give actual retention data, but we did give the trend that we're improving. But Sam, do you want to talk about some of the things that we think are driving the improved retention, largely sort of based in engagement?

Happy to, Andrew, thanks. The results continue to improve. We look at our monthly recurring revenue and say, we got to acquire business, we've got to expand existing business, and we've got to retain business. All those levers have been really successful for us as you've seen the growth of the Marketplace business. We're really proud of those results. I'd say that the engagement Jason alludes to is really the dealer data insights. We brought something very different to the market. We're providing an opportunity for dealers to run their business with more profitability, and that's what every dealer is looking for. So how can we use data and information to help me price most effectively? In some cases, that's priced down to win more audience, as we've said, terrific results on that front. Some places, I might bid up the price and stay in a great deal segment of our search results and win more business and profits to the business. So that -- the CarOffer Acquisition Insights report, how do I use that to source the right vehicles that will map to market trends and opportunity for increased turn times. All of these are ones -- and merchandise health. How am I merchandising? Am I doing an effective job marketing my vehicles against the competition? All of those put you instead as a consultative partner to dealers, and that's what's growing both the new acquisition numbers, the dealer adds, our expansion of QARSD and the record results on retention, which we think is really a testament to what kind of consultative feedback we're providing to those dealers. I'll add also that we've got an in-market engagement team that goes out to our dealers and says, I'm looking at best practices across this particular region. Let me go into the market and share those best practices with another set of dealers in their lead management, their marketing, their merchandising, their pricing. And that creates just wins for the entire industry with more liquidity. The more liquidity means more ROI, means dealers will flock to our Marketplace and keep that fuel going with our Marketplace revenue growth.

And not to -- I'll just maybe summarize a little bit on top of that, not to beat a dead horse. But the notion of engagement, which we talk a lot about is really key. I mean it's the difference between a dealer feeling as though the leads are going into their CRM and they're working those leads and that's it versus several people at the dealership, their GM, their sales manager, et cetera, using our insight every week and oftentimes every day and opening them every day. And when you create those habits, it's just very difficult, and they don't have -- they're not inclined at all to separate. And you then see that translate into longer-term contracts, which we're seeing grow as well. You also see that translate into app usage, which is growing. I think we talked about that on the call as well, and app usage is highly frequent. And as we add capabilities there, we're getting significant growth and adoption there. So it really is all about creating habits and behaviors of dealers that get them much more embedded with us.

Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Jason Trevisan for the closing -- the CEO for the closing remarks.

Thank you very much. So I'd just like to thank everyone for joining the call today and for your interest in CarGurus. As always, I want to give special thanks to our employees and their passion and commitment every day as well as to our customers who put their trust in us. Thanks very much, everyone. Have a great evening.