Cars.com Inc. (NYSE:CARS) Q3 2023 Earnings Call Transcript

Cars.com Inc. (NYSE:CARS) Q3 2023 Earnings Call Transcript November 2, 2023

Cars.com Inc. misses on earnings expectations. Reported EPS is $0.07 EPS, expectations were $0.1.

Operator: Good morning and welcome to the Cars.com Third Quarter 2023 Earnings Conference Call. This call is being recorded and a live webcast and the accompanying slides can be found at investor.cars.com. An archive of the webcast will be available at Cars.com Investor Relations website. I’d now like to turn the call over to Robbin Moore-Randolph, Director of Investor Relations.

Robbin Moore-Randolph: Good morning, everyone, and thank you for joining us. It’s my pleasure to welcome you to the Cars.com Third Quarter 2023 Conference Call. With me this morning are Alex Vetter, CEO; and Sonia Jain, CFO. Alex will start by discussing the business highlights from our third quarter then Sonia will discuss our financial highlights in greater detail along with our 2023 outlook. We’ll finish the call with Q&A. Before I turn the call over to Alex, I’d like to draw your attention to our forward-looking statements and the description and definition of non-GAAP financial measures, which can be found in our presentation. We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA, adjusted EBITDA margin, adjusted operating expenses and free cash flow.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the financial tables included with our earnings press release, and in the appendix of our presentation. Any forward-looking statements are subject to risks and uncertainties. For more information, please refer to the risk factors included in our SEC filings, including those in our most recently filed 10-K, which is available on the IR section of our website. We assume no obligation to update any forward-looking statements. Now I’ll turn the call over to Alex.

Alex Vetter: Thank you, Robbin, and welcome to our third quarter 2023 earnings call. I’m pleased to report that we delivered another quarter of solid results at the high end of our guidance range. I’m also excited to announce our acquisition of D2C Media, a leading automotive technology and digital solutions provider in Canada that enables us to expand our geographical footprint and gain approximately 1,000 new dealer customers. Before we discuss D2C, let’s start with our strong quarterly results. Our third quarter revenue grew 6% year-over-year, driven by growth across our portfolio, including 9% year-over-year ARPD growth. This resulted in adjusted EBITDA margins of 28%, and we are well positioned to build on this growth. Last month, we launched Cars Commerce, our new go-to-market B2B brand as a natural evolution of our growth strategy.

Cars Commerce reinforces our ability to deliver a connected platform that simplifies the pre-tail, retail, and post-sale experiences for shoppers, retailers and OEMs. The mission of Cars Commerce is to simplify everything about buying and selling cars. We aim to eliminate complexity and increase transparency throughout the local retail experience where sales and service are best facilitated. Our asset-light platform approach, which combines our high-intent audience and industry-leading technology solutions, drive significantly more value and efficiency to dealers and OEMs. Our simplified go-to-market strategy will drive a sustainable growth and adoption of our marketplace, solutions and media products. Central to our platform is Cars.com, our trademark brand that is the number one most recognized marketplace in the industry, attracting nearly 26 million in-market shoppers each month.

This quarter, our traffic increased to 151 million visits, and our organic traffic remained strong at 62%. The Cars.com audience is highly engaged with more than 84% planning to purchase a vehicle within six months and nearly half within 30 days. Clearly, we have the audience to match buyers and sellers at scale. Our research consistently shows that approximately 75% of our audience is undecided on make and model and 90% have not selected a dealership. This is where the consumer pre-tail journey begins with visits to Cars.com for unbiased content, ratings and reviews. And we continually improve our marketplace experience to help consumers make more informed decisions. This quarter, we launched My Garage, which allows consumers to add their vehicle to our virtual garage and gain access to new features such as the Cars.com market value.

Cars.com market value connects our marketplace retail data with our real-time trade-in values, helping consumers track the value of their vehicle and know the optimal time to sell or trade-in their car. We will continue to add capabilities to My Garage and encourage consumers to register profiles on Cars.com to keep them engaged between vehicle purchases. Not only do we provide consumers with critical information regarding vehicles, we also enhance their experience with dealership insights to help them decide where they’ll purchase or trade-in their car. We are a leader in reputation management technology and have the largest reviews platform in the industry with more than 13 million dealer reviews left by car shoppers at quarter-end. For many consumers and especially in the current environment of high interest rates, financing considerations are as important as the vehicle and dealership choice.

The average new vehicle price on our marketplace is up 29% and used car price has increased 40% compared to 2019. Approximately 9,000 dealers have enabled shoppers to get pre-approved using our instant financing solution. Given the significant consumer and customer value, we included instant financing in our 2023 marketplace repackaging initiative, which is now complete and is the significant driver of our 9% year-over-year ARPD growth. Additionally, I’m pleased to report that our customer count has stabilized and we ended the quarter with 18,715 dealer customers. As part of the Cars Commerce launch, we have consolidated our media point solutions under the Cars Commerce Media Network umbrella. Customers of our marketplace and solutions can access our 26 million monthly in-market shoppers on Cars.com across social, search, display, video and content.

By reaching a highly engaged audience, both local and national automotive advertisers can influence the decision journey, while shoppers are actively determining what, where, when and how to purchase their next vehicle. We know that our retail media solutions drives meaningful business outcomes and solve real audience and measurement challenges that our customers currently face. For local dealers, we have seen our product suite outperform Google search advertising by as much as 50% on a lower cost per lead basis. In addition, we see that we’re reaching the Cars.com audience across video, display and social channels also improves dealer website traffic by more than 30% compared to single channel advertising. Bringing together our local media point solutions under Cars Commerce Media Network will allow us to better package our media products for greater retail outcomes.

Cars Commerce Media also works for OEMs. As an example, in the third quarter, one of our OEM partners increased our advertising investment with us for an electric vehicle campaign, which resulted in not only elevated searches and dealer connections on Cars.com, but also on dealer websites that we observe via Dealer Inspire. Specifically, there was a double-digit lift in leads on dealer websites, a clear indication that Cars Commerce Media Network drives retail sales results. Turning to solutions, which also contributed to our strong revenue growth. Our website solutions are endorsed by nearly every OEM in the United States. Today, we power more than 6,300 dealer websites, up 8%, and we grew website upsells by more than 1,000 compared to the prior year.

Accu-Trade, our trade and appraisal solution also continues to gain traction, growing to more than 850 units compared to 400 in the prior year and up nearly 100 units on a sequential basis. Accu-Trade creates a much needed used car pipeline for dealers. Dealers using our technology complete appraisals in a fraction of the time that it typically takes, while also increasing accuracy and transparency for the consumer. By alarming, everyone in the dealership with accurate turnkey technology, we are improving both dealership profitability and the consumer experience online and in the store. For the quarter, dealers conducted more than 500,000 appraisals and nearly 20% sequential increase. Our solutions momentum continues. We are excited about our acquisition of D2C Media, a leading automotive technology and digital solutions provider in Canada.

It affords us the opportunity to further expand our Cars Commerce platform into the Canadian market and demonstrates our continued commitment to empowering dealers with innovative digital solutions. D2C Media has approximately 1,000 customers today, and together, we have website endorsements covering approximately 60% of OEMs operating in Canada, positioning us to unlock additional growth opportunities. D2C has demonstrated strong financial performance, consistently generating double-digit top line growth, and strong adjusted EBITDA margins. This acquisition will allow us to accelerate the growth of both websites and our digital solutions into Canada. Before I turn the call over to Sonia, I want to recognize our team of innovators, creators and problem solvers, who work every day to swiftly tailor our products and simplify everything about car buying and selling.

Together, we posted another quarter of solid results, launched Cars Commerce, grew dealer revenue, turned the corner on OEM sales and expanded our growth opportunities with the acquisition of D2C Media. I am also honored to share that we were recognized as one of US News & World Report’s Best Companies to Work for in 2024. And on behalf of all of our employees, we are excited to welcome the newest D2C employees to the Cars Commerce team, where together, we will continue to drive our platform strategy. Now I’d like to turn over the call to Sonia to provide additional details on the quarter. Sonia?

Sonia Jain: Thank you, Alex. I, too, am pleased with our strong performance. We delivered accelerated year-over-year revenue growth and sequential improvement in margin at and above the high end of our guidance. I’m also excited about our acquisition of D2C Media, which we expect will be immediately accretive to our top line growth rate and adjusted EBITDA margin. But first, let’s start with our quarterly results. Revenue for the quarter totaled $174 million, a 6% increase compared to the prior year, driven by dealer revenue that grew 8% year-over-year to $157 million. OEM and national revenue was $15 million, 2% lower compared to the prior year. However, looking specifically at our OEM advertising customers, revenue increased 12% year-over-year, and sequentially, OEM and national revenue grew $2.1 million.

Additionally, other revenue was down approximately $2 million year-over-year, primarily due to the planned expiration of a non-cash Accu-Trade license agreement with a former owner that expired earlier this year. Moving to our expenses. We continue to exercise disciplined expense management while investing to support our revenue growth. Adjusted operating expenses were $151 million, $14 million higher than a year ago, primarily due to higher investment in marketing, specifically Brand Media to support the Cars.com possibilities advertising campaign in person employee events and compensation expense. Our brand investments are critical to our organic traffic strength and ensure that Cars.com remains top of mind for both consumers and dealers.

The fact that over 60% of our traffic comes to us organically drives long-term marketing and financial efficiency for our business, and it also allows us to deliver a unique, high-intent audience to our customers that cannot be duplicated through traditional paid advertising channels. Product and technology investment increased $3 million year-over-year as we continue to invest in consumer and customer experiences. Alex referenced My Garage and Cars.com market value, new features launched this quarter that drive consumer engagement on the marketplace, enhancing our organic traffic strength and dealer value delivery. Net income for the quarter totaled $4.5 million or $0.07 per diluted share compared to a net loss of $0.04 per diluted share a year ago.

The change in net income is primarily attributable to the change in the fair value of contingent consideration associated with the company’s prior acquisitions. For the quarter, we delivered adjusted EBITDA of $49 million or 28.4% of revenue at the high end of our guidance range. Sequentially, our margin expanded 125 basis points. As Alex mentioned, this quarter, we completed our 2023 marketplace repackaging initiative, results have been positive with over 80% of our 9% year-over-year growth in ARPD driven by a combination of repricing and upgrades. To that point, nearly 70% of repackage customers upgraded to either the value-added preferred or premium package. These higher-tier packages include more of our platform advantages and as a result, provides dealers with greater value.

As an example, upgrading to the preferred or premium package has a double-digit improvement on inventory turn times for dealers. With 2023 repackaging behind us, our customer base is stabilizing and we ended the quarter with 18,715 customers. Independence of repackaging, our Q3 retention rate remained near historic highs. Continued demand for our solutions, both websites and Accu-Trade also bolstered our ARPD growth for the quarter. Website customers continue to grow. As of quarter end, we powered more than 6,300 websites, up over 400 from a year ago and up over 150 sequentially. We remain focused on value delivery to our customers, and the size and scale of our audience is an important component of that equation. For the quarter, total traffic increased to 151 million visits and monthly unique visitors totaled 26 million.

We continue to make strategic moves that expand and advance our platform strategy. Yesterday, we acquired D2C Media, a leading Canadian provider of website and digital advertising solution that extends our reach into new markets with our already strong solutions portfolio. D2C media has approximately 1,000 dealer customers, a strong in-market team with tenured experience in the Canadian market, and importantly, a business that has consistently delivered double-digit revenue growth and high adjusted EBITDA margins. We’re excited about D2C’s potential to help us accelerate our profitable top line growth. Not only do we have the ability to grow our website footprint with our combined OEM endorsements, but we also see additional opportunity for growth through integration and cross-sell of our digital retailing tools and Accu-Trade to Canadian customers.

Now turning to our balance sheet. Our strong cash flow and liquidity position gives us the financial flexibility to invest in growth opportunities like D2C. Cash provided by operating activities for the nine month period ended September 30th, 2023, totaled $92 million and free cash flow was $76 million compared to $77 million a year ago. Cash flow was strong year-over-year despite the $16 million year-over-year increase in cash taxes, the majority of which was offset by favourable changes in working capital. During the first nine months of the year, we paid down $26 million of debt, reducing our total debt outstanding to $455 million as of September 30th, 2023. And year-to-date, we also repurchased 1.3 million shares for $24 million and we continue to see value in share repurchases.

At quarter-end, our net leverage ratio was 2.1 times, at the low end of our target range of 2 times to 2.5 times. We continue to maintain ample liquidity of $279 million, comprised of $49 million in cash on hand and $230 million of undrawn revolver. Yesterday, we funded the D2C Media acquisition with a combination of cash on hand and revolver drop. Pro forma for the acquisition, our net leverage ratio as of September 30th would have been 2.5 times at the high end but still within our target range. I also want to reaffirm our commitment to our balanced capital allocation strategy. Given our strong free cash flow generation, we remain committed to paying down debt and continuing to repurchase shares. Now for our fourth quarter guidance, we expect to deliver revenue of approximately $177 million to $179 million, representing year-over-year growth of 5.2% to 6.4%.

Our guidance reflects continued growth in dealer revenue driven by continued adoption of dealer solutions and media products as well as modest sequential improvement in OEM and national revenue. In addition, our fourth quarter guidance includes two months of revenue associated with our acquisition of D2C Media, which we expect will contribute approximately 1.5% of our total revenue dollars in the fourth quarter. Recall that sequentially, the fourth quarter is often impacted by seasonal trends. And our year-over-year growth rate reflects both the successful launch of Accu-Trade Connected and the favourable renegotiation of key website agreements from the fourth quarter of last year. For the full year, our fourth quarter guidance, along with performance to date, places us comfortably within our previously shared revenue guidance range of 4% to 6%.

Full year performance reflects the benefit of this year’s marketplace repackaging initiative, continued penetration of our dealer solutions and modest improvement in OEM revenue, offset by a challenging environment for auto adjacent advertisers, including insurance companies. We expect fourth quarter adjusted EBITDA margin of 29.5% to 30.5%, in line with our previous guidance of approaching 30%. Our consistent and reliable growth demonstrates that our asset-light platform strategy with connected technology solutions generate strong diversified revenue streams for our business, this along with our focused execution position us well to further drive sustainable, profitable growth. And with that, I’d like to open the call for Q&A. Operator?

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Q&A Session

Operator: [Operator Instructions] And our first question comes from Tom White from D.A. Davidson. Your line is open.

Thomas White: Great. Good morning. Thanks and nice quarter guys. A question on OEM ad spend. It sounds like it’s perking up a bit. It’s clearly — it’s been a few years since new vehicle production levels and inventories were kind of sufficient enough to have these OEMs really need to support their franchise dealers with much spend. And in that time, I’d imagine that the types of digital advertising technologies and product offerings that are available to OEMs and getting pitched to OEMs have evolved and changed quite a bit. I’m curious if you’d say that, that was true. And how can you guys ensure that Cars.com can recapture kind of its fair share of this OEM digital ad revenue as it recovers in the coming quarters? Like do you think you’ve got the right products?

Do you need to change or add kind of new offerings to capture that OEM kind of ad spend recovery? And then just a quick follow-up on dealer count. It sounds like it’s stabilized here in the repackaging is done. Just curious if you’re seeing any kind of boomerang customers that may be churned earlier in this year kind of coming back now that it looks like inventories on dealer lots are — have been building a bit? Thanks.

Alex Vetter: Tom, thanks for your comments on the quarter. We too are pleased. And to start on your question regarding OEM, products are always going to change and evolve. But I think our core reason to believe is more about audience. We’re capturing organically the highest concentration of active in-market shoppers that are actively comparing makes and models and deciding what and where to buy in real time. I mean if you look at OEM spending over the last, call it, 10 years, it’s been obsessed with legacy digital KPIs around frequency, clicks, impressions, and we see the market moving much closer towards retail outcomes, and that as OEMs need to rethink their business models and become more efficient, they’re going to need to spend less money, but maximize sales output.

And we see clearly through our data that when OEMs invest in Cars.com, it drives dealer retail results. And so, yes, we’ll tweak our product mix, and we’ll offer new solutions that uses technology to its advantage, but ultimately, the value prop is access to a high intention audience. I think on the marketplace side, we are seeing boomerang dealers that have come back. I think that any time you raise rates in mass on your customer base, you’re going to lose a percentage of that market. But the value we were delivering more than justifies the price points that we were asking. And so, we are seeing dealers come back to us, particularly now that demand is cooling and inventory levels are rising, dealers are looking to figure out how they’re going to be able to move their inventory at a faster rate.

Thomas White: Great. Thanks very much.

Operator: Thank you. And our next question comes from Rajat Gupta from JPMorgan. Your line is open.

Rajat Gupta: Great. Thanks for taking the questions. I just had a question, a broader growth algorithm for the company. Outside of the D2C acquisition and with some of the repackaging initiatives now behind you, what should investors be banking on as a key source of growth into 2024 and beyond? Is it the cross-sell of the new products? Is it a rebound in dealer count, OEM, national revenue? I mean any one or two areas that you would stress on that would be the key drivers of growth going forward. Just a broader question, and I’m going to have like more of a model follow-up. Thanks.