Cars.com Inc. (NYSE:CARS) Q4 2023 Earnings Call Transcript

Cars.com Inc. (NYSE:CARS) Q4 2023 Earnings Call Transcript February 22, 2024

Cars.com Inc. misses on earnings expectations. Reported EPS is $0.12 EPS, expectations were $0.2. CARS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to Cars.com Inc.’s Fourth Quarter and Full Year 2023 Earnings Conference Call. This call is being recorded and a live webcast and 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 Randolph, Director of Investor Relations. Thank you. Please go ahead.

Robbin Randolph: Good morning, everyone and thank you for joining us. It’s my pleasure to welcome you to the Cars.com Inc.’s fourth quarter and full year 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 fourth quarter and full year, then Sonia will discuss our financial results in greater detail along with our 2024 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 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 10K 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 fourth quarter and full year 2023 earnings call. 2023 was a strong year of growth as we executed on our strategy to enable our industry. We delivered another quarter of solid performance, exceeding our guidance. We grew revenue sequentially across marketplace, digital experience, trade and appraisal and media solutions. For the year ARPD grew 7% resulting in $689 million in revenue, a 5% increase year-over-year. Our reoccurring revenue model supports our strong adjusted EBITDA, which was $195 million, representing a 28% margin, and we ended the year with more than 19,500 dealer customers and rebounding OEM interest in our retail media network. 2023 also marked a year of significant strategic progress.

Our team executed on meaningful initiatives that advanced our platform strategy and we continued to invest in innovation for both consumers and partners to drive further growth. For our partners, we united our B2B brands under Cars Commerce, making it easier for them to do business with us and reinforcing our commitment to simplifying everything about buying and selling cars. This underscores our differentiated platform with a powerful combination of audience, technology, and data. During the fourth quarter, we also expanded the Cars.com geographic footprint into Canada with the acquisition of D2C Media, a leading automotive technology and digital solutions provider. The integration of technology and teams is well underway. And throughout 2023, we introduced new simplified marketplace subscription packages, enabling customers to seamlessly leverage our platform capabilities.

This resulted in nearly 70% of repackaged marketplace customers opting for a higher tier subscription package that will drive continued growth in both revenue and adjusted EBITDA. We’re actively helping our customers drive commerce by consulting them on how to win the customer journey. Our dealer experience report helps dealers improve and differentiate their retail experience. For example, George Lawton, the Marketing Operations Manager of Schomp Automotive, a 12-store dealer group in the greater Denver area, has been actively monitoring the experience report each month to manage the reputation of his stores. Since leveraging this report, Schomp’s dealerships are trending up in every experience category. Importantly, we had a record year for customer submitted reviews, now totaling more than 13 million, we continue to have the largest number of reviews in the industry, cementing our leadership position and reputation management.

Moving on to enhancements we made on our consumer experience on Cars.com, we debuted a new feature called Your Garage, enabling consumers to track and trend the real-time trade-in value of their car with the Cars.com instant market value. Initial results have been positive. Consumers leveraging Your Garage visit our marketplace 70% more frequently, reducing our reliance on paid media. We also launched the all New Car Hub to help consumers and brands connect. With new car inventory up 36% in January and with approximately 70 new model launches planned for 2024, including a record number of EVs, OEMs and dealers need to stay in front of undecided shoppers. And new Car Hub combines Cars.com’s proprietary research with OEMs’ branded content and why buy messages directly into our marketplace.

OEMs showcasing their vehicles on New Car Hub see increased consumer engagement in their make and models with increases in share of search volume, traffic, and leads. Helping OEMs and dealers work together to promote inventory and drive commerce is core to what we do. But we’re also leveraging technology to make our industry more efficient. We continue to lead with innovation in our early adopters of AI. We have expanded the use of generative AI to support the user experience in our marketplace. And we’re also in market with several tools such as AutoCorrected, which identifies and highlights important features in seller notes and our conversations tool powered by AnaBot that helps our customers streamline and improve their operating efficiency and user experience.

Our ongoing investment in AI technology reflects our commitment to innovation and the enhancement of our services. In addition to enhancing our consumer and customer experiences, we continue to innovate and promote our original content and #1 marketplace brand Cars.com. Recall that the majority of our traffic comes to us organically. Unlike others, we don’t rent our traffic we own it, a true differentiator amongst our competitive set. And to further our advantage, Cars.com has the number one most downloaded auto marketplace app where organic traffic increased 10% year-over-year. Best thing in our brand, generating great content and leveraging our editorial expertise, I’m pleased to report that we set a new all-time company record for total traffic in 2023 reaching 615 million visits, a 5% increase from the prior year.

Our platform offers a winning combination of demand generation and industry-leading tech solutions that delivers significant value. Our website business continues to grow and at year end we powered approximately 7,300 dealer websites, including D2C. With the expansion into Canada, our TAM expands as more dealers are interested in our website solutions that are supported by the Cars Commerce platform. Dealer usage of AccuTrade, our trade and appraisal solution also continues to climb. We ended the year with more than 880 AccuTrade connected customers. For the quarter, dealers conducted more than 590,000 appraisals of 15% sequential increase. Our technology enables dealers to quickly and efficiently buy and sell inventory while helping maximize profits and improving the customer experience.

As used car inventory becomes more constrained and used car profits come under pressure, it’s more important than ever for dealers to reduce their dependence on the expensive auctions and source cars more cost effectively. AccuTrade enables dealers to save on average $1,300 per vehicle in costly auction and transportation fees by enabling them to buy cars directly from their customers. Unlike other services that generate leads that don’t close or run auctions without sufficient buyers or sellers, AccuTrade is a complete buying solution that enables dealers to source cars from their showroom, service lane, website, and the Cars.com marketplace. AccuTrade also offers the most accurate pricing and value for vehicles because we leverage not only Cars.com’s robust retail, supply, and demand data, but we also have in-house industry experts who make real-time market adjustments.

And so, while the rest of the industry relies on historical trends and broad category-based wholesale data for ranges, we accurately price every car. Our OBD scanner automatically syncs detailed mechanical findings from the customer’s vehicle to inform the appraisal in real-time. AccuTrade doesn’t just focus on the history of the vehicle, we focus on its health, uncovering needed repairs that save dealers on average $650 per vehicle, while also providing consumers with greater transparency of the data, powering the cash offer, thereby reducing negotiation friction between the buyer and the seller. Dealers can now buy more cars from their own customers, which drives greater profitability as they can now avoid the costly auction altogether.

We are proud that FordDirect selected AccuTrade as their brand’s preferred trade and appraisal solution for the shop, a newly launched preferred vendor selection program for their more than 3,000 Ford and Lincoln retailers. OEM endorsements help speed adoption and we are excited about helping Ford and Lincoln dealers take advantage of our technology. Cars Commerce has deep data and analytical capabilities. We recently launched our new industry insights report, which analyzes supply, demand, pricing, and consumer behavior data from across the Cars Commerce platform. The January 2024 report revealed that the automotive industry is shifting to a buyer’s market with more affordable new cars and increased new car inventory up 36% year-over-year.

Used cars scarcity is also increasing with used vehicle listings down 4% compared to the prior year, indicating increased volatility in the used car market this year. While many marketplaces are solely focused on used cars, our new car content and expert insights coupled with improving new car inventory best position us to help OEMs and dealers stimulate demand and move inventory. We recently gathered at the National Auto Dealers Association Conference, the largest annual gathering of U.S. dealers and industry leaders. The show provides an opportunity for us to consult with thousands of current and prospective customers, gather their feedback and demonstrate our newest solutions. I want to thank those of you who were able to join us for our first ever NADA investor breakfast.

It was great seeing many of you in person as we were able to provide a more hands-on experience of our Cars Commerce solutions like AccuTrade and VIN Performance Media, a new advertising solution that dynamically positions a retailer’s VIN specific inventory in front of the right shoppers across search, social, and display. The single solution approach saves time and money while maximizing ad performance and operational efficiency. NADA clearly showed that our strategy is working and we remain focused on simplifying everything about buying and selling cars and creating exceptional value for consumers, dealers, and OEMs. Looking ahead, we remain squarely focused on five growth drivers: grow and sustain engagement with our market-leading audience, grow dealers and cross-sell our solutions to generate more leverage for our customers, create tearless experiences for OEMs, and create more platform advantages.

Our momentum is strong. We are growing demand for our connected platform and empowering our consumers and customers, unlocking both top and bottom-line growth. Now for more details on our solid results and 2024 outlook, I’ll turn the call over to Sonia. Sonia.

Sonia Jain: Thank you, Alex. We ended the year with robust Q4 revenue growth and adjusted EBITDA margins that exceeded our guidance. Revenue grew sequentially throughout the year, reaching $180 million for the quarter, a 7% increase over the prior year. Including the 2 months of D2C Media revenue, revenue increased 5% year-over-year, and we delivered our 12 consecutive quarter of year-over-year revenue growth. Our strong quarterly performance was driven by dealer revenue, which grew 8% year-over-year to $161 million. OEM and National revenue also increased to $15 million, up 8% compared to the prior year and up 6% sequentially. Notably, the OEM portion of OEM and National revenue increased significantly by 24% year-over-year indicative of increased production, new model launches, and a year-end list as OEMs invested the balance of their advertising budgets.

Other revenue was down approximately $2 million compared to the prior year due to the planned expiration of a non-cash AccuTrade license agreement with another marketplace participant that expired in early 2023. Turning to expenses. For the quarter, total operating expenses were $165 million compared to $148 million a year ago. It is worth noting that unlike CreditIQ and AccuTrade, the earn-out associated with D2C runs through operating expenses, primarily in G&A and is a partial driver of the year-over-year increase at $3 million. On an adjusted basis, operating expenses were $151 million, $10 million higher than a year ago, primarily due to our continued investment in people, a $3 million increase in depreciation and amortization and investments in marketing to support the launch of our B2B brand, Cars Commerce.

Net income for the quarter totaled $8 million or $0.12 per diluted share compared to $10 million or $0.15 per diluted share in the prior year. The change in net income is primarily attributable to changes in the fair value contingent consideration associated with our prior acquisitions, specifically CreditIQ and AccuTrade. Adjusted EBITDA for the quarter was $55 million or 31% of revenue, exceeding our guidance. Sequentially, our margin expanded approximately 250 basis points and year-over-year our adjusted EBITDA increased 12% or $6 million. Now moving to our full year 2023 performance. Revenue totaled $689 million, up 5% year-over-year. Dealer revenue increased 7% to $622 million driven by growth in websites, AccuTrade, our 2023 marketplace repackaging initiatives, and media sales.

OEM and National revenue was $56 million or 5% lower compared to the prior year. The strength in our OEM revenue was offset by continued softness in National revenue, largely related to a significant pullback from our insurance customers due to macro and environmental factors. Additionally, other revenue was down approximately $4.5 million, primarily related to the aforementioned non-cash AccuTrade agreement. Turning to expenses. Full year total operating expenses were $635 million compared to $588 million in the prior year. On an adjusted basis, operating expenses were $38 million higher compared to last year. This is largely driven by increased compensation and employee related expenses, particularly in marketing and sales and product and technology.

In addition, as we’ve accelerated product development and technology investments, depreciation and amortization expense was also up year-over-year. In addition to compensation, marketing expenses were also slightly higher year-over-year as we invested in both our consumer and B2B brand with our Cars.com Possibilities campaign and the launch of the Cars Commerce go-to-market brand. Net income for the year totaled $118 million or a $1.74 per diluted share compared to $17 million or $0.25 per diluted share in the prior year. Current year net income was primarily related to the release of a significant portion of the Company’s valuation allowance for deferred tax assets that was recorded in 2020. Adjusted EBITDA for the full year was $195 million or 28.3% of revenue compared to $187 million or 28.6% of revenue in the prior year.

Now turning to our key metrics. While we experienced some variance in our dealer customer count related to the impacts of our 2023 marketplace repackaging initiative and the sunset of digital dealers, we added 950 new dealer customers through the acquisition of D2C Media and ended the quarter with 19,504 dealer customers compared to 18,715 dealer customers for the third quarter of 2023. As you can see, our platform strategy is working. ARPD grew 7% or $162 to $2,523 driven by the strategic decision to include more of our platform offering in higher tiers of our marketplace packages and increased dealer adoption of digital solutions. Our platform strategy ultimately drives higher customer lifetime value by improving both ARPD and retention through our enhanced value delivery.

As an audience-driven tech company, our ability to deliver a large and engaged audience to our customers is critical to the value we provide them. For the quarter, we delivered 143 million visits, a 2% increase compared to the prior year. And average monthly unique visitors were 24 million for the quarter. Our asset-light business model consistently generates attractive free cash flow conversion. Net cash provided by operating activities totaled $137 million for the year. Free cash flow was $116 million, $7 million higher compared to the prior year, driven primarily by an $8 million increase in adjusted EBITDA and favorable changes to working capital, partially offset by an increase in cash taxes of $17 million. Our strong financial profile enables us to execute a balanced capital allocation strategy, which includes value creative investments in the business, a thoughtful acquisition strategy and return of capital to shareholders, all while maintaining modest leverage.

In 2023, we repurchased 1.7 million shares or nearly 3% of total shares outstanding at the start of the year. As of December 31, 2023, we have $120 million remaining on our share repurchase authorization. Total debt outstanding at year-end was $490 million, and our net leverage of 2.3x remains squarely in the middle of our target range of 2x to 2.5x. We have ample liquidity at $234 million, which includes $39 million of cash and cash equivalents and $195 million of revolver capacity. Now turning to our guidance. We expect to deliver another year of strong growth. Market conditions for our in-market solutions are improving. With increased OEM production, new model launches, and rising dealer inventory, coupled with a still cautious consumer, our in-market solutions are more valuable than ever.

With that as a backdrop, we expect to deliver first quarter revenue of $179 million to $181 million or year-over-year revenue growth of 7% to 8%, which reflects continued growth in dealer revenue driven by ongoing adoption of our suite of products, the D2C acquisition, and the full period impact of the 2023 marketplace repackaging initiative. OEM and National advertising revenue is also expected to be up year-over-year, but historically it has experienced some seasonality from the fourth quarter to the first quarter. For the full year, we anticipate continued dealer and OEM adoption of our platform, which is reflected in our revenue growth guidance of 6% to 8%. As we continue to make strategic investments that support our growth, we anticipate adjusted EBITDA margins for the first quarter to be between 27% and 29%.

Recall, we usually make seasonally higher investments in marketing and sales in the first quarter due to the timing of in-person industry events. And 2024 is no different. We expect margins to improve over the course of the year and anticipate delivering full year adjusted EBITDA margins between 28% and 30%. Capital expenditures for the year are expected to range between $23 million and $25 million. Cash taxes are expected to increase slightly to approximately $20 million, and overall, we anticipate delivering another year of free cash flow growth. In summary, we delivered strong results for 2023 driven by our focused execution. And looking ahead, we are well-positioned to deliver sustained value for consumers, customers, and our shareholders.

And with that, I’d like to open the call for Q&A. Operator.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Rajat Gupta from JPMorgan. Please go ahead.

Rajat Gupta: Great. Good morning. Thanks for taking the questions. Congrats on the good quarter as well. I had a first question just on the 2024 guidance, the 6% to 8% revenue guidance. Could you give us a little more granularity on what the breakup of that or how much is RPD versus just like-for-like price increases versus just product mix? How much is dealer count, OEM, revenue etcetera? Any more granularity would be helpful. I have a follow-up. Thanks.

Sonia Jain: Yes. Thanks for the questions, Rajat, it’s Sonia. Maybe I can, I’ll start by giving a little more color and let’s see if it helps a little bit. One of the things that’s factored into our full year guidance is the acquisition of D2C. So if you recall, we bought that business in November and captured 2 months of revenue in 2023, and we’ll get the full benefit of that acquisition in 2024, along with sort of our efforts to continue to integrate that business, which means more sales of AccuTrade in Canada, leveraging kind of the combined OEM endorsements that exist between our two companies to go faster in terms of Canadian expansion. We’re also positive on OEM and National revenue. We saw some positive performance in that business in Q4 that we’re really excited about.

And while there may be a little bit of lumpiness from Q4 to Q1, just in terms of how OEMs spend their budget, we expect a good year with inventory levels rising, new model launches, EV releases that require consumer education. And then lastly on dealer revenue, that’s been just a really strong portion of our business over the last several quarters, and I don’t think anything has changed. Our focus is really on trying to grow ARPD there on an organic basis, and we think we have the ability to do that just given the suite of products that we have and the continued penetration. At NADA, we saw a lot of really positive interest in our new media product as Alex was just talking about VIN Performance Media. In addition, we saw a lot of really strong interest in AccuTrade.

You may have noticed we got it in endorsement from Ford. We have a lot of other OEMs that are excited to partner with us, particularly given some of the used car pricing volatility that’s out there. So we generally see and are optimistic about the growth trajectory for 2024 across all of our lines of business.

Rajat Gupta: Got it. That’s helpful color. And then just on the dealer count, I noticed that excluding D2C Media, it was down sequentially maybe a little more than what we would’ve expected. One of your peers talked about some continued pressure on the independent used car dealer side of things. Curious, how should we think about that for 2024 in terms of implications? What’s kind of like embedded in your guidance in terms of behavior from those customers? And you also mentioned in the presentation that you essentially have no digital dealers on the platform anymore. And curious, like are you seeing – are you expecting any of that to change just on the digital side as well in 2024? Thanks.

Alex Vetter: Hey, Rajat, great questions. Well, first of all, I’ve seen this cycle a number of times in my tenure in the space. And what I will tell you is that Q4 tends to be a softer period in terms of dealer net ads, and then we’re seeing that spill over into Q1. And I think it’s largely attributable to the macro environment where profitability concerns regarding the price of used cars, lower inventory levels available in the market, new cars not selling as fast, and dealers take a general reactive stance where they cut expenses dramatically in the short-term and then revisit whether or not they should bring them back. And we see that too in our business. I wish it wasn’t the behavior of our industry, but it happens.

The good news with our strong traffic trends, our organic concentration or our traffic concentration on organic traffic, we’ve proven that we win a lot of these dealers back even when they do blink because of the current trends. I think broader forecasts for this year are healthy and strong, so we feel very good about the full year view, but I know we’re feeling some choppiness right now because dealers are panicked about the current environment. So we’re out working with dealers on this stuff. The good news is that when you look at the bulk of where our growth is coming from, it’s on technology solutions that actually directly help the profitability concerns that dealers are feeling. And so, yes, it’s a slower sales cycle to sell in our solutions, but once we get those solutions sold, it has a halo effect and a stickiness effect for the whole platform.

And so those would be the big headlines. I think finally, I just also echo what Sonia said, like we look at the new car side of the business, the bulk of our business is the franchise dealer community. We don’t index heavily in the independent dealer community like some of our peers. And so they are also looking at us for media solutions that can help them move those new cars as well. And I think that gives us some strong footing heading into this year.

Rajat Gupta: Got it. And on the digital independent side, anything that’s changed or you expect to change? I know there are not many digital use dealers left, but just curious about that.

Alex Vetter: We’re not expecting that to be a growth driver in the business. And as you noted, we have none of those dealers in our current counts, so we don’t have any downside exposure to those operations. And there certainly should be upside. I mean, I generally believe that anybody that’s trying to sell or buy or sell cars in the auto industry needs to be with our platform, but we’re not needing those segments to come back in order to deliver our guide.

Rajat Gupta: Got it. Got it, great. Thanks for the color.

Operator: Thank you. And your next question comes from the line of Thomas White from D.A. Davidson. Please proceed.