Cars.com Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 10 speakers on the call.

Operator

Ladies and gentlemen, and welcome to the KAR Second Quarter 2024 Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, August 8, 2024. I'd now like to turn the conference over to Catherine Chen, Vice President of IR.

Operator

Please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining us. It's my pleasure to welcome you to the cars.cominc. Q2 2024 conference call. With me this morning are Alex Sutter, CEO and Sonia Jain, CFO. Alex will start by discussing the business highlights from our Q2.

Speaker 1

Then Sonia will discuss our financial results in greater detail along with our outlook. We'll finish the call with Q and 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'll be discussing certain non GAAP financial measures today, including adjusted EBITDA, adjusted EBITDA margin, adjusted operating expenses, adjusted net income 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.

Speaker 1

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 ks, 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.

Speaker 2

Thanks, Catherine, and thanks, everyone, for joining us on today's call. We extended our track record of delivering both revenue growth and strong profitability with our 2nd quarter performance. Q2 revenue was up 6% year over year, boosting us to record year to date revenue in the first half of twenty twenty four. OEM and national performance was particularly robust, up 28% year over year. Dealer revenue also contributed to growth as we expanded dealer count while maintaining ARPD.

Speaker 2

On profitability, adjusted EBITDA was solidly within our expectations of 10% year over year from strong operating leverage. And free cash flow grew to $56,000,000 for the 1st 6 months of 2024, which was the highest level in 3 years. Q2 was our 15th straight quarter of delivering year over year revenue growth, showcasing our ability to execute through challenging external conditions like the industry wide CDK disruption that occurred in June and continues into the Q3. Recall, we have a high concentration of franchise dealerships who rely on CDK. With dealership operations interrupted, many of our sales conversations and product launches were paused.

Speaker 2

I'm proud of our team who creatively stepped up to support dealers whose systems were down, both in sending leads to dealers directly and updating inventory manually. While we made strong efforts to support our retail partners, we also lost considerable sales momentum. Our priority in Q3 is to re ramp those engagements, particularly for products like Accu Trade, which require a longer sales cycle and hands on dealership engagement. This was a frustrating event for the industry and for us, but we believe it's ultimately a temporary impact as we continue to grow the business in 2024 and beyond. More importantly, we delivered on our key growth drivers in the Q2 that advanced our platform strategy and laid a strong foundation for continued growth in the remainder of the year.

Speaker 2

We're transforming OEM relationships. We grew dealer customers and deepened product differentiation and strengthened our leading consumer marketplace. 1st, our OEM business accelerated growing 28% year over year from increased demand from both new and existing partners. More than 2 thirds of OEM customers increased their year over year spending on our products and services during Q2. They recognize we offer the best solutions to connect them to in market high intent shoppers, especially as competition for consumer awareness rises in tandem with vehicle supply.

Speaker 2

Our strong value delivery led to multi week sellouts for the homepage take of our product and tripling of sponsorship revenue year over year among other positive results. Furthermore, our consumer scale and brand attracted new EV entrants in EOS and Rivian as new customers there in Q2. These wins and our past success with Tesla position us well to support EV tech leaders as they aggressively grow market share. And we believe there are still huge opportunities ahead to capture OEM growth for our marketplace and media as well as diversify our partnerships into products like Accu Trade. More on that in just a minute.

Speaker 2

We also achieved sequential dealer customer growth despite June sales interruptions from the CDK incident. It's important to note that we also maintained ARPD, which was up modestly year over year. Our marketplace had a strong quarter with May being our best month for new franchise sales in the past year. And we continue to target more dealer customer growth and cross selling our solutions. While AccuTrace's subscriber growth in Q2 did not meet our expectations, we have made substantial progress on several initiatives that maintain our confidence for continued growth.

Speaker 2

Strategic initiatives that are underway help lift engagement and appraisal volume, which we view as the number one predictor of customer satisfaction and ultimately retention. For the month of June, new Accu Trade users who started in April generated on average 31% more appraisals per dealer versus those who started in March due to enhancements in our onboarding process. And in total, dealers generated over 639,000 appraisals through Accu Trade with higher average appraisals per dealer in the Q2. Though it's still early, it's also encouraging to see that our efforts have yielded close to 100% retention for users who enrolled in Accu Trade in April May. These trends, plus positive feedback from new customers, are strong signals that our Accu Trade subscriber base should expand over time.

Speaker 2

What really underpins our confidence is the fact that Accu Trade continually outperforms competitors. Our data shows that Accu Trade appraisals are 34% more accurate than competitors, offering clear economic value for dealers and consumers. Recent third party research further bolstered the merits of our product. We have also found that our Accu Trade users are our most engaged customers, with nearly half of them subscribing to 3 or more Cars Commerce product lines to leverage our platform synergies. This combination of high product efficacy and enthusiastic adoption by our largest and most sophisticated users reinforces our competitive edge and provides us with actionable insights on how to drive broader Accu Trade adoption over time.

Speaker 2

To that end, I'm pleased to announce that we have won several new OEM endorsements that we believe will be catalysts for future growth. Earlier this week, we announced that Accu Trade was certified by Stellantis Digital as a trading appraisal solution for their U. S. Retailers. Jaguar Land Rover also selected Accu Trade as their exclusive trade and appraisal solution for their new digital retail experience on jlr.comanddealer websites.

Speaker 2

This makes the Accu Trade trade in website application automatically available to all JLR dealers starting in September. As a reminder, this is part of our suite of native modern retail applications that offers a seamless omni channel experience for dealers and consumers. The Accu Trade trade in website application drives high quality leads to dealers and was recently redesigned to increase trade in lead volumes

Speaker 3

by 50%. We see potential

Speaker 2

for the trade in website application, which grew 40% quarter over quarter to be a new and attractive entry point for Accu Trade adoption. Overall, these endorsements underscore the growing recognition that Accu Trade is a better model for sourcing vehicles than what is currently available via auctions, disjointed website solutions or opaque trade in methods. In digital website experiences, we grew to nearly 7,520 customers in the Q2 from strong performance across Cars' Commerce website solutions. In Canada, B2C just became the number one dealer website provider in the country and that lead extends even further when we include the DI website growth that we've driven since late last year. We are extremely pleased with the team's execution not only in delivering strong synergies across our platform, but also in leveraging OEM endorsements, which are a key driver in growing our website customer base.

Speaker 2

And we have line of sight to additional OEM certifications in the back half of the year, which should add to our sales pipeline in Canada. On the product side, we've also rolled out a new DI website redesign that has yielded double digit gains in consumer traffic, engagement and conversion for pilot sites. We expect this innovation will continue to drive our website differentiation, customer satisfaction and subscriber growth. Finally, our industry leading marketplace continues to scale while winning high consumer engagement. Q2 traffic was up year over year and we maintained our lead on organic traffic at approximately 60% of our total mix.

Speaker 2

We're reaching the highest intent and most active shoppers who drove repeat visitation roughly 7% higher year over year as we exited the quarter. We also continue to invest in unique editorial content like our American Made Index that drives consumer interest and efficiently attracts new shoppers. As a result of continued product and content innovation, leads improved meaningfully over the course of the second quarter, another proof point of improving value delivery for our dealers and OEMs. Summing it up, we grew top line, bottom line and cash flows, all while staying nimble to better position ourselves for continued growth. We're committed to advancing our platform strategy through vectors like improving product adoption, expanding OEM partnerships and capturing other enterprise opportunities as we further transform and enable the automotive retail experience.

Speaker 2

I'll now turn the call over to Sonia to lead the discussion of our Q2 financial results and outlook. Sonia?

Speaker 4

Thank you, Alex. We delivered year over year revenue growth and margin expansion in the second quarter through disciplined execution of our platform strategy. Despite being slightly below our expectations, revenue of $179,000,000 was up 6% year over year, reaching a new 2nd quarter record. This includes the roughly 1% unexpected impact from discrete items related to legacy solutions contracts. Excluding that impact, revenue would have been roughly in line with the low end of our guidance range.

Speaker 4

Dealer revenue grew 4% year over year to $160,000,000 driven by contribution from our D2C acquisition and increased adoption of our trade and appraisal and website products. OEM and national revenue was $16,000,000 up 28% compared to the prior year. This acceleration in growth reflects continuing OEM investments into marketing and advertising to influence and drive consumer awareness of their products amidst rising vehicle inventory levels. For the 2nd quarter, total operating expenses were $169,000,000 compared to $156,000,000 a year ago. Product and technology expenditure increased $3,000,000 year over year as we added talent in support of our product roadmap, up leveled key technical roles and invested in back end systems.

Speaker 4

General and administrative expense was up $5,000,000 year over year, mostly due to the inclusion of B2C operating costs, including $2,700,000 in D2C earn out expense this quarter. As a reminder, unlike the earn outs associated with our other acquisitions, D2C earn outs redeemed compensation expense under GAAP and therefore run through operating expenses. 2nd quarter adjusted operating expenses were $156,000,000 roughly 6% higher than the same period a year ago. Net income for the Q2 was $11,000,000 or $0.17 per diluted share and adjusted net income for the Q2 was $26,000,000 or $0.38 per diluted share compared to $23,000,000 or $0.33 per diluted share a year ago. Adjusted EBITDA for the 2nd quarter was $50,000,000 up $5,000,000 or 10% year over year and adjusted EBITDA margin of 28.2 percent was in line with our guidance range.

Speaker 4

Operating leverage increased over 100 basis points year over year from a combination of revenue growth and mix as well as disciplined investments in the business. Now on to key metrics. Notwithstanding temporary disruptions to new sales and product launches from the CDK incident in June, we ended Q2 with 19,390 total customers, returning to sequential organic dealer customer growth. And notably, our marketplace customers also grew during the quarter. Our July dealer customer count was impacted by the CDK incident.

Speaker 4

However, we believe this to be temporary in nature. ARPD of $2,474 for the 2nd quarter was up slightly year over year, driven by increased product penetration, partially offset by aforementioned discrete items and higher than expected growth from B2C customers, who on average contribute lower revenue per dealer. We're pleased to see growing uptake of our marketplace and digital experience products, thanks to our cross selling efforts. Quarter, we're working diligently to drive subscriber growth. On our last call in May, we committed to accelerating the Accu Trade connected learning curve to more quickly embed the technology into dealer operations.

Speaker 4

Onboarding and account support changes we made in the first half have yielded meaningfully higher product utilization by new users. While these types of operational changes require time and investment, we're optimistic that we can keep improving dealer satisfaction and retention. And the multiplier effect of our platform is real. We can see that in Accu Trade data. Accu Trade customers are far more likely to use multiple Cars Commerce products with average revenue per dealer that's more than double that of non Accu Trade customers.

Speaker 4

This data illustrates the power of cross selling and of growing the Accu Trade base as part of our platform strategy. Now shifting to our balance sheet. Net cash provided by operating activities totaled $69,000,000 year to date. Free cash flow was $56,000,000 year to date, roughly $11,000,000 higher year over year. Free cash flow was driven primarily by improved adjusted EBITDA and lower cash taxes, partially offset by higher cash interest and increased CapEx.

Speaker 4

During the Q2, we made $20,000,000 in earn out payments, primarily related to Accu Trade. We also repurchased 300,000 shares for $4,900,000 bringing first half repurchases to $14,000,000 In addition, we repaid $5,000,000 of debt and reduced total debt outstanding to $475,000,000 as of June 30, 2024. Our total net leverage is now 2.1x, down from 2.3x last year and comfortably within our target range of 2x to 2.5x. With total liquidity of $304,000,000 as of June 30, 2024, we have ample resources to execute our growth strategy and pursue the best return on capital. With $105,000,000 remaining on our current share repurchase authorization and conviction around our growth strategy, we now intend to return approximately 50% of second half free cash flow to shareholders via share repurchases.

Speaker 4

Our strong free cash flow conversion enabled us to deploy our capital in a manner that drives incremental shareholder value, whether through share buybacks, attractive acquisitions or debt repayment. I'll now conclude with our guidance. In the Q3 of 2024, we expect to deliver revenue in the range of $178,000,000 to $181,000,000 or year over year growth of 2% to 4%. Guidance reflects growth in dealer revenue from increasing product adoption, including B2C. OEM and national revenue is also expected to grow year over year, but down slightly sequentially when compared to strong performance in the 2nd quarter.

Speaker 4

Embedded in our guidance is also the impact of the CDK cyber incident, which widely disrupted our industry, our customers and our business in June July, Not only was our sales momentum at the end of June severely curtailed, but this continued into July and has an accruing effect on Q3 revenue given the subscription nature of our business. We expect approximately 1% to 2% of CDK related revenue impact to our business in the Q3 from a combination of lost sales and product launch delays. In addition, we expect to deliver 3rd quarter adjusted EBITDA margins between 26.5% 28.5% compared to 28.4% a year ago. This guidance reflects continued investments to support our growth initiatives and also takes into account our revenue outlook for the Q3. In light of our year to date performance and considering current business trends, we now expect fiscal year 2024 revenue growth of 4.5% to 5.5%.

Speaker 4

This range reflects positive product growth and contribution from our D2C acquisition. Our revised assumptions also include a slower rate of adoption for Accu Trade and lost and delayed sales due to the CDK disruption, which have a compounding effect on full year subscription revenue. And finally, we are reaffirming our outlook for full year adjusted EBITDA margin between 28% to 30%. At the midpoint, this represents adjusted EBITDA growth of approximately 8% year over year. We are committed to driving discipline and operational efficiency and even with lower revenue growth expectations, believe there is sufficient leverage in our model to improve adjusted EBITDA and deliver margin expansion.

Speaker 4

And with that, I'd like to open the call for Q and A. Operator?

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question comes from the line of Neve Khan from B. Riley Securities. Your line is now open.

Speaker 5

Great. Thank you and good morning all. A couple of things from me. One maybe Sonia for you. I think you mentioned 1% unexpected impact from legacy solutions contract.

Speaker 5

Can you just maybe explain that more a little bit in terms of how that kind of flows through P and L and how it affected you? And the other question I have is on Accu Trade. So you did talk about improved satisfaction with the product feature rollout. If I just look at the count, count went down sequentially and you kind of expect slower growth now because of, I guess, some lost sales. Maybe just go through the dynamics of like what might have led to their higher churn and what has changed going forward?

Speaker 5

Thank you.

Speaker 4

Good morning, Naved. Thanks for your questions. I think your first one was on the website business. We can't get into the individual customer specifics, but we do believe they were one time in nature. And it was just a timing thing.

Speaker 4

They impacted top line. Yes.

Speaker 2

And on the Accu Trade front, Naveed, certainly, I'm disappointed in our Q2 results there because we made a lot of positive changes with the product. In fact, our most avid users swear by the product. They love the product. Getting dealer adoption to change their operational process has proved to be more difficult. And when there's turnover at dealerships, we lose that advocacy inside the stores.

Speaker 2

There is a shift that we're making on the product, which we signaled on the call, which is to follow our proven DI formula of seeking these OEM endorsements to land and expand accounts through that model, which should bring in more dealers with manufacturer backing into the platform. It means we're going to get in at a lower price point. So you may not see the same revenue lift that we were anticipating this year selling the connected full Accu Trade product. But we do think we can get solid dealer growth on website solutions and then move up sell move to up sell them in the store full blown store solution over time. That's going to prolong the ramp here and move it more into 2025, but we still see solid product growth in the solution this year.

Speaker 2

It's just slower than I think we all would have liked.

Speaker 5

Understood. And Sonia, just going back to the legacy solutions contract. So you quantified it for Q2. Is it fair to assume there is an impact from the remainder of the year as well, which is part of the guidance today? Or is that something separate from that?

Speaker 5

Can you just maybe parse it out for me? Thanks.

Speaker 4

The discrete items are really range bound into the Q2. They obviously influence our full year results, but the impact is really confined to the Q2.

Speaker 3

Got it. Thank you, guys.

Operator

Thank you. Your next question comes from the line of Gary Prestopino from Barrington Research. Your line is now open.

Speaker 6

Hi. Good morning, everyone. I know this question was asked, Alex, but with Accu Trade, could you maybe just again go over what besides the impact of the CDK disruption, which definitely impacted your product uptake. What was going on there? Is it a function of that the dealers did not have the manpower to implement the product or they didn't have any incentive to implement the product?

Speaker 6

I guess, trying to get a feel for what happened in the quarter and what you've changed?

Speaker 2

Yes. Well, first answer, Gary, is I want to connect those 2, because while the CD8 ks impact was unfortunate for our customer partners, it also had an indirect impact on our sales pipeline as well. Most of our Accu Trade success year to date has been with dealer groups. And so a huge percentage of our sales pipeline was expecting those dealer groups to further deploy the solution to all of their stores. And that concentration of CDK dealer, they just put those sales motions on hold, right?

Speaker 2

We had major dealer group deals that we thought would close in the quarter and they got kicked out not only indefinitely, but we hope to reboot those in Q3, assuming dealership operations return it to normalcy, which they are. And so we feel good about that. But where we sit today, we just don't have verbal commitment that they're ready to proceed with expanding Accu Trade deployment throughout the rest of their platforms. And so I do want to connect those two things. I do think as we signaled in prior calls, we've been really focused on dealer success and onboarding and we had some big wins in the quarter.

Speaker 2

Like if you look at the dealers that we sold in the prior three periods, their utilization of the product is up 30% over the original cohort we sold in the Q1. And so we're getting better at onboarding, we're getting better at targeting, and we're getting better at dealer utilization. Those are all going to be tailwinds for the product, but it's clear to us that we're going to go slower, get it right and build allegiance to the platform in the dealer community so that they endorse the solution and get it expanded across their footprint of stores. It's really just a slowdown in the where we were at the beginning of this year, we had our assumption that this would scale much faster and that's clearly not happening as we would have liked. But the fundamentals of the value prop are rock solid and the dealer excitement about the solution when they're using it remains extremely strong.

Speaker 6

So is you ended up with about 1,000 dealer customers on Accu Trade in Q1. Is it safe to assume that that number did increase a little bit in Q2? I mean, was there any deconversions?

Speaker 2

It didn't grow in Q2. And that's the disappointment that we thought we would see better growth in that. Again, a lot of the deals that we had in our sales pipeline for Q2 were CDK dealers. And so those went from like 90% likely to 0 in our sales forecasting waiting virtually overnight. And then that really put a damper on Q3 momentum, which obviously impacts full year.

Speaker 6

Okay. So you've changed the strategy and you're going after you're trying to get OEM endorsements With those OEM endorsements, which it's nice to see, you've got Stellantis and Jaguar Land Rover. With those endorsements, are the deal are the OEMs giving the dealers co op support in terms of some kind of monetary figures given to them to adopt Accu Trade?

Speaker 3

So a

Speaker 2

couple of things, Gary. First of all, I wouldn't say we're totally changing the strategy because our Accu Trade sales are still solid and we're still getting dealers to adopt the full solution. I would classify this as saying we're showing agility with the strategy to pursue growth in new ways. And so the website solutions is something that we signaled last year that all OEMs are realizing that they need trade in solutions to facilitate new car sales. If you can't get a consumer out of their existing vehicle, it's hard to sell them a new car.

Speaker 2

And so all OEMs started talking to us about using Accu Trade technology, not only on their Tier 1 website, to talk to consumers directly, but deploying it across their dealer websites. And so yes, we got a couple of huge wins that we shifted to in the quarter to land some OEM endorsements that do include co op dollars for the platform. And in some cases, they're paying for the dealer to have this widget on their website. The JLR deal, we're the exclusive trade in provider for all JLR websites. And so we're going to begin that rollout in Q3, where we'll be replacing any legacy trade in technology on dealer websites and inserting Accu Trade.

Speaker 2

We know that through that experience, the dealers are going to be impressed with what they see in the product and we think that will open up upsell conversations to deploy the full Accu Trade technology in their physical stores and off our marketplace as well.

Speaker 6

Okay. And just one more question on that with the certification, particularly you mentioned Jaguar Land Rover, you're going to be rolling that out. The dealers aren't required to take Accu Trade. Again, it's up to the individual dealers to decide, but the OEM can be very coercive in that regard. Is that right?

Speaker 6

Is that a correct assumption?

Speaker 2

I'll let JLR have to speak to how hard they're going to enforce it, but they've announced this as the exclusive technology that they want to see deployed across all JLR websites, whether we've built them or not. And so we are providing this technology that will be private labeled on the dealer websites. JLR is beginning their rollout to their dealer network they're looking to create a consistent digital retail experience, which we are going to power not only for the corporate website, but again, exclusively across all JLR websites. So we do think it will produce meaningful upsell opportunities. It certainly will mean lower revenue initially, but like we showed with dealer website adoption, when we landed these OEM endorsements, it led to faster overall sales growth for not just websites, but for media and for marketplace to those dealers because of the OEM backing.

Speaker 6

Okay. And then I said just one more question, I'll get it up. Is it fairly safe to assume that if we didn't have this issue with CDK, there would have been no step down in the revenue guidance

Speaker 3

for the back half of the year?

Speaker 4

It's a good question, Gary. I mean, as Alex indicated, Accu Trade was a little softer than we expected it to be in Q2. We're really pleased with the OEM endorsements we have in that land and expand strategy that we're going to run with our website application Connected. And we're also pleased with the promotions we put into market to drive dealer engagement. They just take time.

Speaker 4

So that was certainly an additional component factored into the guide in addition to the disruption from CDK.

Speaker 6

Okay. Thank you.

Speaker 7

Thank you.

Operator

Thank you. Your next question comes from the line of Raja Gupta from JPMorgan. Your line is now open.

Speaker 7

Hi, good morning. Thanks for taking the questions. Just had a question on the second half guidance. Appreciate all the color on the Q3, the impact from CDK and the Accu Trade impact. But if I look at the 4th quarter guidance, implied 4th quarter guidance, the midpoint implies around 3% revenue growth.

Speaker 7

I mean, that would be slower than the Q3 if I excluded the CDK impact. So I'm curious like what's driving that deceleration? Why isn't there like offsets from the other areas of the core business? Or is it like really Accu Trade driven? And just relatedly, I was just curious if how much was the Accu Trade contribution supposed to be in the initial 2024 guidance that you provided earlier in the year?

Speaker 7

If you could just guide those 2 would be helpful and I have a quick follow-up. Thanks.

Operator

Thanks for the questions, Rajit.

Speaker 4

I am not 100% sure I'm getting to quite the same math as you are for slowing growth in Q4. We do expect to see some strong trajectory as we move through the balance of the second half. From some of our comments earlier, as you've probably gathered, we had strong aspirations for the Accu Trade ramp up over the course of this year. Last year, we were largely devoted to pricing and packaging efforts on our marketplace. And so there have been some challenges.

Speaker 4

CDK certainly interrupted some of the efforts we had put in place in Q2 to try to drive dealer engagement. And that is a reason for the revision in part to our guidance range.

Speaker 7

Understood. Okay, that's clear. We can check offline on the 4th quarter math. And just the buyback comment on the second half, again, my math would imply something like between $30,000,000 to $40,000,000 of potential share repurchases in the second half. Is that in the ballpark in terms of the assumptions we should be making?

Speaker 4

That is in the ballpark. We agree on that math.

Speaker 7

Okay. Great. And then just last question, just on the competitive landscape, what's the latest that you're seeing from some of your public or private peers in terms of pricing or sales competitiveness? And what would you call out to be the main advantages in the current landscape for Cars Commerce?

Speaker 2

Thanks. Yes. I mean, look, it's I'm following some of the public reporting that's coming out this week and trying to track the various puts and takes from various players. I think the high level benefits that we offer that our competitors do not, Rajat, you know that the majority of our traffic is coming to us organically or directly. And so when customers invest with us, they're getting true incremental lift to their sales performance.

Speaker 2

Most of our peers rely on search engine marketing arbitrage, which directly competes with the dealers' other marketing budgets. That's number 1. I think on the technology solutions side, I don't think we have a real peer because our website solutions are best in class, both domestically in the U. S. And now in Canada, where we achieved number 1 status.

Speaker 2

Then our Accu Trade technology, while growing slower than we would like, is still contributing nice lead to both our growth and our platform efficacy, which has strong flow through to the bottom line. And so as we get dealers to adopt our technology, it's adding meaningful layers of ARPD that create a meaningful profit picture for the business, it's going to generate a lot of free cash flow. So I think we're really well positioned. We've got strong growth in both revenue and EBITDA this year in the second half. While it's a little bit lower than we would like, I think the fundamentals are strong here and we continue to execute.

Speaker 7

Understood. Great. Thanks for the color and good luck.

Operator

Thank you. Next question from the line of Marvin Fong from BTIG. Your line is now open.

Speaker 3

But I guess just to put a finer point, So with Accu Trade, do you have the visibility on how many actual transactions are occurring there? And should we view that as appraisals being a good proxy for that? And then part B of that question is, you obviously won those 2 great endorsements in the quarter with the Lantus and Jaguar. What's the pipeline for more wins there? You had 4 direct a couple of quarters ago.

Speaker 3

Is there an active is there activity around other major nameplates? And then I have a follow-up.

Speaker 2

So great questions, Marvin. So first and foremost, we do see vehicle acquisitions on dealerships because we can see which cars are appraised and then we see them appear in their dealer inventory listed on our marketplace. And so we are starting to match that technology. And what we saw year to date is that dealerships are acquiring about 2018, which think about that, that if you were to apply auction fees against 2017 or 2018 cars, dealers are spending $2,000 to $3,000 to acquire a car via auction for one vehicle, but with Accu Trade, our software solutions, they could acquire 17 or 18 for that same dollar amount. And so we know that the delta between sourcing inventory from your customer base versus the physical auction is a macro trend that you can absolute bet on.

Speaker 2

This is the winning approach and dealerships that are doing this successfully are reporting record profits. And so we know that we're on the right macro attack point in terms of the legacy model of wholesale versus the new way to retail. I think the second part of your question was really about, I think, the OEM endorsements. And you'll see even on our social posts announcing the Stellantis deal, there's more dealer comments on these posts than anything we've ever talked about. There's general excitement coming from the dealer community that finally their car companies are backing dealer digital offerings.

Speaker 2

Historically, OEMs have forced dealerships to update their physical showrooms and build modern coffee bars and physical structures. I think you're going to see continued capital allocation shifts by OEMs to help dealers do digital more and we've built that infrastructure to both support Tier 1 and Tier 3 far more effectively than any of our peers.

Speaker 3

Got you. And obviously, we talked a lot about the guidance. I actually would just like to kind of take a look at the 2nd quarter numbers in terms of both dealer count and ARPD. So did the CDK impact those numbers at all? I mean, you mentioned the lost sales momentum closing the quarter as well as just the fact that it looks like Accu Trade had a bit more churn.

Speaker 3

So the fact that or what looks like ARPD was a bit lower than at least I was modeling, how much of that was kind of due to CDK? How much was due to other items? And then how much was due to just the Accu Trade shortfall? If you could maybe just help us understand how the Q2 evolved because it did, I believe, come in below the low end of your guidance on the revenue line. Just some help there would be great.

Speaker 2

Yes, I'll start and then maybe Sonia could add some more detail. But first of all, we were really pleased to grow dealer count in the quarter, right? We would have certainly liked it to be higher, but the fundamental trend line started to shift and we started seeing higher new sales. We announced on the call that we've got strong traffic trends, our lead and value delivery is also accelerating. And so very pleased that our dealer count grew in the quarter and I think that can bode well.

Speaker 2

Unfortunately and by the way, the fact that we did that without seeing any depreciation ARPD shows that that is solid dealer growth, right, that we're getting both customer growth and we're holding, if not slightly growing our average revenue per dealer. It's a very healthy metric. It did impact it negatively in that we anticipated more sales coming in honestly through Accu Trade in Q2. And in Q3, we just thought we'd have more momentum by now. And I think we've talked about that enough here that I don't have to go into those details, but it would have actually grown ARPD better had we would have seen that sales lift.

Speaker 2

Looking ahead, obviously, D2C has a lower price point than domestically what we sell our services. So even though we may get continued dealer growth, that inorganically depresses ARPD a bit. And our solution strategy to sell dealer website solutions comes in at a lower starting point as well. And so ARPD may not grow as fast, but it's still very strong, growing steadily. And if we can get dealer growth and ARPD growth, that creates a really powerful financial picture.

Speaker 2

I don't know, Sonia, what else you'd add in terms of detail?

Speaker 4

Yes. Maybe to just fill in a couple a little bit more color. I think related to ARPD, Marvin, one of the impacts in Q2 is in fact the discrete items that I was mentioning earlier. Those do run through ARPD since they were in our dealer revenue number and we're trying to be fairly consistent with our use of these kinds of metrics. So that's probably the single biggest reason that the ARPD came in a little bit lower than you modeled in.

Speaker 3

So just to be clear, in your guidance when you provided it a couple of months ago, the discrete items was not contemplated?

Speaker 4

Those were not contemplated. No, those were not expected.

Speaker 3

Nor were they expected in the full year?

Speaker 4

Nor were they expected in the full year. The other thing I'll mention too, which may be helpful, while the CDK disruption certainly had an impact on our business, for Q2 in particular, it was less of a financial impact. You see it more in the operating metrics of the business given the disruption to the sales cycle. So it interferes with like your Q2 exit rate going into Q3, but the financial impact is going to be weighted to the following quarter. So that's why we've been talking about it in the context of Q3 full year guidance, if that's helpful.

Speaker 3

Yes, that takes total sense. I thought maybe more on the dealer accounts and stuff like a June 30 cutoff

Speaker 4

with that had more of a CDK reflection. Yes, that's where you thought.

Speaker 3

Right. Okay. I'll take the rest of my questions offline. Thank you.

Operator

Next question from the line of Tom White from D. A. Davidson. Your line is now open.

Speaker 8

Great. Thanks. A couple if I could. I guess just first on the national OEM line. Sonya, maybe you could just parse out a little bit for us, kind of how the different like cohorts of advertisers in there performed.

Speaker 8

I guess I'm sort of grouping it maybe like legacy kind of auto OEMs, nonautonational advertisers and then maybe some new auto OEMs like the EV guys. Just curious like how sort of spend is trending for those groups? And can you confirm, did you say that the line will be down quarter over quarter in the Q3? And then I got a follow-up for Alex.

Speaker 2

I'll just start on the mix. Most of our growth with OEMs, Tom, have come through the smaller upstart and or mid tier OEMs. We still have the largest OEMs have largely sat on the sidelines. The reason we're not baking those into our second half guide is that hunting those giants is hard to predict, right? If one of those giants were to step back in, it would change the game for us profoundly, but we just don't feel confident baking that into our full year guide.

Speaker 2

So a lot of our OEM success year to date and as we look ahead is coming from more of the disruptive EV players trying to take market share and more of your foreign and import automakers who are also trying to grow market share in the U. S. We don't have much growth from the large domestic OEMs that have the biggest budgets yet.

Speaker 4

And then really specifically to your question on sequential growth in OEM from Q2 to Q3. We do expect it to be down slightly, but I wouldn't consider it to be like a hugely material downtick. It's still growing year over year. It's going to be somewhat consistent with what you saw us delivering kind of the Q1 timeframe.

Speaker 8

Okay. That's helpful. Thanks. And then not to beat a dead horse on Accu Trade, but I guess I just want to make sure I understand, Alex, when you refer to this sort of this website, I think you just called it website solutions. So basically what's happening is that for whatever reason, some dealers, maybe it's turnover at the dealership or just it's tough for dealers to kind of like really change the way they maybe handle trade ins actually at the store.

Speaker 8

So that instead of like you guys selling in the sort of a handheld unit that plugs into the diagnostics and all that stuff, Sort of now you're sort of aiming more to actually just put some of the technology on the dealership websites to value trade ins and that's kind of the way to land the customer. And then hopefully over time, you think you can kind of get more of the on premise, for lack of a better word, kind of technology going?

Speaker 2

Yes. I think let me try to explain it this way to try to connect the dots. Our most successful Accu Trade dealerships use Accu Trade throughout their physical stores. They're appraising every vehicle that comes in for service. They're offering this as something they can do for customers in a matter of minutes.

Speaker 2

And they're acquiring, in some cases, hundreds of cars per month purely from their service lane. And they love the product and there's even opportunity for us to take pricing up that they use it so passionately. I think the downside of that is it takes a lot of time to get dealerships to embrace that physical change of us both deploying people and resources into the dealership to conduct that on premise training. And so it's slower sales ramp, it takes more time, it has a higher cost in our go to market. What we're finding in terms of what OEMs and dealers are willing to do is embrace online first as a way to get them started using our technology and then move towards upselling them towards the full physical store rollout.

Speaker 2

I wouldn't recommend this strategy if all we had was to go convince dealers to sell Accu Trade on their website, but when you have the OEM setting up regional meetings with their dealer bodies and announcing their financial commitments to helping dealers do this more effectively, We think it can really boost our sales effort because they're now bringing the dealers to us and then we're focused more on just installing the technology and training them on how to use it on their own website. Those that find the success in doing that, we think will naturally gravitate to saying, how do we get more volume? Can we start sourcing from the cars.com marketplace? Can we start to promote, we'll buy any car media with you? And can we source cars in our service lane?

Speaker 2

Will you train us how to do that? We think this will be a better sales prospecting strategy and again slower revenue on the front end, but we think it'll create a lot bigger customer base using the technology and our tools.

Speaker 8

Great. Thanks for the description.

Speaker 2

Thanks for the question.

Operator

Thank you. Next question from the line of Joe Spak from UBS. Your line is now open.

Speaker 9

Thanks. Good morning. Just to the CDK outage again, I mean as you just sort of described it, this is really somewhat of a temporary impact from delayed adoption. I just want to confirm like there's you're not really sort of seeing any or maybe there was some cancellation in light of maybe some lower near term profits or any reconsideration going on? And then my understanding of CBK is mostly DMS and infrastructure back office financing, but they do have other products.

Speaker 9

I think they've got some digital retail trade valuation offering. So I'm wondering if you see any overlap there and there's actually maybe an opportunity here from some potential sort of dissatisfaction with that vendor.

Speaker 2

So the first part of your question, we do believe this has been more of a one time impact. In a subscription model like ours, when you lose 30 or 60 selling days of new customer acquisition, it can have a prolonged impact on the cumulative effect of your subscription revenue number, which is I think what you see in our full year second half guide. So the impact is one time, but again, the subscription nature has a more prolonged impact, if you will. I think you're right that this has been a real challenge, not just on CDK's DMS, but their digital retail solutions, CRM, they're inventory management. And so we do think there's opportunities for us to pick up market share where our cloud based technology, we know we can provide a degree of enterprise level support and dealerships are looking to find more modern tools and technology that run their stores.

Speaker 2

So I do think it has more upside potential on a go forward basis, but the one time impact certainly muted some of our success in Q2 and Q3 as well.

Speaker 9

Okay. Thank you. And just as a second question on the comment about 50% of second half free cash flow to buybacks. I mean, like rough math, that seems like a little bit over maybe 2% of the current market cap. And especially after the reaction this morning, clearly, you want to sort of send a strong signal in confidence of the business.

Speaker 9

But can you just tell us a little bit more about sort of how you think about the use of cash for that versus maybe repaying more debt, which I think also would be fairly accretive or maybe even M and A? And maybe just to follow-up on the last question, there's even an opportunity to acquire some assets that might help you more compete with an opening versus CTK?

Operator

Yes. No, thanks for the question.

Speaker 4

I mean, one of the great strengths of our business is that we do generate a lot of free cash flow. Even after deploying 50% of free cash flow in the second half towards share repurchases, we still believe that we have ample flexibility to continue with other portions of our strategy when it comes to capital allocation, so namely debt pay down. Yes, we agree with you in today's interest rate environment. Debt pay down is generally speaking an accretive thing. And even that aside, we have the flexibility for M and A.

Speaker 4

So I don't view it as a limiting thing. We have been balanced. We think it's prudent for us to lean in a little bit more here on the share repurchase front this quarter.

Speaker 9

Thank you.

Operator

Next question from the line of Doug Arthur from Huber Research. Your line is now open.

Speaker 6

Yes, I'll take the questions offline. Thanks.

Speaker 3

Okay, Doug.

Operator

All right.

Speaker 2

I think operator, yes.

Operator

Yes, there will be no question. Please go ahead, presenter.

Speaker 2

Thank you. I want to thank everyone for tuning in today. And I hope that people realize that as we've demonstrated time and time again, including this quarter, we're growing consistently our revenue and our profitability, which is a real winning combination for long term value creation. We've got a lot of powerful opportunities and our team is head down executing on our platform strategy, growing the revenue and focusing on innovation. So we want to thank you for your time today.

Speaker 2

And we look forward to talking to more of you again shortly.

Operator

Ladies and gentlemen, this concludes today's

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Earnings Conference Call
Cars.com Q2 2024
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