CarGurus Inc

NASDAQ:CARG

Earnings Call Transcript 2020-Q1

[Operator]

Good day, and welcome to the CarGurus, Inc. First Quarter 2020 Earnings Results Conference Call. Today's conference is being recorded.

And at this time, I'd like to turn the conference over to Mr. Rodney Nelson, Head of Investor Relations. Please go ahead, sir.

[Rodney Nelson, executive]

Thank you, operator. Good afternoon, and welcome to CarGurus' First Quarter 2020 Earnings Call. We'll be discussing the results announced in our press release issued today after the market close and posted on our Investor Relations website. With me on the call today is Langley Steinert, CarGurus' Founder and Chief Executive Officer; Jason Trevisan, Chief Financial Officer and President, International; and Sam Zales, President and Chief Operating Officer.

During the call, we will make statements regarding our business that may be considered forward-looking within applicable securities laws, including statements concerning our outlook for the second quarter and full year 2020, management's expectations for our future financial and operational performance, our business growth and international strategies, the impact of the COVID-19 pandemic on our business and financial results and other statements regarding our plans, prospects and expectations. These statements are not promises or guarantees and are subject to risks and uncertainties, which could cause them to differ materially from our actual results. Information concerning those risks is available in our earnings press release distributed after market close today and in our most recent reports on Forms 10-K and 10-Q, which, along with our other SEC filings, can be found on the SEC's website and in the Investor Relations section of our website. We undertake no obligation to update forward-looking statements, except as required by law.

Further, during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release issued today. Our updated investor presentation can also be found on the Investor Relations website of our -- Investor Relations section of our website.

With that, I will turn it over to Langley.

[E. Steinert, executive]

Thank you, Rodney, and thanks to everyone for joining us today. The world, our industry and our business have changed significantly in the months since we last spoke. Before I begin my prepared remarks, on behalf of myself and everyone at CarGurus, I want to thank all those in the medical community, both here in Boston and around the world, for all their work battling this pandemic. The doctors and nurses treating patients with COVID and other essential workers are the true heroes in this battle, putting their own lives at risk to help others in need. Our heart goes out to those families that have lost their loved ones due to this pandemic.

Fundamentally, as an entrepreneur, I'm an optimist. I have faith in the vast capabilities of our scientific community to help us navigate a safe passage out of this storm.

The human and economic toll of the COVID-19 pandemic is staggering, yet even in the face of these current challenges, I've seen incredible resolve and collaborative spirit from our employees and our dealer customers, which I am deeply grateful. In the midst of this industry turmoil, we are proud that as the market leader, we've led with our actions. We were the first major online auto marketplace in the U.S., Canada and U.K. to extend billing relief to our customers, helping them weather this difficult period. It was led by continuing to deliver value as over the last few weeks, we have seen a strong rebound in organic, direct and application-based traffic, a testament to the brand value we have built over the last few years.

We've led with rapid innovation. Our product teams launched our real-time performance marketing suite in January, and have recently introduced contactless sales features. And our marketing teams have released timely consumer insights and market analysis to help dealers and consumers engage safely throughout this period.

Finally, we are also proud of how we demonstrated our business' fundamental resilience, flexibility and underlying profitability as we scaled back expenses in mid-March to set us up well for future investment.

I'll briefly discuss our business performance through the first 2 months of the year before outlining the impact of COVID-19 and our response. Through the end of February, revenue and operating income were trending above our plan, supported by improving audience growth rates versus the back half of 2019. Through the first 2 months of the year, U.S. average monthly unique visitors sessions and total leads from our core site reached tendering towards high single-digit year-over-year growth. Our leads for paying deals were growing even faster, up 12% year-over-year over the same period. In our U.S. dealer business, we began a targeted rollout of our RPM suite to select dealers in the first quarter, and we saw encouraging adoption trends, as 93% of RPM customers closed in Q1 selecting a package, including our social ads product. We also completed an alpha test of our trade-in product in Q1.

While we acknowledge we still have room to improve the product execution and our go-to-market strategy, dealers continue to express a strong desire for inventory acquisition solutions, particularly consumer-sourced vehicles. We were very encouraged by consumer engagement during the test period. We are working towards the next iteration of the product that will include a broader base of dealer participation.

Beyond our U.S. dealer business, our OEM advertising business came in ahead of our expectations through February, while our consumer financing platform saw a record engagement in the first quarter.

In our international business, we continued to generate strong results in our most established markets, Canada and the United Kingdom. Leads across these 2 markets were up 40% year-over-year through the end of February. We added 360 net new paying dealers over the same period. In short, CarGurus was in a position to have another strong year in 2020.

However, in late February, we began to see COVID-19 impact our business as outbreaks in Italy forced event cancellations and school closures before a nationwide lockdown was implemented in early March. Shortly thereafter, we saw similar actions take place across each of our markets. In the United States, a number of states have placed some level of restriction on dealerships by excluding them from the list of essential businesses or closing the agencies to process title transfers.

West states are also restricting sales completely, while other states are asking dealers to work only by appointment or digital engagement. The United States, where sales are still possible, volumes fell as much as 90% year-over-year at some dealers during certain periods in March and April. We began to see the impact of COVID on our U.S. traffic in mid-March, and we moved quickly to adjust consumer marketing spend to align with consumer demand and strategically cut back on discretionary spending as stay-at-home orders were put in place. As a result, our U.S. traffic bottomed across late March and early April. While our consumer marketing spend remains reduced and we expect U.S. traffic to be lower in Q2 than in Q1, we have seen a strong recovery in organic, direct and app-based traffic in recent weeks.

Since the first week of April, weekly U.S. organic, direct and app-based traffic has increased 31%, and we exited April seeing year-over-year growth in total unpaid traffic. In addition, weekly unpaid leads exceeded 20% year-over-year growth exiting April, while total leads to paying dealers ended April flat to modestly up year-over-year, signaling a strong undercurrent of U.S. consumer demand and a testament to our growing brand strength.

The impact on our dealer business follows a similar trajectory. Over the last several weeks, we have taken many steps to help our dealer customers through this period. We were the first major online automotive marketplace to offer billings relief in each of our operating markets, including a 50% reduction in the U.S., Canada and the U.K. for April and May service periods. For June, we are extending a 20% discount in the U.S. and Canada and 50% in the U.K. We believe these discounts will help dealers weather challenging financial conditions, maintain exposure to our leading audience and build a healthy sales pipeline. While we know these discounts will not be enough for all our paying dealers to maintain their paid program, we are maintaining visibility for POS dealers through our suspended offering. We replaced our existing free service with a new suspended offering, where consumers can shop vehicles for these nonpaying dealers and express interest through our marketplace, which we intend to pass along to dealers when they resume our paying program. We believe this suspended program best preserves the value proposition of our paying program as we seek to create an even bigger performance gap between our free and paid products going forward.

In addition to these changes, we've invested new features to facilitate safe engagement to our platform. We've introduced contactless sales features in each of our operating markets in April that allowed dealers to highlight socially distance appointments, contactless purchase and free at-home test drive and drop off. Over 5,000 dealers that opted in to these features over the last several weeks, creating a safer shopping experience for both consumers and dealers.

In our dealer resource center, we've launched driving difference, which provides dealers with tools and best practices for navigating this challenging environment. In Canada and the U.K., we have launched pilots of our delivery product, allowing dealers to expand their geographic reach, and we rolled out WhatsApp for text chat interactions in the U.K. Finally, we continue to host webinars and virtual dealer councils to help dealers stay connected, maintain best practices and strategize for the months ahead.

We view each of our dealers as a valued partner. And while our discounting partner means less revenue for our business in the near term, we believe these steps are helping dealers weather the storm and remain on our platform as paying dealers. We've seen an outpouring of positive responses from our dealers, including Colman Hoyt, owner of Acton Chrysler Dodge Jeep Ram. Colman notes, "If there was ever any validation that CarGurus is in extraordinarily dominant position, the robust, aggressive, early decision to change your subscription prices caused a widespread ripple effect to the rest of the vendor community, across not just digital marketing, but other services that are provided to dealers. You guys set the pace. And I commend and congratulate you for that. It was a wake-up call to a lot of your competitors. Great job."

We recognize the dealers are in a challenging position and are facing difficult spending decisions of their own, while we are confident our leading audience technology and return on investment will drive more dealers like Acton Chrysler Dodge Jeep Ram to CarGurus over time. Beyond our dealer facing efforts, we have enacted several measures in an effort to maintain the health of our business over the long term. As we shared in our April Shareholder Letter, we have reduced operating expenses significantly by lowering consumer and dealer marketing spend and discretionary expenses in each of our markets. The variable nature of our algorithmic traffic acquisition spend gives us the flexibility to manage cash flow in periods of mute consumer demand and reduced revenue, while also allowing us to invest proactively as business activity recovers in the future.

We are actively monitoring state and local guidelines and consumer behavior to determine how we can scale consumer marketing spend up and down in each local market. We have also strategically reduced discretionary spend across the business. Our executive team has agreed to a 50% reduction in their base salaries through mid-July, and our Board of Directors also voluntarily reduced our annual cash compensation for 2020.

Finally, we made this difficult decision to reduce our workforce by 13% in April. While each of these decisions was challenging, we believe they will allow for greater flexibility and focus, both in the near and long term so that CarGurus emerges from this pandemic as an even stronger business.

In addition to our expense reduction measures, we reevaluated our resource distribution across various strategic initiatives. We believe our model is well suited to international expansion as our scalable technology and premium consumer-centric marketplace is competing primarily with paid inclusion models, which we believe limits the consumer experience and dealer value proposition. Still, each country we have entered is at a different stage of development.

As part of this review, we have decided to cease operations in Germany, Italy and Spain and have halted expansion efforts in other international markets. These markets were in their relative infancy, and as such, were far more reliant on paid traffic acquisition than the U.S., Canada or the U.K. The cost of restarting these marketplaces post-COVID would have been significant. And as we dynamically evaluate our capital allocation framework, we see larger and more addressable opportunities in the U.S., Canada and the U.K. We believe it is in the best interest of our business and our shareholders to focus our efforts on these more developed markets going forward. While we plan to reallocate the resources from these markets in the future, we expect to save roughly $5 million in 2020 by ceasing operations in Germany, Italy and Spain.

As we look ahead, it remains difficult to project our business, given the number of variables impacting the economy, our industry and our company. Still, we are seeing encouraging signs from our consumer audience. In April, our consumer insights team conducted a survey of over 700 car shoppers, which showed that 73% intend to purchase a vehicle in 2020, while only 8% who were planning to buy a car before the pandemic have delayed their plans indefinitely. So shoppers' purchase intent remains high. Furthermore, openness to digital channels has increased. Prior to the pandemic, 32% of car buyers were open to buying online. Whereas today, 61% are now open through a digital transaction. This data suggests there is still healthy consumer demand in the U.S., though with less timing certainty. But it also underscores changing consumer preferences.

While we cannot predict when lockdowns will be lifted, when the economy will begin to rebound or what normal may look like, we are mindful of several possible outcomes. First, the longer lockdowns remain in place, the greater the likelihood that recovering consumer demand will be more muted and pushed further into the future, particularly as the holiday shopping season draws near when car buying activity typically wanes. Second, we know our discounting program will not be enough to preserve paying -- the paying status of all our dealers, and our new suspended status offering is an attractive alternative for dealers facing economic hardship effectively, allowing them to pause their subscription. Total U.S. paying dealers fell by 1,107 in the first quarter, and our paying dealer count has continued moving lower since.

Dealer cancellation rates, which we believe, peaked in late March and early April, have since stabilized. And while it's an early trend, we are seeing some previously canceled dealers return to paying status. Size and duration of our discounting and the pace of paying dealer return both have a significant impact on our financial results for the remainder of 2020, and the latter plays a meaningful role in our 2020 exit rate and our business trajectory into 2021.

Given our unmatched audience scale in the U.S., what we believe is best-in-class return on investment, we think we are best positioned to attract net new paying dealers as we emerge from the COVID-19 crisis. In the meantime, our technology team is delivering innovation. We continue to focus on improving consumer retention, and our rollout of Google One-Tap log-in has increased our e-mail capture rate by nearly 40%. Additionally, the health crisis highlights the need for more robust digital retailing solutions for dealers. We had already prioritized digital retailer as a strategic initiative entering 2020, and we plan to develop these tools even more aggressively going forward.

A critical element of digital retailing is financing, where we are pursuing additional lending partners for our platform to enhance consumer credit spectrum and dealer coverage. We have also begun exploring paths to offer ancillary products and other features of the transaction process in our marketplace. So these efforts remain in early stage.

While these are challenging times for our employees, our dealers and our business, we are doing everything we can to emerge from the COVID-19 crisis as an even stronger company. We have over $150 million of cash and investments on our balance sheet, with no debt and a flexible business model, which we believe positions us best in our industry to invest prudently, yet aggressively in audience growth and to attract new dealer business.

Our U.S. audience size is unmatched, and we believe we provide dealers with the highest ROI, most efficient consumer acquisition channels across our marketplace and other digital marketing tools. We will continue to build out our product portfolio across both dealer products and new growth areas such as trade-in, consumer finance and other digital retailing tools. I believe a more focused effort will ultimately allow us to extend our leadership position in the U.S. to capture greater market share in Canada and the U.K.

With that, I'll turn the call over to Jason.

[Jason Trevisan, executive]

Thank you, Langley. I'll provide a detailed overview of our first quarter performance, followed by some directional comments on our outlook for the second quarter and full year 2020. Total first quarter revenue was $157.7 million, up 17% year-over-year and roughly in line with the midpoint of our prior guidance. Our marketplace subscription revenue grew 17% versus the year ago period to $141.9 million, and advertising and other revenue grew 10% year-over-year to $15.8 million.

Focusing on performance by geography. Our U.S. business accounted for 94% of total revenue in the first quarter. U.S. revenue grew 15% year-over-year to $148 million, while international revenue grew 41% year-over-year to $9.7 million.

As Langley referenced, we are ceasing operations in Germany, Italy and Spain, and halting future international expansion efforts. We expect this to have little impact on our international revenue going forward. Italy contributed only a few hundred thousand dollars in the first quarter revenue, while neither Germany nor Spain generated any revenue.

Turning to paying dealer count. We ended Q1 with 35,317 total paying dealers, a decline of 798 from the end of 2019. In the U.S., we finished the first quarter with 27,883 paying dealers, representing a decline of 1,107 from the end of 2019. Decline in our U.S. paying dealer count has continued into Q2 as many dealers have chosen to revert to our suspended status product, while they remain under state and local restrictions. So we are seeing stabilization in cancellation rates and an ability to win back some canceled accounts. U.S. paying dealer count ended April roughly 6% below our first quarter total.

In our international business, we added 309 net new paying dealers in the first quarter, 250 of which came from our marketplaces in Canada and the U.K. We ended the quarter with 7,434 total paying dealers, up 44% versus the year ago period. Similar to our U.S. business, we saw net dealer declines in our Canadian and U.K. marketplaces in the month of March, and we experienced further net paying dealer declines in April. Going forward, we'll remove Italian paying dealers from our account, which totaled 510 dealers at the end of the first quarter.

Coming into 2020, the anticipated connection and lead volume would be the leading driver of U.S. AARSD growth for the full year. In the first quarter, we faced our toughest volume growth comps of the year in January and February, and the impact of COVID-19 resulted in both a decline in consumer activity and dealer count. In isolating for January and February, unit pricing was a leading driver, contributing roughly 40% of U.S. AARSD growth in the period. Connection and lead volume contributed nearly 1/3 of AARSD growth in the period, while the remainder came from new products.

When incorporating March results, effectively all of U.S. AARSD growth would have been driven by unit pricing and new products due to the decline in both consumer activity and paying dealer count. In total, U.S. AARSD grew 19.2% year-over-year to $18,393. This represents a 60 basis point acceleration in Q4 2019 due in part to a decline in U.S. paying dealer count.

International AARSD grew 7% year-over-year to $5,222. First quarter international AARSD included the impact of PistonHeads for the first time, which we will continue to include in the calculation going forward. Similar to previous quarters, we excluded the impact of our Italian marketplace from this metric. Going forward, international AARSD will be calculated based on combined trailing 12-month marketplace subscription revenue and average paying dealer count from our core Canadian and U.K. marketplaces in PistonHeads.

I'll discuss our expenses and profitability on a non-GAAP basis, which backs out our stock-based compensation expense, amortization of acquired intangible assets and acquisition-related expenses. First quarter non-GAAP gross margin was 92.7%, down roughly 165 basis points from the year ago quarter. Similar to the prior 2 quarters, 2 factors contributed to the year-over-year contraction in gross margin percentage. First, we recognize media costs associated with our off-site display products and our cost of revenue. As these products scale, they will create a modest headwind to gross margins. Second, technology investments in our data center and cloud-hosting expenses also contributed to the year-over-year contraction. However, these factors do not change our stated long-term operating income or adjusted EBITDA margin targets outlined in our investor deck posted on our Investor Relations website.

Total first quarter non-GAAP operating expenses were $121.1 million, up 8% year-over-year. Non-GAAP sales and marketing expense grew 2% year-over-year to $90.8 million in the first quarter and represented 57.6% of revenue, down from 65.8% in the year ago quarter. Improvement in sales and marketing leverage is a result of consumer marketing expense reductions in March in addition to our brand investments, driving more direct and owned channel traffic. During the first 2 months of the quarter, non-GAAP sales and marketing expense as a percent of revenue was 61.8%, down roughly 410 basis points from the comparable year ago period.

Our first quarter non-GAAP product, technology and development expense grew 38% year-over-year to $17.2 million, representing 11.2% of revenue. The increase in product, technology and development expense is driven primarily by the acquisition of Autolist and continued investment in our product and engineering organization. We generated non-GAAP operating income of $25.1 million in the first quarter, roughly $13 million ahead of the high end of our prior guidance range. While the bulk of our operating income outperformance was driven by consumer marketing expense reductions in March, it is important to note, non-GAAP operating income through the first 2 months of the quarter was trending ahead of our operating plan. Non-GAAP diluted earnings per share were $0.19 for the first quarter, roughly $0.11 ahead of the high end of our prior guidance range.

On a GAAP basis, we generated first quarter gross margin of 92.6% and total operating expenses of $134.1 million, up 11.6% versus the year ago period. Increase in operating expenses was primarily driven by the acquisition of Autolist and continued investment in our product technology and development teams. First quarter operating income was $12 million, up 62% year-over-year. First quarter GAAP net income attributable to common shareholders totaled $13 million.

Geographically, first quarter U.S. GAAP operating income was $20.3 million, up 17% year-over-year. We had a GAAP operating loss of $8.2 million in our international business compared to a $9.9 million loss in the year ago quarter. We ended the first quarter with $155.7 million in cash and investments, a decrease of $15.9 million from the end of the fourth quarter. The reduction in our cash balance was driven primarily by our acquisition of Autolist, which closed in January with total acquisition costs of $21 million. We generated $8.3 million in non-GAAP free cash flow, which includes capital expenditures and capitalized website development costs of $1.9 million.

During the first quarter, we withheld and remitted $3.4 million in withholding payments from RSU share settlements, stemming from our equity compensation plan. In April, our Board of Directors approved an expense reduction plan, which included a 13% reduction in our workforce. In addition, we will cease operations in Germany, Italy and Spain, and halt other international expansion efforts. In conjunction with this plan, we expect to incur a total estimated pretax restructuring charge of roughly $4.3 million in the second quarter, 75% of which is associated with employee severance and benefit costs. The remainder stems from long-lived asset write-offs from our international marketplaces. Approximately $2.6 million of these charges will result in cash expenditures.

Before we open up the call for Q&A, I want to offer commentary on our outlook for the remainder of the year. While we are not in a position to offer the same form of financial guidance as we have historically, I want to give some directional color on how we are approaching cash management, liquidity, growth and profitability.

Starting with cash management. We have demonstrated our business' expense flexibility over the last several weeks. 55% of our 2019 cash expenses were tied to advertising, of which the bulk was spent on consumer marketing. Our consumer marketing expenses are highly variable as we spend the majority of these dollars in digital marketing channels such as search, social media, retargeting and display advertising. We were able to reduce these expenses quickly and significantly in mid-March when consumer demand waned, but we are continuing to spend meaningful amounts for traffic acquisition and our brand. While we expect these expenses will remain below historical levels for the foreseeable future, we are actively monitoring consumer and economic activity at the national, state and metropolitan levels, and we will scale our traffic acquisition spend up and down accordingly. Based on the comprehensive expense reduction plan we announced in April, we believe these measures will yield over $100 million in annualized cost savings compared to our prior operating plan.

On the liquidity front, we believe we are in a strong position to weather an extended downturn. We entered Q2 with $156 million in cash and investments on our balance sheet and no debt, which we believe is sufficient to manage our business through this crisis. But we do expect to use more cash in the near-term as we deal with challenges related to COVID-19. Given our clean balance sheet, we also believe that we have multiple avenues to garner additional capital should we need it.

Turning to revenue and profitability. We expect Q2 revenue to be down significantly year-over-year as we recognize discounted billing months and reduced OEM spend. Given there are still many unknowns to this crisis in both the near and long-term impacts it will have on the economy and our business, we are evaluating a number of scenarios as it pertains to revenue for the remainder of the year.

In light of the billings discounts we have applied to April, May and June, and a softer OEM advertising environment amidst reduced consumer demand, we expect total revenue of roughly $85 million in the second quarter. We expect to generate positive non-GAAP operating margin in the second quarter, a testament to the speed of our response to the crisis and the flexibility of our business model. When accounting for a $4.3 million restructuring charge, we may incur GAAP operating losses in the quarter.

For the full year, forecasting our business remains difficult and depends largely on the duration of lockdowns, pace of recovery and the possible reintroduction of lockdowns should a second wave of the virus occur. Even in our upside scenario, which assumes no further discounting, a steady pace of paid dealer reacquisition, reductions in churn and consistent acceleration and expansion activity for the remainder of the year, we would expect fourth quarter revenue to be below our first quarter revenue of $157.7 million.

Regarding margins, our downside 2020 scenario assumes the possibility of the health crisis persisting or a second wave of lockdowns occur, some dealers going out of business, extending billings discount into the future and more muted economic recovery. Given the flexibility we have in our expense base through our variable consumer marketing spend, even in our downside scenario, we believe the business could achieve 10%-plus non-GAAP operating margin for the full year 2020.

While our dealers are facing unprecedented challenges, we feel confident in the leadership we've provided in our industry. We believe that our industry-leading audience, listings tools and digital marketing products, provide the highest ROI and strongest value proposition in our industry. We are investing in digital tools to help dealers and consumers alike operate safely and efficiently through this period. And we continue to attract a large audience of engaged down-funnel shoppers to our marketplace. We believe we are in solid financial position to both preserve our own business' health and invest proactively as the economy recovers. And we believe we will emerge in this situation with an even stronger leading position in the U.S. through continued market share gains in our international businesses.

With that, I'll open the call up for Q&A.

[Operator]

[Operator Instructions] We'll take our first question from Dan Kurnos with The Benchmark Company.

[Daniel Kurnos, analyst]

Good color, guys, just around sort of how you're thinking about marketing spend. We know, obviously, in the marketplace that there are some pretty attractive rates out there. CPMs are way down. And so you guys have obviously been pretty aggressive on the dealer side in terms of trying to take some mind share there. Just curious, if it makes sense, even sort of pre-recovery, to get a little bit more aggressive if you think you can get incremental market share gains at extremely high ROI customer acquisition cost here?

[E. Steinert, executive]

Yes. So Dan, it's Langley. I think you're going to find us to be, as we have in the past, be analytical and careful about making sure we map our marketing spend with the demand function. As we talked about in our remarks, we've been, frankly, positively encouraged by some of the early trends on both consumer traffic and lead flow in many markets. Probably the only thing I would say is, in addition to that is that we are going to be careful about looking at it kind of market-by-market because what we have seen is, while there are a lot of strong signals in some markets, there are a few increasingly minority of the markets, thankfully, that are still in a pretty hard lockdown. So we're going to be careful, probably on a geographic basis to make sure we're mapping to each regional market.

[Daniel Kurnos, analyst]

And then just maybe on the product side. Obviously, you've got dealers talking about maybe 25%-plus permanent reductions to staff, everybody going to digital solutions. You gave a lot of color about it on the call. Obviously, you had -- you launched RPM, you had other stuff in the works, alpha test trading in Q1. Does the environment create a change in the way that you are developing your product road map? Obviously, you've rolled out some new tools, but do you maybe focus on those or grow them deeper before you get back to what you were doing before? Or is it still just kind of status quo and you have the right game plan to begin with?

[Samuel Zales, executive]

Dan, it's Sam Zales. Thanks for the question. I think it's the combination of continuing to do what we've done well, which is innovate with ancillary products that meet those customer needs. You talked about RPM. We were off to a very good start, and we believe as dealers continue to look at -- I want to make sure you can hear me. I just saw a note that -- I want to make sure you can hear me. As dealers are continuing to look at not just their listings package, but also the $12 billion they are spending in digital marketing that we've got a product there that we think is second to none in the marketplace. We put our large audience up against retargeting the data that we know on their shopping experience to sell that to dealers. It's a tremendous offering in the marketplace. We've launched contactless selling activity, which is helping consumers and dealers find a better match for their process of buying today. The consumer finance product that we launched about a year ago is showing great promise. We're going to continue to invest there.

And the feedback from our dealer council, which we just held a couple of weeks ago, 30-plus leading dealers in the country, feedback was, when you look at digital retail, there are many solutions out there in the marketplace, none of which work in a completely end-to-end, start of the search process to a complete digital transaction. It leaves an opportunity to a player to come in and build the solutions in shopping, finance, ancillary products that ties together that full end-to-end digital transaction. We're going to continue to invest there as our newest set of investments, and the comments Langley made at the beginning of the call, these existing products are really off the ground and exciting for us. But digital retail is the next phase because we see an open market opportunity to do something nobody else has done there.

[Operator]

Our next question will come from Ron Josey with JMP Securities.

[Ronald Josey, analyst]

Just as states start to open up, so I'm thinking specifically about Georgia and states like that, are you guys seeing dealers come back to the platform faster or higher traffic? I guess, just taking a bigger picture, kind of look at the question. So I'm really asking, as the country opens up, how correlated is that kind of to traffic and dealer results?

[Samuel Zales, executive]

Ron, Sam Zales. Thanks for the question. We certainly are seeing that happen in some of the big states. If you look at Pennsylvania

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transportation. All RPMs were shut for a period of time. We are seeing states open up. As Langley said, state-by-state, yes, overall, we're seeing lead volumes grow. State-by-state, the effects are very different. Arizona had very little impact in consumer demand, and therefore, dealers have more opportunity to make sales in those environments. New York, New Jersey, Pennsylvania, tougher situations there. We've mentioned in the prepared remarks that the cancellations in our business have turned the corner, certainly in markets where we're seeing new business come in. It's in those markets that are opening up for business. But across the board, even in the challenging environments where dealers are forced to make sales either in an online fashion or in their service lines, we are seeing our lead volumes drive more sales and more interesting deals coming back

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consumer leads for when the dealer comes back into

[Audio Gap]

who were still interested in purchasing and have just been pretty much delayed in their process because of the shutdowns are now able to transact through those dealers. So we are seeing significant drift in joining the paid program from them, and that's the nature of our lead volume growing.

[E. Steinert, executive]

Ron, the only thing I would add to Sam's comment, just kind of to state the obvious, is that, obviously, we're predominantly almost, I want to say, like 95% a used car platform as opposed to new car. And in these kind of challenging economic times, I think dealers are going to fall back on used car as their profit engine, because I think new car is going to be very challenged. So a, thinking that as a fact; and then secondly, just our sheer scale at this point as the platform really makes us kind of a must to have. It's not really, I would argue, not really optional to have us as being your platform. So I think that's kind of evidenced by the fact that we are seeing some pretty encouraging churn in regional dealer cancellations, which we saw a peak in kind of late March. We're seeing a pretty good trend of people coming back on because they realize, a, that they need to be on; and b, that they're seeing these state restrictions being lifted and really have to build their pipeline to get ready for once things do open up, and God willing, kind of June, most of the states. So I think those are the trends that we're seeing, which are positive.

[Operator]

[Operator Instructions] We'll next go to Marvin Fong with BTIG.

[Marvin Fong, analyst]

Glad to hear everyone's safe and doing well. Question on some of your own advertising-driven products, I'm thinking like dealer display, SEM Plus and retargeting. Should we just think of those as all kind of moving in line with how much overall car demand is going down? Or are they holding up a little better? Any color you could provide on those particular products would be great. And then I have a follow-up.

[Samuel Zales, executive]

Marvin, I hope you can hear me. I'm told that my audio is not terrific. It's Sam Zales here.

[Marvin Fong, analyst]

I can, Sam.

[Samuel Zales, executive]

Okay. Sorry about that. The RPM products, I think, are taking off in the sense that dealers are looking to fill their pipelines. Langley just mentioned that state-by-state, depending on lockdown or openness to being able to sell, it's the opportunity not only to expand beyond our lead program, the leads that we drive in our listings activity, but also to build the pipeline for their brands as they open up again. As I said earlier, that $12 billion is spent today on online digital marketing activity. So we're just taking advantage of having the largest audience using our data that looks at shopping experience for those consumers and retargeting them to send that consumer back to a dealer's website. That's a unique value proposition that's saying, I'm not -- I'm now seeing that consumer who's only looking at my inventory. So it's an added benefit of building a completely branded experience to drive that consumer to the dealer website as an ancillary and an additional way to build pipeline during a downturn. We said in our consumer research that consumers are still planning to make purchases. They may have just expanded their deadlines for making those purchases. This is a perfect way to take advantage of pipeline building for dealers.

[Marvin Fong, analyst]

Great. Appreciate that color. And then my follow-up is just, I think, you or Jason alluded that national OEM advertising would be pressured going forward. Just any color on how those discussions are going? When -- do you have any visibility on when the OEMs might look to restart more advertising in the digital channel?

[Samuel Zales, executive]

I do, Marvin. I think Langley characterized very well. Used car markets typically perform much better in downturn, down cycles than new cars. When you think about new car, inventory sitting on dealers' lots, the feedback you hit well is that OEMs are thinking, not that I got to cancel all my marketing forever, if I might delay my spin until later in the year. So as we mentioned in our opening remarks, some of that hit us in the end of March into early April. I think most OEMs and -- most of them are sticking with their advertising, but some of the OEMs are saying, I'm going to push out my spend to when I follow the demand curve and that may be closer to, say, third quarter, when they start want to ramping up that advertising to push people to think about new car purchases when, hopefully, the recovery comes and the economy moves forward.

[Operator]

And we'll take our next question from Jed Kelly with Oppenheimer.

[Jed Kelly, analyst]

Great. Can you hear me okay?

[E. Steinert, executive]

Yes.

[Jed Kelly, analyst]

Yes. Okay. Just as we start the recovery and used cars become more popular with consumers, it kind of implies your valuation, and your valuation technology is more important. Is there a way for you to sort of, a, accelerate your market share with dealers against the other marketplaces, where you can actually become the only one they use instead of dealers using multiple marketplaces?

[Jason Trevisan, executive]

Thanks very much for the question. This is Jason, Jed. Yes. So we believe -- we have long said that there is an opportunity for, on the consumer side, a winner take most opportunity. If you are able to offer the most selection, give the most information on it, sort it in the most intuitive way, and in particular, in an environment where car values are likely to be more volatile, then you should be the destination that users -- that consumers can use and solve most of their needs. And we believe, and I think, the data supports that we check all those boxes.

From a dealer perspective, there is -- you could argue in more recessionary times as wallets are tighter that there will be a flight to quality. And the 2 typical sort of directions that we think dealers will go is they will go to where there is scale and where there is ROI. And we believe that we're in the unique and pretty attractive spot to have both the largest scale, or from an aggregate standpoint for most of our dealers as well as terrific ROI. We are continuing to invest time and energy in demonstrating that to dealers so that we can, with more proof positive, provide more of a closed-loop attribution perspective that shows them that we are the best ROI. And that if they advertise on our platform, given the size of our audience and given the virtuous nature of the marketplace that they may not need to advertise on 2 or 3 other marketplaces because we will bring them the bulk of the value. And then when we add on to that, some of these other products that you've talked about like RPM, we then help them tap even further into that audience, our audience, by helping them connect with them when they're not on our platform.

[E. Steinert, executive]

Jed, this is Langley. I'll probably add a little bit more color. I've had some discussions with a number of national franchise dealer groups, some publicly traded, who have, as much as said that in these tough times, they're going to consolidate budgets. And thankfully, we're in that list because of the reasons, I think, Jason talked about of principally scale and ROI. We've got the biggest audience. We're delivering the best value to dealers from an ROI standpoint. So I do think there's going to be a consolidation. I'm not going to get into who might -- who's out in that, but I do think we'll benefit.

[Operator]

We'll next go to Derek Glynn with Consumer Edge Research.

[Derek Glynn, analyst]

Just to start, can you peel back the layers on how your dealer mix is impacting AARSD as dealers who may be in better shape financially probably also are the ones staying on and generating that higher AARSD, while those lower AARSD dealers maybe the ones spending their subscription? Can you just help us understand kind of what impact that had in the quarter and what you expect going forward?

[Jason Trevisan, executive]

Sure. Thanks. This is Jason. We've shared in the past that in normal times, our smaller dealers tend to be less sticky for a number of reasons. And in this environment, that -- I think that general rule still applies. But I think in this environment, what's different is what we mentioned earlier, which is the geographic nature of it. And so a stronger indicator of dealers' willingness to stay in business and maintain sort of full throttle on marketing is whether they can have consumers limit their dealership or not. So I would say geography and the sort of societal lockdown elements of that geography are a bigger contributor. But you still have the general nature that larger dealers tend to be stickier and run more like businesses versus a smaller one -- like a large business rather than a smaller rent shop. So the net-net is that I would not suggest that mix has been a material contributor to AARSD. Instead, it's been the drivers we've talked about. It's through February, which is probably the more accurate time frame when pricing was 40%, the others were about 1/3 each. And then frankly, AARSD gets a little sort of wonky when the dealer count goes down. And so in that case, it's a different mix of contributors.

[Derek Glynn, analyst]

Got it. That's helpful. And then in light of some of the recent exits in some of your international markets, I'm wondering how you're evaluating your presence and commitment to the U.K. and Canada, particularly given the wide range of possible economic outcomes from COVID, as you've mentioned. Just wanted to get your thoughts on that.

[Jason Trevisan, executive]

Sure. Thanks, Derek. It's Jason again. Yes, we are -- it was a difficult decision because we had teams that have put a lot of work into launching those markets. And we believe we had very strong products. And in Italy, as an example, we had gotten really strong positive reception from the dealer community. At the end of the day, as we said in our Shareholder Letter, it's about focus and it's about resource allocation. And for us, it's both capital and human resource allocation. So what I find most compelling, I guess, about the focus on Canada and U.K. is that we now have our international teams focused on executing in 2 markets versus more than 2 markets. And I have already seen, to be honest, an ability to move faster by being able to focus and by being able to adapt in this environment. We led the decision for discounting in those markets, just as we did in the U.S., and we have had really promising support from dealers.

We also just held our U.K. dealer council, who has said to us that we changed the game in the industry by doing that, and they are grateful for it. They're also seeing that we are having very strong -- on a relative basis, very strong lead growth rebounding from the lows that we were at. And in some cases, dealers are getting more leads today than they were a year ago. And by coupling contactless solutions, by introducing delivery in those 2 markets and by introducing WhatsApp in the U.K., we've had really impressive innovation in the last couple of months that I think is an output of being able to focus and is helping dealers during this strange time. So I'm more excited about Canada and the U.K. than I was simply because we have more guns and more ammunition pointed in those markets.

[Operator]

[Operator Instructions] And it does appear we have no further questions in the queue at this time.

[E. Steinert, executive]

I want to thank everyone for dialing in this evening. As we've talked about in our remarks, these are certainly challenging times. But we feel we're really extremely well positioned to help our dealer partners and consumers as shopping behavior continues to build in the coming months. I want to conclude tonight's remarks by saying again our thoughts go out to those around the world that are affected by this pandemic. And again, give our sincere thanks to the medical community, both here in Boston and around the world for all those people who are on the frontline every day, trying to battle this virus.

Lastly, I want to just give a special thanks for our employees, for their -- both their hard work and their flexibility as we all work from home these times. As many of our employees who have small kids kind of test working from home. When you've got small kids running around, it's not always easy. But anyways, I want to thank everyone for their hard work. Hopefully, we can all get back in the office soon.

And with that, I'll close it off and say goodnight to everyone.

[Operator]

Thank you. And again, that does conclude today's call. We do thank you for your participation. You may now disconnect.