CarGurus Inc

NASDAQ:CARG

Earnings Call Transcript 2019-Q3

[Operator]

Greetings, and welcome to CarGurus Inc. Third Quarter 2019 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.

I would now like to turn the conference over to your host Mr. Rodney Nelson, Head of Investor Relations. Thank you. You may begin.

[Rodney Nelson, Head of Investor Relations]

Thank you, operator. Good afternoon, and welcome to CarGurus’ third quarter 2019 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 Sam Zales, President and Chief Operating Officer.

During the call, we’ll make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the fourth quarter and full-year 2019, management’s expectations for our future financial and operational performance; our business and growth strategy and our plans to execute on our growth strategy, including our ability to expand our global audience and add new paying dealers; our brand awareness and traffic acquisition efforts, including investments in growing our audience and brand building across our U.S. and international businesses as well as our ability to reduce customer acquisition costs over time; our ability to achieve our 2019 strategic initiatives; the timing for lease of new products; our investments in and ability to drive adoption of new and existing products and features and their benefits; our expectations for our consumer finance offering and peer-to-peer marketplace, including our ability to expand through additional lenders and maximize market opportunities; our expectations for our new digital marketing and social media products and the ability of these solutions to assist our dealer’s digital marketing efforts; the value proposition of our products, including the ability of new products to drive AARSD growth; the growth levers we expect to drive our business; our ability to maintain existing and acquire new customers; our expansion into international markets and our international growth strategy; our ability to successfully integrate and improve the PistonHeads website; our expected expenses; our ability to successfully grow our product and engineering organization; and other statements regarding our plans, prospects and expectations.

Forward-looking statements may include words and phrases such as we expect, we believe, we intend, we anticipate, we plan, may, likely, upcoming and similar terms. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise these forward-looking statements except as required by law.

Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained under the heading Risk Factors in our Quarterly Report on Form 10-Q filed after today’s market close as may be updated by our other SEC filings.

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 after market close today. The press release, investor presentation and our SEC filings can be found in the Investor Relations section of our website at investors.cargurus.com and the SEC’s website at sec.gov.

With that, I’ll turn it over to Langley.

[Langley Steinert, Founder and Chief Executive Officer]

Thank you, Rodney, and thanks to, everyone, for joining us today. CarGurus delivered a robust third quarter featuring strong subscription revenue growth, U.S. margin expansion and several important product developments.

We grew our industry-leading U.S. audience generating nearly three times as many visitor – visits as our next closest competitor and we delivered year-over-year U.S. lead growth of 13%, providing strong value to our dealers and aiding growth in our core listings business.

Our business – our brand investments are driving more traffic from direct app and owned channels, and year-to-date leads from these channels have grown 20% year-over-year. Brand remains an important investment area for us, and we launched our new My Car, My Deal campaign in Q3.

In our emerging products business, we added a second lender to our consumer finance marketplace, expanding our dealer and consumer credit spectrum coverage. Our international business delivered rapid growth evidenced by our highest total international net dealer additions and triple-digit audience growth.

Finally, in October, we held our first-ever user conference, Navigate, where we hosted hundreds of dealers unveiled new products and features. Our core U.S. business is taking share as we earn more of the $14 billion dealers spend annually on digital marketing. The share gains start with our U.S. listings business, where we continue to see a long runway for growth.

Our commitment to transparency allows us to track the largest audience in our industry, generating nearly three times the number of visits as our next closest competitor according to Comscore.

In the third quarter, over 38 million average monthly unique visitors logged over 103 million average monthly unique sessions on our U.S. site, representing a two-year compounded annual growth rate of 24% and 21%, respectively. Yet we have substantial opportunity to continue increasing our total audience and growing our brand.

While we have the largest audience already, we also have a large opportunity to gain unique visitor share since we have roughly 40% share of total deduplicated visitors to all major U.S. auto listing sites as measured by Comscore. We are still quite early in our brand investment initiatives, but the last two years of investments are bearing fruit.

As I mentioned, year-to-date leads from direct app and owned channels are up 20% year-over-year, helping us create an even more robust traffic mix and enabling greater efficiency in our traffic acquisition efforts. In fact, our year-to-date cost to acquire a U.S. lead is lower in 2019 than it was through the first three quarters of 2018.

Our brand initiatives are a strategic comparative for our business and our recently launched My Car, My Deal campaign highlights our platform’s unique consumer value proposition, which we believe will fuel long-term consumer attention and even better acquisition economics. But it’s not just the scale of our audience that matters, it’s the quality of the shoppers we attract it generates what we are confident is the industry’s leading return on investment for our dealer partners.

We have always focused our traffic acquisition efforts on down funnel consumers. And in turn, we provide users with a robust platform to conduct their car shopping process premised on three tenants: more inventory, more information transparency, sorted in a more consumer-oriented way. Our U.S. audience can choose from an average of over 5.5 million listings from our more than 40,000 dealers, an experience that they cannot find from any of our major competitors, which we believe obviates the need to use other car shopping sites.

We aid their process with tools, such as our instant market value, dealer ratings, and deal rating-driven search results. And we’re helping them gain more transparency on the buying process with our consumer finance offering. Simply put, we are delivering to dealers scale, quality and value through our massive audience of informed ready-to-buy shoppers.

To that end, we grew leads to U.S. dealers 13% year-over-year in the third quarter. Year-to-date, leads have grown 16% year-over-year compared with sessions and unique visitor growth of 10% and 9%, respectively.

Bottom line, leads, connections and quality matter most to dealers. Our technology team is always focused on delivering high-quality leads and connections through our traffic acquisition and onsite conversion efforts and we will always prioritize initiatives to do so. This objective is our North Star in each product decision we make, even if it means passing on short-term revenue opportunities.

For instance, we may forego revenue in our OEM ad business, if instead we can deliver a better consumer experience, more quality, consumer leads and connections, walk-in traffic, strong dealer ROI and incremental recurring subscription revenue down the road.

While we do not plan to provide lead-level detail every quarter going forward, we believe this highlights our ability to grow our platform’s value and our core listings business even when traffic growth is muted. That growth in platform value is reflected in our U.S. AARSD performance.

U.S. AARSD eclipse 20% growth for the fifth consecutive quarter, rising 21% year-over-year. Connection and lead volume growth was the leading driver of AARSD growth in the quarter. However, it’s important to note that new product posted its best-ever contribution to AARSD growth.

In addition, our U.S. paying dealer base continues to grow, as we added 261 paying dealers in the third quarter, bringing our U.S. – our total U.S. paying dealer count to 28,692. Despite our high dealer market penetration, our growth runway remains long, and we are still bringing more dealers onto our core U.S. listings platform, up-selling dealers to a growing set of listings package levels and cross-selling our portfolio of digital marketing products.

In October, we hosted hundreds of dealers and partners at Navigate, our inaugural user conference, which I’m pleased to say was a great success. Our sales and marketing teams organized a terrific event with insightful speakers and content, including keynotes from CarGurus executives, as well as thought leaders from around the industry.

Dealers were led through product demos and received a sneak peek at our revamped dealer dashboard featuring our pricing tool, market insights and powerful audience engagement analytics.

Our product team also announced real-time performance marketing, or RPM, our multi-channel digital marketing suite that will unify our dealer digital marketing products. RPM will also incorporate our new social product for Facebook campaigns, which we announced alongside RPM at navigate. A social product allows dealers to target CarGurus’ users that have viewed vehicles similar to that dealer’s inventory, leveraging the power and industry-leading scale of our deep datasets and unlocking more engagement with our unique audience.

With the introduction of social ads, we believe RPM will deliver optimized campaign performance through smart budget allocations across multiple channels, eliminating guesswork and delivering what we believe will be best-in-class return on investment.

In addition, we’ll provide dealers with analytics from every channel on the metrics that matter most, spend allocation and impressions, clicks, SRP and VDP views, leads and unit costs, all embedded in the dealer dashboard. Between our listings platform and RPM, we believe we’re delivering unmatched marketing sophistication and value to our dealers and unlocking long-term growth opportunities in a $14 billion total addressable market. We plan to launch RPM in the U.S. in early 2020, and we will keep you appraised of major milestones.

Our core U.S. business is scaling efficiently, as we gain leverage on our sales and marketing investments. Beyond the core business, we remain committed to investing in long-term emerging product areas to augment future growth. Earlier this year, we’ve shared with you the launch of our consumer finance platform, providing consumers with instant prequalification decisions on nearly 3 million CarGurus listings at launch.

Today, I’m pleased to share that we’ve added Westlake Financial Services as our second platform – second lender to our platform. Our partnership with Westlake launched in Q3 will be rolling out to dealers over the course of the fourth quarter. Westlake dramatically expands both dealer and consumer credit spectrum coverage on our platform. And we’re excited to provide consumers with a multi-lender marketplace that offers them transparency and choice.

In turn, more dealers will be able to receive leads from down funnel consumers with a loan prequalification, which we believe significantly increases conversion to sale. In fact, consumers that prequalify on our platform are submitting loan applications at dealerships over 20% of the time, creating a high-value lead source for dealers.

We continue to pursue additional lending partners to build an even more robust offering, and we’re thrilled by both the progress we made and the opportunity ahead of us in consumer finance.

Turning to our international business. We delivered strong growth on both sides of our marketplaces. Our core international CarGurus platforms reached new all-time highs in terms of both average monthly unique visitors and sessions in the third quarter.

Including the impact of PistonHeads, we attracted 10.2 million average monthly unique visitors and 26.2 million average monthly unique sessions, representing year-over-year growth of 129% and 151%, respectively. The momentum in our international business is creating a strong dealer value proposition and we are rapidly growing our paying dealer base.

We added 671 net new paying dealers to our international business in the third quarter, comprise – comprised of strong contributions from each of our commercialized international markets and representing our best-ever quarter of total international net dealer additions.

Most encouragingly, unit economics in our most developed markets are improving admits rapidly growth and increasing efficiency in our traffic acquisition strategies, which we believe is leading – is a leading indicator of future profitability in those markets.

In the UK, our core CarGurus platform generated triple-digit lead growth for the fourth consecutive quarter, which leads to dealers rising 120% year-over-year in the third quarter. As we integrate PistonHeads in our go-to-market strategy, we believe that we will have a scaled, unique platform, providing a differentiated value proposition to UK dealers.

In summary, we’re delivering strong efficient growth in our core U.S. marketplace subscription business and investing prudently in new product arenas to expand our total addressable market. We believe the combination of our listings platform and RPM will provide U.S. dealers with a best-in-class multi-channel digital marketing solution to efficiently acquire customers, and our team is delivering consumer innovation in our emerging products as well.

Our international team is replicating our domestic success abroad and generating strong growth with healthy unit economics. We believe we’re in position to finish out the year strong and set ourselves up for continued success in 2020.

With that, I’ll turn it over to Jason.

[Jason Trevisan, Chief Financial Officer]

Thank you, Langley. I’ll provide a detailed overview of our third quarter performance, followed by our guidance for the fourth quarter and updated outlook for the full-year 2019.

Total third quarter revenue was $150.5 million, up 26% year-over-year and roughly $2 million ahead of the high-end of our guidance range. Our marketplace subscription revenue grew 28% versus the year-ago period to $135.5 million, and advertising and other revenue grew 13% year-over-year to $14.9 million.

Parsing performance by geography, the U.S. accounted for 94% of total revenue in the third quarter. U.S. revenue rose 24% versus the year-ago period to $141.6 million, while international revenue grew 98% year-over-year to $8.8 million.

Turning to paying dealer count. We eclipsed 35,000 total paying dealers in the third quarter. We ended Q3 with 35,199 total paying dealers, representing an increase of 932 from Q2.

In the U.S., we finished the quarter with 28,692 paying dealers, up 6% year-over-year and an increase of 261 from the end of the second quarter. This compares to 370 U.S. net dealer additions in the second quarter of this year and 257 net dealer additions in the year-ago quarter.

As we stated often, quarter-to-quarter net dealer ads will be variable, but over the long-term, U.S. net dealer ads will likely remain gradual as our paid dealer market share increases.

In our international business, we added 671 net new paying dealers in the third quarter. We generated strong performances across each of our commercialized international markets, Canada, the UK and Italy, contributing to this quarter’s net dealer addition total. We finished the third quarter with 6,507 international paying dealers, up 88% versus the year-ago period.

As Langley mentioned, U.S. AARSD growth exceeded 20% for the fifth consecutive quarter, driven primarily by increased connection and lead volumes to dealers. U.S. AARSD grew 21% year-over-year in the third quarter to $16,967. We’re seeing consistent adoption of our new products, as delivery and our audience retargeting product, in particular, are generating strong demand in our U.S. business.

Each of our dealer products are priced as subscription and our newer products will take time to build installed base of recurring revenue. Still, we’re pleased with the adoption patterns we’re seeing across our portfolio, resulting in new products generating their strongest contribution to U.S. AARSD growth to date.

International AARSD grew 5% year-over-year to $5,079. As a reminder, we excluded and we will continue to exclude the impact of PistonHeads in our Italian marketplace from this metric until we have four trailing quarters of operating results in each market to accurately render its contribution.

Keep in mind, that this metric will be lumpy on a quarter-to-quarter basis, as we experienced high percentage growth in paying dealer count in our international business. However, if we’re successful in continuing to grow leads per dealer, launch new products and achieve significant penetration of our paying dealer opportunity, individual country AARSD should begin to deliver more consistent year-over-year growth in time.

I’ll discuss our expenses and profitability on a non-GAAP basis, which backs out our stock-based compensation expense and amortization of acquired intangible assets. Third quarter non-GAAP gross margin was 93.8%, down roughly 90 basis points versus the year-ago period. Two factors contributed to the year-over-year contraction in gross margin.

First, we recognized media costs associated with our audience retargeting product in our cost of revenue. As this product scales, it 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 third quarter operating expenses were $122.5 million, up 21% year-over-year. Non-GAAP sales and marketing expense grew 20% year-over-year to $97.6 million and represented 64.9% of revenue, down from 68.4% of revenue in the year-ago period.

The improvement in sales and marketing leverage are the result of our brand investments, driving more traffic from direct sources in addition to efficiency gains and our traffic acquisition and onsite conversion improvements. We will invest prudently yet aggressively along each of these fronts across our markets to grow audience and increase connection and lead volumes to dealers.

Our non-GAAP product technology and development expenses grew 36% versus the year-ago period to $13.8 million. The investments we’re making in our technology team impact multiple initiatives, including supporting our core marketplace subscription revenue business in both our domestic and international businesses and projects in the emerging product arena.

We continue to allocate resources as needed to manage near-term business needs and support longer-term growth initiatives, and growing our technology and product teams remains a top priority. For instance, right now our investments in emerging products, such as P2P, or consumer finance remain modest, both on an absolute dollar basis and relative to investments supporting our core business.

However, if we’re successful in honing these products and see sufficiently attractive corresponding unit economics, we will undoubtedly increase our investments to support the high revenue growth potential of these products.

We generated non-GAAP operating income of $18.6 million, roughly $6.1 million ahead of the high-end of our guidance range. Our operating income outperformance was driven by a combination of marketplace subscription revenue outperformance, continued efficiency gains in traffic acquisition driving operating leverage and other expense favorability in the quarter.

Non-GAAP diluted earnings per share were $0.14 for the third quarter, $0.04 ahead of the high-end of our guidance range. On a GAAP basis, we delivered third quarter gross margin of 93.8% and total operating expenses of $131.4 million, up 23% year-over-year. The increase in operating expenses is primarily the result of increased sales and marketing expenses.

Third quarter operating income increased 65% year-over-year to $9.7 million. Third quarter GAAP net income attributable to common shareholders totaled $10.4 million. Geographically, our third quarter U.S. GAAP operating income was $20 million, and we had a GAAP operating loss of $10.3 million in our international business.

As Langley referenced, we’re seeing operating leverage materialize in our U.S. business through our sales and marketing investments and our unit economics are improving in our most mature international markets.

In Canada, our cost per lead declined 21% year-over-year in the third quarter, and is down 18% year-to-date. In the UK, our cost per lead on our core site declined 44% year-over-year in the third quarter, and is down 39% year-to-date. We still have ground to cover to reach profitability in these markets. But given how quickly we have grown investments in these businesses, we’re very pleased with these trends.

We ended the third quarter with $164.3 million in cash and investments, an increase of $17.2 million from the end of the second quarter. We generated $23.8 million in cash from operations in the third quarter and $21.1 million of non-GAAP free cash flow, which includes capital expenditures and capitalized website development costs of $2.7 million.

During the third quarter, we withheld and remitted $4.2 million in withholding payments from RSU share settlements, stemming from our equity compensation plan. We continue to evaluate this practice and may explore other avenues for managing tax withholding related to equity compensation going forward, though no change to this practice is imminent.

I’ll close my prepared remarks with our outlook for the fourth quarter and full-year 2019. We expect to deliver strong marketplace subscription growth in the fourth quarter, driven primarily by robust U.S. AARSD growth and strength in international net paying dealer additions.

We expect to deliver more modest year-over-year growth in our advertising business relative to our subscription business growth in Q4, as car shopping activity typically wanes towards the end of the year. With these factors in mind, we are raising our full-year revenue outlook to a range of $583 million to $586 million, implying roughly 29% year-over-year growth at the midpoint. This compares to our prior guidance of $576.5 million to $582.5 million.

We’re raising our non-GAAP operating income to a range of $63.6 million to $65.6 million, up from $54.5 million to $58.5 million, implying an 11.1% operating margin at the midpoint of our operating income and revenue guidance ranges. This is roughly 220 basis points ahead of our initial full-year 2019 guidance set on our Q4 2018 call in February and 140 basis points ahead of our full-year 2018 non-GAAP operating margin. We’re raising our full-year non-GAAP earnings per share guidance to a range of $0.47 to $0.48 per share, up from $0.42 to $0.45 previously.

Focusing on the fourth quarter, we expect total revenue to be in the range of $152.2 to $155.2 million, non-GAAP operating income in the range of $17.1 million to $19.1 million and non-GAAP earnings per share in the range of $0.12 to $0.13.

Overall, our business is poised to finish 2019 strong. We’re efficiently scaling our leading U.S. audience and delivering quality leads and connections to dealers, resulting in what we believe is industry-leading return on investment. The investments we’re making in our brand are yielding audience growth, increased customer acquisition efficiency and operating leverage for our U.S. business.

Our international business is delivering strong growth with unit economic trends that support long-term profitability. Our technology and product teams continue to deliver innovation, not only in our core listings and digital marketing products, but also in setting us up for long-term growth in areas such as consumer finance and P2P. We’re looking forward to closing out 2019 strong and with momentum that will set us up nicely for sustained success in 2020.

With that, we’ll open up the call for Q&A.

[Operator]

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tom White with D.A. Davidson. Please proceed with your question.

[Thomas White, D.A. Davidson & Co.]

Great. Thanks for taking my question. Good evening, guys. Just two on international, if I could. I was hoping maybe, Langley, just help us understand your latest thinking about adding more international markets over the next, say, two to three years versus focusing your international investments on kind of scaling your existing countries more quickly and maybe accelerating their path to profitability?

And then just sort of secondarily, can you maybe give us a sense of how UK is doing in terms of their sort of timeline or ramped profitability versus what you saw in the U.S.? Thanks.

[Langley Steinert, Founder and Chief Executive Officer]

So, yes, so let me take the first question, and actually I’ll have Sam handle that second one about UK. I mean, generally, it’s hard for us to predict where we may or may not go in the future internationally. But I think globally, it’s probably safe to say that, our focus will be more on taking the investments we have in the existing markets and trying to push them towards both scale and profitable So, that’s probably the best place to leave it.

[Sam Zales, President and Chief Operating Officer]

And Tom, I’ll pick it up, it’s Sam Zales, on the UK specifically. I think, comparing it to the U.S. businesses, it’s hard to do. The U.S. business is sort of simmered for many years with a different business model. And we aggressively went into these models knowing that in the UK in this market and others, the pain point exists that consumers do not have a transparent experience and dealers are anxiously awaiting a high ROI connection – consumer connection growth partner to work with.

I think you heard from Langley’s prepared remarks that we’re growing lead volume in the UK by north of 100%. We’ve done that for quarters consecutively. I think, when you look at the business, we mentioned in our Investor Day that unit economics are moving all in the right direction, which means how we look at the revenue per connection versus the cost per connection, all moving us on that path toward profitability.

The lead growth, the visitor growth has been tremendous. And I think most importantly, dealer ads and AARSD all moving in the right direction. So the markers are all moving in the process we wanted them to, you just can’t compare it to the US. I hope that’s a fair answer.

[Thomas White, D.A. Davidson & Co.]

Okay. Thank you.

[Operator]

Our next question comes from the line of Naved Khan with SunTrust. Please proceed with your question.

[Naved Khan, SunTrust Robinson Humphrey Inc]

Yes, thanks a lot. Just a couple of questions. So lead growth of 13% that was quite strong relative to the growth in unique visitors. Can you just maybe call out some of the contributors to how lead volume is exceeding visitation? And then I have a follow-up question after that.

[Jason Trevisan, Chief Financial Officer]

Sure, Naved. Hey, it’s Jason Trevisan. We – a couple of ways. Number one is, we’re always trying to attract a more down funnel customer in both the brand efforts that we do, as well as our, what we call ATA, Algorithmic Traffic Acquisition. And so I think that first point is that, we’re attracting people who are more likely to convert, so we’re getting smarter about that. And as a result, higher percentage of our users are converting.

The second is, we’re putting resources against conversion optimization and putting features and design in our site, that is conveying more information to users. So that they’re more informed and more ready to convert – or to connect rather with dealers. So it’s both the intelligence in our spend and acquisition, as well as the experience optimization on our site.

[Naved Khan, SunTrust Robinson Humphrey Inc]

Understood. Okay, that’s helpful. And then on the advertising revenue, I know this is a small line for you. But in terms of the OEM spending, anything that you might be hearing that – about their propensity to spend on advertising? Are they holding back more? Are they taking longer to commit? What are you seeing there?

[Sam Zales, President and Chief Operating Officer]

Hi, Naved, it’s Sam Zales. We’re working with all the OEMs and we’re proud of that. I think we bring a unique value proposition in advertising, which is the largest audience in the marketplace and we’re performing well. For the OEMs, I do think the macro environment of some issues with union activity and other OEM trends in the marketplace are challenging. But we have seen growth year-over-year. We said it would be slower growth in advertising.

I think the key thing for our business, as Jason just said, we are prioritizing our business and Langley said it well, we met even forego some ad revenue in the preference for leads and connections to our dealers. Our core business will always be a priority for us. And I think, as we continue to serve every one of the OEMs in the market, we hope that, that our audience and the differentiated value proposition will drive continued growth.

[Naved Khan, SunTrust Robinson Humphrey Inc]

Thank you.

[Operator]

Our next question comes from the line of Daniel Powell with Goldman Sachs. Please proceed with your question.

[Daniel Powell, Goldman Sachs]

Great. Thanks. Just two, if I may. The first question is kind of focused on sort of growth versus margin tradeoff. You guys have seen your marketing spend decelerate here, the last couple of quarters and obviously shown a lot of strong margin expansion. Just curious as you look at your opportunities to invest, particularly with that cost per lead coming down year-over-year, what’s your sort of willingness or philosophy around driving growth through putting more dollars to work in those channels?

And then secondly, on some of the new products, just curious if you could give us a sense in the quarter for what were some of the strongest contributors in that bucket that you highlighted as being most pronounced this quarter than any other in the past? Thanks.

[Langley Steinert, Founder and Chief Executive Officer]

Yes. Daniel, it’s Langley. So, growth versus margin, obviously, we have really two main businesses, domestic and international. We kind of look at marketing differently in the light of those two markets. Obviously, U.S. is probably a – certainly a little bit more of a – we’re a little farther along. And so, we certainly take seriously our responsibility there to be effective with our marketing.

As Jason alluded to it earlier that it’s really not just about driving unique, it’s about driving visitors that convert. And so we spent a lot of time with our different channels to think about how we can drive the lowest funnel customers possible and try to drive converting traffic.

So it really isn’t – in really in all our markets, it’s not just about traffic, it’s about traffic that converts and that really turns into leads, that’s what our dealer partners are looking for. Obviously international, we’re probably in a different phase.

But even within international, I mean, I think Sam alluded to it that, we take each market individually and we look at our responsibility in a – certainly not in a one year horizon, but in a multi-year horizon to try to bring those two at least break-even and grow them in that fashion. So, you’ll see across all our markets. We take marketing responsibly and kind of try to focus on the best return on investment we can find.

[Sam Zales, President and Chief Operating Officer]

And Daniel, I’ll take part two, it’s Sam Zales, to your question on new products. As mentioned in the remarks, AARSD had a nice impact of new products growing that AARSD number significantly. The two that I’d say would stand out our delivery product that we mentioned a few quarters ago giving dealers an opportunity to display their inventory in a broader segment of the national market.

So for consumers who have a limited search set, getting the ability to see a vehicle from another part of the country that can be shipped at either no price or a price point according to the dealers’ requirements and giving them that opportunity to expand their addressable universe has been a great success for our dealer partners.

Audience retargeting is a second offering that’s had real nice uptake. Remember, you’re giving them the opportunity – dealers an opportunity to put their inventory in front of the largest automotive audience, purchasing audience in the marketplace, and retarget those consumers back to the dealer website, where they’re looking at only that dealer’s inventory. So that’s had strong uptake as well.

[Daniel Powell, Goldman Sachs]

Great. Thank you.

[Operator]

Our next question comes from the line of Mark Mahaney with RBC Capital Markets. Please proceed with your question.

[Mark Mahaney, RBC Capital Markets]

Two please. There – a couple of comments about how you saw the lowest CAC or you’re seeing the lowest now that you’ve seen in – it sounds like a year or two. Any color just to peel back that onion a little bit why do you think that is and do you think that’s sustainable?

And then, Langley, I know you talked about this RPM product. Could you just briefly summarize that again? I’m sorry, I jumped over. I heard the very end of it and it sounded intriguing, but I didn’t get the details, if you could please re-spin it? Thank you.

[Jason Trevisan, Chief Financial Officer]

Hey, Mark. So on CAC, I – two broad reactions or comments. One is, yes, it – it’s improving, which we are pleased with, particularly in light of some spend growth. And it’s improving, because we – it’s all done internally.

We have a lot of engineering resources and data science resources against it. And we think we are one of the most sophisticated acquirers of consumers out there and we are always improving our capabilities there. And we think, particularly in light of spend growth, that is an accomplishment that a lot of companies aren’t able to do.

The second thing I would say is a comment that touches on some Langley just said, which is that it’s not just simply about finding the cheapest connection or the cheapest lead. I mean, that’s certainly a metric that we look at, and we believe we’re getting more efficient and the data would support that. But it’s really about getting high-quality leads that – and connections that we also measure based on how well they convert at the dealer.

And so while we’re proud of that and we highlighted it for everyone. We also want to make sure everybody knows that the quality is an important metric that doesn’t always come through in the efficiency data itself.

[Langley Steinert, Founder and Chief Executive Officer]

Yes, Mark, it’s Langley. So RPM, just to summarize, again. Basically, we take a – a set of customers that have been on our site and may have looked at, for instance, Ford F-150 and the Boston zip code and then we can compare that against a dealer that subscribe for our RPM product and retarget that customer offsite.

So they may be either on the New York Times or ESPN or on Facebook. And allow that dealer to in real-time with a very targeted ad that we serve up on their behalf, which shows a piece of inventory from their lot. So we think their inventory with that cookie and deliver an ad for that dealers inventory, which deep links into their website.

So it’s highly segmented deep links to that inventory and we believe has certainly, the initial results have shown great click-through behavior and great ROI for the dealer. I think, the – obviously, there are many other people that can offer retargeting to a dealer, but I think what’s unique about us is, in fact, our scale, not just the scale, but the segmentation that we can apply to that data. No one in the industry has the scale and the segmentation that we can apply to the dealer with regards to kind of offsite retargeting.

[Mark Mahaney, RBC Capital Markets]

Okay. Thank you, Langley. Thank you, Jason.

[Operator]

Our next question comes from the line of Dan Kurnos with Benchmark Company. Please proceed with your question.

[Daniel Kurnos, The Benchmark Company LLC]

Great, thanks. Good evening. Just, Langley, thanks for the additional color on lead growth and sort of your high-level runway expectations. Not to be greedy, but just can we push for a little more granularity around sort of the sustainability?

And since you guys have been really harping on the whole quality conversation here, if we can just sort of think about how you view the runway in terms of, let’s say, higher conversion leads versus generic audience growth. Like once we get past sort of the tougher audience comps, did things rebound more significantly, or they stayed kind of the same level just simply due to the playground that you guys are focusing on?

[Langley Steinert, Founder and Chief Executive Officer]

Yes. I mean, it’s hard for me to predict the future and the lawyers will tell me, I’m not allowed to, so I won’t. But I mean, suffice to say that, I go back to what we said earlier, which is that, I think too many people focus on unique growth. Uniques are uniques. We want people that convert. So our marketing efforts are really focused on traffic that converts via TV or search engine marketing we may do or retargeting. We’re all – we’re really focused on making sure we drive traffic that can generate a lead for a dealer.

Now, it’s hard for me to predict. But I think we’ve shown that at least in the last nine months that we’re really focused on that goal, which in turn speaks to, I guess, to your audience or to profitability. And in the U.S. market, trying to show leverage to our business and expanded margins by being even more efficient with our marketing spend.

[Daniel Kurnos, The Benchmark Company LLC]

Got it. And then maybe just one for Sam, just on international. I know, you talked about just sort of improving metrics across the Board. But to an earlier question, just about maybe the traction you’re seeing with it, the AM100, we know that, obviously, I think you guys pointed out the U.S. simmered for a long time. But in the UK, they’re still kind of a sort of testing weight mode. Are you seeing some of those guys start to increase their spend at a more rapid clip, or is there any kind of movements on that front that’s notable, call it, at this point?

[Sam Zales, President and Chief Operating Officer]

Yes. Thanks, Dan. A couple of comments. First, I think in the mature markets like the UK, for international, we’re in that phase that I’ve outlined before. First, we start with expanding inventory and acquiring that to make a consumer experience that has breadth of inventory choice. We then grow in audience. We then sell dealers and then we continue to up-sell them either at higher price points or add more products there. That market obviously is in that phase three to four range.

We’ve seen, I think, as you see the success of our paying dealer base grow substantially, that may give you a hint at AM100 and the broad base of dealers in the UK that are finding that when you have a 100%-plus lead growth year-over-year and in audience growth, it’s growing faster than any in the market. They’re subscribing at greater length to the paid subscriptions. And then you’re closing business for them.

And over time, we’re doing the same thing we did here in the U.S., which is, when we see that kind of growth, we kindly request the renewal, because we’ve invested in that connection, growth of consumers, the dealers should pay more for those programs. Those are all working to our satisfaction and they’re doing so because we’re driving that really efficient lead in connection growth.

And as evidence, you heard about the navigate conference we had here a week and a half ago. We had a significant attendance rate for those AM100 participants, who are excited about what we’re doing. They’re here in person and coming across the pond to participate, says a lot to us about our significance now in a market that we only started three years ago or so. I hope that provides some clarity.

[Daniel Kurnos, The Benchmark Company LLC]

Okay, great. Thank you, Langley. Thanks, Sam.

[Operator]

Our next question comes from the line of Ralph Schackart with William Blair. Please proceed with your question.

[Ralph Schackart, William Blair & Company]

Good evening. Sam, maybe just staying with the navigate comments that you had in the previous question. Just curious how the conference perform relative to your expectations, perhaps a sense of how large the conference was purpose. Any customer feedback you could share just overall global platform products be really helpful? Thank you.

[Sam Zales, President and Chief Operating Officer]

Yep. Thanks, Ralph. It performed better than expectations, but it’s our first year doing it. And I think we’re learning a lot talking to other market leaders, online marketplaces, SaaS companies that have a industry conference. The goals and objectives were one to provide thought leadership to executives and dealer management principles to provide both in-market industry knowledge, but also topics of general management, digital marketing, innovation, operations, excellence. So that it was general and industry specific.

And then the second goal was networking and allowing the broadest base of senior executives and internet digital marketing principles that dealerships to share best practices with one another and we latched that on top of our dealer executive councils, where we hear from some of the most influential people in the industry.

So our attendance was in the hundreds. And that’s more than we might have expected in the first year of trying this. Remember, you’re taking dealers out of an operations environment for a couple of days to come across country and in many cases, we had dealers, actually from Canada, the UK and Italy all join us as well in internationally. And I think the feedback we got was 100% interest in coming back again, which is rare for a survey to come back that way.

But most importantly, we fulfilled on that vision of having a single industry conference that they felt was the most unique in terms of thought leadership, not just around industry activity, but broader general management and digital marketing concepts to help them run their business. And that’s opposed to an industry that has other conferences that usually a vendor is selling their wares. We weren’t doing that for that, but we think we accomplished the networking and the brand responsiveness to CarGurus that we would hope for. So thank you for asking about it.

[Ralph Schackart, William Blair & Company]

That’s really helpful, Sam. Thanks a lot.

[Operator]

Our next question comes from the line of Ron Josey with JMP Securities. Please proceed with your question.

[Ronald Josey, JMP Securities]

Great. Thanks for taking the question. Two please. Just on the addition of Westlake and the consumer finance, can you just talk about how many dealers now offer financing on the platform? I think in the past, you talked about Capital One covered 10,000 dealers. And now you have two different providers, just talk about how both providers can work with each other or otherwise?

And then as a follow-up, Jason and Langley talking about the efficiencies in CAC and whatnot. When you think longer-term and if these CAC trends hold, how do you think about your longer-term view on sales and marketing that I think your longer-term guidance calls about 45% of revenue. So if CAC trends continue to come down, longer-term, you’re seeing sales and marketing 45% of revenue, do you think that could go lower? Thank you.

[Jason Trevisan, Chief Financial Officer]

Sure. Hey, Ron. So on Westlake. Yes, with Westlake, we now have coverage of about 85% of our used inventory. And that covers tens of thousands of dealers or – yes. And so – and furthermore, though, and I think equally as important as it gives us much better credit – consumer credit spectrum coverage. And so there’s – those are the two key dimensions. And then where there’s overlap, we’re also giving consumers choice, which is sort of the third dimension of consumer value prop.

So, while Westlake may not be as prominent a name as Cap One from a consumer perspective, they have really compelling coverage and have been a great partner to us so far. So it’s that second ad is a really important one for our consumer financing business.

In terms of CAC and if I heard you, it was sort of sustainability of it and how that leads to long-term sales and marketing leverage. Yes, I would say, there’s another dimension to which we haven’t raised yet, but which is going to be ongoing contributor to this, which is features and products that we can build, which help retain the consumer for longer than just the period when they’re shopping with us, and will allow us to develop a longer-term relationship with them and not have to require them when they go to buy their next car few years down the road.

So between ongoing efficiency of our ATA, onsite conversion and consumer attention, we think it’s sustainable. And I would say furthermore, if you look at Comscore data, right now, we have about 40% of deduped consumers that are using auto sites. And so we think there’s runway from a scale perspective as well, in addition to efficiency.

What all that means is, that is maybe a somewhat mundane punch line, but it’s that we still believe in our long-term margin targets that we’ve given. And that puts us South of where we are now in the – puts us down in the 40s, so it’s a long way to go. But we want to keep delivering to the consumer. And so we’re not trying to get greedy long-term and not deliver products and messaging to them, that’s going to continue to build brand equity.

[Ronald Josey, JMP Securities]

Makes a lot of sense. Thank you.

[Operator]

Our next question comes from the line of Nick Jones with Citi. Please proceed with your question.

[Nicholas Jones, Citigroup]

Hi, thanks for taking my question. I guess, if you could maybe touch on kind of the unaided brand awareness versus the amount of traffic you’re able to get in the U.S.? It’s kind of piggybacking. I know you guys are winning kind of the lion’s share of traffic compared to competitors.

Why is that not connecting maybe the unaided or aided awareness when I look back at kind of the Analyst Day slide deck, what some of the competitors are doing, and I guess, how do we think about that opportunity as far as where does the benefit come, is it more traffic? Is it lower CAC? I guess, if you could just add some color there?

[Jason Trevisan, Chief Financial Officer]

Sure. We think of brand building as a marathon, not a sprint, and you got to build it up over time. And I think what we’ve come to appreciate is, it’s not necessarily how much a company is spending in year, but it’s the cumulative effect of how much they’ve spent over time.

And to state the obvious, we’re the newest entrant among the large players in this in the U.S.. And so, others had a lot more cumulative spend than we did and we’re building ours now. And we’ve seen a lot of progress in the 2.5 now years, two years that we’ve been doing it.

And what does it result in? I mean, it results in all the things you said. It results in traffic, it results in brand affinity, it results in we think trust with our site, which leads to higher quality and more trusting leads to dealers. And so it’s goodness to our dealers as well. And so it’s – we firmly believe in the value that it’s driving us right now and the value that it’s accumulating over time.

[Nicholas Jones, Citigroup]

Thank you.

[Operator]

Our next question comes from the line of Brad Erickson with Needham & Company. Please proceed with your question.

[Brad Erickson, Needham & Company, LLC]

Thanks. I just had a couple of follow-ups. First, when you’re talking about driving stronger conversion, which you’ve mentioned several times on the call, I guess, in the context of attribution, can you talk about what’s your renewal discussions are sounding like with dealer customers? And specifically, I guess, what are the tools that you’re using to sort of highlight that conversion to those customers as you look to get paid for this lead growth you’re talking about?

And then second, can you just remind us what the portion of your traffic comes from either indirect channels overall or just SEO, would be great? Thanks.

[Langley Steinert, Founder and Chief Executive Officer]

Sure. We’ll start with the second one. And we have not broken down specific channels in the Investor Day deck. You see a breakout of, I want to say, 12 to 15 discrete channels that are primary sources of consumers. We did give some data on this call. As you heard that our lead growth from owned channels of app and direct outpaced our overall growth.

So that gained – continues to gain more share, which, as you would expect, that certainly leads to increased efficiency. And – but I would say, there are a couple of slides in the Investor Day deck that you can sort of use the ruler go to the y-axis and estimate kind of different channel percentages.

[Sam Zales, President and Chief Operating Officer]

And, Brad, I’ll – it’s Sam Zales I’ll take the second one, which is about renewals. How is that going for us? I think, in the AARSD numbers, you can see the continued growth and get the sense that we’re having success. The renewal calls, I think, I mentioned on this call before, they’re not easy for any dealer to say your price is increasing. And by that, it’s an emotional reaction no matter what it is.

I think the two things we’ve talked about on the call, when leads and connections grow, it’s not a price increase. We’re increasing AARSD based on the volume of consumer connections that we’re driving. Number two is, we’re pretty certain that we provide the highest return on investment, marketing and customer acquisition program in our market. And we’re doing that, as you said, through attribution and doing that in a number of ways.

One is, we partner with a number of CRM companies, so that dealers have an opportunity to see our connection volume comparative to our competitors. When we’re the largest audience and we believe we’re driving the largest connection volume, it’s pretty easy to see a comparative and make a decision for where I want to spend my marketing dollars.

Number two is, we’re doing significant attribution testing with DMS data. So we’ll pull data from back ends to look in aggregate at what close rates we’re seeing, not just on our leads, which are phone calls, e-mails and text chat conversions, but it is clicks to dealer websites, clicks on mapping directions, and in many cases, it’s looking at walk-in traffic.

So we’re now looking at DMV data, third-party cookie data to provide information in an aggregate level on our close rates, which demonstrate this return on investment. And we’ll be even looking at third-party research studies to understand, where we compare to the market. So for all those reasons, we’re seeing that AARSD growth and we’re seeing the success of the renewal process.

[Brad Erickson, Needham & Company, LLC]

That’s great. Thanks.

[Operator]

Our next question comes from the line of Marvin Fong with BTIG. Please proceed with your question.

[Marvin Fong, BTIG Research & Strategy]

Good evening. Thanks for taking my question. Just one for me. I think everything else has been answered. Just on the social ad product, could you perhaps elaborate a little more on how you view the size of that market? And how the product your go-to-market strategy there, how the product might be priced or structured? Thanks.

[Langley Steinert, Founder and Chief Executive Officer]

Yes. Marvin, it’s Langley. So you had two questions. The size of market, you should do your own research, but I don’t think there’s a dealer you could talk to that isn’t top of mind. I mean, I think dealers, listen, we all get that fundamentally, there’s probably three places for a dealer to get customers.

One is – one, in marketplaces like ourselves. The other one, to give a plug for Google, as they certainly can go run their AdWords programs, which most of them do. And then lastly, it’s it’s social. It’s Facebook. I mean, that’s the biggest – second biggest, probably second biggest platform for these – for them to be exploring outside of marketplaces.

I think what we find as a compelling value proposition for a dealer is, with all due respect to Facebook, Facebook is a great platform for reach. It’s not particularly segmented, unlike Google. So for Facebook to be truly effective, you need to be able to segment that audience against make, model, ZIP, trim. And for a dealer to be able to do that effectively, they need to get their hands on data and we’re the biggest data source in the industry by close to a factor of three.

So not only do we have the biggest data set, but I would – with all due respect to our competitors, I believe we have probably the most sophisticated data analytics and segmentation capabilities. So we have the biggest audience. We have the most sophisticated segmentation. And in the end of all, we can drive a lot of – and deep linking. I mean, these ads are highly relevant to what the customer had previously been looking for and they deep link straight into the dealer’s inventory.

So I think it’s a very effective product. And again, you should do your own research. But there’s probably not a dealer you could talk to that says that – of the things they’re excited and interested about, social is absolutely top of their list.

Oh, the other thing you said – you asked about how it’s going to be – it’s going to be a subscription product. So again, kind of in line with our are thinking about revenue streams that we like subscription businesses, because they’re – typically, if you do your job well, they’re evergreen revenue sources. So it’s going to be a subscription product.

[Marvin Fong, BTIG Research & Strategy]

Great. Thanks, guys, and congrats on the quarter.

[Operator]

Our final question comes from the line of Derek Glynn with Consumer Edge Research. Please proceed with your question.

[Derek Glynn, Consumer Edge Research, LLC]

Hey, guys, thanks for taking our questions. Just a follow-up on the new brand advertising. Can you give us a sense of the size and scope of that campaign and how it compares to prior campaigns you’ve done just in terms of dollars invested?

[Jason Trevisan, Chief Financial Officer]

Hey, Derek, it’s Jason. No, we don’t break out our spend by discrete channels like that or discrete campaigns. I would say, the – what little color I would give on it is that, we’re increasingly emphasizing to consumers how we’re different.

And we think that we’re quite different, as hopefully everyone on this call understands from a business model perspective and a consumer experience and dealer experience perspective, but we also recognize that that’s not always obvious to people who haven’t shopped for car in the last few years. And so we’re increasing the – we’re putting that more into relief in our latest campaign.

[Derek Glynn, Consumer Edge Research, LLC]

Okay, got it. And then can you shed any more light on the free cash flow performance during the quarter? It just looked like that was a nice step-up from prior quarters. I’m wondering if there’s any puts and takes there, if that’s a good run rate to think about going forward? Thanks, guys.

[Jason Trevisan, Chief Financial Officer]

I would say rarely is a single quarter, especially from a cash flow perspective, good to use for run rate purposes. A fair amount of it is timing with some of our larger accounts payable. So I would look at it over a number of quarters.

And yes, I would look at margins – U.S. segment margins as the better barometer for run rate. And even that can be tough on a quarterly basis because of the timing of some of our marketing spend given shopping patterns. You can expect consistency with the share – net share settling that we’re doing, and our CapEx is pretty predictable. So I’d stop there.

[Derek Glynn, Consumer Edge Research, LLC]

All right. Great, guys. Thanks for all come through.

[Operator]

We have reached the end of our question-and-answer session. And I would like to turn the call over back to Langley Steinert for any closing remarks.

[Langley Steinert, Founder and Chief Executive Officer]

So thanks, everyone, for dialing in this evening. I appreciate your questions, and thanks for your continued interest in CarGurus. Good evening.

[Operator]

This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.