CarGurus Inc

NASDAQ:CARG

Earnings Call Transcript 2020-Q4

[Operator]

Greetings and welcome to CarGurus Fourth Quarter 2020 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 Josh Goldstein, Corporate Counsel for CarGurus. Thank you. You may begin.

[Josh Goldstein, Corporate Counsel]

Thank you, operator. Good afternoon and welcome to the CarGurus' fourth quarter 2020 earnings call. We'll be discussing the results announced in our press release issued today after the market closed and posted on our Investor Relations website. With me on the call today are Jason Trevisan, Chief Financial Officer; Scot Fredo, Chief Financial Officer; 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 first quarter 2021, management's expectations for our future financial and operational performance and innovation, our business and growth strategies, the value proposition of our CarOffer acquisition, the potential impact of the COVID 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 actual results. Information concerning those risks is available in our earnings press release distributed after the market closed today and in our most recent reports on Forms 10-K and 10-Q which, along with 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 financial measures is included in our press release issued today. Our updated investor presentation can also be found on the Investor Relations section of our website.

And with that, I'll turn it over to Jason.

[Jason Trevisan, Chief Financial Officer]

Thank you very much, Josh, and thank you to all those joining us today. I'm both honored and incredibly energized to assume the CEO role, and to continue to work closely with Langley, the board of directors, our senior leadership team and the incredibly talented global team of Gurus to drive the growth of our business in the coming years. It's the strength of this team that gives me the utmost confidence we will continue to find new ways to stay at the forefront of innovation in the rapidly changing automotive industry.

As the CEO, I will use a very simple framework to lead our growing business: strategy, people and operations. Our leadership team has developed and will continue to define a thoughtful and innovative strategy. We will continue to hire the best people and we will arm our Gurus with the tools and technologies to continue executing quickly and effectively. While strategy, people, operations is simply a framework to support our evolution. I'd like to touch briefly on some of the current priorities of each aspect today.

Our strategy has evolved from primarily a listings business to one that has three complementary elements: listings, digital retail, and digital wholesale. There's extraordinary innovation happening in each of those areas independently, but it's establishing bridges between these historically disconnected domains where our platform becomes highly differentiated. To deliver on our strategy, we need to continue hiring world-class employees, who can execute, innovate and inspire.

Within our operations, we have already begun investing meaningfully in the strength of our foundation by empowering our Gurus with more flexible technology platforms and more robust data infrastructures to optimize efficient operations and innovation. We'll deliver on this framework with a heightened land on customer centricity. Although we believe we already lead the U.S. listings market by delivering a consumer friendly experience and an unrivaled ROI to dealers. We are committed to amplifying the voice of our customers, consumers and dealers in the products we develop markets we serve and the company we are building. With these focused priorities within CarGurus and as macro market conditions improve and the auto industry accelerates online adoption and digital transactions, I could not be more excited to lead our incredible team of Gurus around the world.

Now let's discuss our latest results. I'm pleased to share that CarGurus has generated strong results in the fourth quarter and throughout 2020, despite the ongoing uncertainty amidst the COVID pandemic. Our performance demonstrates the durability of our market leadership position and the flexibility and resilience of our business model. Our U.S. marketplace showed impressive resilience despite market volatility. And for the full year 2020, we delivered over 63 million connections and over 38 million leads, delivering more leads to paying dealers than in the prior year.

We continue to provide what we believe is industry leading ROI for our paying dealers. Despite dealers cutting their budgets across marketing channels, our multiproduct attach rate held at 30% in the U.S. While our total U.S. leads generated in full year 2020 roughly equaled our U.S. lead volumes in full year 2019, the average paying dealers saw lead growth and our efficiency in generating leads in 2020 was far greater, which was a primary driver of our stronger operating margins in 2020.

Over the course of 2021, we intend to continue to grow leads per paying dealer through additional investment in our brands while also benefiting from new efficiencies and our algorithmic traffic acquisition and improved conversion rates on our site, which we expect to create durable efficiency gains. We're excited about the momentum we have exiting 2020, especially in the U.S. where we saw growth in net paying dealer ads in Q4.

With most forecasts for 2021 indicating better year-over-year car sales, we believe dealers marketing spend will continue trending up eventually returning to pre-COVID spend levels. And we remain confident that our advantage ROI for dealers and our most engaged ready to buy audience will make us an attractive option as dealers resume more robust marketing. One sign of that increased marketing spend by dealers is the increase in our U.S. paying dealer counts in Q3. Our retention rates are strong and our sales team is bringing both new and returning dealers from all segments back onto our pay platform.

Turning to our international business, we continue to efficiently attract consumers across our markets, generating a high return on dealers marketing investment, and furthering our position as a trusted partner to dealers in what was a challenging business environment. Including PistonHeads, our international marketplace has attracted over 7 million average monthly unique visitors, who logged 16.3 million average monthly unique sessions in the fourth quarter. At the same time, we continue to see encouraging trends and our cost of consumer acquisition.

In the fourth quarter, our cost per lead fell 38% year-over-year in Canada and 46% year-over-year in our core UK business. These trends are allowing us to maintain our investment strategy while demonstrating rapidly improving unit economics. Despite the impact of COVID, we delivered net dealer additions quarter-over-quarter in our international business and we now count 6,697 total international paying dealers. As we look to build the most complete automotive shopping platform for both dealers and consumers, we are adding digital retail and digital wholesale as two complementary strategic pillars to our core listings business.

Digital retail is an evolution that we are building in close partnership with our dealer customers. Our Area Boost product was our first step into digital retail, allowing dealers to market their cars to consumers, who may never enter their showroom. We continue to see growth in the number of dealers offering delivery services on our platform, which increases choice for consumers and expand the market for dealers. The second key development of our digital retail capabilities is consumer financing where consumers can pre-qualify on CarGurus with our lending partners to benefit from more transparency and certainty in the financing process and save time at the dealership. This is a win-win for both consumers and dealers as it moves more steps of the car purchase online and provides dealers with highly qualified consumer leads.

We're continuing to actively develop our digital retail offerings as represented by the RouteOne integration we launched last quarter which provides the dealer with more information on the consumer and integrates it directly into their dealership systems, allowing for a seamless transition from online to in-store. We are currently in pilot with several dealer customers on a deal builder flow where consumers can build a penny perfect price directly within the CarGurus vehicle detail page. The deal is based on actual pre-qualified lender interest rates in terms and dealer specific F&I products like warranty and wheel and tire packages. The consumer can then schedule a time to pick up the car at the dealership, saving potentially hours of time in the dealership.

We're piloting with dealers additional capabilities we've built with partners that allow dealers to seamlessly handle out of state tax titling and registration and vehicle delivery. A complete online auto transaction is complex yet we know that a growing portion of consumers are eager to complete more of their transactions online, and we're committed to helping dealers of all types serve this consumer demand. We will continue to build, partner and acquire the capabilities necessary to enable consumers and dealers to not only shop for cars on our platform, but ultimately conduct the entire transaction fully online.

Digital wholesaling is our other strategic growth factor that will make us an even more robust platform for dealers to buy and sell cars wholesale to complement their retail selling with us. We're thrilled to have completed the 51% acquisition of CarOffer last month. And I want to publicly welcome the CarOffer team to the CarGurus family. Since their launch in the third quarter of 2019, the team at CarOffer has built an incredible data-driven platform and is helping thousands of dealers buy and sell wholesale vehicles intelligently and efficiently. Their technology platform coupled with their robust inspection, transportation and arbitration operations are driving impressive growth.

I'm excited about our momentum exiting 2020 and heading into 2021. Our listings business is more efficient coming out of COVID than prior, and we're successfully growing subscription spend with existing, returning and new dealers. We believe our investments in digital retail and wholesale will complement our listings platform and yield continued growth, profitability and scale for years to come. I'm truly grateful to Langley and the board for the opportunity to lead this amazing team of Gurus as we continue to build upon our solid foundation and grow the scale and scope of our business. I look forward to updating you on our progress on future earnings calls.

With that I'll turn it over to Scot to discuss our financial results.

[Scot Fredo, Chief Financial Officer]

Thank you, Jason. I'll provide a detailed overview of our fourth quarter performance followed by our guidance for the first quarter of 2021. Total fourth quarter revenue was $151.6 million, down 4% year-over-year though nearly $3 million ahead of the high end of our guidance range. Our marketplace subscription revenue fell 5% versus the year ago period to $133.2 million reflecting the impact of COVID-19 on our business and our dealer customers. Advertising and other revenue grew 4% year-over-year to $18.4 million reflecting additional revenue from partnerships with financing service companies and OEM advertising continuing to recover from COVID induced pullback earlier in the year.

The U.S. accounted for 95% of total revenue in the fourth quarter, U.S. revenue declined at 3% versus the year ago period to $143.7 million, while international revenue declined 23% year-over-year to $7.9 million. The decline in international revenue reflects the effects of lost revenue due to our decision to support our UK dealer customers with free services in December following the resurgence of lockdowns in the United Kingdom. Our U.S. and international businesses generated $126.2 million and $7.0 million respectively in marketplace subscription revenue in the fourth quarter.

Turning to paying dealer count, we ended Q4 with 30,631 total paying dealers representing a decrease of 2,987 dealers versus the year ago period, and an increase of 469 dealers in comparison to the prior quarter. In the U.S., we finished the quarter with 23,934 paying dealers, which is a decrease of 2,355 dealers from the year ago period and an increase of 275 dealers compared to the prior quarter. In our international business, we finished the fourth quarter with 6,697 international paying dealers down 632 from the year ago period and an increase of 194 dealers compared to the prior quarter.

We believe our U.S. and international paying dealer count increase from the prior quarter is an encouraging sign heading into 2021. As we exited the year, we saw momentum across all of our segments with strong dealer retention, reacquisition of dealers who churned during peak COVID months and acquisition of new dealers. In the fourth quarter, U.S. quarterly average revenue per subscribing dealer, or QARSD, was $5,304, representing a 6% increase compared to the year ago period and an increase of 3% compared to the prior quarter.

International quarterly average revenue per subscribing dealer was $1,060, representing a 16% decrease compared to the year ago period and the prior quarter. The drop in our international QARSD versus the prior quarter is primarily due to the free services provided to UK paying dealers in December due to lockdowns. In the U.S., we returned to a renewal process in which we price dealers to reflect the value we provided via incremental lead volume delivered over the course of the year.

I will now discuss our expenses and profitability on a non-GAAP basis, which backs out our stock-based compensation expense, amortization of acquired intangible assets, acquisition related expenses and restructuring charges. Fourth quarter non-GAAP gross margin was 92% down roughly 90 basis points versus the year ago quarter. The contraction in gross margin percentage is attributed to the increase in our cost of revenue. We recognized media costs associated with our off-site display products in our cost of revenue.

As these products continue to scale, it will create a modest headwind to gross margins. Second, technology spend in our data center and cloud hosting expenses also contributed to the year-over-year contraction. Total fourth quarter non-GAAP operating expenses were $93.5 million, down 25% year-over-year. Non-GAAP sales and marketing expense fell 34% year-over-year to $64.8 million and represented 43% of revenue down from 62% of revenue in a year ago period. The leverage in sales and marketing spend as a result of efficiency gains in our traffic acquisition and reduction in our brand investments.

Our fourth quarter non-GAAP technology and development expenses grew 5% versus a year ago period to $15.1 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. As we've noted previously, our product and engineering organization supports both core business and emerging products, which Jason discussed earlier.

We believe these initiatives will unlock new revenue streams in large total addressable markets and represent future growth levers to our business, so we intend to invest prudently yet aggressively in pursuit of these growth opportunities. We generated non-GAAP operating income of $46.7 million, representing a margin of 31% and roughly $6 million ahead of the high-end of our guidance range. Our strong operating income performance was primarily driven by continued efficiency in our traffic acquisition. This was offset by one-time increase of the tax reserve in the fourth quarter to hedge open routine tax audits.

Non-GAAP diluted earnings per share were $0.32 for the fourth quarter and $0.04 above the high end of our guidance range. On a GAAP basis, we generated fourth quarter gross margin of 92% and incurred total operating expenses of $106.6 million, down roughly 20% year-over-year. The decline in operating expenses was primarily driven by a decrease in our variable consumer marketing expenses. Fourth quarter GAAP operating income increased 145% year-over-year to $33.5 million. Fourth quarter GAAP net income attributable to common shareholders totaled $25.2 million.

Geographically, fourth quarter U.S. GAAP operating income was $38.8 million, up 73% year-over-year. We had a GAAP operating loss of $5.3 million in our international business compared to an $8.8 million loss in the year ago quarter. We ended the fourth quarter with $290.3 million in cash and investments, an increase of $44.4 million from the end of the third quarter. The increase in our cash balance was driven primarily by our continued reduction in our expenses during the quarter, which yielded positive cash generation. We generated $47.9 million in cash from operations in the fourth quarter and $46.2 million of non-GAAP free cash flow, which includes capital expenditures and capitalized website development costs of $1.8 million.

Before I provide our outlook for the first quarter of 2021, I want to provide some additional context for factors impacting our revenue and operating income guidance, which includes the 51% acquisition of CarOffer on January 14. While our fourth quarter results were strong and we have momentum heading into 2021, there was still macro level economic uncertainty due to the COVID situation. The UK is again in lockdown this month, and we've given UK dealers free services for the month of February. It continues to be difficult to look ahead with confidence while considering the potential impact of a COVID resurgence to consumers, our dealer customers, and our employees.

As such we are only providing guidance for Q1, which includes the full impact of CarOffer in our consolidated financial results. While we are not giving full year guidance at this time, it is likely that Q1 will be our most profitable quarter of the year as we invest in the business by growing our team, especially with technical resources in product and development, and also invest in marketing to build our brand and generate traffic to our site and leads to our dealers. With these factors in mind, as we look at the first quarter, we expect total revenue to be in the range of $156 million to $160 million.

Non-GAAP operating income in the range of $33.5 million to $36.5 million and non-GAAP earnings per share in the range of $0.21 to $0.23. Please note that our guidance for the first quarter 2021 includes the impact of known customer billings relief for such period, namely the free services in the UK for February, but does not include the potential impact of further lockdowns. As Jason mentioned, we are excited about our momentum exiting 2020 and entering 2021 and we look forward to sharing our progress in future earnings calls.

That concludes the financial prepared remarks. And now I'll turn it over to the operator to open it up for Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Tom White with D.A. Davidson. Please state with your question.

[Tom White, D.A. Davidson]

Good afternoon guys. Thanks for taking my question and congrats on the new roles for both of you. I just had a couple of questions on guidance and I guess maybe just first on CarOffer and the extent to which that's in the first quarter guide. I think at the time of the deal – the time of the deal was announced might back of the envelope math suggested it was maybe doing something like $10 million in revenues per quarter. Curious if you can give me any sense if I'm off base there and curious if that's going to show up in other revenues or in subscription and whether those dealers would be in dealer count. And then just to follow up on the guidance commentary about profitability I guess margin is kind of being at peak in the first quarter. Can you help us maybe understand the range of margin outcomes that that might be possible kind of in the balance of the year? Thanks.

[Jason Trevisan, Chief Financial Officer]

Sure. I can – hi, Tom. It’s Jason. Thanks for your comments. In terms – I'll take the first part and then I'll turn it over to Scot for the margin question. Yes, we have not broken out CarOffer revenue or gotten too specific on it, but I would say that you're in the zone. It is a transaction business. And so I mentioned that because it has more – it is more affected by seasonality of auto industry than a subscription business would be. And we're also not getting the benefit of the full quarter because we hadn't closed the transaction by Jan 1. It will show up again, because it's not included there because it's not subscription revenue. It won't be included in the subscription line. It will be in advertising and other. And we'll talk more about how we're handling dealer count there in the next quarter, but we're going to try and keep it as simple as possible. So, yes, we'll give more detail there, but we'll be pretty explicit about it. Scot, do you want to just touch on the margin question?

[Scot Fredo, Chief Financial Officer]

Sure, Tom. What we're looking at is walking into Q1, we're still seeing a ton of efficiency from marketing spend. Competitive spend has not picked up. So we've – you can see in our past quarter's guidance, we just consistently beat on that bottom line. We are being prudently cautious with what we'll need to spend going forward. That's the number one area that would likely tick up a bit over time. We believe we'll be more efficient than we certainly were in 2019, but getting – maintaining the levels of efficiency that we saw in Q2, Q3 and Q4 is what we're just being cautious about as we look to the out quarters. And as mentioned in our guidance, we've got a lot of hiring to do to build the team back up.

[Tom White, D.A. Davidson]

Great. Thanks guys. Appreciate the color.

[Scot Fredo, Chief Financial Officer]

Thank you.

[Operator]

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

[Ralph Schackart, William Blair]

Good evening and congrats to both Jason and Scot on the new roles as well. Jason, just curious on your overall vision for the company, I know you'll be working pretty close with Langley, but you obviously have a very strong platform and core listings business. Today, you talked about digital retailing, digital wholesaling, which seems like a pretty big market opportunity. But maybe if you could just kind of give a perspective on your thoughts on the business, so what it may look like a few years out in a post-COVID environment with some of these opportunities and new products that you're adding?

[Jason Trevisan, Chief Financial Officer]

Sure. Hi Ralph, thank you for the comment. It's – look, we think that these three elements complement each other nicely. And our listings business is incredibly strong right now and leads in most categories. And that's a terrific sort of launching off point to offer consumers and dealers more functionality. And so the first type of functionality is, as we talked about, to allow them to do more elements of the transaction on our site to make it more efficient for both of them. And furthermore, we think that as they start to do that they are going to want to do more types of transactions than just consumer buying from a dealer on our platform. And so that's when you start to get into wholesale. So that's dealers selling to other dealers – buying and selling from other dealers.

And there also could be an element of consumers selling to dealers. And the reason that these three are so powerful on a single platform is when you start to share the data across. And so, we talked about some of the examples of that in the script, but when you can start to give wholesale dealers, who are doing a wholesale transaction information about retail pricing, that's very powerful. Likewise, when a dealer is looking to sell a car retail for them to know in the same place, what the wholesale value of that might be is also very powerful.

And in particular, when you layer on top of that geographic arbitrage or the breakdown of geographic constraints, then that data becomes even more powerful because odds are dealer and a consumer are willing to value a car differently in New England in the winter than they are in the south in the winter. So the vision for the future is as we laid out these three pillars and not only advancing in each of them discretely, but really in stitching them together longer-term using data across them.

[Ralph Schackart, William Blair]

Okay. Thanks for that. It makes sense. Maybe a little bit more of a near-term question. You talked about dealership marketing spend trending up to the year. I know it's impossible to know the pace, but just curious what your thought is on the pace of that, maybe how has that trended since the first of the year, and will dealers be spending in front of I guess using restrictions or vaccine rollouts, or is that something you anticipate to sort of lag that activity? Thanks.

[Sam Zales, President and Chief Operating Officer]

Hi, Ralph. It's Sam Zales. Thanks for the question. We're optimistic and seeing dealer spend move in the right direction I think because of restrictions becoming a little bit easier coming out of last year. And I believe that every dealer looked at the COVID situation last year and said, we figured out a way to sell smarter and sell more efficiently using contactless services, which we help them promote on their – on our site. And we believe that continued progression of dealers coming back on the platform. You saw our net dealer ads increasing, and you saw the [indiscernible] growth.

It's a definition that as we grow our lead volume, as we did so well, the realization that consumers are still in the market and ready to purchase, but just to purchase more safely that marketing spend as the highest ROI for a dealer. So we're seeing positive trends on all those fronts, and we believe it will continue on as this hopefully the health returns to our markets overall vaccines are out and consumers continue to purchase more.

[Operator]

Our next question comes from the line of Dan Kurnos with The Benchmark Company. Please proceed with your question. Hello, Dan your line is live. Our next question comes from line of Jed Kelly with Oppenheimer. Please proceed with you question.

[Jed Kelly, Oppenheimer]

Great. Thanks for taking my question. A couple, if I may. Just on back to CarOffer, just given some of the investor enthusiasm we saw after you announced the deal. Are you – how are you thinking of giving like KPIs in terms of dealer count and gross merchant volume? Or are you going to keep things? And why would you keep things close to the baskets? It's more transactional, which the marketplace market clearly likes?

[Scot Fredo, Chief Financial Officer]

Hey, Jed its Scot. I'll take that one. So we're still working through what we will do on KPIs as there was an earlier question and we've got to figure out how we account for dealer count as far as KPIs go. If you think about how dealer counts work today, it's specifically marketplace subscriptions, right? That's what we give and then that aligns with [indiscernible]. As Jason mentioned, the transactional nature of CarOffer is not subscription. So the dealer – that sort of doesn't marry, so we have to figure out what those KPIs will be. I should note that we obviously just acquired them officially mid-month in January. So we are only getting 2.5 months of what their revenue would be in the quarter, just from an accounting standpoint. So I just want to mention that because that is in our guidance accordingly, that there's only 2.5 months of the quarter of revenue.

[Jed Kelly, Oppenheimer]

Got it. And then just going back to the guidance, I mean, is there any way you could parse out the difference between like what you're expecting for international revenue given – your given the UK free subscriptions versus the U.S.?

[Jason Trevisan, Chief Financial Officer]

For the quarter, it says it's relatively flattish quarter-over-quarter in that, in both quarters the UK is getting a free month of services. So there's not much of a difference from Q4 to Q1. We obviously don't get too specific there with guidance, but relatively speaking the sort of discounting level is the same. Right now we don't anticipate needing to discount in March, but we still are, if the market demands that we could go that way.

[Operator]

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

[Dan Kurnos, The Benchmark Company]

Great. Thank you guys. Hear me now?

[Jason Trevisan, Chief Financial Officer]

Yes.

[Dan Kurnos, The Benchmark Company]

Alright. Great, thanks. Sorry about that. I don't know what happened. And anyways congratulations to both you guys. I guess maybe Jason, you take a step back for a second and just maybe give some people color, confidence, however you want to address it just around. I obviously Langley is not going to walk up into the sunset. This is not an overnight decision, but just given that this is kind of probably the biggest, maybe 10 is a strong word, but talking about kind of three-pronged approach relative to just having more of a really strong listings business, not end of the listing businesses under assault or anything, but a lot of question marks around; does Google get in, does Amazon get in, you know, kind of the timing of that. Just love to hear kind of the thought process behind that?

And then again, just on Caroffer really quickly, I know you guys will probably take a little bit of time to get some guideposts, but maybe some initial feedback from dealers. It feels like it's something that's going to really help stickiness. So just to the extent that, already you're getting some positive feedback or what you're hearing in terms of potential uplift here would be helpful? Thanks.

[Jason Trevisan, Chief Financial Officer]

Sure. Hey, Dan, it's Jason. So just clarifying your first question; you were asking about the timing of some of the strategic elements we laid out or the...

[Dan Kurnos, The Benchmark Company]

No, just really the whole, the management kind of transition.

[Jason Trevisan, Chief Financial Officer]

Yes. So you're right. This was not an overnight decision. This is something that Langley and Sam and I have been, and the exec team have been working on in the back half a better part of 2020. So this has been planned for awhile. It allows, as you probably saw in the shareholder letter allows Langley to focus on the areas that he enjoys focusing on long-term product M&A in particular, two of them in particular. And then, I'm going to continue to collaborate with him as we manage business. At the same time – over that same time we've been developing our strategy and so this the three pillars of this, which the acquisition of Caroffer was really cementing us in the wholesale one, that's also been in the works for awhile.

And, so these are things that we've been building toward and in a lot of respects, we think they do to expanding our strategy and it's certainly more ambitious strategy does two things. One, it shores up our listings business really nicely, we think, but two, it absolutely puts us into new markets, new arenas, so that we can better serve both the dealer and the consumer. Remember we've long been a consumer first company and we continue to want to provide for the consumer the best possible experience to buy and sell their car. So it's a natural, we think this is a natural evolution for us and it is very exciting for us because it puts us on a much more ambitious path.

As it relates to Caroffer, yes, we did a lot of dealer diligence and they are the proof is in the pudding in terms of how quickly they're joining this Caroffer platform, but this does dealers are very excited about our two respective platforms. They get really excited when they hear where we're headed in terms of sharing the data. And so, yes, we do think that it will make for a stickier, deeper relationship with dealers, because in many ways wholesale and retail and the auto industry are starting to converge more than they have historically, as markets are opened up by the transparency of online. And so as those converge the need and desire to share the data across is growing among dealers, and we're going to be able to offer that to them.

[Dan Kurnos, The Benchmark Company]

Great. Thanks guys.

[Operator]

Our next question comes from the line of John Colantuoni with Jefferies. Please proceed with your question.

[John Colantuoni, Jefferies]

Thanks for taking my questions. First as more of the transaction process moves on to your site. Can you give us any insight into how you're thinking about sharing economics with dealership? Also, do you see fully online transactions in any way cannibalizing your lead generation business as dealerships start to see less traffic driven to their showrooms?

And then second how was reception, maybe you could talk about reception for two renewals that you conducted during the fourth quarter, and whether that yields any learnings about the capacity or willingness for dealerships to absorb price increases during or after the pandemic? Thanks.

[Sam Zales, President and Chief Operating Officer]

Hey, John, it's Sam Zales. Let me start with the last one first, if I could we were really pleased with renewal performance, I think third quarter, as you might've known, we were very careful that we knew we were coming out of the heart of the pandemic and wanted to be careful in our approach. We restarted that process in the fourth quarter being thoughtful again, that with lead growth, as, at such a substantial rate, we wanted to be thoughtful about unit economics and margin for dealers and return on investment. But with that growth in lead volume and dealers, as I said earlier, becoming more aggressive about marketing spend and certainly seeing consumers ready to purchase, we felt it was the right time to start renewals again.

And I think you'll see that reflected in the [indiscernible] numbers growing, and we're optimistic that if we do it in a smart way and not be overly aggressive and deliberate instead about price increases, that we do it based on value and based on the leads and quantity we're delivering and the quality that we're delivering to drive a return on investment. So we're, bullish on where that came out. I think you asked about potential economic models with digital transactions. I think our approach is to build a digital retail, two sides of a consumer experience.

One is a completely digital experience where a purchase can be made through our dealership community fully online and the vehicle delivered to the consumers' doorstep. And we're enabling our dealer partners to do so in some of these pilots, Jason mentioned in his prepared remarks. But we also believe there's a digital to in-store experience. And we're enabling that as well, where a consumer goes through much of that purchase process, the pre-approval on financing, a valuation on a trade-in F&I transactions all integrated. But then if the consumer wants to touch and feel of a purchase with a test drive in the dealership, we want to enable that as well. So that's how we're thinking about the dual opportunity to serve consumer needs.

As far as economic model goes it could be one of many approaches. It could be a SaaS subscription that sits on top of our core listings business. We don't see cannibalizing that business at all, that if a consumer goes through the traditional connection of consumer to dealer through today's offline world, we'll have a great opportunity to reap an economic benefit out of that. But also, that if it's digitized and we want to demonstrate for those consumers who want the digital experience, here's a SaaS subscription to do that, it might be a cost per transaction where we take a piece of a transaction because we're running it fully through the dealership’s dealer management system. It could be a concept of a combination of those.

We'll be working on that as we continue our pilot developments over time. And we'll keep you appraised of how we take that to market from a commercial perspective.

[John Colantuoni, Jefferies]

Thank you so much.

[Operator]

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

[Daniel Powell, Goldman Sachs]

Great. Thanks for taking my questions. On the first one, it looks like the sequential growth in U.S. car sales was a little lighter this quarter last. Is that related to dealer mix on the net ad side. And is that something we must take into consideration in the context of the Q1 guide [indiscernible]. And then I have follow-up.

[Sam Zales, President and Chief Operating Officer]

Hey Dan, sorry, you cut out a little bit on that last part. I know the first thing was sequential car sales, what was the other part?

[Daniel Powell, Goldman Sachs]

Yes, I was just looking to get detail on that sequential growth was a little lower this quarter than last and I was curious if that was driven by dealer mix on the net ad side and if that was a trend that was impacting or centered in the Q1 guide?

[Sam Zales, President and Chief Operating Officer]

Okay, yes, so we had really strong dealer ads as you saw. And actually, the deal was coming on, or coming on at strong pricing relative to our install base. So, dealers are helping increased car sales right now, the new ones that are coming on the platform. We're still prudently renewing. And Q4 being a slow seasonal quarter, we still held back a bit. We did push harder and Q4 than we have in other quarters on renewals, but are still trying not to be tone-deaf to the market situation that our dealers are going through.

We also had a tremendous quarter in Q3 with regards to our RPM product. And in Q4 dealer adoption was still very strong throughout the core. So that does help increase it. But RPM was a little bit sort of flat-ish or didn't uptick as much from an impact standpoint. So, our secondary product, but we were up overall on car sales.

[Daniel Powell, Goldman Sachs]

Got it. That's really helpful. And then as it relates to lead growth on the platform, any context you've given apologies if I missed it, but just relative to traffic growth and some of the comments you made last quarter, big versus small on the lead growth side, any details you provided there for Q4?

[Jason Trevisan, Chief Financial Officer]

Hey, Daniel, it’s Jason. I mean, the details we provide are – we're still in a bit of a wonky comparison period. We still put significant value on leads over uniques and sessions. And excuse me. And you've also heard us start to reference paying dealers lead growth, where in an environment that we've been in it's even more important that are feeding the dealers who are supporting our platform.

So we've become more efficient in how we acquire traffic and how we acquire leads in particular. And we're going to continue to focus on lead growth, versus the others. There is seasonality and so leads tend to be a softer in Q4 in general. But we're really sort of confident and comfortable in the leads that we're sending to our subscriber dealers.

[Daniel Powell, Goldman Sachs]

Got it. Makes sense. Appreciate it guys.

[Operator]

Our next question comes to of Nick Jones with Citigroup. Please proceed with your question.

[Nick Jones, Citigroup]

Great. Thanks for taking the questions. I guess as we kind of wait to see more stimulus checks get issued, I mean, is there any trends you can call out or you recall from 2020 that were positive or negative as those come out, potential throw in tax season? And then want to follow-up on a covered?

[Jason Trevisan, Chief Financial Officer]

Hey, Nick it’s Jason. Now I wouldn't say that it's been – there's been a discernible impact from it. Car volumes are – again we're in some strange comps, so it's hard to comp it. But there was pent-up demand from the months where nothing was happening. And starting to normalize now, and most people think that car volumes sort of normalize over the next couple, few months. But no, I wouldn't say – we're not at the tip of the sphere enough to feel the impact of stimulus checks.

[Nick Jones, Citigroup]

Got it. Thanks. And then a CarOffer, or I guess, maybe it's kind of a two-part question. I guess one like over time, does this fold into, like, the CarGurus brand is kind of an integrated platform for dealers that’s kind of really for the deeper relationship and then kind of the follow-up is if I recall CarOffer as kind of more expensive cars and maybe you typically see in auction. Is there an opportunity to kind of go cheaper or value cars? I know some franchise dealers are looking for just kind of high mileage, cheaper cars rather they think they get more margin on? Thanks.

[Sam Zales, President and Chief Operating Officer]

Hey, Nick, it's Sam Zales. Thanks for the question. We're really excited about what CarOffer has done in such a short period of time in their history. I don't think we're going to do anything related to brand itself because, I think, they built a tremendous brand as a truly, differentiated, instantaneous trade platform in the wholesale arena. I think we do want to do what you're saying, which is introduce the incredible capability for dealers to use from a wholesale purchase perspective and sale perspective, introducing one of our customers to the platform, and we're doing that. And we’re really excited about the take on that thus far. And it will be certainly as Jason talked about the use of our data with our instant market value and retail data that we've got matched to wholesale data will provide just incredible liquidity of the marketplace.

So we will certainly bring it in and fold it as a dual set of offerings for our dealers to both sell retail and sell – and buy and sell through wholesale. So we're excited about that, but I don't think we're doing anything from a brand perspective right away. They are focused more in their early stage on a relatively higher end vehicle. I wouldn't put it at the highest end of the vehicle spectrum, but they certainly focus franchise first, which has been a really valuable market to go after, you're proving to the largest players in the marketplace that you have an incredibly differentiated and distinct technology platform to enable transactions.

And the beauty is, as we introduce our independent dealers to the CarOffer platform, it will broaden that spectrum of vehicles on the trading platform and broaden out the opportunity for our dealer community to both buy and sell and make it the one-stop shop for that experience. I think CarOffer brings a tool set and a very low capital model to facilitate transactions efficiently, not require a buyer to sit and look through an auction model. It works instantaneously, and they like capital model to get that vehicle from one place in the country to another. And we're excited to introduce that to our broad set of both franchise and independent dealers.

[Operator]

Our next question comes from the line of Naved Khan with Truist Securities. Please state your question.

[Robert Zeller, Truist Securities]

Hi, this is Robert Zeller on for Naved. Congrats both of you guys on your new roles. It was great to see the number of paying dealers increase in three – versus 3Q in both U.S. and international. And you mentioned retention, reactivation and acquisition of new dealers as drivers. So I'm just wondering, has the momentum sustained so far into 2021? And is there anything CarGurus is doing in particular to bring U.S. back, or should we just think of this purely as a function of the economy opening back up? And then my second question is just around the pace of investments. How should we view the pace of investments over the course of 2021, including advertising spend? Thanks.

[Sam Zales, President and Chief Operating Officer]

Hey, Robert, it's Sam Zales. Thanks for the first question. I would just tell you that I think the results of what we did in fourth quarter reflect CarGurus providing two things, a strong lead growth that Jason mentioned in his comments. Jason and Scot mentioned just very strong lead growth, and we're doing that highly efficiently, but as we've always said, we think we have the highest return on investment product offering in the marketplace. The dealers recognize it's a large quantity of consumers, but it's the down-funnel shopper you're bringing me one who spent more time on your platform than any other, more who's ready to purchase. And more of those who at a reasonable price point drive a great ROI for the business. And we're really excited about that acceleration and where we go from there.

Jason, I'll turn it to you or Scot on the second part of the question.

[Jason Trevisan, Chief Financial Officer]

Sure. So on pace of investments – it’s Jason. On pace of investment, we are continuing to invest in the listings experience. We do still think there's quite a bit of optimization and more that we can deliver to both dealers and consumers there. So we're still investing in the technology and product there. We are becoming much more efficient. If we have become much more efficient in marketing and we think a lot of that efficiency is durable and will remain. So we expect that to continue, not at the same pace of 2020 as we've said a handful of times but certainly a far more efficient model than pre-COVID.

And then, we will be growing our investments in the retail and wholesale efforts. Those are clearly more nascent than anything else we're doing, but they're complimentary. And we think are going to, as I said before, when you put the three pillars together and stitch them together, they become extremely compelling. In terms of the pace of it from a sort of a quarterly perspective, won’t get into much comment there other than echo Scot's point that because of the seasonality of the business if you look at one of our largest, I guess variable costs, expense items, it's marketing, and because of the way the seasonality works, marketing does tend to go up in Q2 and Q3 versus Q1.

[Operator]

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

[Marvin Fong, BTIG]

Thanks for taking my questions and congratulations on the new roles, to both of you. My first question, just thought we can get a little more color, I think last quarter, the smaller dealers, 30 and under inventory units with a drag on the dealer account. I'm just wondering if you could update us on how the franchise dealer additions versus the small independence trended in the fourth quarter. And then I have a follow-up.

[Scot Fredo, Chief Financial Officer]

Hey, Marvin. Thanks. It's Scot. Yes. So we mentioned in the prepared remarks, across all segments, dealer growth was strong in the quarter, franchise has initially the strongest coming out of sort of COVID lockdowns and has remained. So the larger dealers have been the first return and but we didn't highlight them this time because all segments were strong this quarter.

[Marvin Fong, BTIG]

Great. Thanks for that. And then my second question, just maybe a bit of a two-parter on marketing spend. So I think you mentioned that you had maybe dialed back the brand marketing in the fourth quarter, plan to bring that back in 2021. So maybe you could just help us think about, was it the market that kind of got at that decision about brand investment for the fourth quarter? And then just secondarily, I think you also mentioned Scot, maybe some of the pricing is not where you expected to wind up because the competitiveness of the bidding is perhaps not at full maturity, just curious, given where car sales are, they're pretty healthy, all things considered, why do you think it is that pricing is still although fast in terms of bidding – competitive bidding for keywords and so forth. Thanks.

[Jason Trevisan, Chief Financial Officer]

So Jason here and I'll take the brand spend question, and then Scot, maybe you can take the next one or Sam. On brand spend, yes, I mean, Q4 is not a very robust quarter of car purchasing. So between that, and this year, the election and the holiday season, it's more expensive. And so it's just a less efficient time to be spending on brand. It's still a really important driver and we recognize the value in both the way it can help differentiate us, but also provide air cover and sort of tailwinds for our traffic acquisition in general. So it remains as central piece of our growth strategy as it always has. And Q4 reduction in brand is typical for us. Maybe for my benefit, but I think for others too, can you repeat the – time like you had sort of parts two and three of your question.

[Marvin Fong, BTIG]

Yes. Sorry. Just to be more concise, but just in terms of marketing spend, I think you’d said maybe you’re being a bit conservative thinking that pricing might come up from where it is today, that markets are still not as competitive, perhaps they should be. So just wanted to elaborate on that. What do you think it would take from – in terms of the pricing? Why is it not as strong as it could be considering car sales are about 16 million SAAR used car sales are pretty healthy? Just any additional color on why pricing is weak? That’d be great.

[Jason Trevisan, Chief Financial Officer]

And just so I’m clear, you’re talking about pricing – our pricing?

[Marvin Fong, BTIG]

Yes. Like what you’re spending to drive – to drive traffic, I guess. We can take this off line.

[Jason Trevisan, Chief Financial Officer]

Yes. So I think – so I’m interpreting it as spending among the market and our competitors and peers to drive traffic. I think – look, I think a lot of companies are still sort of recovering from COVID. And I think the dealer universe has done an extraordinary job adapting to more of an online world, but at the same time, they’re not back to where they were fully. And even if SAAR is at levels that are sort of close to where they were, a lot of dealerships missed out a decent chunk of sales, they normally would have had over the course of 2020.

So I definitely, call it a hangover, call it a steady return rather than a rapid return to normalcy. And so as long as that exists, I think they’re partners like us are going to be thoughtful about how much we should spend to drive to them. So if we have a lower paying dealer count than it might make sense for us to be a little more efficient in the volume of leads that we drive. And then as they come back, then we start to dial up our spend, so it becomes more of a virtuous cycle.

[Marvin Fong, BTIG]

Great. Thanks for that. Very helpful. Thanks, Jason.

[Operator]

Our next question comes to line of Doug Arthur with Huber Research. Please proceed with your question.

[Doug Arthur, Huber Research]

Guys, I’ve covered. Thank you very much.

[Operator]

Our final question comes from the line of Nick Bageris with Raymond James. Please proceed with your question.

[Nick Bageris, Raymond James]

Hey guys. Thanks for taking my question. If you can just give some more color on some of the new digital retailing initiatives you discussed Area Boost and RouteOne integration. Just more on kind of the initial reception of these new product introductions. And then any other areas within digital retailing that you view as kind of large white space opportunities for new product introductions going forward? Thanks.

[Sam Zales, President and Chief Operating Officer]

Nick, Hi. It’s Sam Zales. I think you’ve caught most of the products that are in market. As you know, we’ve been in the consumer finance arena for quite a while now. And that’s had tremendous reception from dealers because you’re bringing a pre-approved consumer through the sales cycle and they close much more efficiently and effectively. So a pre-approved consumer really is so much further down funnel that it creates incredible close rate. Number two is Area Boost has been an important part of the logistics capability of saying, getting a dealer to market their vehicles to a much broader audience around the country. Jason brought it up in his earlier comments, a vehicle that can be transported from across the country has a much different value proposition in seasonal times in different parts of our countries.

So we’ve had great reception there. These new pilots are focused on that digital and digital to in-store transaction, fully digital to digital in-store. And when you create that capability of bringing that consumer through the sales cycle, both pre-approval, a valuation for a trade in and ability to do their financing and insurance capabilities online and ability to schedule a test drive, if they’re doing it in the store for a scheduled time to pick up that vehicle or drop off a vehicle. You’re just bringing them much further through the sales cycle and creating a great efficiency for our dealer partners. So we’ve been really pleased with the reception of those pilots, but those pilots are small and they’re newer in the market today.

What we’re going to do from those is learn how effectively they work. And so far, the feedback from our dealers is, if a shopper who is purchasing as opposed to what our current business is, as Jason talked about it, when you do a lead generation business in the offline world versus connecting a consumer to a dealer in the digital world, you are creating transactions. And what we’re hearing from them is we’re doing that pretty effectively, we’re going to do that and then take that to market fully in a commercialized fashion once we are sure that consumer and dealer experience is as good as it possibly can be. So you’ll hear more from us on that in the future. And thanks for asking about it.

[Nick Bageris, Raymond James]

Thanks a lot. Appreciate it.

[Operator]

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

[Jason Trevisan, Chief Financial Officer]

I’d just like to thank – everyone, give a sincere thank you to our dealer customers, our consumers, our shareholders, and most of all our employees. We’re very excited about the momentum we’re building and thrilled to have your support and dedication. Thank you very much. Have a great evening.

[Operator]

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