Cars.com Inc. (NYSE:CARS) Q1 2024 Earnings Call Transcript

Cars.com Inc. (NYSE:CARS) Q1 2024 Earnings Call Transcript May 9, 2024

Cars.com Inc. misses on earnings expectations. Reported EPS is $0.01165 EPS, expectations were $0.08. Cars.com Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen and welcome to the Cars.com First Quarter 2024 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, May 9, 2024. I would now like to turn the conference over to Catherine Chen, Vice President of IR. Please go ahead.

Catherine Chen: Good morning, everyone and thank you for joining us. It’s my pleasure to welcome you to the Cars.com Inc. first quarter 2024 conference call. With me this morning are Alex Vetter, CEO and Sonia Jain, CFO. Alex will start by discussing the business highlights from our first quarter. Then Sonia will discuss our financial results in greater detail, along with our Q2 2024 outlook. We will finish the call with Q&A. Before I turn the call over to Alex, I’d like to draw your attention to our forward-looking statements and the description and definition of non-GAAP financial measures, which can be found in our presentation. We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA, adjusted EBITDA margin, adjusted operating expenses, adjusted net income and free cash flow.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the financial tables included with our earnings press release and in the appendix of our presentation. Any forward-looking statements are subject to risks and uncertainties. For more information, please refer to the risk factors included in our SEC filings, including those in our most recently filed 10-K, which is available on the IR section of our website. We assume no obligation to update any forward-looking statements. Now, I’ll turn the call over to Alex.

Alex Vetter: Thank you, Catherine. We are excited to have you leading shareholder engagement and guiding our discussion of our platform strategy for the investment community. I’d also like to thank Robbin for her contributions to our Investor Relations program over the last 3 years. And I’d like to welcome everyone to our first quarter 2024 earnings call. We are starting this year with strong growth across our suite of products that simplifies car buying and selling for consumers, dealers and OEMs. First quarter revenue was up 8% year-over-year and we are pleased with our double-digit growth in OEM and national sales. Average revenue per dealer grew 5% year-over-year, reflecting increased adoption and successful cross-selling of our solutions and adjusted EBITDA margin of 29% reinforces the strength of our brand, the inherent profitability of our platform strategy, and our track record of driving disciplined growth.

Our Q1 performance was achieved through steady execution of our platform strategy and key growth drivers. Over the last several years, we’ve not only expanded our leading marketplace, but also thoughtfully added software and digital solutions that broaden our addressable market and provide us with multiple ways to deliver growth. This diversified approach powered first quarter results by transforming OEM relationships, cross-selling Cars Commerce platform solutions and the strength of our engaged market-leading audience. We leverage this momentum to achieve our best quarterly top line growth in over 2 years, putting us on solid footing to deliver full year expectations and we see the potential for even greater traction as macro tailwinds intersect with our value proposition to maximize advertising and operating efficiency that drive more vehicle sales.

Turning to our growth drivers. OEM and national revenue was up 13% year-over-year from strong upfront and incremental sales that benefited from our consistent investments in OEM related products. In light of dynamics around recent supply normalization, we have seen renewed OEM interest in our market leading solutions. Reaching high intent buyers is an imperative with new model launches growing in 2024 and new car inventory up nearly 40%, according to our latest Industry Insights report. It’s therefore no surprise that our OEM partners are looking to us to help them connect more efficiently to in-market shoppers and showcase their cars. Approximately two-thirds of OEM customers increased marketing and advertising investments in our products and solutions during the first quarter.

These investments manifested across multiple aspects of our platform. For example, OEMs promoting new models via homepage takeovers helped Q1 sales for that product rebound to the highest level in 4 years. EV-only manufacturers also continue to be interested in directly lifting vehicles on our Cars.com marketplace as a complement to the traditional media advertising and to show up directly in consumer search results. I’ll also note that incremental spending commitments by OEMs, which are earmarked in response to real-time market conditions, were up nicely in Q1 and another signal of positive momentum for the business. We expect the same differentiation that is attracting renewed OEM investment in our solutions will also drive sustainable dealer customer growth over time.

We ended Q1 with 19,381 dealer customers and remain confident that we can deliver dealer customer growth for the full year. Our new marketplace sales reached the highest level in 3 years, reaffirming our strong platform value. However, as anticipated, we also experienced modest sequential attrition related to temporary cuts by some dealers as they adjust the profitability pressures. Through proactive conversations with these and other accounts, we already saw retention improve in April and we are focused on making further progress. For both new and returning customers, we will continue to cross-sell Cars Commerce platform products that simplify retail operations while also growing ARPD. In Q1, we grew all of our industry leading brands year-over-year.

Dealers use Accu-Trade, Dealer Inspire and the Cars Commerce Media Network to efficiently acquire vehicles and market to high-intent buyers. And those who adopted multiple products had inventory that turned over 20% faster on average, which can be especially impactful given rising inventory levels. Accu-Trade connected customers grew to just under 1,000 accounts during the quarter, generating more than 622,000 appraisals. At Germain Toyota in Naples, Florida, leveraging Accu-Trade has helped the team buy and sell approximately 100 vehicles each month through their service drive. The success of our product has eliminated their need to go to auctions saving them travel time, transportation costs and expensive auction fees, while also creating a great experience for their customers.

On the digital experience front, we grew 22% year-over-year to end the quarter, powering more than 7,400 websites across DI and D2C customers. D2C has expanded our website in Accu-Trade TAM into the Canadian market and our team is working hard to accelerate penetration of these valuable subscription products. Moving to media products. VIN Performance Media is also off to a promising start with early adopters seeing significant increases in leads, interaction and website transfers for their promoted inventory. Our proprietary machine learning model when matched against our in-market audience not only promotes the right win to the right shopper across media channels, but also powers in-demand features like targeting advertising to move aged inventory.

And finally, I’d like to highlight the Q1 performance of our number one most recognized marketplace brand, Cars.com, which consistently delivers a large and engaged in-market audience to dealers and OEMs. More than 28 million average monthly shoppers visited Cars.com during the first quarter to research and shop for the right vehicle. Consumers trust and rely on our unique resource they find on our marketplace like our new affordability report to steer them to the best vehicle for their budget and lifestyle. They also increasingly use tools like your garage in the new car hub, which continue to drive strong repeat traffic to our marketplace, keeping us connected to consumers through their car ownership journey. Building strong organic relationships with consumers has been an enduring hallmark of Cars.com for over 25 years and we are committed to delivering more innovative content and technology to capture in-market audiences at scale.

In closing, focusing on our platform strategy help us advance our product roadmap, accelerate to high single-digit revenue growth and meaningfully improve profitability in the first quarter. Our strategy is working as intended, propelling sustainable growth with a durable and well-rounded product portfolio that addresses our customers’ most pressing needs. We have immense opportunities ahead and we are excited to show you what we think this business can do as we simplify car buying and selling for everyone. Now, Sonia will lead the discussion of our first quarter financial results. Sonia?

Sonia Jain: Thank you, Alex. We started the year on strong footing, delivering solid revenue growth and an adjusted EBITDA margin that exceeded our guidance range. Revenue was slightly above $180 million in the first quarter, an 8% increase over the prior year and the best quarterly growth we have seen in over 2 years. Both dealer revenue and OEM and national revenue were up year-over-year across all product categories. Dealer revenue grew 8% year-over-year to $162 million, driven by contributions from repackaging, the acquisition and continued growth of D2C and continued product penetration. OEM and national revenue was $15 million, up 13% compared to the prior year. We benefited from additional OEM investments as they seek to raise consumer awareness amid rising inventory levels.

Now turning to expenses. For the quarter, total operating expenses were $167 million compared to $155 million a year ago. Product and technology expenditures increased $4 million year-over-year as we enhanced marketplace features, further augmented our product portfolio and invested in our back end systems. As a reminder, unlike the earn-outs associated with our other acquisitions, the D2C earn-out runs primarily through G&A as it was deemed compensation expense under GAAP and in the period, we expensed $2.8 million associated with the earn-out. Adjusted operating expenses were $155 million, $9 million higher than the same period last year, primarily related to the aforementioned investments in technical talent and software to support our platform and products roadmap and a $3 million increase in depreciation and amortization.

Net income for the first quarter was $0.8 million or $0.01 per diluted share compared to $11.5 million or $0.17 per diluted share in the prior year. The change in net income is primarily attributable to earn-outs associated with our acquisitions. I’ll also note in our comparison, net income in Q1 2023 was elevated due to the outsized change in the fair value contingent consideration of our acquisitions. Meanwhile, adjusted net income for the quarter was $28.7 million or $0.43 per diluted share compared to $26.2 million or $0.39 per diluted share a year ago. Adjusted EBITDA for the first quarter was $53 million, while adjusted EBITDA margin of 29.2% exceeded our guidance range. We are pleased with our year-over-year margin expansion of 270 basis points which resulted from the strong flow-through of nearly two-thirds of our revenue growth to adjusted EBITDA.

Moving to key metrics for Q1. We ended the quarter with 19,381 total customers down slightly quarter-over-quarter due to what we believe are temporary budget cuts by some dealers in response to declining profitability. Nevertheless, we expect to grow full year dealer count as we work to win back these customers and expand into new accounts based on our strong value proposition. Unit economics continued to strengthen as ARPD reached $2,505 for the first quarter, up 5% year-over-year from positive repackaging contribution and Accu-Trade growth partially offset by lower ARPD from D2C customers. While Accu-Trade customer satisfaction scores are strong, it does take time for dealers to implement and ramp utilization of the tool across their dealership.

We are actively exploring ways to accelerate this learning curve over the next several quarters and believe it is a significant opportunity for us in the near future. And we do expect to keep growing our ARPD over time as we cross-sell additional products into existing accounts, sign-up new customers and higher tier marketplace packages and improve overall retention through enhanced value delivery. Now turning to our balance sheet. Net cash provided by operating activities totaled $33 million year-to-date. Free cash flow remained strong at $27 million, roughly $5 million higher year-over-year, driven primarily by improved adjusted EBITDA and favorable working capital, partially offset by one-time cash cost and timing of interest expense. During the first quarter, we repurchased 500,000 shares for $9.5 million.

We also repaid $10 million of debt and reduced total debt outstanding to $480 million as of March 31, 2024. This brings our total net leverage to 2.2x, down from 2.3x last year and comfortably within our target range of 2x to 2.5x. Altogether, we have ample liquidity of $226 million, including $31 million of cash and cash equivalents and $195 million of revolver capacity as of March 31, 2024. As discussed in our earnings release, we also recently amended our existing credit facility in a leverage neutral transaction. Replacing both our current term loan and revolving loan with a new $350 million revolver maturing in May 2029. We borrowed $80 million on the new facility at clothing, effectively extinguishing outstanding balances on the current term and revolving loan, eliminating the need for any required amortization ahead of the maturity date.

This all-revolver structure bolsters our financial flexibility, adding $75 million of incremental liquidity and allows us to pursue the best return on capital, whether through organic growth, or additive acquisitions or separately through returning capital to shareholders. We enjoy strong free cash flow conversion, and we’ll look to deploy our capital in a manner that drives incremental shareholder value. Looking ahead, we will continue buybacks under our remaining share repurchase authorization of $110 million, and we will also remain committed to paying down our debt. In addition, we anticipate making additional earn-out payments in Q2 and related to certain acquisitions. I’ll now conclude with our guidance. In the second quarter of 2024, we expect to deliver revenue in the range of $181 million to $183 million.

or year-over-year growth of 7% to 9%. Guidance reflects continued strength in dealer revenue, driven by increased adoption of products like Dealer Inspire and Accu-Trade. OEM and national revenue growth is also expected to accelerate, benefiting from what we perceive as a more competitive sales environment that necessitates OEMs increasing their marketing and advertising directed to in-market shoppers. As a reminder, our Q2 revenue guidance also benefits from last year’s repackaging initiative, which began in March of 2023. We expect to deliver second quarter adjusted EBITDA margin between 27.5% and 29.5%, an expansion of 150 basis points year-over-year at the midpoint of the range. This guidance reflects additional investments to support our marketplace brands and product development initiatives as well as timing shifts of certain investments from the first quarter to the second quarter.

For the year, we are reaffirming our guidance ranges of 6% to 8% revenue growth as well as adjusted EBITDA margin between 28% to 30%. With a growing and differentiated product portfolio, efficient marketplace flywheel, which feeds our platform strategy, an asset-light business model, we are poised to deliver on our goals and look forward to updating you on our progress throughout the year. And with that, I’d like to open the call for Q&A. Operator?

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