Thank you, operator. Good afternoon. I'm delighted to welcome you to CarGurus' first quarter 2022 earnings call. We will 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 Executive Officer; Scot Fredo, Chief Financial Officer; Sam Zales, President and Chief Operating Officer; and Bruce Thompson, Founder and Chief Executive Officer of CarOffer. During the call, we will make statements regarding our business that may be considered forward-looking within applicable securities laws, including statements concerning our outlook for the second quarter of 2022. Management's expectations for our future financial and operational performance, our business and growth strategies, our expectations for our CarOffer business and acquisition synergies, the value proposition of our current product offerings and other product opportunities, the impact of the semiconductor chip shortage and other macro-level industry issues and other statements regarding our plans, prospects and expectations. These statements are not promises or guarantees and are subject 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 market close today and in our most recent reports on Forms 10-K and 10-Q, which along with our other SEC filings can be found on the SEC's website and in the Investor Relations section of our website. We undertake no obligation to update forward-looking statements, except as required by law. Further, during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release issued today as well as in our updated investor presentation, which can be found on the Investor Relations section of our website. With that, I'll now turn it over to Jason.

Thank you very much, Kirndeep, and thank you to all those joining us today. 2022 is off to a terrific start. While macroeconomic factors continue to challenge the automotive industry, CarGurus remains at the forefront of providing innovative solutions to both our dealer partners and consumer audience during these dynamic times. In 2021, we transformed our business by acquiring CarOffer, launching CarGurus Instant Max Cash Offer, and accelerating our digital retail capabilities. 2021 was the year of transformation for our business. And 2022 is the year of activation in which we plan to execute on the potential built last year by activating digital deal on our platform, lighting up new geographies for CarGurus Instant Max Cash Offer, adding more dealers on CarOffer's matrix, and introducing new bundling options across our different offerings. As we initiate these new aspects of the business, we are also unlocking synergies that are made possible through the combined potential of our foundational listings business with our digital retail and digital wholesale businesses to create an end-to-end transaction-enabled marketplace for consumers and dealers alike. For consumers, this means a place to transparently shop, finance, buy, and sell from the largest selection of dealers' inventory in the U.S. And for dealers, it means the ability to efficiently source, market, and sell to the largest and highest intent consumer audience in the U.S. As we continue to make this vision a reality, I'm pleased to share CarGurus achieved exceptional results and exceeded our forecasted revenue guidance for the quarter. Revenues for the quarter from our CarOffer business, inclusive of our dealer-to-dealer business and Instant Max Cash Offer, was $267 million, growing 50% quarter-over-quarter and over 1600% year-over-year. The industry's first instant trade platform for vehicle acquisition and disposition continues to garner dealer traction as indicated by the dealer base expanding to 10,850 enrolled dealer rooftops at the end of Q1. The joint CarOffer and CarGurus sales teams added another 1,750 rooftops this past quarter. As we continue to grow the network, we're able to diversify the dealer base, utilizing the matrix and further enhance the types of vehicles transacting on our platform. Gross merchandise sales, or GMS, for our dealer-to-dealer business and Instant Max Cash Offer was approximately $2 billion, declining modestly quarter-over-quarter. Each quarter since the acquisition of CarOffer, we have gained a deeper understanding and appreciation for how fluctuations in wholesale and retail prices affect our dealer partners as they continue to navigate the ongoing semiconductor chip shortage. Two factors drove relatively more subdued dealer wholesale behavior in Q1. One, dealers witnessed wholesale prices start to retreat throughout Q1; and two, retail consumer demand continued to moderate as a result of historically high prices, rising auto loan rates, inflation, and delayed tax refunds. Nonetheless, our dealer-to-dealer business generated $105 million in revenue in the first quarter, growing approximately 12% quarter-over-quarter and over 575% year-over-year. The growth this quarter also included changes in our revenue mix. We saw a slight decline in transactions, but an increase in fee revenue as we increased our buy and sell fees at the beginning of March from $275 to $325 and increased inspection costs to $110 from $90. Additionally, we had an increase in transportation services revenue, which is low-margin revenue relative to transactions through the assumption of transportation for a large customer who is experiencing a material backlog of vehicle pickups. In spite of the continued unpredictability of the effects of the global pandemic and supply chain issues on the used and new car market, I'm pleased with the impressive growth and adoption of CarOffer to date. There remains a long runway for growth as we continue to further penetrate the U.S. dealer market and provide them with our unique solution to meet their inventory needs. Furthermore, the profitability of the CarOffer business during its infancy highlights the efficiency of the model. Of the $267 million in CarOffer revenue, our Instant Max Cash Offer business generated approximately $162 million, exceeding the high end of our forecasted guidance for the quarter and growing 92% quarter-over-quarter. In Q1, we expanded our coverage to five additional states, now covering approximately 80% of the U.S. While expansion primarily took place towards the end of the quarter, expansion into new markets accounted for 23% of the quarter-over-quarter growth while growth in existing geographies accounted for 77% of the growth, largely driven by improved consumer conversion. This quarter, transactions more than doubled. Much like the last two quarters, we continue to optimize CarGurus' Instant Max Cash Offer, or Instant Max for short. We have added more self-service options as well as greater automation to further enhance the consumer experience. Our virtual inspection intake pilot allows consumers to set up a video call with a CarOffer specialist to improve our condition assessments. Our online appointment scheduling system allows consumers the flexibility to schedule driveway pickups online and was utilized by 85% of consumers. These enhancements provide users with more optionality and convenience to complement receiving the highest and most competitive offer for thousands of dealers. As we approach national coverage, we will continue to optimize and refine the Instant Max experience for both our consumer and dealer partners. We believe over the long run, we are positioned to capture meaningful market share as CarGurus is the only U.S. marketplace where the largest network of dealers and the largest consumer audience can transact instantly and at scale using our instant trade technology. Turning to our foundational listings business, I'm thrilled to share we exceeded our forecasted marketplace revenue for the quarter. This robust performance was driven by healthy dealer additions and revenue expansion. In the U.S., our listings business had strong paying dealer additions in the quarter, up 359 from Q4, growing dealer counts across all our dealer segments. Net dealer adds this quarter were evenly split between new dealer additions as well as dealers who churned off our platform during the pandemic and the semiconductor chip shortage, and have since rejoined. In addition to improving dealer accounts, we saw growth in quarterly average revenue for subscribing dealers, or QARSD. This quarter, U.S. QARSD grew approximately 5% year-over-year to $5,713. QARSD growth was primarily driven by higher paying dealer additions, greater upsells, and increased adoption of RPM and Area Boost. In addition to growing and innovating our listings business, we are also focused on continuously providing exceptional customer service to our dealer partners with a strategic emphasis on retention and growth. This focus has allowed us to grow our dealer base while witnessing materially lower churn in Q1 when compared to historical averages since the beginning of the pandemic and chip shortage. Internationally, we ended Q1 with 6,648 paying dealers, down modestly quarter-over-quarter. We saw QARSD grow by 40% to $1,556 year-over-year as a result of existing dealer revenue expansion and one-time discounts offered to select accounts during the lockdown last year. In Q1, we launched digital display in both the U.K. and Canada, also known as RPM in the U.S. The pilot demonstrated that dealers utilizing digital display were able to target low-funnel CarGurus customers who have not only visited their own listings, but viewed similar vehicles from other sellers and drive them back to their own websites. Since launching digital display, we're seeing very strong click-through rates to drive dealer adoption. We're thrilled to see strong receptivity for digital display and are excited for international dealers to leverage the same capabilities that are available to our dealers in the U.S. It is through product innovation and outstanding service that we will continue to drive growth in our listings business and provide our dealer base with the highest ROI in their markets. In the spirit of always innovating the core functionality of the listings business, in the fourth quarter, we tested and launched new digital retail pilots for deposits and hard-pull financing that allowed consumers even greater flexibility and optionality in completing their purchase. These pilots and existing offerings allow our dealer partners to offer our 31 million unique monthly visitors a convenient self-selective journey, all while providing trust, transparency, and the best pricing from the largest selection of inventory in the U.S. Following the success of our pilots, at this year's NADA conference, we shared a preview of our upcoming digital retail offering Digital Deal. Digital Deal is an evolution of our CG convert offering, helping dealers close more business from the 60% of CarGurus' auto shoppers who prefer to do more of the car buying process from home. Our Digital Deal solution provides dealers with high-quality sales opportunities by moving shoppers further down the purchase funnel before a dealership visit, by allowing them to build a near penny-perfect deal online, including dealership finance and insurance offerings, and scheduling an appointment to visit the dealership to finalize the sale. If enabled by the dealership, shoppers will also have the option to place a $500 credit card deposit to reserve the vehicle for 72 hours. Digital Deal has been made available to select dealers at NADA and will be available for all dealers to opt into later this month. This new product is designed to help dealers compete with online retailers. It empowers dealers to close more business with less time and effort and Digital Deal leads are two times more likely to close than traditional leads. Combined with Area Boost, Digital Deal gives dealers the ability to sell online in both their local market and as far outside it as they would like. Not only does Digital Deal provide tremendous value to dealers, but car shopper satisfaction is 2.5 times higher than standard CarGurus leads, creating a mutually beneficial offering for our consumer audience and dealer partners. We're excited to launch Digital Deal later this month. With this launch, we're closer to creating a full end-to-end digital retail solution and providing a unique offering to serve our consumers and dealers who wish to have a digital to in-store experience. We believe our digital retail capabilities will level the playing field for our dealer partners who are unable to provide these solutions to consumers on their own and/or wish to utilize our largest consumer audience to sell additional inventory through the CarGurus' digital retail platform to drive greater profitability. With innovative new solutions like Digital Deal and Instant Max Cash Offer, we've been able to realize the full benefits of the efficiencies and synergies that exist when you create a transaction-enabled marketplace. Formerly, the main value of each consumer came from their VDP lead submission. However, since expanding our business, we are able to increase the value of our shoppers as they interact with multiple products across our platform and thus, increase our revenue per consumer. This allows us to gain leverage in our marketing spend as we grow the contribution from a consumer across multiple products. For example, approximately 50% of our Instant Max offer savers view a VDP for a new purchase. These consumers are high-intent shoppers at the bottom of our funnel who are interested in both selling their car and purchasing a new one. Increasingly, we are able to target these types of consumers and help them engage with even more of our product offerings. Heightened consumer activity creates leverage with our marketing, allowing us to capture synergies from a transaction-enabled marketplace that did not exist previously. Furthermore, as we create a stickier platform that services the full life cycle for dealers as well as consumers, we are able to bundle our offerings to capture additional synergies and revenue. This past quarter, we began two small pilots designed to increase dealer engagement in our full product suite. The first is offering advantaged pricing to non-listing dealers who are utilizing our CarOffer platform, and the second is offering dealers that are on both CarGurus and CarOffer favorable pricing on their listing subscriptions by meeting monthly CarOffer transaction volume thresholds. Although we are in the early stages of tying our offerings into one cohesive product suite for our dealer partners, bundling incentivizes dealers to utilize more than just one of our many offerings to improve their business. All in all, we're thrilled with our first quarter results. We're proud of the growth of our foundational listings business as well as the profitability of CarOffer, both driving incredibly strong top and bottom line results. While the semiconductor chip shortage continues to cause near-term inventory uncertainty and volatility, we continue to deliver tremendous shareholder value, all while pushing forward our vision of creating a full end-to-end transaction-enabled marketplace. We're combining our foundational listings business with digital wholesale and digital retail to create the only end-to-end automotive transaction-enabled marketplace in the U.S. for consumers to transparently and confidently shop, finance, buy, and sell from the largest network of dealers and for dealers to efficiently source, market, and sell to the largest and highest intent consumer audience in the U.S. We are focused on increasing optionality and convenience for both dealers and consumers by providing consumers flexibility to complete a sale or purchase in a manner that works best for them and offering dealers more choice to tailor their product suite that best serves their individual business. Each transaction is unique. We are committed to creating solutions that mutually benefit the various needs of consumers and dealers. None of these incredible results or innovative ideas would be possible without each and every one of our team members. So, I'd like to take a moment to express my gratitude and appreciation to our employees globally. After a little over two years, I'm excited to welcome our employees back to the office in June. The pandemic created new challenges and disrupted not only our work lives but our personal lives as well. Nonetheless, over the past two years, our employees embodied our core values and continued to innovate and drive our vision forward. It's through their commitment and passion that we were able to turn our vision into a reality. Now, I'll turn it over to Scot to discuss our financial results.

Thank you, Jason. I'll provide a detailed overview of our first quarter performance, followed by our guidance for the second quarter of 2022. Total first quarter revenue was $430.6 million, up 151% year-over-year and nearly $21 million ahead of the high end of our most recent guidance range. Marketplace revenue was $163.3 million for the first quarter, up 2% from the prior quarter and up 5% from $155.8 million in the prior year. The growth in marketplace revenue was primarily due to an increase in our foundational listings revenue driven mostly by an increase in our paying dealers in the U.S. quarter-over-quarter. Wholesale revenue was $91 million for the first quarter of 2022, up 559% from $13.8 million in the prior year. Compared to the previous quarter, wholesale revenue grew 10% in the first quarter. The increase in wholesale revenue compared to the prior quarter is mostly due to the increase in transportation revenue that Jason mentioned. Lastly, our third and final revenue component, product revenue, was $176.3 million for the first quarter, up 9,896% from $1.8 million in the prior year and up 84% from the previous quarter. The increase in revenue from the prior quarter is primarily due to transaction volume growth associated with Instant Max Cash Offer. 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 net income attributable to redeemable non-controlling interest. First quarter non-GAAP gross margin was 44% compared to 59% in the prior quarter and 86% in the year-ago quarter. The change in non-GAAP gross margin is primarily due to the growth of Instant Max Cash Offer and its associated costs of acquiring vehicles directly from the consumer. Additionally, the contraction was due to an increase in transportation and arbitration costs associated with the dealer-to-dealer services. Total first quarter non-GAAP operating expenses were $125.2 million, up 27% year-over-year. Non-GAAP sales and marketing expense decreased 3% compared to the previous quarter and increased 28% year-over-year to $83.6 million. Non-GAAP sales and marketing expense represented 19% of revenue, down from 38% of revenue in the year-ago period. The slight decrease in non-GAAP sales and marketing expense compared to the previous quarter is primarily due to the efficiencies in our paid traffic acquisition spend as we realized synergies that Jason previously mentioned. However, compared to the year-ago quarter and moving forward in 2022, while we would expect these efficiencies to remain, we will have increased expense as we invest to market Instant Max Cash Offer and seek to increase our brand awareness among consumers. Our first quarter non-GAAP product, technology and development expenses grew 25% versus the year-ago period to $24.3 million. The increase is primarily due to an increase in employee-related costs as a result of a 30% increase in headcount and continued investment in our technology teams to grow our new areas in digital wholesale and digital retail as well as new features and enhancements to our marketplace subscription products. We generated non-GAAP operating income of $62.2 million, representing a margin of 14% and in the middle of our guidance range. Non-GAAP diluted earnings per share attributable to CarGurus Inc. were $0.36 for the first quarter, $0.03 above the high-end of our guidance range. On a GAAP basis, we generated first quarter gross margin of 42% compared to 86% in the year-ago period. The contraction in gross margin is primarily due to the reasons previously discussed, in addition to amortization of acquired intangibles of approximately $5.4 million that were previously reported in operating expenses and are now included within cost of revenue. We incurred total operating expenses of $155.2 million, up roughly 28% year-over-year. The increase in operating expenses was primarily driven by an increase in payroll and employee-related benefit expenses, as we increased our headcount supporting our core business over the last year by 13% as well as increased headcount as a result of the CarOffer acquisition. First quarter GAAP operating income increased 3% year-over-year to $26.7 million. First quarter GAAP net income attributable to CarGurus Inc. totaled $19.9 million. And first quarter GAAP net loss attributable to common shareholders totaled $62.1 million, primarily due to the accretion of redeemable non-controlling interest to redemption value of $82 million in the first quarter. We ended the first quarter with $375 million in cash and investments, an increase of $53.1 million from the end of the fourth quarter. The increase was driven by a $40 million decrease in our accounts receivable balance, a $30.1 million increase in accrued expenses offset by $23.6 million in payments made to our third-party processor related to CarOffer. We generated $93.1 million in cash from operations in the first quarter and $89.3 million of non-GAAP free cash flow, which includes capital expenditures and capitalized website development costs of $3.7 million. I'll close my prepared remarks with our outlook for the second quarter of 2022. We expect our second quarter revenue to be in the range of $480 million to $510 million. Similar to previous quarters, we are providing second quarter revenue guidance for Instant Max Cash Offer, which we anticipate to be in the range of $219 million to $239 million. We are estimating non-GAAP operating income in the range of $44 million to $52 million and non-GAAP earnings per share in the range of $0.26 to $0.29. We expect non-GAAP operating income to contract in Q2 compared to Q1 as we increase our marketing spend to drive consumer awareness and continue to invest in technology and building our team to drive long-term growth. With that, we look forward to seeing some of you at our upcoming Investor Day. And now I'll open up the call for Q&A.

Thank you. We will now begin our question-and-answer session. Our first question comes from John Colantuoni with Jefferies. Please go ahead.

Looking at CarOffer, it seems that average gross merchandise sales per dealership decreased by about 30% sequentially in the first quarter and showed a decline in the double digits year-on-year. Can you discuss how this aligns with your expectations? Additionally, is the recent decline in consumer demand for used cars affecting dealerships' willingness to purchase programmatically? Furthermore, could you provide insights into how engagement at CarOffer has evolved in recent months? I have a follow-up as well.

Sure. Sam, do you want to take a shot at this and if Bruce, you want to add anything?

Happy to start, John. Thanks. Sam Zales here, and I'll pass it to Bruce, who is the expert on this shortly. You're referring to the transition from the fourth quarter to the first quarter, and I would say the entire industry felt the effects of wholesale pricing. When wholesale prices decline, it creates a volatile situation, which makes dealers hesitant to buy and sell. This is something we discussed in the third quarter of last year. That dynamic affects the business. Additionally, consumer demand is currently weak in the market, which also influences how dealers approach transactions and manage their inventory. As you pointed out, as we enter the second quarter, the wholesale pricing model is shifting, with prices beginning to rise again, which is encouraging for dealers' confidence in making transactions on both the purchasing and selling sides. This summarizes the impact. From a broader perspective, let me turn it over to you, Bruce, for any additional insights.

Yeah. I would just basically reiterate what you're saying, Sam, also that we had incredible December and January. Speaking to your point, I think wholesale prices came down 6.4% since the first of the year. That being said, we have today more programmatic buyers on the system than we've ever had. So, we've seen a rapid expansion of that, a ton of momentum going into this quarter. And given the headwinds there and particularly February, our aggressiveness to and Instant Max Cash Offer, I mean we're learning every day. Basically, in about six months or so, we set up a $1 billion business. And we wanted to get aggressive there, but as we're buying these cars, we're finding out, picking up these cars from consumers, paying these consumers on the spot, we're learning a lot. And really getting that dialed in, feeling very, very good about that as we move into this month and next.

Great. And I wanted to ask one about the marketplace. With dealership seeing a moderation in used car demand, could you see that benefiting CarGurus as dealerships look to boost sales by leveraging more digital advertising? I guess I'm trying to figure out the counterbalance between dealerships trying to offset a drop in demand and maybe being a little bit more careful about how much inventory that they keep at their dealerships. Maybe you could just talk a little bit about how you see that dynamic impacting CarGurus marketplace business? Thanks.

Thank you, John. This is Jason. As we've mentioned before, our platform has become broader and more comprehensive, covering dealers' sourcing, marketing, selling, and the complete consumer lifecycle. This diversification helps to balance our business. When one area experiences growth, another might face challenges, and the opposite can also happen. Currently, as consumer demand decreases, which you may have observed from various market data, we believe that dealers will need to market more aggressively. This shift can benefit our marketplace business, and we've already seen some of this momentum in the first quarter as we added hundreds of dealers. However, inventory constraints play a significant role; even if consumer demand decreases and dealer marketing increases, a lack of available cars may limit their aggressiveness compared to pre-COVID times. While the inventory situation remains challenging, we believe it is likely improving compared to before. If consumer demand is not as strong as it was in the latter part of last year, that is favorable for our listings business, RPM, and the digital retail products we're launching.

Appreciate the color.

Thanks for the question.

Thank you. We have next question from the line of Chris Pierce with Needham. Please go ahead.

Hey. How are you doing? I think Bruce sort of hit on it, but I kind of wanted to go deeper. I'm looking at slide 29. Can you just walk me through CarOffer non-GAAP gross profit margin heading lower? And does it relate to Internet cash out where Bruce said you're learning every day? Or I guess what are the inputs? Is there a contra revenue in there? Is CarGurus pricing to be lower from arbitration if you just kind of go deeper on that, I'd appreciate it?

Yeah. Scott, do you want to take a shot at that? You're on mute.

Hey, Chris. How are you doing? It's Scott. So, on slide 29, non-GAAP gross profit, that's what you're looking at?

Yeah.

We experienced a significant advantage from the amortization item, and you can observe that high trend in Q4 due to a one-time pickup. When you examine the GAAP gross profit line, you'll notice a variation from Q4 to Q1, which is primarily due to a mix issue. As mentioned during the call, we faced price volatility, prompting us to adopt a more aggressive pricing strategy for Instant Max, which led to a slight compression in gross margins. Additionally, we incurred higher transportation costs that carried over from Q4 to Q1, contributing to the overall compression in gross margin from one quarter to the next.

Okay. And then bigger picture, kind of what are dealers telling you as we get closer to the ADESA deal sunsetting or closing and kind of how are dealers thinking about their sourcing of in their selling in the wholesale market.

This is Bruce. From my perspective, I believe it benefits us as we are already seeing some momentum. I anticipate that this will continue as dealers decide whether to participate in the ADESA brick-and-mortar auctions or the cobot brick-and-mortar auctions in the future. I think this is a positive sign for dealers moving ahead.

Well, this is Jason. We continue to notice a shift in market share from physical to digital. While this transition is still relatively new, it is happening rapidly, and we anticipate it will persist for a significant period. There is substantial market share to be captured from this change. Additionally, we have received feedback from dealers indicating that they are now less willing to collaborate with a group that is owned by one of their competitors than they might have been in the past.

Thank you.

Thank you. We have next question from the line of Tom White with D.A. Davidson. Please go ahead.

Great. Thanks for taking my question. Maybe just a follow-up on the comments about the sensitivity of volumes in the wholesale dealer-to-dealer business to the wholesale prices. Jason, if you looked out like, I don't know, three or four quarters or whenever we think new inventory is going to come back online in a meaningful way. Do you expect that part of the CarOffer business to be sensitive to that as well? I'm curious whether you guys have given any thought to adding a subscription-based element to that business?

Sure. This is Jason. I'll address both of your questions. Regarding your second question, we do have some smaller subscription-based products in the wholesale sector, but they don't make up the majority of our business. From a wholesale perspective, we believe the transaction model is more effective. As for your first question, it will take some time for new car production to ramp up and significantly affect used car pricing on a broader scale. However, we did observe a decline in used car pricing at the retail level during Q1. In wholesale, as someone previously noted, the situation is not so much a decline as it is uncertainty among dealers due to volatility. If dealers had a clearer expectation of a gradual decrease in pricing, they would still need to buy and sell cars. The challenge arises from concerns about sudden or unexpected changes in the near term. The wholesale unit prices have experienced significant increases over the past two years, with two instances where prices flattened and decreased unexpectedly. This uncertainty and volatility have led to some hesitance among dealers. Most analysts believe that wholesale unit pricing will return to lower levels in the upcoming years, and dealers recognize their need to source cars during that period. I would describe the sensitivity more in terms of volatility rather than a simple increase or decline in prices.

That’s great.

Even in moments of uncertainty, we believe that a digital model remains a better option, and an instant trade platform allows for controlled bidding and selling in a more technical manner, which offers reassurance during turbulent times. This approach reduces dependence on the outcomes of individual auctions.

Got it. That's really helpful. A quick follow-up. I remember last quarter you mentioned that the rental car companies were an active part of the wholesale dealer-to-dealer business. Can you discuss their level of activity in the second quarter? And generally, do you see that segment as a durable customer base, or do you view them as more opportunistic since they needed to ramp up their fleets?

This is Bruce. My discussion with the fleet indicates that we believe it is a sustainable channel for us. For the upcoming quarters, if not indefinitely, there has been a shift from buying from the OEMs to nearly new, which is working very well for them. We observed this in the second quarter, especially as transportation and travel continue to increase across the country. We expect this trend to persist. Comparing quarter-over-quarter, from the fourth quarter to the first quarter, we saw an increase of nearly $100 million. We are satisfied with our performance in the first quarter. As Jason pointed out, market fluctuations can cause some uncertainty, similar to recent stock market changes. However, these fluctuations tend to stabilize over time, and we feel very confident about our current position.

Great. Thanks guys.

Thank you. We have next question from the line of Brad Erickson with RBC Capital Markets. Please go ahead.

Hi. Thanks. Just on the margin guidance, you mentioned the sales and marketing expense. Can you just unpack the size of that marketing investment and give us some guardrails as to how to think about how much you intend to spend? And just curious also if there's any contribution there from higher transport reps like there was in Q1, or is that not a factor?

Hey, Brad. It's Scott. I'll take this one. So, there are a couple of key points to address. I'm not going to get too detailed about marketing expenditure, but there are essentially two main components. We've discussed for about a year the need to invest more in our core business, and we've started to see that happen a bit in Q4 and Q1. The spending has increased compared to what we saw in Q2 and Q3 last year, where we had significantly lower expenses than in Q1 of the previous year. We're focusing more on our core business to attract traffic to our site, enhance consumer engagement, and convert that into valuable leads for our dealers. Additionally, we are allocating more resources to marketing Instant Max, which had seen minimal investment until now. We plan to increase spending significantly in Q2 and anticipate continuing this trend. The guidance regarding earnings reflects our commitment to increasing marketing expenditures. Furthermore, we are in the process of expanding our team, with many positions to fill across the organization, especially in technology, but also in all departments, and CarGurus is expanding their team considerably. So, our primary areas of investment are in personnel and marketing, along with significant investments in digital retail.

Got it. Thanks for that. And then, just on the buy button beyond what you kind of gave in the prepared remarks. Just any updated learnings you can provide there sort of evidence of success and just any update as you continue to pilot that?

Happy to take it, Brad. Thanks. We can't be more excited about the Instant Max Cash Offer product. I think our conversion rates from our site for consumer saving offers to transactions are all trending positively, which we're really pleased about. I'm sorry, and maybe I'm getting ahead of myself with the Instant Max Cash Offer. Regarding the buy button, I'm just really enthusiastic about that one. Digital continues to progress in the right direction. Sorry, Brad. We're very eager about the next phase of the digital deal. As Jason mentioned, it represents the next expansion of what the convert product is. The new capabilities we're adding provide an opportunity for dealers to engage with down-funnel shoppers. We’re collecting data on consumer interest in making a purchase, and we've noted that the close rate on those leads is twice as high as the already impressive close rate we see on our general leads. This improvement is largely due to our integration of soft pull financing into the hard pull process, streamlining the transaction for consumers at the dealership. We are fully integrated into the dealership's CRM, facilitating the start of the shopping, financing, and buying process for consumers. We believe this aligns with the industry’s direction, as 60% of our consumers prefer to engage digitally. They have the option to complete everything online or visit the showroom to test drive the vehicle. We feel we have a competitive product in the marketplace, so we're thrilled to launch the digital deal. As announced at NADA, we're formally rolling it out this quarter, and we're very excited to connect more consumers with dealers through digital purchases.

Got it. Thank you.

Thank you. The next question is from the line of Jed Kelly with Oppenheimer. Please go ahead.

Great. I have two questions. First, can you discuss the reasons behind the recent price increases for CarOffer and what the scale of the pricing adjustments looks like? Secondly, regarding the Instant Max Cash Offer product, how should we anticipate the gross margin evolving in the future? Are you planning to maintain breakeven margins in order to enhance consumer engagement? What is the overall strategy for this product? Thank you.

I'll begin, and others can chime in. Thanks for the question, Jed. Regarding the price increases at CarOffer, we've always been competitively priced for dealers. Our transaction fees are lower than most, if not all, of their digital competitors, especially in the physical aspects as well, along with the added convenience we provide. When considering the total transaction cost, we definitely stand out. Given that and the satisfaction levels from dealers, we identified an opportunity to raise prices to better align with how dealers perceive value in the market. We haven't discussed further adjustments since we implemented this in March, but we feel confident about that decision, and dealers have been very supportive. As many competing options continue to deplete resources, those companies may have to increase prices, which could benefit us if we choose to follow suit. However, we remain dedicated to delivering significant value to dealers. Before I move on to Instant Max, Sam, Bruce, do you have anything to add or did I cover everything?

I think you covered it.

Okay, great. On Instant Max, we are looking at a significant market opportunity. As we've done in other areas of our business and earlier stages, we're focused on ensuring the unit economics are solid before expanding significantly. We're concentrating on the gross margin, and this quarter we achieved a low to mid single-digit gross margin, with some months even higher. In months where it was lower, it was due to our competitive offers, where we intentionally reduced our spreads. We're experimenting with special offer periods where we further compressed our spreads by design, and we can adjust this as needed. At this early stage, our goal is to maintain positive gross margins at the unit level, and I don't foresee a situation where we would operate at a loss. The next step is determining how much we want to invest in marketing once we feel confident in our approach. From a business model standpoint, having hundreds or thousands of dealers bid on a car offers a significantly better value to consumers than dealing with just one dealer. We need to communicate this improved value proposition to the market. As Scott mentioned, we plan to increase marketing efforts to spread the word among our user base. We are observing cross-pollination between Instant Max users and those engaging with leads and consumer finance, which indicates a positive feedback loop in our platform overall. Our intention is to maintain positive gross margins indefinitely, and we are ready to invest more in marketing due to the product's exceptional quality.

And this is Bruce. I want to emphasize that we are in the very early stages here. We established a business that didn't exist within the company six months ago. I believe we've managed to expand this buying-from-consumer business to a C2D model faster than any other company out there. We are continuously learning, and as we do, we are improving our processes for buying cars from consumers. We're getting better at fine-tuning the algorithms and handling the logistics involved. So, I expect our performance to improve each month, and we're already seeing those enhancements. I'm very excited about Instant Max Cash Offer.

Thank you.

Thank you. We have next question from the line of Naved Khan with Truist. Please go ahead.

Thank you. I have a couple of questions regarding CarOffer. Can you provide insights on what you’re observing with your older dealer cohorts, specifically those who joined about three to four quarters ago? Are they increasingly using the platform to purchase cars? Are they transferring their business from other channels to CarOffer? I'm interested in understanding the trends in this area. Also, in your prepared remarks, Jason, you mentioned some backlog in vehicle pickup. Is that related to the IMCO side or the car rental companies?

Navid, I can start off. It's Sam Zales, and Jason or Bruce can add more detail if needed. The cohorts are moving in a positive direction, and it's important to emphasize that they're all progressing well. The increase in the diversity of dealers getting on the platform, either buying or selling, along with the cohorts trending upward, is a very encouraging sign for us. However, I want to note that the broader market conditions we've discussed earlier regarding wholesale pricing volatility can affect this. For example, in the fourth quarter, we saw everything trend upward, and while the cohorts continue to rise, confidence can wane when dealers become apprehensive due to market fluctuations. Nevertheless, the cohorts are on an upward trajectory, and we're pleased with this progress as we continue to onboard more dealers to the platform and implement their metrics. Regarding your question about transportation, we took over the transportation for a major partner in the dealer-to-dealer segment, which was a one-time change in the first quarter, if that's what you meant. Bruce, do you have anything to add?

Typically, we handle the transportation for all of our clients. There was one large fleet client in particular that managed their own transportation and got a bit behind. We took over that transportation and cleaned everything up. That's what you saw in the first quarter, which was a cleanup of fourth quarter units.

Got it. So, to explore that a bit further, did that have an impact on Q1 volumes, or was it not really a factor?

It didn't significantly impact volume, but it did affect the margin profile due to a higher proportion of revenue coming from transportation, which has lower margins compared to our fee revenue. This was a unique situation since we typically handle transportation in most transactions, but in this case, the client had managed it historically. The dealer experience is very important to us, and when it became an issue for them, we stepped in to ensure a positive experience for everyone.

Thank you. We have next question from the line of Marvin Fong with BTIG. Please go ahead.

Thank you for taking my question. I only have one. It seems everything else has been covered. However, regarding your guidance for the second quarter, I am curious about the dealer-to-dealer side for CarOffer. It appears the gross margin was 30% in the first quarter. With the recent price increases, do you have any insights on what it might be in the second quarter as reflected in your guidance? Should we anticipate a slight increase, both in the second quarter and possibly on a structural basis? Thank you.

So, it's Jason. We discussed the one-time event related to transportation and the dynamics concerning arbitration. Additionally, it will be the first full quarter with the new fee structure. For all these reasons, if you compare transaction volume on a consistent basis, you would definitely notice higher margins in Q2.

Thank you. We have next question from the line of Doug Arthur with Huber Research. Please go ahead.

I think my question has been answered. I mean, I'm not quite totally understanding why the product gross profit margin went negative, but you've certainly cited a lot of issues. I would assume, over time, the kind of stable to growing margin there is more low to mid single-digit over time. Is that still a fair cut out?

Absolutely. Scott, could you provide more details regarding the transition from Q4 to Q1? It's important to note that the product section of the P&L isn't solely about Instant Max Cash Offer. It doesn't include transportation and inspection related to Instant Max but does cover D2D arbitration and other factors that contributed negatively. If you check our investor presentation, you'll see a clearer breakdown that indicates Instant Max Cash Offer achieved a 3% non-GAAP gross margin. There were months when this figure was higher, but we intentionally reduced it at times to evaluate our offer competitiveness. This is specific to Q1. Looking ahead, I referred to previous comments about enhancing our bidding algorithm and pricing strategies. We're continually refining our conversion process, as well as the pickup and land dealer model, which are still under development since we started them six to eight months ago. We are confident that gross margins have potential for improvement, and over the long term, we expect to maintain mid single-digit margins. We're already noticing this in some periods, though other testing activities did lower Q1 margins to 3%. Sure.

Thank you. We have next question from the line of Alex Potter with Piper Sandler. Please go ahead.

Thanks. I have one question related to arbitration. You mentioned that some arbitration costs affected margins this quarter, but you also expressed confidence that this situation will improve. Could you provide some additional commentary? Is this related to inspection quality issues? What measures are you implementing to ensure that those inspection reports are more accurate? Any insights you can share about arbitration and inspection accuracy would be appreciated. Thank you.

Alex, I'll start and then hand it over to Bruce, who is well-versed in this area. From our viewpoint, we are very excited about what the CarOffer business is doing for us. Regarding arbitration, when market prices decline, that indicates something important. First and foremost, our arbitration figures represent a very small proportion of our gross merchandise sales, which is a key metric for our business. As prices decline or fluctuate, as Jason mentioned, dealers may respond by being more cautious when purchasing vehicles if prices are dropping consistently. We have confidence in our return policy and prioritize dealer satisfaction. Our strategy is to enhance our inspection process, which we've done by adding more inspectors and discussing virtual inspections for our C2D cars. This provides a significant advantage to our process, and as Bruce frequently notes, we are learning from the changes in wholesale market pricing. More instances of fluctuations are likely to arise. We noted an overall increase in revenue mix and chose to invest further in our inspection processes. We're also reviewing our dealer processes and outcomes, especially where dealers may be contesting results. We are cautious in balancing customer satisfaction with sound business decisions. That being said, as I mentioned, arbitration numbers remain a very small percentage of our overall gross merchandise sales, and we have implemented adjustments as we move into the second quarter. Bruce, do you have anything else to add?

To your point, I think arbitrations were about 1% of our gross merchandise sales. We had a strong December and January, and if there is any arbitration volume, it typically comes after February, which is when we started to see decreases. We are very disciplined about the units we accept, allowing us to manage them carefully. Additionally, we are introducing various tools to assist us in the future. Overall, it was a unique situation following December and January, and I believe we have a good strategy moving forward.

Okay. Understood. Thanks guys.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Jason Trevisan, CEO, for closing remarks. Over to you, sir.

Thank you for joining us today and for your questions. As I mentioned in my prepared remarks, we are very pleased with our performance in Q1 and are looking forward to Q2 and the remainder of the year. This reflects our successful transformation into a business that is equipped for all types of transactions within our marketplace, effectively meeting the full lifecycle needs of both dealers and consumers. This progression opens up new markets for us and enables a highly profitable operation to support our investments and growth. We look forward to seeing many of you in person at our Investor Day on May 25, where we can share more about our story. Thank you again for your questions. Have a great evening.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.