Earnings Call Transcript - CARG Q2 2023

Operator, Operator

Good day and welcome to the CarGurus' Second Quarter 2023 Earnings Conference Call. All lines participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Kirndeep Singh, Vice President and Head of Investor Relations. Please go ahead.

Kirndeep Singh, Vice President and Head of Investor Relations

Thank you, operator. Good afternoon. I'm delighted to welcome you to CarGurus' second quarter 2023 earnings call. With me on the call today are Jason Trevisan, Chief Executive Officer; and Sam Zales, President and Chief Operating Officer. During the call, we will be making forward-looking statements, which are based on our current expectations and beliefs. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those reflected in such statements. Information concerning those risks and uncertainties is discussed in our SEC filings, which can be found on the SEC's website and in the Investor Relations section of our website. We undertake no obligation to update or revise forward-looking statements, except as required by law. Further, during the course of our call today, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to comparable 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. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency as it relates to metrics used by our management in its financial and operational decision-making. With that, I'll now turn the call over to Jason.

Jason Trevisan, Chief Executive Officer

Thank you, Kirndeep, and thank you to all those joining us today. As many of you are aware, we delayed our originally planned earnings call in order to complete our normal quarterly close process for the quarter ended June 30th, 2023, and I apologize for the last-minute change. We appreciate your understanding and flexibility and are excited to discuss the results announced in our press release issued today. Now, let me turn to our results. We are extremely pleased with our second quarter results as we exceeded our forecasted consolidated adjusted EBITDA guidance for the quarter. The strength of our results came from growth in our Marketplace business, which was fueled by product adoption and enhanced monetization strategies targeting both new and existing dealers. Concurrently, we took measures to improve our Digital Wholesale operations to ensure the long-term viability of the advancements made in the first half of this year. We are pleased that our diligent efforts led to segment profitability and higher operating efficiency this quarter. Our progress this quarter underscores our ability to respond to dynamic conditions internally and externally, all while remaining steadfast in building an online platform that supports both consumer and dealer customers at every stage of the buying and selling journey. Underpinning our strong performance was our resilient Marketplace business, which met our forecast for the quarter. Our annual business review or ABR process continued to make significant progress in our subscription revenue base. The renewal process simplifies our offerings and enhances the value we deliver to our dealers through repackaging and bundling. We expect our ABR process will renew approximately 20% of the dealer base this year with a focus on renewing disproportionately underpriced dealers to be more in line with market rates. Since the commencement of our renewals, we have seen strong double-digit percentage price increases for underpriced dealers who have not seen renewals since pre-pandemic. As we continue to provide dealers with the highest ROI, we believe there is an opportunity to expand dealer wallet share through multiple levers, one of them being unit price increases through ABRs. We ended the quarter with 24,220 paying dealers in the US, down 1% from the year-ago period. Excluding attrition related to ABRs, we would have had net dealer adds for the quarter. As we previously mentioned, we are comfortable with the ABR-related attrition as the net result is positive monthly recurring revenue. Nevertheless, when analyzing ABR-related attrition from the first quarter, we won back approximately 40% of the involuntary churn cohort in the subsequent quarter and brought back those dealers at more appropriately priced listings rates and higher spend, which is the primary objective of our ABR process. In Q2, US Quarterly Average Revenue per Subscribing Dealer or QARSD was $6,110, growing 6% year-over-year. QARSD growth was driven by package upgrades, new product adoption, signing on new dealers at higher average monthly recurring revenue, and unit price increases through our ABRs. Through continuous investments and improvements in our product offerings, we generate greater value for both our dealer partners and our largest consumer audience. The strong growth in QARSD underscores our ability to monetize offerings and lead volume beyond just the ABR process to align with the value we provide. As a result of our history as a data-focused business, we are growing our investment in artificial intelligence or AI. As we strive to be the most trusted partner for our dealer and consumer customers, our ability to provide valuable data insights to customers stands out as a key differentiator. For instance, our fair share report empowers dealers to maximize their competitive share of local market leads. And the price analysis tool enables dealers to assess whether they are enduring price cuts or churn times that are more severe compared to their local market competitors. Our sales team leverages these insights to assist dealers in selecting the most effective products and packages aligned with their business objectives, helping them to gain a competitive advantage in their market. Moreover, the rapid advancements in consumer-facing AI have transformed the way consumers search and gather information. Recently, we introduced a pilot that allows shoppers to search for vehicles using conversational language, matching their preferences to relevant listings. And in June, we released a ChatGPT plug-in that generates vehicle description pages based on the shopper's specific criteria. The way consumers shop for vehicles continues to evolve. And at CarGurus, we are evolving to best meet their needs by offering new ways to shop. Our latest dealer product offering, Digital Deal, transforms the car shopping experience for consumers by leveraging advanced online capabilities to offer a seamless online to in-store purchase. This includes providing trade-in estimates, offering prequalification or hard pull financing options, facilitating the purchase of dealer- or vehicle-specific finance and insurance products, placing a deposit, and scheduling an appointment. Adoption has grown significantly with 2,900 dealers onboard, representing a 29% sequential increase. We are delivering dealers more value through Digital Deal with higher quality leads that are growing as a share of our total leads. In the past year, Digital Deal dealers have seen greater than 4,000 basis point increase in leads originating from high intent, ready-to-purchase shoppers that are up to five times more likely to close when compared to standard email leads, making the dealership more efficient in closing a deal and moving on to their next sales faster. Moreover, customers who schedule an appointment have up to a 50% increase in close rates compared to Digital Deal leads without appointments and this quarter, appointments increased 112% quarter-over-quarter. When coupled with delivery capabilities, Digital Deal with geographic expansion enables dealers to reach a wider audience outside the physical reach of their lots. This offering now has 100% coverage in the contiguous 48 states and has seen adoption increase 107% quarter-over-quarter. Notably, 64% of our Digital Deal listings have geographic expansion enabled, which has the added benefit of providing consumers with the greatest selection of deliverable inventory. These factors drive both more volume and higher lead quality for our partners. Dealers are not the only ones benefiting from these innovative offerings. With a vast selection of over 250,000 digitally enabled listings, we provide consumers with unparalleled inventory selection, competitive prices, convenience, and a sense of trust throughout their car shopping journey. Our focus on empowering customers to take control of their shopping experience has yielded impressive results as indicated by Net Promoter Scores that are up to two times higher for customers who use Digital Deal. As we think about the future of Digital Retail, our objective is to not only tailor the shopping journey for our consumer customers but to also level the playing field for our dealer partners, who may be unable to develop these solutions independently or who wish to take full advantage of the breadth of our consumer audience. By utilizing the CarGurus platform, dealers can efficiently sell additional inventory to a wider audience and ultimately grow dealership profits. Digital Retail makes attribution easier for dealers, which in turn allows us to demonstrate our superior ROI and further monetize the value we bring to our partners. This year, we have excelled in striking a balance between our commitment to innovation and our drive for operational improvements. As we expected, CarOffer achieved profitability and exceeded our forecast for the quarter. We are pleased with the team's ability to identify operational challenges in the latter part of last year and take action to implement processes, policies, and systems to promptly remediate these issues. We experienced a softening in the Wholesale market in the back half of the second quarter with declining prices and sales conversion rates, which presented us with an opportunity to thoroughly evaluate and pressure test the efficacy of our operational improvements. Despite an increase in volume during the quarter, we observed sustained or further improvements in our KPIs. Arbitration and rematch rates declined sequentially by 71%, which resulted in further improvements in downstream KPIs such as dead legs of transportation, which improved by 13%. Our transportation logistics have improved materially from the back half of last year with an average of approximately seven days to deliver a vehicle. Additionally, we have materially improved our titling process. And when compared to last year, we observed a 30% reduction in the time it takes to obtain and subsequently process a title. Improvements in our titling process stem from greater operational rigor and bolstering the titling team. A shorter titling turnaround time has also resulted in improved accounts receivables and inventory balance. Although we saw the Wholesale market soften in Q2, we did see greater transactions on the CarOffer platform. We ended the quarter with 20,793 transactions, up approximately 19% quarter-over-quarter. The increase in dealer-to-dealer volume despite a softening market was in part driven by rental fleet customers buying ahead of summer travel. We have had rental companies leverage our platform in the past to meet their fleet requirements. And we are closely monitoring their use of our platform to ensure we are maintaining a healthy buying and selling environment for our dealer partners and building a platform for the long-term. Instant Max Cash Offer, on the other hand, remained flat quarter-over-quarter as we continue to limit volume. The net overall increase in transactions resulted in gross merchandise sales or GMS of $575 million for the second quarter. Although we are proud of the progress we have made and remain confident in our ability to maintain a stronger business, there's still more work to be done. With our operations now functioning at a higher caliber, our attention turns towards garnering dealer trust and confidence to scale the business in a challenging macro environment. Over the past two quarters, we bolstered the CarOffer technology platform by incorporating new tool sets designed to enhance dealer confidence and boost conversion rates. While sight unseen matrix buying and selling has proven successful in a stable or positive wholesale environment, we are now enhancing our matrix tooling with additional features. These additions aim to provide dealers with the assurance and comfort they need to purchase a vehicle in a price declining market. To establish a sense of confidence in their matrix transactions, these tools act as a steppingstone, leveraging the matrix technology while introducing optionality. For example, 24-hour approval increases dealer confidence by allowing the buying dealer who has matrix rules for vehicles with 24-hour approval optionality to review vehicle details, history, and photos before making a purchasing decision. We have also enhanced our use of mobile app and click through, providing dealers access at their fingertips to efficiently browse and approve inventory. Through this matrix tooling and operational improvements, we are building a stronger, more reliable platform for our customers to drive dealer confidence and engagement. Across our business, we are pleased with our results and progress. We've made great strides this quarter toward our ultimate vision of an end-to-end transaction-enabled platform. We continue to innovate for our customers in all areas of our business. Our foundational listings business is leveraging unique data insights and AI to better empower our valued dealer partners and our largest consumer audience. In Digital Wholesale, we are enhancing our matrix technology with new tool sets to instill dealer confidence and engagement. And with Digital Retail, we are rapidly growing the adoption of Digital Deal, empowering dealers to cater to customers in a way that aligns with their business objectives and consumers to shop in a manner that best suits their needs and preferences. As we continue to invest in these opportunities, we aim to drive greater value for our customers and shareholders and to bring our vision to life. As we continue to build toward that exciting vision, we have remained prudent in managing our operating expenses with greater efficiency in our Marketplace business and operational improvements that have yielded a healthier Digital Wholesale business. Now, let me walk through our financial results. I'll provide a detailed overview of our second quarter performance followed by our guidance for the third quarter. Total second quarter revenue was $239.7 million, down 53% from the year-ago period. Our total revenue for the second quarter was at the high end of our guidance range. Marketplace revenue was $171 million for the second quarter, up 4% from $163.9 million in the prior year and up 2% from $167.1 million in the prior quarter. The increase in Marketplace revenue compared to the prior year was primarily due to signing on new dealers with higher average monthly recurring revenue and expansion through product upgrades and add-ons for existing dealers. Similar to the first quarter, subscription revenue growth was partly offset by headwinds to consumer financing and OEM advertising revenue. Wholesale revenue was $32 million for the second quarter of 2023, down 58% from $75.9 million in the prior year and up 27% from $25.2 million in the prior quarter. The year-over-year decrease in wholesale revenue is due to our continued prioritization of operational improvements on the platform coupled with less favorable market conditions. Quarter-over-quarter, however, we saw a slight increase in dealer-to-dealer transactions in part due to increased participation from rental fleets ahead of summer travel. Lastly, product revenue was $36.8 million for the second quarter, $0.8 million above our most recent guidance range. Product revenue was down 86% from $271.4 million in the prior year and down 7% from $39.7 million in the prior quarter. The year-over-year decline is due to our decision to limit transactions for Instant Max Cash Offer while we focus on operational improvements. Additionally, through our enhanced inspection capabilities and arbitration policies, we have seen a meaningful reduction in arbitration rates and subsequently arbitration revenue. Instant Max Cash Offer generated $35.8 million in revenue. Together, our wholesale and product revenue line items make up our CarOffer business, otherwise known as the Digital Wholesale segment. Total revenue for Digital Wholesale in the second quarter was $68.8 million, down 80% versus the prior year. I'll now discuss our expenses and profitability on a non-GAAP basis. Second quarter non-GAAP gross margin was 71% compared to 38% in the year-ago quarter. The change in non-GAAP gross margin year-over-year is primarily due to the shift in revenue mix to our high-margin Marketplace business. Total second quarter non-GAAP operating expenses were $128.5 million, down 5% year-over-year. Non-GAAP sales and marketing expense was down 18% year-over-year to $75 million. The decrease in marketing expense compared to the prior year reflects our decision to limit marketing investment for Instant Max Cash Offer. Non-GAAP sales and marketing expense represented 31% of revenue, up from 18% of revenue in the year-ago period. Our second quarter non-GAAP product, technology and development expenses grew 24% versus the year-ago period to $31.4 million. Similar to previous quarters, the increase is primarily due to an increase in salaries and employee-related costs as a result of a 10% increase in headcount from the year-ago period. We expect this expense to remain elevated as we continue to develop and grow our expanded product offerings to build our end-to-end transaction-enabled platform. Consolidated adjusted EBITDA of $45.2 million in the second quarter was $3.2 million above the high end of our most recent guidance range. This was due to prudent expense management, Digital Wholesale operational improvements, and increased participation from rental fleets. Non-GAAP diluted earnings per share attributable to common shareholders was $0.29 for the second quarter, $0.04 above the high end of our most recent guidance range. On a GAAP basis, we generated a second quarter gross margin of 68% compared to 37% in the year-ago period. In the second quarter, we incurred total operating expenses of $146.4 million, down 11% year-over-year. As I mentioned earlier, the decrease in operating expenses reflects a strategic decision to pause marketing for Instant Max Cash Offer in addition to a 40% year-over-year decrease in stock-based compensation expense due to the revaluation of certain liability-based stock awards. Second quarter GAAP operating income decreased 25% year-over-year to $17.7 million. Second quarter GAAP consolidated net income was $13.8 million. Net income attributable to CarGurus totaled $16.4 million, and second quarter GAAP net income attributable to common shareholders was $16.4 million. We ended the second quarter with $453.6 million in cash, cash equivalents, and short-term investments, a decrease of $3.1 million from the end of the first quarter. We generated $29.3 million in cash from operations in the second quarter and $23.5 million of non-GAAP free cash flow, which includes capitalized website development and capital expenditure costs of $5.8 million. Cash provided by operations in the second quarter was primarily driven by our results, partly offset by a $9.5 million cash decrease in our working capital accounts. During the second quarter, we repurchased 1.3 million shares for an aggregate purchase price of $22 million. As of June 30th, we had repurchased a total of $105.8 million in shares and had approximately $144.2 million remaining available for share repurchases. I'll close my prepared remarks with our outlook for the third quarter. We expect our third quarter revenue to be in the range of $201 million to $221 million. We expect to see improved year-over-year Marketplace revenue growth driven by continued strength in our listings business. In our Digital Wholesale segment, we expect lower revenue sequentially due to typical wholesale seasonality in the back half of the year, coupled with cautious buying as dealers face uncertainty following the fourth and fifth largest non-seasonally adjusted month-over-month price decline in June and July since 1997 and a seasonal pullback in rental fleet buying. We anticipate third quarter revenue for our Product line item to be in the range of $15 million to $25 million. As it relates to our operating expenses, we expect lease expense and marketing spend to be relatively flat sequentially. However, as we've previously mentioned, we remain prudent in our marketing spend for the full year and still expect it to be below 2022 spend primarily due to our reduction in Instant Max Cash Offer marketing. As a result, we expect Marketplace EBITDA to see growth sequentially. However, for Digital Wholesale, with record wholesale price drops and lower conversion rates, we expect CarOffer to be impacted despite our operational improvements. While our efficiency remains, we expect unprofitable EBITDA until market conditions and customer buying activity pick up. We expect our third quarter non-GAAP consolidated adjusted EBITDA to be in the range of $36 million to $44 million and non-GAAP earnings per share in the range of $0.24 to $0.27. In the second quarter, we exceeded our expectations. And in the second half of 2023, we plan to continue to make progress on our vision of being the only end-to-end automotive transaction-enabled platform, in service of both our dealer and consumer customers. None of our progress or results would have been possible without the hard work and unwavering dedication of our incredible employees, who have been instrumental in making our vision a reality. With that, I'll open up the call for Q&A.

Operator, Operator

We will now begin the question-and-answer session. Today's first question comes from Chris Pierce with Needham. Please go ahead.

Chris Pierce, Analyst

Good afternoon everyone. Could you provide more insight on ABR, particularly regarding your comment that 20% of dealers are up for review? I'm curious if this indicates that the remaining dealers will also be reviewed in 2024 or 2025, or if some dealers won’t be reviewed because they are already at scale pricing. Additionally, regarding QARSD growth, you mentioned several factors contributing to the growth. Could you provide a range for how much of the growth was driven by ABR modifications and the other factors you mentioned?

Sam Zales, President and Chief Operating Officer

Hey Chris, it's Sam Zales. Thank you for the question. We're very happy with the ABR performance. As we mentioned before, we targeted the dealers in the market that were significantly underpriced and prioritized them. This focus on the 20% of severely underpriced dealers has allowed us to achieve great success in renewals, with price increases reaching double-digit percentages. For those who think we aren't accepting the price renewals, as you've heard, we're bringing those customers back in the next quarter at a substantial rate. We're genuinely pleased with how ABR is performing. This doesn't imply that we aren't raising prices across the organization or selling more packages, which relates to your QARSD question. New customers are signing up at much higher prices than before, so we don't need to focus on repricing since the new customers are starting at increased price points. We're also engaging with customers throughout the year, with customers upgrading to new products, adding new packages, and expanding into additional stores. All of this is contributing to the focus on the 20% of more severely underpriced dealers, which has gone very well for us. It indicates that we can continue this strategy as we move into late 2023 and into 2024. All of this aims to elevate customers to higher price points while maintaining balance. Over time, we will add packaging and repricing as we progress and continue to deliver the ROI we're providing to those customers. I hope that answers your first question. The second part regarding QARSD relates to the various factors we've outlined. We're really pleased with the growth in QARSD for the business, as dealers upgrade to higher-level products, add features, and new dealers come in at higher price points, along with account renewals that yield a significant increase in monthly recurring revenue from those accounts being repriced. It's a mix of unit price increases, growing lead quantity, high ROI from our new products, and upgrades to packages. I can't say one aspect is outperforming another at the moment; they're all working together to enhance QARSD. I hope that addresses your question.

Jed Kelly, Analyst

Thanks for taking my question. Regarding pricing, it seems you are focusing on underpriced dealers and the easier opportunities, with plans to introduce packages next. Could you discuss the pricing environment in light of the current state of the auto market? We have seen lower approval rates and declining wholesale prices. Can you provide insights into the stability of pricing? Additionally, where do we stand with CarOffer in terms of getting comfortable enough to start playing offense with lower arbitration? It appears you have brought that business back to profitability, which is great, but when can we expect to see a return to growth mode? Thanks.

Jason Trevisan, Chief Executive Officer

Hey Jed, it's Jason here. Thanks for the question. Regarding the pricing environment, we have observed consistent macro-level data indicating that inventory is lower than in previous years. The seasonally adjusted annual rate and estimated volumes are also down compared to earlier years, and consumer demand has decreased as well. This situation often prompts dealers, especially the more experienced ones, to recognize the need for more aggressive marketing to sell the cars they currently have and maintain a reasonable number of days on the lot. You are correct that we are focusing on the most undervalued options with our adjusted bid requests. As Sam mentioned, we frequently collaborate with a substantial percentage of dealers each year to make amendments and improvements to the overall subscription. We have consistently proven to be a strong return on investment for dealers, and relative to others, we maintain a good ROI. When we combine this excellent ROI with strong volume and improving lead quality, which enhances our conversion rates to sales, we feel confident in pursuing various pricing strategies. Even though the market has changed, dealers still need to market effectively. They are astute and will gravitate towards the highest ROI opportunities. Sam, would you like to address the question about CarOffer?

Sam Zales, President and Chief Operating Officer

Sure. Thanks, Jason. Jed, thanks for the question. We are very pleased with the operational improvements at CarOffer. It was a collaborative effort with their strong leadership and our teams working together to revamp the business and refocus on key performance indicators and operational discipline. I mentioned it would take a couple of quarters, and we have successfully turned it into a profitable and well-run business. The current challenges, as you mentioned, relate to the state of the market and the macroeconomic environment. We observed significant price drops in the wholesale market, which haven't been seen since 1997, during June and July. There is typically a seasonal decline in buying activity. As for wholesale pricing, dealers are holding onto more inventory, and conversion rates at auctions have decreased significantly. Additionally, the fleets we've allowed to participate in a controlled manner are currently de-fleeting; they've moved past the summer season and are not actively buying. On top of that, we unfortunately lost some dealer confidence in the platform over the past three quarters until we made changes to our inspection process, arbitration, sale rates, and rematches. Our transportation logistics have improved dramatically, and we've significantly reduced the time it takes to get titles to dealers. We are now working on rebuilding that trust with our customers, and additionally, we're developing new tools aimed at enhancing confidence in our instant trade platform. This platform functions well in a rising price environment but is more cautious in a declining market for dealers. We are implementing features like a 24-hour look capability, allowing dealers to double-check before approving transactions; they can review vehicle photos, history, and condition reports. We're also introducing a buy now option for unsold inventory, which gives dealers a chance to purchase. Moreover, we're enhancing mobile tools to facilitate quicker and more effective transaction approvals for buyers and sellers. I want to emphasize that I'm excited about the operational improvements. We now need to navigate the macro environment to increase our volume going forward while rebuilding dealer confidence in this platform, effectively creating a new version of CarOffer to achieve our desired volumes and drive a growing and profitable business for the future.

Jed Kelly, Analyst

Thanks. And then you have the staff to get dealers trained up on all the new tools for CarOffer?

Sam Zales, President and Chief Operating Officer

We are indeed focusing on utilizing technology and AI to enhance the capabilities of dealers. This includes using mobile tools to assist in connecting buyers and sellers on the lot, especially when they encounter higher bids than anticipated for their vehicles. Our approach has shifted from simply acquiring new customers to helping existing ones use our platform more effectively. We are concentrating on ensuring that these customers achieve greater success with our tools before we actively seek out new clients. This process involves rebuilding confidence in the platform, refining our operating practices, and ensuring we can run profitably as we move forward.

Brad Erickson, Analyst

Yes. Thanks. I have two. First, Sam, you were just talking about the enhanced features with CarOffer. I guess a couple there. How quickly do you expect some of those enhancements to matter and drive noticeable volume? And would you ever, I guess, look to go a step further and offering more like the traditional time to auctions just as another way to gain share with those dealers? Is that sort of on anyone's mental whiteboard anywhere? That's the first one. And then the second one, probably for Jason, on the EBITDA outlook commentary. You mentioned Marketplace EBITDA sounds like up sequentially from here, but CarOffer maybe still being a headwind negative until the market turns around. Is the implication there that kind of quarter-to-quarter, it's a little hard to necessarily count on overall EBITDA being up? Is that how we should take the outlook there kind of on a net basis? Thanks.

Sam Zales, President and Chief Operating Officer

Thank you, Brad. We're seeing positive results with the new tools that enhance the instant trade form. This capability is enabled by the matrix, which is essential for the 24-hour and buy-it-now functions. These tools complement the complex features we've developed over the years to assist dealers, and they are contributing to increased transaction volume, which we likely wouldn’t have experienced in a market with declining prices. These features are beneficial for our dealers in facilitating transactions. Considering the time to auctions, we believe there's a different approach with instant trade. It doesn’t necessitate that buyers and sellers are physically present or monitoring a screen during an auction. For instance, sending a mobile message to alert someone that their price point is better than expected can be very effective, fitting seamlessly into busy schedules of our dealer executives. We are focused on enhancing the instant trade platform with features that support decision-making around purchases, especially in a market experiencing significant price drops and customers holding onto vehicles. It's likely to be a gradual process as we move through the third quarter, but I'm optimistic that these tools will foster confidence, ensuring we're prepared to better serve our customers when the market improves.

Jason Trevisan, Chief Executive Officer

Yes, I can speak on EBITDA. Brad, you're thinking about it correctly. We've indicated that Marketplace EBITDA is strong sequentially due to growth in Marketplace. We've also discussed some of the OpEx trends in Marketplace. CarOffer is currently at the low end of guidance, slightly more than offsetting that. At the high end of guidance, it's relatively flat. Predicting CarOffer is challenging for the reasons we've mentioned previously. However, you've heard Sam's comments about the more significant opportunity in Marketplace EBITDA, where the trends are positive.

Naved Khan, Analyst

Hi thanks a lot. A couple of questions. Maybe just on the CarOffer side of the business. Car rental companies came back. Just curious what your thoughts are about their continued participation? I know there's seasonality, and they try to obviously get the vehicles before the peak season starts for them. But do you expect them to continue to come back in future periods? Or are they just reacting to small allocations from OEMs and therefore, they may not need CarOffer as much in future years? So that's one. And then secondarily, maybe just talk about the macro and maybe your thoughts on when the price declines may started to normalize? Do you think that might happen in 2024 or any thoughts there would be helpful?

Sam Zales, President and Chief Operating Officer

Naved, I'll address the first question. It's a valid inquiry regarding the rental fleets. We have always seen the instant trade platform as a valuable resource for larger buyers who know exactly what they want and the volume they require. Our tools have been very effective for the higher-end vehicles that rental fleets are seeking to supplement their new car inventory. I believe this could signify a longer-term trend in the market, with fleets increasingly indicating a need for these higher-quality vehicles, and our inspection process is enabling them to acquire more of those. Currently, we're managing their involvement on our platform from a buying standpoint. The current market message for the third quarter indicates that they are either reducing fleet sizes or halting some buying activities. I don't predict any changes in the near future, as this follows their travel season, which means they won't need to stock up aggressively. However, feedback from our partners suggests that our tools are working exceptionally well for them. They will return when their cycles shift. They are already considering our platform, not just for purchasing but also as a potential selling avenue. Moving forward, we will engage with them in a measured manner, but for now, it appears they have raised their inventory levels and will remain cautious regarding new purchases for a while. Jason, would you like to address the macro question?

Jason Trevisan, Chief Executive Officer

Sure. On the macro front, we mentioned last quarter that we expect used car prices to end the year slightly lower than they are currently. We still believe that this forecast remains directionally accurate, although it's challenging to predict. I want to highlight two important aspects. First, it's not just about whether there's a steady increase or decrease in prices; it's the volatility that really matters. This is why we referred to the significant price declines in June and July. Volatility is crucial because dealers can adjust their expectations for price changes if they are predictable. Surprises make them understandably cautious. If we move towards a more stabilized environment, whether that means a slight increase or decrease, it would be a much better situation compared to a lot of volatility. The second point I want to emphasize is that our team has significantly enhanced the platform, making it more effective for buying in various market conditions and building confidence across different scenarios. They hope this will also apply even in fluctuating environments. At the very least, it has improved its ability to instill confidence during price declines.

John Colantuoni, Analyst

Great. Thanks for taking my questions. I wanted to start with the sequential decrease in Instant Max Cash. Should we take that as any indication that you're less sort of focused on growing that offering in the long-term versus some near-term macro impacts like softening in the wholesale market? And second, with the significantly higher lead conversion in Digital Deal, it seems like there's a huge opportunity to increase QARSD over time. Talk about your expectations for expanding that offering across the dealership network in the coming years and if there's any barriers to integrating that product into dealership's workflows?

Jason Trevisan, Chief Executive Officer

Sure. Thanks, John. I'll address the second question first. Sam, please share your insights on Max after I'm done. We agree with you, John, that Digital Deal is helping users progress through the funnel in a seamless manner, which is adding significant value for dealers. Dealers are recognizing this and are prioritizing these leads over others because they understand these leads are of higher quality. We've also mentioned that Digital Deal does not negatively impact conversion rates, resulting in a win-win situation. Consumers appreciate it, and dealers adopting it are not seeing a decrease in their lead volume. In fact, a growing percentage of their leads are converting at higher rates and are of better quality. I believe there's a mindset among this customer segment where they might not fully consider the complete ROI and instead focus on their expected cost per lead. Since these leads can convert up to five times better, we need to help illustrate the added value. Even though they might receive similar leads as before Digital Deal, they are clearly selling significantly more cars now, and they recognize this benefit as well. This represents an educational opportunity since this solution is novel in the market. There isn’t much resistance to incorporating it into their workflow; onboarding to Digital Deal is quite straightforward. While a few features like hard pull require some additional effort, dealers are already witnessing the positive results. Once implemented, they receive some training from us to ensure their sales teams capitalize on the benefits. Everything integrates into their CRM easily, but it’s important they maximize its use. This isn’t a change in workflow; it’s about ensuring complete awareness and education. We’ve observed this, especially with larger dealer groups where some locations see results quickly, leading to higher car sales, which, in turn, helps educate and train other locations. We agree with your assessment of the significant opportunity to enhance what flows through our site to the dealers, making it substantially more valuable than it was previously.

Sam Zales, President and Chief Operating Officer

I'll take it, Jason, on the IMCO. John, thanks for asking the question. We remain very bullish on IMCO for the long-term. We think we bring a unique capability to the marketplace, something totally differentiated. And with our 40 million visitors, we're finding something that is truly market leading for them as evidenced by our NPS scores in the 90s. We're just thrilled with what we're doing on that one. However, you asked the perfect question, which is the macro environment leads to a lot of things happening. Number one, prices drop overall. So our AOS for that business drops when you think about the average selling price, if you will, of the vehicle. Competitive bids in the market because macro environment is going down, make it very harder to win because you're competing on very small margins on that front. We've been through the situation of price declines, not quite what's happened in June and July, as we said, fourth largest price declines since 1997. That can lead to more arbitrations. We don't want to go back to that market where we were six, nine months ago. And consumers are hanging on to their vehicles more. They're just saying, my equity in that vehicle is such that I probably have to hang on. The market is not rewarding me as it was in first half of 2022 when the prices were as high as they've ever been in wholesale. So, with them hanging on, we're saying marketing low, keep it low. Let's run a breakeven business. Let's keep it running well. We couldn't be more excited, though, to build some new capabilities there to fire it up as the market gets better as we hopefully come out of third quarter and look to bigger growth going forward. Thanks for the question.

Marvin Fong, Analyst

Good evening. Thank you for my questions. I have two. First, can you discuss how the process of signing up new dealers for Digital Wholesale has been going? Have you also paused this in the last few quarters while improving operations? When do you plan to become more active in signing up dealers, and how is that progressing? The second question is about the ABR. You mentioned a target of 20% for this year. Can you clarify if we are at around 10% so far this year since we are at the midpoint? Are the remaining 20% this year as far from market pricing as the ones you've already dealt with? I want to understand if the ABR tailwind will be as significant as we've experienced so far this year. Thank you.

Sam Zales, President and Chief Operating Officer

Thanks Marvin. I'll take the first one related to the CarOffer business. We did pause going out to the market. I think I mentioned that we converted a sales team into a focused on account management. We just had to rebuild, and we still have more work to do to rebuild operational procedures and customer confidence. So, it wouldn't really make sense when the operations weren't maximized and working as efficiently or running profitable business as we got to. It wouldn't make sense to go bring on a lot of new customers when we're in the middle of retooling the operations of the business. So, we did convert those folks and have taken on new business only really more on an inbound process. So, there are large national accounts who buy a lot, and an instant trade platform is perfect for them. And they've sparked interest and said, hey, I heard you got CarOffer 2.0. The operations are working really, really well. Come in and join up again and build a matrix. There's a set of dealers where we're approaching who stopped buying for a period of time or former buyers, and we're bringing them back on with all of the new highlights of the inspections improving so dramatically, our arbitration rates down tremendously, our transportation quicker, our title transfer time moving so quickly. So, we are re-winning business, but we're not out pitching and enrolling customers who've never been on the platform before. That will happen once we get through this period of saying macro environment improves, and we're fully there on the operational improvements to say, let's go out and start pitching CarOffer 2.0. We're not there yet. We're not guiding to that in the third quarter right now. Jason, you want to talk about ABRs, and I can follow on if there's anything?

Jason Trevisan, Chief Executive Officer

Sure. We mentioned that we're aiming for about 20% in ABRs for the year. At this halfway point, it's reasonable to say we're at 10%, although we've only been working on this for a couple of quarters. We're still ramping up as we gain more experience and train additional team members. It's also important to note that we're beginning with the most underpriced dealers. However, the key takeaway, which we've emphasized several times tonight, is that ABR is just one aspect. It represents a dealer that is underpriced and may not be engaging in several other activities we offer. These include options like package upgrades, new product purchases, increased lead volumes, or expanding store presence. All of these factors typically lead to higher subscription spending, although not necessarily through the straightforward ABR of re-pricing an underpriced dealer. The percentage of dealers participating in these activities alongside the ABRs is, expectedly, much higher.

Ron Josey, Analyst

Great. Thanks for taking the question guys. Appreciate it. Jason, I wanted to stick with the ABR commentary and Sam, on the ABR commentary. I think I heard on the call, you mentioned a 40% win back rate post 1Q ABRs. Talk to us about what led these dealers to come back to the platform. Are these the leads that they're missing, the traffic? Any insights there would be helpful. And those that came back, are they buying more products like Digital Deal or trialing it at least as you look to increase overall usage? Or are they just primarily saying, okay, fine, we're going to pay higher prices. And just on the ABR sort of like upsell, when you enter the ABR process, I'm curious what percentage of the ABR is often just greater adoption of the products that CarGurus is offering? Thanks guys.

Jason Trevisan, Chief Executive Officer

Hey Ron, it's Jason. What's bringing them back is that they are realizing that we offered them a great lead volume which helped them sell many more cars. We provided this at very favorable prices before, and even our new proposed prices still present a strong return on investment for them. While they may not be happy about paying more, they understand it's money well spent, so they have returned. We've shared studies with you and our dealers showing that if a dealer leaves our platform, they lose a significant amount of volume, more than they would if they left another platform. This is a reality; in a way, they're conducting their own A/B test to see what happens if they aren't on CarGurus. Forty percent of them are realizing that, despite not liking the proposed price, it remains a worthwhile expense for them. Yes, when they come back, they are paying the higher prices we suggested, and that's not a negotiating tactic from either side. They return at the prices we proposed, sometimes with additional products or possibly a different package level. Typically, these are dealers who were paying very low prices before, and the increase in their subscription rates has become acceptable to them. So, they are not inclined to add additional spending immediately. You also asked about when they come back, what was the second point?

Nick Jones, Analyst

Thank you for answering my question. To follow up on the ABRs and discuss them further, it seems you're still providing a strong return on investments. Should we interpret that as a sign that there may be room to increase prices in future years compared to the competition and the returns you are achieving? How should we consider the ABR process in the coming years in relation to your current adjustments? Thank you.

Jason Trevisan, Chief Executive Officer

We still believe, and the evidence strongly supports, that we offer the best return on investment, indicating our pricing is favorable. We're enhancing our quality through initiatives like Digital Deal, and we believe our prices remain competitive. These factors suggest there is significant potential for growth. We have initiated earlier ABRs with the dealers who are currently underpriced. If we succeed and take an aggressive approach from a volume standpoint, the unit price push of the ABR may lose momentum over time. However, we are dedicated to continually adding value to our product at each package tier. We've discussed some aspects of this in our script, particularly how we are packaging data and providing insights to dealers. There are numerous examples of how we are consistently adding value beyond just leads. Customers often consider their spending in terms of cost per lead, but in reality, we deliver various forms of value, leading to an overall ROI that encompasses much more than just a cost per lead.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Jason Trevisan, CEO for any closing remarks.

Jason Trevisan, Chief Executive Officer

Thank you. So, I'd just like to thank everyone for your time today and your thoughtful questions on the call and your interest and support in our company. And of course, I want to reiterate our thanks to all of our CarGurus employees and CarOffer employees. I know it's been a great quarter, a lot of hard work and we're very grateful for that. So, thanks everyone.

Operator, Operator

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.