Earnings Call Transcript - CARG Q1 2023

Operator, Operator

Greetings, and welcome to CarGurus Q1 2023 Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kirndeep Singh, Vice President, Head of Investment. Thank you, Kirndeep. You may begin.

Kirndeep Singh, Vice President, Head of Investment

Thank you, operator. Good afternoon. I'm delighted to welcome you to CarGurus First Quarter 2023 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; and Sam Zales, President and Chief Operating Officer. During the call, we will make statements regarding our business that may be considered forward-looking within applicable securities laws, including statements concerning our outlook for the second quarter of 2023, management's expectations for future financial and operational performance; our business and growth strategies; our expectations for our CarOffer business and acquisition synergies and 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 to risks and uncertainties, which could cause them to differ materially from actual results. Information concerning those risks and uncertainties is available in our earnings press release distributed after the market closed today and in our most recent reports 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 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 also be found on the Investor Relations section of our website. With that, I will now turn it over to Jason.

Jason Trevisan, CEO

Thank you, Kirndeep, and thanks to everyone joining us today. Every year, I begin with a theme that aligns with our strategic objectives, and 2023 is no exception. In 2021, we focused on the transformation of our business. In 2022, we activated substantial new products across the platform. And now in 2023, our North Star is monetization through transaction enablement. During our evolution from a listings business to a transaction-enabled platform, we remained acutely focused on providing our dealer partners with the highest ROI, a comprehensive product suite, and continued innovation to meet their evolving needs. As we build on the previous year's themes by maturing our end-to-end offering that better serves our largest consumer audience and dealer partners, we are now beginning to concentrate our efforts on monetizable transaction activities for both dealers and consumers across the platform. Transaction enablement allows dealers to further monetize retail sales. Our Instant Max Cash Offer allows consumers to monetize the transaction through the direct sale of their own vehicle. And at CarGurus, we are able to monetize high-value Digital Deal leads. Through innovation in our growth vectors of Digital Wholesale and Digital Retail and more robust transaction enablement, we aim to provide increased value to our customers while striving to achieve a balance between capturing that value and driving greater adoption. We have made tremendous progress in becoming the number 1 digital destination for consumers and dealers to confidently and conveniently buy and sell any vehicle, anywhere with the best selection in price. Although the macro environment continues to create volatility in inventory and pricing trends, our foundational listings business continues to exhibit resiliency and strong profitability. While we recently faced operational challenges with our CarOffer business, progress this quarter demonstrates our agility in responding promptly and effectively to navigate the year ahead. We are proud that our strong execution allowed us to exceed our forecasted guidance for the quarter while maintaining a balance among pursuing innovation, fueling growth, and ensuring scalable profitability. We entered the quarter with expectations that OEM advertising and consumer financing would serve as headwinds and offset our subscription revenue growth. While that was certainly true, during the first quarter, we also witnessed reduced dealer inventory levels due to economic projections indicating a potential deceleration or recession. These factors resulted in a further tightening of inventory and marketing dollars as dealers look to preserve healthy profit margins. Despite these compounding factors, I'm pleased to share we exceeded our forecasted Marketplace revenue for the quarter. One key driver of our Marketplace results this quarter was the scaling and overperformance of monthly recurring revenue, resulting from annual business reviews or ABRs. Through the ABR process, we are renewing a cohort of meaningfully underpriced dealers each quarter, and we have made significant improvements to our renewal process by streamlining our packaging and enhancing the value proposition for our dealers through the addition of new features and benefits to our listings tiers that best support our dealers' needs. Even during a period of historically low inventory, our improved ABR process demonstrated the strength of our platform to effectively scale and recognize more appropriate value delivered while simultaneously enabling us to be more consultative in introducing cross-product adoption opportunities that best support our customers' business needs. In fact, in Q1, the ABR process was 2.5 times more successful in converting Area Boost dealers into a new offering known as Digital Deal with geographic expansion. I'll provide further details about this new offering later in my remarks. While ABR has yielded positive revenue expansion as expected, they elevated involuntary dealer attrition as we held firmer on what we're confident is highly attractive pricing and dealer ROI. We ended the quarter with 24,394 paying dealers in the U.S., up 175 dealers from the year-ago period, but down 173 dealers from the prior quarter. Excluding ABR-related churn, we had positive dealer adds quarter-over-quarter. Although we observed healthy dealer acquisitions earlier in the quarter, we noticed a rise in voluntary cancellations across all dealer types, we believe, primarily due to the aforementioned lower inventory levels and margin preservation during a period of economic uncertainty. Despite the quarter-over-quarter decline, we're pleased with the results of the ABR process and remain confident that we are delivering to our dealers a compelling value proposition. In Q1, U.S. quarterly average revenue per subscribing dealer or QARSD was $5,943, growing 4% year-over-year. Performance was primarily due to revenue expansion through listings, upgrades, and product adoption, signing on new dealers with higher average monthly recurring revenue and unit price increases. By consistently investing in and enhancing our product offerings, we are capable of innovating quicker and more frequently than any other marketplace, which in turn brings more value to both our dealer partners and largest consumer audience while driving long-term QARSD growth. As part of our continued product development, we launched Digital Deal in May of 2022, a critical step in our ability to create an end-to-end platform. Digital Deal provides consumers with the flexibility to customize their car shopping experience by allowing them to do more online. Shoppers can receive trade-in estimates, pre-qualification or hard-pull financing, purchase dealer- or vehicle-specific finance, and insurance products and even place a deposit on their preferred vehicle. This offering provides our customers with the flexibility to transact in a way that best suits their needs. At the end of the first quarter, this new capability has been adopted by 2,251 dealers, adding 663 dealers quarter-over-quarter. Although there were price increases at the beginning of the year, we were able to boost our sales velocity, which also included the addition of large national players with 100 to 200 rooftops. Digital Deal continues to gain dealer share as it attracts high-value leads from highly engaged consumers who are ready to purchase, saving dealers time and money. Digital Deal leads are over 2 to 3 times more likely to close than standard CarGurus' email leads. Moreover, consumers who go farther down the funnel and complete a hard pull are 5 times more likely to close. Our most successful dealers utilizing Digital Deal are now seeing an average of 25% of their CarGurus online leads come from Digital Deal. For dealers, this adds tremendous value as the ROI is significant when 25% of their shoppers are high-value leads, making the dealership more efficient in closing a deal and moving on to their next sale faster. A representative at Belk Ford and Oxford Toyota said, 'Digital Deal leads that have prequalified financing are almost guaranteed to convert. They're another indicator they are high quality and are easier to reach with a guaranteed phone number.' Our Digital Retail capabilities do not stop there. Coupled with Area Boost, dealers now have the ability to sell vehicles online to consumers outside of their immediate geographic reach. We have seen healthy cross-product Digital Retail adoption with 57% of Digital Deal users also enrolling in Area Boost. Area Boost helps dealers expand their reach by displaying their deliverable listings to shoppers outside their local market. Capitalizing on the synergies between these two offerings, we recently launched a newly bundled offering called Digital Deal with geographic expansion. It allows dealers to leverage a high-quality lead flow while attracting a wider audience outside the physical reach of a dealership. This new offering has increased close rates by 2 times when compared to standard Area Boost leads. Because of the exponentially higher value these two products provide in tandem instead of separately, Area Boost will now be an exclusive feature through Digital Deal with geographic expansion. Together, they provide a dealer with both more volume and higher lead quality. Our early-stage Digital Retail capabilities provide flexibility and convenience for both our dealers and consumer customers. We are leveling the playing field for our dealer partners who are unable to provide these solutions on their own and/or want to leverage our largest consumer audience to sell additional inventory through the CarGurus platform to drive greater profitability. As we progress towards our ultimate goal of creating an end-to-end solution, the power of this vision becomes even more clear, giving our dealer partners a cohesive experience that provides them value, whether it is through an expanded customer base data-driven decision-making and/or high-value lead generation. And at the same time, these capabilities provide us an opportunity to not only create a stickier platform, but the ability to capture greater market share and dealer wallet share. In our Digital Wholesale segment, we entered Q1 with a plan to intentionally reduce volumes sequentially, while we optimize several operational aspects of the business to better handle the market and pricing volatility. Over the last five months, we have aggressively addressed these issues to build a stronger, more stable, and more predictable business that can thrive in all market conditions. In doing so, we remain committed to building a sustainable business that produces a path to profitability. As we developed our strategy to improve CarOffer operations, it became apparent that a significant number of our challenges were rooted in our need to enhance and upgrade our inspection capabilities and our corresponding policies and procedures. Increased arbitrations, rematches, and transportation inefficiencies were largely the result of our inspection quality. For this reason, we intensified our efforts to bolster inspections, processes, and policies to improve our quality and reduce non-revenue-generating costs. These efforts have resulted in a 70% reduction in arbitration cases from their peak in the fourth quarter. During the same period, we also witnessed a 55% decrease in rematch rates. A rematch is the active movement and arbitrated vehicle to the next highest bidder on the platform, potentially causing higher transportation losses and risk of further delayed arbitration from unsatisfactory vehicle quality. By prioritizing positive unit economic transactions and minimizing problematic ones, we also achieved positive transportation margins in the first quarter as well, improving approximately 3,500 basis points quarter-over-quarter. As a reminder, transportation margin is largely passed through. These improved margins stem from a combination of a favorable price environment for dealers as well as a drop in arbitrations, unwinds, and rematch rates, which have reduced the occurrence of dead legs instances where we incur the cost of transportation but receive no revenue. Our efforts resulted in an approximately 55% reduction quarter-over-quarter of dead legs. As our KPIs continue to trend in the right direction, we are creating a sustainable path to profitability. This quarter, we meaningfully exceeded our forecasted revenue and EBITDA plans for our Digital Wholesale segment. We generated $64.8 million in revenue and had an EBITDA loss of $1.7 million. Our performance this quarter was driven by operational improvements and higher-than-forecasted dealer-to-dealer transaction volume as buying conditions improved in February and March. While tight dealer inventory and declining wholesale and retail prices to begin the year helped us keep volumes low, we did see greater dealer confidence in the back half of the quarter with seasonally strong consumer demand and rising wholesale prices following a seven-month decline. These factors, along with modest re-engagement from some rental fleet customers, albeit at controlled volumes, caused dealer-to-dealer transactions to rise quarter-over-quarter, while we deliberately reduced Instant Max Cash Offer, or Instant Max for short, transactions by over 50% from the prior quarter. We ended the quarter with 17,505 transactions, down approximately 5% quarter-over-quarter. The overall reduction in volumes resulted in gross merchandise sales, or GMS, of $445 million. Although we are pleased with our results, we are aware that external factors have played a meaningful role. That is why our decision-making continues to prioritize establishing a profitable platform that can thrive in any environment. We are concentrating on operational improvements over volume growth to ensure our platform is dependable for dealers to conduct transactions with confidence. In doing so, earlier in Q1, we launched a new option for dealers called 24-hour approval. This capability allows dealers to review vehicle details, photos, and vehicle history before making a purchasing decision, which provides dealers additional comfort in a volatile price environment. In the first quarter, 24-hour approval facilitated a significant number of transactions while simultaneously improving dealer confidence and satisfaction. Moreover, as we continue to improve our operations, we remain committed to ensuring that all transactions are executed with the highest level of quality. This focus on quality and improvement is showing signs of positive traction with our customers as we have seen dealers re-engage with our platform. By implementing operational enhancements and taking a meticulous approach, we are establishing a stronger foundation for our CarOffer business as a trusted platform for dealers' buying and selling needs. Across the business, we are very pleased with our first quarter results. We made significant strides on the path towards realizing our vision of creating a profitable end-to-end transaction-enabled platform that provides consumers with the trust, transparency, and choice they need to confidently shop, finance, buy, and sell a vehicle, and empower dealers with innovative tools to source, market, and sell vehicles. The unique combination of our resilient foundational listings business, differentiated Digital Wholesale business, and innovative Digital Retail offerings create a unique value proposition as an automotive ecosystem that serves our customers' lifecycle needs. The year began on a positive note. Our achievements this quarter showcased our resilience in overcoming both internal and external challenges to create a more robust and profitable foundation for the future. We are excited about the opportunities that lie ahead in 2023, and we are focused on creating a unique value proposition for our consumer and dealer customers and delivering long-term value for our shareholders. Now let me walk through our financial results. I'll provide a detailed overview of our first-quarter performance, followed by our guidance for the second quarter. Total first-quarter revenue was $232 million, $17 million above the high end of our most recent guidance range. Total revenue was down 46% from the year-ago period. Marketplace revenue was $167.1 million for the first quarter, up 2% from $163.3 million in the prior year and up 1% from $166.2 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 on our high-margin listings business. As anticipated, growth in subscription revenue was largely offset by a decline in advertising and consumer finance revenues. Wholesale revenue was $25.2 million for the first quarter, down 72% from $91 million in the prior year, but up 6% from $23.7 million in the prior quarter. The year-over-year decline in wholesale revenue is due to the self-imposed slowdown to ensure that the right processes and policies are in place to enable scalable and predictable growth. Quarter-over-quarter, however, we saw a slight increase in dealer-to-dealer transactions due to seasonally strong consumer demand, rising wholesale prices, and modest rental fleet participation. Lastly, Product revenue was $39.7 million for the first quarter, $8.7 million above the high end of our most recent guidance range. Product revenue was down 78% from $176.3 million in the prior year and down 59% from $96.8 million in the prior quarter. The year-over-year and quarter-over-quarter declines are due to our purposeful slowdown in transaction volumes this quarter for Instant Max Cash Offer with a greater emphasis on operational rigor. Through higher quality inspections, we saw a meaningful reduction in arbitration rates and, consequently, arbitration revenue during the first quarter as well. 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 first quarter was $64.8 million, down 76% from the prior year and down 46% from the prior quarter. 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 and net income or loss attributable to redeemable noncontrolling interest. First-quarter non-GAAP gross margin was 69%, compared to 44% 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 first-quarter non-GAAP operating expenses were $123.8 million, down 1% year-over-year. Non-GAAP sales and marketing expense was down 13% year-over-year to $72.5 million. The decrease in marketing expense reflects our decision to limit marketing investment for Instant Max Cash Offer, partly offset by a slight increase in spend related to the launch of our new brand campaign at the beginning of the year. Our first-quarter non-GAAP product, technology, and development expenses grew 25% versus the year-ago period to $30.3 million. Similar to previous quarters, the increase is primarily due to an increase in employee-related costs as a result of a 6% increase in headcount from the year-ago period coupled with the commencement of our lease in February for our new corporate headquarters in Boston. We expect product, technology, and development expenses to remain at these levels as we continue to develop and grow our expanded Digital Retail product offerings to build our end-to-end transaction-enabled platform. We generated non-GAAP operating income of $36.6 million in the first quarter, reflecting an operating margin of 16%. Consolidated adjusted EBITDA was $40.8 million in the first quarter, $13.8 million above the high end of our most recent guidance range. This was due to continued strong Marketplace subscription performance, prudent and effective expense management, favorable wholesale market dynamics, and improved CarOffer operations. Non-GAAP diluted earnings per share attributable to common shareholders was $0.26 for the first quarter, $0.07 above the high end of our most recent guidance range. On a GAAP basis, we generated first-quarter gross margin of 67%, compared to 42% in the year-ago period. The expansion in gross margin versus the prior year period is due to the shift in revenue mix to the higher-margin Marketplace business. In the first quarter, we incurred total operating expenses of $140.9 million, down 9% year-over-year. As I mentioned earlier, the decrease in operating expenses reflects a strategic reduction in sales and marketing expense in addition to a 46% year-over-year decrease in stock-based compensation expense due to the revaluation of certain liability-based stock awards. First-quarter GAAP operating income decreased 47% year-over-year to $14.1 million. First-quarter GAAP consolidated net income was $11.9 million. Net income attributable to CarGurus totaled $16.1 million, and first-quarter GAAP net loss attributable to redeemable noncontrolling interests was negative $4.3 million. We ended the first quarter with $456.7 million in cash and cash equivalents, a decrease of $12.8 million from the end of the fourth quarter. We generated $66.3 million in cash from operations in the first quarter and $60.5 million of non-GAAP free cash flow, which includes capitalized website development and capital expenditure costs of $5.9 million. Cash provided by operations in the first quarter was primarily driven by our results and a $38 million cash increase in our working capital accounts. During the first quarter, we repurchased 4 million shares for an aggregate purchase price of $65.2 million. As of March 31, we had approximately $166.2 million available for additional share repurchases. I'll conclude with the outlook for the second quarter. We expect our second-quarter revenue to be in the range of $220 million to $240 million. We once again expect strong Marketplace subscription revenue to be offset by headwinds from consumer financing and OEM advertising. In our Digital Wholesale segment, we continue to prioritize operational excellence over volumes. In Q2, we are forecasting a softening in the wholesale market, along with a continued decline in arbitration revenue driven by improved operational performance. As a result, we expect second-quarter revenue for our Product line item to be in the range of $26 million to $36 million. We expect our second-quarter non-GAAP consolidated adjusted EBITDA to be in the range of $34 million to $42 million and non-GAAP earnings per share in the range of $0.22 to $0.25. As we continue to make operational improvements that are sustainable for our CarOffer business, we expect to reach EBITDA breakeven to profitable for our Digital Wholesale segment during the second quarter. Moreover, as it relates to our operating expenses, we expect Marketplace EBITDA to be lower quarter-over-quarter as we will have a full quarter of our lease expense and increased marketing spend related to our brand campaign. However, as we've previously mentioned, we remain prudent in our marketing spend for the full year and expect it to be modestly below 2022 spend due to our reduction in Instant Max Cash Offer marketing. In the first quarter, we significantly exceeded our expectations. We're proud of our results and our team's ability to react quickly to overcome challenges. Our achievements and advancements would not have been feasible if it weren't for our incredible employees globally, whose unwavering commitment and hard work have been instrumental in driving our progress in achieving our results. With that, I'll open up the call for Q&A.

Operator, Operator

Our first question comes from Marvin Fong with BTIG.

Marvin Fong, Analyst

I'd just like to start on CarOffer. I recognize a lot of progress was made there and I did hear about your commentary for the second quarter. But I guess, absent just sort of the end market conditions, I mean, how are you feeling, in general, about the progress you've made there and about your timing and willingness you have to really start leaning back into that business and putting some volume back through the channel, particularly on the Instant Max side.

Sam Zales, President and COO

It's great to talk to you, Marvin. I appreciate the question. To be straightforward, we are extremely pleased with the turnaround of the CarOffer business over the last few quarters. Our aim is to operate a profitable and predictable business that ensures a positive customer experience and more profitable transactions. The progress we've achieved has been remarkable. I want to acknowledge the CarOffer team in Dallas and the various business unit teams at CarGurus who have collaborated to enhance our people, processes, systems, and products, essentially evolving CarOffer into what we now refer to as CarOffer 2.0. This transformation began with data, giving us access to crucial information about our transaction process, which we used to identify and improve areas that needed attention. Our efforts began with inspections, where we focused on mechanical, electrical, and frame damage checks, significantly improving our ability to determine which transactions or vehicles should not proceed. This proactive approach has allowed us to fail more transactions upfront, reducing arbitration and enhancing trust among buyers and sellers on our platform. As a result, arbitration rates have dropped dramatically by 70%, which has, in turn, reduced our arbitration losses since we've effectively managed inventory and minimized depreciation. Our rematch rate, which helps find the next dealer in the platform for transactions, has also improved significantly due to the quality of inspections we've conducted. Additionally, transforming transportation from a negative gross margin business into a profitable one has been a significant achievement, all contributing to our path towards profitability. As I mentioned a couple of quarters ago, it will take some time, and we still have work ahead of us. This turnaround has built substantial confidence for our customers in the buying and selling process, but there's more to be done. We will not rush into scaling up volume until we thoroughly test our profitability path, as we strongly believe we can operate profitably at lower volumes, and that will be our focus before scaling up. You'll see us continue to push forward on volumes, but our priority remains on maintaining profitability, and we are proud of the results we've achieved so far. I hope that answers your question.

Marvin Fong, Analyst

It did. And kudos on all the progress you guys have made. If I could do a follow-up question. You've mentioned that the rental agencies have come back. I think you're controlling their participation. And actually, I think it's interesting to hear they came back since I've been hearing that the OEMs have been giving fleet a good allocation in terms of production volumes. So just curious how has your thinking evolved on the rental agencies being how much of a part of the mix they're going to be on sort of an ongoing basis? And as things stand now, are they being more rational in terms of bidding than they were, say, this time last year? Just kind of give us some additional color, that would be terrific.

Sam Zales, President and COO

Yes. Thanks, Marvin, it's Sam again. Our process is the same in being this predictable and profitable business that we want to create at CarOffer, which is to be thoughtful about any one partner taking on more of the Marketplace than any other. I think when you have an instant trade platform that works as well as it does with our technology, but you add to it the incredible improvement in inspections and the quality of the vehicles going through the platform, the players, like the rental agencies, will say, 'I am getting more distribution from the OEMs. But if I got to fulfill volume as the market continues to grow, and I have an opportunity in the summertime to fill up my rental fleets, I'm going to do that with the best partners out there.' So we controlled their activity coming in. They were watching their impact on the other players in the marketplace. And you saw our overall success of having more and more buyers and sellers succeeding on the platform because of our operational work. We're going to bring them in and bring them in at a tamped level where we control the volume and make sure that we are still in that marketplace that's creating that confidence build in all of our customers as we go forward. So we'll bring them in but watch and control how much we let them participate. And we hope that we're fulfilling that need as a secondary source beyond the OEMs and the new car distributions that they get. And they're saying, you've got quality vehicles that are late-model vehicles that I want to put on my rental fleets, then we're going to service those, but do it in a controlled way with this tremendous operational improvement that we've created.

Operator, Operator

Our next question comes from John Colantuoni with Jefferies.

John Colantuoni, Analyst

I wanted to start with pricing. It has increased nicely, although the number of U.S.-paying dealers has slightly decreased in the last two quarters. How much of that would you attribute to seasonality and the challenging macro environment versus your efforts to implement some pricing changes? And for the second question, it appears that in the second quarter, your outlook suggests moderately lower revenue in Product. Could you provide some additional insight on that?

Jason Trevisan, CEO

Thanks for the question, John. This is Jason Trevisan. We have been concentrating on ensuring that the value we provide to dealers is recognized. Our surveys and third-party research indicate that we are consistently delivering both high volume and excellent ROI. Our focus has been on package levels and cross-selling other products, not solely on pricing, although that remains an important factor. As mentioned in our prepared remarks, we have maintained steady prices during our annual business reviews, which has likely led to some increased churn. If we exclude what we term involuntary churn, we would actually have seen net additions of dealers. While we are not specifying an exact figure, we are intentionally deciding to be firm in capturing value, even if that results in short-term churn. Our priority is on monthly recurring revenue rather than just the dealer count. We believe that in the long run, dealers will start to recognize the ROI we provide and will return to us. Dealers are currently very focused on maintaining their margins, especially after experiencing significant dealer net income and operating margins during COVID. As they move past that high point, we are noticing that some dealers are cutting costs to sustain their margins. It remains to be seen whether that strategy is sustainable, but it did affect us a bit in Q1. Could you please repeat your second question?

John Colantuoni, Analyst

Yes. Just second one, just a quick one about Product revenue. In your outlook, it looks like you're looking for a sequential moderation in the second quarter. Just curious if you could add a little bit of color around why that's going to happen.

Jason Trevisan, CEO

Sure. We are forecasting that, which is influenced by our marketing spend and the anticipated levels of that spend. Our outlook is also impacted by market conditions and consumer sentiment regarding their willingness to buy. Additionally, there are fluctuations that occur within the quarter which are not uniform across each month of Q1 and Q2. Therefore, there are some minor variations to consider as well. Similar to Sam's comments, our focus remains on establishing a consistent and repeatable method to generate profitable transactions, while minimizing the occurrence of negative or poor transactions. We are pleased with the gross margin achieved in Q1 on C2D.

Operator, Operator

Our next question comes from Tom White with D.A. Davidson.

Tom White, Analyst

Following up on the last question, Jason, it seems like you might be expecting that used vehicle pricing or wholesale pricing could decline or become more volatile based on your guidance for the Product segment. Can you discuss how this recent volatility is affecting dealer interest in transactions for the second quarter? Additionally, it seems there is positive news regarding the ABRs. Could you clarify whether the revenue increase from these previously undermonetized cohorts is primarily due to higher unit pricing for listings, or if it also involves cross-sells or upsells?

Jason Trevisan, CEO

Sure, I'll address the first question and then Sam can discuss the ABR question. Dealer interest in transactions usually shifts with changes in wholesale unit pricing. Typically, when prices are falling, dealers are less likely to engage in transactions. While each seller has a corresponding buyer, we've noticed that transaction volumes in the industry, including on the CarOffer platform, tend to correlate closely with this trend. The reasoning is that when dealers observe a drop in prices over the past week or two, they anticipate further declines in the coming week. This makes them hesitant to acquire an asset that could depreciate before they have even prepared it for resale. Conversely, consumers using the Instant Max model are less focused on recent car price trends. Instead, they concentrate on the current dollar value being offered. If the dollar amounts are higher compared to their last check, they are more willing to make a deal. Thus, for consumers, the focus is more on current price levels rather than past trends. Transactions do not cease; rather, dealers view the situation differently. Over the last three to six months, we at CarOffer have worked to position the business for health and profitability even as prices have been steadily declining, except for a brief period in the first quarter, differing from the prior two years when prices were generally on the rise.

Sam Zales, President and COO

Jason, I'll jump in. Tom, your question was about the annual business reviews and their success. We are very proud of the results we are seeing in that area. As you know, we moved away from the old renewal process over the last couple of years. The timing wasn't ideal due to market conditions following COVID, and we aimed to be more consultative in this process to provide dealers with insights into their merchandising and performance. We believe we attract the largest audience and provide the highest return on investment for their marketing spend. Consequently, we've taken a more consultative approach in offering insights to help them maximize their packages. Regarding the growth you asked about, it manifests in two ways. First, we are moving dealers to higher-paying packages or encouraging them to subscribe to new products. The success of Digital Deal has been remarkable; it is our fastest-growing product. We deliver substantial ROI, with close rates two to five times higher than our regular email leads. This indicates that we have created a product that allows us to increase prices while packaging it for dealers to broaden their market reach. They are willing to invest more in these products. We are selling premium packages, and in some instances, we are targeting underpriced dealers. We recognize that some are paying significantly less than they should be, and their ROI does not reflect a fair balance with ours. We plan to increase prices for those dealers, even if they maintain the same package. We are very pleased with our progress in the annual business reviews and will continue to grow them moving forward.

Tom White, Analyst

That's great. Super quick follow-up. On the voluntary churn you highlighted, am I right to presume that, that's mostly, like, smaller independents and so it maybe impacts dealer count but less of an impact on MRR?

Sam Zales, President and COO

Voluntary churn has been consistent across the board. Given the current market conditions, inventory is down, and we are focused on margin preservation following the strong outcomes for the dealer community in 2022. We observed this trend universally. However, the change in our net dealer additions came from our strict approach towards dealer pricing; we are no longer accepting dealers who do not pay a fair and reasonable price for the program. This is where we felt the impact on net dealer additions. The voluntary churn remains low and has been stable across different segments of our business.

Operator, Operator

Our next question comes from Ronald Josey with Citi.

Ronald Josey, Analyst

Jason, I wanted to take in a question. I wanted to ask a little more about CarGurus' brand ad campaign now that you're seeing demand and newer tools drive greater overall results and just awareness. We're seeing the fact that traffic went up. Talk to us more about the brand campaign and the efficacy of it as we see the top line growing.

Jason Trevisan, CEO

Sure, thanks for the question, Ron. As a reminder, we really kicked things off at the beginning of Q1, so we are just a few months in. Our goal, as we've shared, is to highlight the increased capabilities and options available on our site for consumers to shop, finance, buy, and sell. We aim to grow our unaided and broader brand awareness while creating a stronger emotional connection compared to the more pragmatic approach we historically took to branding. We recognize that the spend from larger players in our category has decreased significantly over the past couple of years, which presents an opportunity for us to increase our share of voice. It’s still early in this process, and while we've started conducting research to understand the situation better, we're optimistic about the initial findings. However, it's too soon to see substantial changes in metrics like unaided or aided awareness. We believe this effort is crucial for building trust, especially as we encourage consumers to engage more deeply with our site, like making deposits or seeking financing. This foundation is vital to our strategy, and while we’re encouraged by the early indications, we know it remains early days. Regarding our spending expectations for the year, we've provided a lot of guidance on that, but advertising and branding are areas where we can be flexible based on performance. If our efforts are yielding positive results, we may choose to invest more aggressively; if not, we may opt for a more conservative approach. Thus, we aim to provide guidance while also staying adaptable as a company.

Operator, Operator

There are no further questions at this time. I would like to turn the floor back over to CEO, Jason Trevisan, for closing comments.

Jason Trevisan, CEO

I would just like to thank everyone on the call today. Thank you for your thoughtful questions. In particular, I want to thank all of our employees. We just finished talking about volatility and there's certainly a lot of activity around our industry and many industries, but we're really excited about our results from Q1, as you've heard in our remarks today, and we're excited about all the activity that we have going on in our business. In May, we will be at the Jefferies and JPMorgan conferences. And so we look forward to seeing investors at those events. Thank you very much.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.