Earnings Call Transcript
CarGurus, Inc. (CARG)
Earnings Call Transcript - CARG Q3 2025
Operator, Operator
Good day, and welcome to the CarGurus earnings call. Please note that 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' Third Quarter 2025 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 our 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 and other business metrics 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 thanks to everyone joining us today. In the third quarter, we delivered double-digit year-over-year Marketplace revenue growth while also expanding profitability across our U.S. and international businesses. Marketplace revenue and Marketplace EBITDA both finished above the midpoint of our guidance range, reflecting focused investment to drive sustainable top line growth and disciplined execution of our strategic priorities. Marketplace revenue grew approximately 14% year-over-year or $28 million, and Marketplace adjusted EBITDA was up 18% during the same period. Growth was driven by continued expansion in CarSID, led by dealer upgrades to higher tiers, broader adoption of our add-on products, like-for-like price increases, and higher lead quantity and quality. We also added 1,989 net new dealers globally year-over-year, supported by stronger retention. Our international operations contributed meaningfully with revenue up 27% year-over-year, driven by momentum in both Canada and the U.K. CarSID grew 15%, and we added 807 net new dealers year-over-year. At the foundation of these results is the strength of our market-leading two-sided Marketplace. Built on trust and transparency, CarGurus connects the largest audience of car shoppers with the broadest network of dealers, giving consumers confidence and dealer high-quality demand and intelligence, both of which bolster Marketplace liquidity through rising engagement and adoption. As our Marketplace continues to scale, it generates vast proprietary data and machine learning signals that fuel a uniquely advantaged analytics and intelligence platform for dealers. With this expanding data set and our accelerating AI capabilities, we turn data into intelligence, delivering predictive tools and insights that help dealers make faster, smarter decisions and achieve stronger outcomes. These dynamics reinforce two durable advantages: scale and data intelligence. Scale delivers reach and liquidity. With the broadest dealer network and deepest inventory, our marketplace offers car shoppers unmatched selection and transparency, attracting the largest consumer audience and in turn, more dealers. That flywheel has supported faster growth and share gains from our primary competitors. Data intelligence transforms that scale into smarter products. We believe our growing size generates the most comprehensive retail demand and pricing signals in the markets where we operate, which we productize into solutions that improve dealer profitability. For example, our retail demand analysis recommends vehicles aligned with local shopper interest. And when dealers follow those recommendations, we've proven their inventory turns faster. Our pricing models enable dealers to price with precision, improve margins and outperform competitors, while behavioral and intent data enriches leads to improve conversion and ROI. This creates a virtuous cycle in which scale drives richer data and intelligence derived from that data improves dealer performance and the consumer experience, which in turn, we believe drives ever-increasing adoption and engagement. Building on our position as the number one most visited automotive marketplace, we've continued to expand our platform with software and data products that help dealers make more intelligent decisions across four key workflows: inventory, marketing, conversion, and data. We've already introduced a variety of offerings in each of these four pillars. In inventory, products like Sell My Car, Acquisition Insights and Next Best Deal Rating help dealers source the right vehicles, merchandise, and price each inventory unit with precision. In marketing, solutions such as our core listings packages, Highlight, RPM, and New Car Exposure connect dealers with high-quality, ready-to-purchase shoppers efficiently and generate significant dealer awareness and walk-in traffic. In conversion, offerings like Lead AI, our in-person engagement team and Digital Deal help dealers convert leads into sales, driving better attribution and higher close rates. And in data, our dealer data insights suite delivers local market intelligence that powers smarter, more profitable decisions. Over the past few years, we have built a strong foundation and garnered dealer engagement across these pillars and are now advancing from add-in features in these areas to differentiated software and data products, each with a clear value proposition and measurable ROI. We believe these products will expand our addressable market from the current $3.5 billion spent by U.S. dealers on marketplaces by roughly an additional $4 billion U.S. dealers spend on software and data products in these segments. We believe that our growing product suite positions CarGurus as an intelligence-driven partner that helps dealers optimize every stage of their workflow beyond simply marketplaces. We plan to deepen monetization across these pillars through scalable software and data solutions, and we're excited to share that we've begun that this quarter with our newly launched PriceVantage, which I will cover shortly. Much like we've done for our dealer partners, we're expanding our offerings along the consumer journey, continuing to lead the market in trust and transparency while broadening our role more upstream with research and downstream to purchase. With the largest selection and a seamless online to offline experience, shoppers can research with confidence, connect with dealers and complete the transaction on our platform or at the dealership in the way that works best for them. We believe this expansion of our product suite on top of our market-leading marketplace will continue to reinforce our scale and data intelligence flywheels and result in us capturing more dealer wallet share and deepening consumer engagement to support long-term growth. With that context, I'll now walk through our progress across our three drivers of value creation. Driver number one, expanding our suite of data-driven solutions across dealers' workflows to help them drive more profitable businesses. Core to our mission of helping dealers make more profitable decisions, we recently launched PriceVantage, a major machine learning-based evolution of our pricing tool. It is the only used vehicle pricing solution powered by real-time consumer demand from the number one most visited car shopping Marketplace, giving dealers an edge to predict the market rather than just react to it, enabling smarter pricing, faster turns, and improved profitability. Built on the industry's largest data set of shopper behavior and market supply, PriceVantage leverages AI to deliver VIN level activity, turn time predictions, lead potential, market day supply and visibility into comparable listings, all within a single unified workflow that directly syndicates into dealers' inventory management systems. It translates live market dynamics into data-driven pricing recommendations aligned with each dealer's goals, giving dealers greater speed, control and confidence in every pricing decision. Early beta results demonstrate the power of the software. The most engaged dealers using PriceVantage saw a fivefold improvement in turn time compared to their top five competitors on CarGurus. Taking price drop recommendations drove a 68% median increase in daily VDP views and 77% of recommendations met or exceeded predicted sales velocity outcomes. We launched a Chrome-based browser extension that embeds these insights into the platforms where dealers already operate, such as their IMS or auction sites. Dealers can access real-time price recommendations without leaving their workflow with future releases planned to extend into sourcing and merchandising. PriceVantage is the latest and most substantial addition to CarGurus' expanding suite of dealer intelligence software solutions. Other offerings continue to grow, especially our dealer data insights suite, which strengthens dealers' predictive capabilities, delivering greater efficiency and faster sales. Next Best Deal Rating is now used by nearly 20,000 dealers, growing over 70% year-over-year. Merchandising insights adoption grew to 9,791 dealers, while Max margin insights adoption rose to 5,032 dealers. In the third quarter alone, dealers made over 700,000 price changes through Next Best Deal Rating. We've seen a median 48% increase in VDP views and faster turn times for vehicles using our recommendations. Engagement remains high with Next Best Deal Rating driving nearly 50 price changes per dealer in Q3 and dealer data insights reports overall driving 75 price and inventory changes per dealer. Over two-thirds of recommendations we send to dealers are being opened and read, indicating the value of these insights. Last quarter, we also introduced New Car Exposure to give dealers more sophisticated control of their new vehicle marketing. New Car Exposure continues its rollout across markets, now reaching 94 DMAs and brand combinations. To date, it has driven 31% of new car VDP views and 13% of new car leads, with participating dealers capturing a greater share of new car leads than those relying solely on organic placements. Innovations like this are deepening dealer engagement by enabling smarter decisions across inventory, marketing, conversion, and data. Dealers are upgrading into premium tiers more frequently. They're adopting our products and solutions at higher rates, and they're signing long-term contracts. Together, we believe these factors support our ability to grow CarrID. CarrID growth has been manifesting in three trends. First, customers who remain on our platform consistently increase their spend over time. Second, new customers are joining at higher average order sizes than in prior years. Third, newer customers are ramping their spend faster than prior new customers did. On all these observable dimensions, we're seeing clear evidence that the growing quality and breadth of our products have been driving measurable CarrID growth. Driver number two, meeting the evolving needs of car shoppers by powering a more intelligent and seamless journey. As I said earlier, we're expanding the CarGurus experience across the full car buying journey from research through consideration and purchase. This quarter, we advanced two key innovations that bring that vision to life. First, consideration. We expanded CG Discover, our Gen AI-powered shopping assistant. Unlike others that use Gen AI to repackage traditional filters, Discover uses conversational understanding and real-time reasoning to interpret a shopper's intent and curate the best fit vehicles for millions of listings. It helps consumers refine choices and explore inventory with greater speed and clarity while giving CarGurus richer demand signals and pricing insights to strengthen the data intelligence flywheel. Early engagement has been strong, and we have since expanded Discover to our homepage and app, creating more prominent entry points that have driven higher traffic into the experience. Research shows 80% of consumers are open to using AI in their car buying journey, underscoring the scale of this opportunity. Traffic to CG Discover has nearly tripled quarter-over-quarter and leads have grown 3.3 times. Discover VDP to lead conversion is 6,000 basis points higher than standard VDP to lead conversion. As Discover scales, every interaction generates signals and insights, making the platform smarter and strengthening both dealer and consumer experiences. Next, purchase. Car shoppers want confidence at every step from discovery to purchase. Research shows consumers feel the hardest part of car buying happens in the dealership when shoppers feel anxious about pricing, alternatives, and making a rush decision. Our goal is to reduce that anxiety with transparent dealership ratings and reviews and by extending the CarGurus experience into the dealership where support matters most. We're excited to introduce Dealership Mode, a major innovation in the purchase step designed to deliver real-time support at the exact moment shoppers need it. When a CarGurus user visits a participating dealer lot, the app activates through geofencing and push notifications to provide VIN level pricing and ratings, reduce payment anxiety with a financing calculator, compare cars on the lot or highlight alternatives at the dealership and surface reviews to validate quality. Dealership Mode gives consumers clarity and confidence at the most stressful point in the process. For dealers, Dealership Mode strengthens attribution and ROI. While we already maintain significant attribution on closed sales data through DMS integrations and third-party data providers, Dealership Mode now enables us to close the purchase loop more fully, connecting online engagement to in-store activity, which we believe demonstrates clear ROI and higher quality leads. With millions of monthly app users making hundreds of thousands of lot visits, we believe the opportunity is significant. Based on an early analysis, 56% of consumers who see Dealership Mode in the app navigation have clicked into the experience, and over half of our users have opted in for push notifications. Over time, we expect Dealership Mode will drive even greater app adoption, build consumer trust, and help dealers convert more sales. By improving the consumer experience and extending our brand awareness, we are giving shoppers more reasons to start and end with CarGurus. This deeper engagement is translating into higher intent activity, with CarGurus-led sales growing year-over-year in the past two years. Separately, as we implement changes to comply with cookie consent regulations across markets, reported uniques and sessions are expected to decline as some users do not opt into tracking. This represents a change in how traffic is measured rather than an indication of an underlying change in site traffic or in the leads and connections we believe we're delivering to our dealer partners. Driver number three, enabling dealers and consumers to complete more of the transaction online, streamlining the final steps of the deal. In the third quarter, we advanced our transaction capabilities through continued progress across Digital Deal and Sell My Car. These offerings are delivering a seamless online-to-offline journey for shoppers. Digital Deal adoption surpassed 12,500 dealers this quarter, with over 1 million listings digitally enabled. With more Digital Deal listings and improved user experience, we have driven 45% year-over-year growth in high-value actions such as financing applications, appointment scheduling, and deposits. Users who complete these high-value actions close at up to three times higher rates than standard email leads. In fact, our strongest close rate comes from reservations. Reservations closed at nearly 16 times the rate of standard leads for out-of-market shoppers and nine times for in-market shoppers. Appointments are up approximately 20% year-over-year. Financing adoption is also strengthening, supported by direct credit applications, prequalification, and SRP filters that surface vehicles consumers are already approved to finance. Digital Deal leads with a financing element have grown 77% year-over-year. We also embedded high-value actions into the core site experience. This quarter, we introduced a post-lead high-value action menu that surfaces additional steps such as scheduling an appointment or submitting a deposit immediately after a shopper submits a core lead. This creates a natural ramp for consumers and provides dealers with even stronger intent signals. Alongside a broader redesign of the Digital Deal experience, initial testing shows several hundred thousand incremental leads from the new experience. We now expect that by year-end, nearly 30% of a Digital Deal enabled dealers' email leads will come through Digital Deal. These leads include verified contact information, full name, email, and phone number, and around 45% of them historically carry at least one high-value action. Beyond enabling more of the transaction online, we're helping dealers source inventory with greater efficiency. Sell My Car adoption has continued to grow and is now live in 115 markets, reaching roughly 75% of our eligible traffic. Lead quality and conversion have continued to strengthen. A growing share of Sell My Car acquired vehicles are listed on our Marketplace soon after purchase, demonstrating that these are high-quality retail-ready leads. Collectively, these advancements are streamlining the transaction for both dealers and consumers, improving lead quality, accelerating conversions, and reinforcing our ability to meet customers wherever they are in their journey. Across all of our value creation levers, I'd like to discuss the accelerating use of agentic AI. AI has been foundational to CarGurus since our inception and continues to power innovation across the platform. We're embedding agentic AI in numerous places throughout our products and systems to create smarter, faster and more intuitive experiences for both consumers and dealers. CarGurus Discover, our conversational Gen AI-powered shopping assistant uses large language models to help consumers refine choices and explore inventory with greater speed and clarity. In our mobile app, Dealership Mode activates when a shopper visits a participating dealership lot, providing AI-generated comparisons and summaries of vehicles. In our dealer dashboard, PriceVantage extends these capabilities to dealers by using predictive AI and real-time demand data to deliver VIN level pricing insights, turn time forecasts, and competitive benchmarking directly into their workflows. We also continue to scale AI-driven content and quality improvements across the platform to drive consumer traffic and reduce operational overhead across internal teams. SEO content generation powered by generative AI and guided by our editorial expertise has expanded high-quality content roughly tenfold across CarGurus and our core channels, driving a 60% increase in top and mid-funnel sessions year-to-date. Pricing compliance monitoring now also uses AI to identify inconsistencies and ensure data integrity across millions of listings. Internally, AI is transforming how teams work. Over the past year, we've deployed numerous solutions that have improved speed, precision, and efficiency across nearly every function. Our Gen AI sales tools have provided account summaries, tailored recommendations, and predictive insights that have helped teams identify opportunities to strengthen retention and deepen dealer relationships. Nearly 80% of managed leads in October, chat, and text were handled and closed by AI. This automation has enabled us to reduce the outsourced team by over 40%, driving meaningful efficiency gains and cost reduction. Engineering productivity has risen by nearly 25% in the past year through the use of AI coding tools and code review agents. Our LLM gateway democratizes LLM integration, allowing teams to embed new use cases directly into workflows and bring ideas to market faster, while our enterprise LLM-based search platform enhances knowledge retrieval and workflow automation. AI also strengthens fraud detection and prevention, enhancing data integrity and platform trust. Adoption is broad and disciplined. 91% of employees report using AI weekly, driving faster execution, sharper insights and greater collaboration across the company. Looking ahead, we believe that the combination of proprietary data, machine learning, predictive analytics, and agentic AI positions CarGurus to deliver new levels of intelligence, automation, and efficiency to both dealers and consumers. AI remains central to how we innovate, operate and lead in automotive technology. In Q3, we delivered strong revenue growth, healthy margins, and disciplined execution. We advanced products that give dealers greater control, efficiency, and intelligence, while creating more confidence and clarity for consumers. These innovations are expanding our reach beyond the $3.5 billion U.S. Marketplace segment into an additional $4 billion dealer software and data products TAM, which we believe broadens our long-term growth opportunity. Innovation remains at the center of this progress. We're extending our platform across each of our four pillars: inventory, marketing, conversion, and data with scalable software and intelligence solutions that address more of the dealer workflow and consumer journey. These advancements reinforce our leadership as a data and technology-driven company, which we believe unlocks new sources of growth and value creation. Across every initiative, our focus remains on measurable value, capturing more dealer wallet share, deepening consumer engagement, and strengthening our platform's foundation. With that momentum, we believe that we're scaling solutions that reinforce our leadership, support durable growth, and create long-term value for our customers and stockholders. Now let me walk through our third quarter financial results, followed by our guidance for the fourth quarter and full year 2025. Third-quarter consolidated revenue was $239 million, up 3% year-over-year. Marketplace revenue was $232 million for the third quarter, up 14% year-over-year toward the high end of our guidance range. Marketplace revenue growth was driven by strength in our subscription-based listings revenue. In the third quarter, U.S. CarrID grew 8% year-over-year, and we added 1,182 paying U.S. dealers year-over-year, marking our seventh consecutive quarter with positive net dealer adds and our fourth straight quarter of accelerating year-over-year dealer count growth. We continue to expand our footprint while taking greater wallet share in our growing base, driven by upgrades, broader adoption of add-on products, like-for-like price increases, and higher lead quantity and quality. Our international business had yet another strong quarter with revenue up 27% year-over-year and international CarrID up 15% year-over-year, the ninth consecutive quarter of double-digit year-over-year international CarrID growth. Wholesale revenue was approximately $2 million for the third quarter and product revenue was roughly $5 million for the third quarter as we ceased facilitating transactions in the quarter as a result of our decision in August to wind down the CarOffer transactions business. As a reminder, we expect to account for the wind down of CarOffer as a discontinued operation in the fourth quarter. As such, we do not expect there to be revenue associated with digital wholesale going forward. I'll now discuss our profitability and expenses on a non-GAAP basis. Third-quarter non-GAAP gross profit was $214 million, up 11% year-over-year. Non-GAAP gross margin was 90%, up about 650 basis points year-over-year. Marketplace non-GAAP gross profit was up 13% year-over-year, and non-GAAP gross margin was stable at 93%. On a consolidated basis, adjusted EBITDA was approximately $79 million, up 21% year-over-year. Adjusted EBITDA margin was 33%, up about 490 basis points year-over-year. Marketplace adjusted EBITDA grew 18% year-over-year to approximately $82 million, above the midpoint of our guidance range. As a reminder, we guided to Marketplace EBITDA only this quarter as we sunset the CarOffer transactions business. Margin rose about 120 basis points year-over-year to 36%, but declined slightly quarter-over-quarter due to investments in new product innovation and sequentially higher sales and marketing expenses. Digital wholesale adjusted EBITDA loss of approximately $4 million was modestly higher quarter-over-quarter as expected. The sequentially larger loss was driven by lower volumes due to the cessation of transactions in the third quarter as a result of our decision to wind down the CarOffer transactions business. Moving to OpEx. Our third-quarter consolidated non-GAAP operating expenses totaled $142 million, up 7% year-over-year and 4% quarter-over-quarter, reflecting sequentially higher sales and marketing expenses and investment in new product innovation, as I mentioned earlier. During the third quarter, we incurred $3.8 million in one-time cash restructuring charges, and we expect remaining cash restructuring charges of $2 million in the fourth quarter. Accordingly, we have narrowed our previously estimated range from $5 million to $7 million to $5 million to $6 million. We still expect to substantially complete the CarOffer wind down by year-end, with total wind-down related charges expected to be in the range of $13 million to $15 million, which is lower than the original range of $14 million to $19 million. Non-GAAP diluted earnings per share attributable to common stockholders was $0.57 for the third quarter, up $0.13 or 30% year-over-year, reflecting primarily the increase in adjusted EBITDA and lower diluted share count. We continue to generate strong free cash flow, and we ended the quarter with $179 million in cash and cash equivalents, a decrease of $52 million from the end of the second quarter, primarily driven by $111 million in share repurchases in the quarter, partly offset by higher adjusted EBITDA. As of September 30, we have approximately $55 million remaining on our share repurchase authorization. I will now close my prepared remarks with our guidance and outlook for the fourth quarter and full year 2025. As a reminder, due to the wind down of CarOffer, last quarter, we stopped guiding to consolidated revenue and consolidated adjusted EBITDA and instead, we'll guide to Marketplace revenue and Marketplace adjusted EBITDA as that is representative of our go-forward operations. We expect our fourth quarter Marketplace revenue to be in the range of $236 million to $241 million, up between 12% and 15% year-over-year, respectively. And we expect full year Marketplace revenue to be in the range of $902 million to $907 million, up between 13% and 14% year-over-year, respectively. For the fourth quarter, we expect our non-GAAP Marketplace adjusted EBITDA to be in the range of $83 million to $91 million, up between 5% and 15% year-over-year, respectively. And we expect full year Marketplace adjusted EBITDA to be in the range of $313 million to $321 million, up between 18% and 21% year-over-year, respectively. We expect to meet the discontinued operations criteria in the fourth quarter. As a result, we expect our full year guidance, similar to the third and fourth quarters, to reflect Marketplace absorbing approximately $1 million in ongoing quarterly CarOffer expenses as a result of the wind down. Accordingly, we've included about $2 million of first half costs that we expect to be recast to continuing operations once the criteria are met. These estimates are preliminary and subject to change. The midpoint of our Q4 guidance implies a full-year Marketplace EBITDA margin of approximately 35%. We're pleased with the strength and growth of our Marketplace and excited by the early results of our various new product investments. That innovation has delivered growing adoption across more dealer pillars and deeper consumer engagement across their shopping journey. That success reinforces our confidence to continue growing our investments in new, primarily AI-centric innovation across our dealer and consumer product suites that we believe will drive long-term growth. We expect fourth quarter non-GAAP consolidated earnings per share to be in the range of $0.61 to $0.67, up between 13% and 24% year-over-year, respectively, and full year consolidated earnings per share to be in the range of $2.19 to $2.25, up between 29% and 32% year-over-year, respectively. And we expect fourth quarter and full year diluted weighted average common shares outstanding to be approximately 97 million and 101 million, respectively. With that, let's open the call for Q&A.
Operator, Operator
Our first question comes from Chris Pierce with Needham & Company.
Christopher Pierce, Analyst
If I'm looking at the deck on Slide 5, I think you have a stat that you shared for the first time that may or may not be right, but it says 25% of CarGurus dealers only pay for CarGurus. Is there a way to think about where that stat was a year ago, two years ago and some sort of upper bound as maybe you guys drive separation versus peers?
Jason Trevisan, Chief Executive Officer
Thanks for the question, Chris. We haven't provided a trend on that statistic. However, our surveys indicate that dealers are increasingly using fewer marketplace partners. Over the last few years, the average number has dropped from around three to just under two, currently about 1.8. This reflects a consolidation towards those partners that typically deliver the best return on investment. So, that's the broader trend regarding that dynamic, but we haven't shared a trend number for the 25%.
Christopher Pierce, Analyst
Are you seeing dealers more willing to engage in digital deals now that there seems to be an acceptance of fully digital transactions growing in the industry? When do you think will be the right time to leverage pricing power, considering the conversion metrics you mentioned? Do dealers need to make specific changes on their end to accept these leads, or is it more about simple housekeeping so a customer can arrive, have their loan ready, take a test drive, and leave the dealership in about an hour?
Samuel Zales, President and Chief Operating Officer
Chris, it's Sam here. Thanks so much. We have consistently discussed our research indicating that 80% of consumers prefer to engage online, yet they still wish to physically experience and test drive the car. We believe we have a strong product to address this. Currently, we have 12,500 customers enrolled in the program, which is part of our premium tiers, meaning dealers who access Digital Deal need to invest more. I understand that as this trend persists, it presents a significant opportunity for us. What excites us most is that an increasing number of our consumers are taking what we refer to as high-value actions. They are scheduling appointments, placing deposits, looking into financing, and sharing their credit information. We believe these actions lead to higher quality, more advanced leads, ultimately resulting in improved ROI for our dealers. Looking ahead, as you mentioned, we are curious about how much more this will grow. This presents us with an opportunity for pricing power, which we will evaluate as we make future plans.
Operator, Operator
Our next question comes from Marvin Fong with BTIG.
Marvin Fong, Analyst
I had a question just on the international CarrID and international in general is doing so well, very good growth there across the board. I just wanted your thoughts on how much faster and higher you think CarrID can grow? Obviously, we can look at in the U.K., the dominant player there and generating revenue per dealer is much higher than...
Operator, Operator
Sorry to interrupt you there, Marvin. Marvin, we are unable to hear you clearly. Could you please use your handset?
Marvin Fong, Analyst
Is this better?
Operator, Operator
Yes, please go ahead.
Marvin Fong, Analyst
Sorry about that. Yes, I just wanted to ask about CarrID, particularly in the international segment. I believe the incumbents in the U.K. in Canada charge a lot more than you are right now, and we're seeing very nice CarrID growth in international. So just wanted your thoughts there and how quickly you can pull that lever and close that gap.
Samuel Zales, President and Chief Operating Officer
Thanks, Marvin. It's Sam Zales. We're really, really proud of the international markets and what we're doing there. You'll recall that we're competing against two big players who had monopoly power in those markets. But I think what we're showing is two things. When you drive lead quality and lead quantity in an aggressive amount, it makes dealers stand up to say and you price at a lower price point, it makes dealers stand up and say the ROI is better, and we've shown you the research in the markets to show that our ROI is advantaged versus our competitors. I think though, we're still in a market zone of adoption right now. We're keeping our prices at a lower level because we are winning more and more customers. As you saw, we added 800-plus customers in the international market. So our goal there is to say, let's be smart about pricing. Let's price to the value that we're offering to our dealers. And we know we can always grow that over time, but we're looking to build more market share. So you may have read in Canada that one of the largest dealers in a press release that was out AutoCanada converted by saying, I'm no longer going to be on the auto trader program, and I want CarGurus as my preferred partner in that regard. Those are the kinds of things that will give us that opportunity to continue growing not only dealers, and that leads to other dealers picking up their heads and saying, I might do the same thing. It allows us to keep growing our customer base, but also growing CarrID. The 15% growth, we're really proud of. We'll continue to push in that direction, but we don't want to get too aggressive on that front at a time we're still signing more dealers in both Canada and the U.K. And that will replicate if we can, the market experience we had here in the U.S. We started with lower pricing. We got the largest base of dealers to our franchise and joined us, and then we raised prices over time, and we think that's a good model to try to take on in that arena. So thank you for recognizing 27% growth in international. We're really proud of it and excited to try to push forward.
Jason Trevisan, Chief Executive Officer
I would like to add to that and emphasize a point made earlier in the call. International CarrID represents about one-third of the U.S. market. The factors that influence CarrID in the U.S., such as upsell, cross-sell, lead growth, lead quality, and pricing, are also present in international markets but are at an earlier and less developed stage. This suggests there is significant potential for growth internationally. Additionally, I'd like to highlight some trends we've observed in U.S. CarrID that we believe will also apply internationally. First, our paying dealers tend to increase their spending the longer they remain with us. Second, new dealers are joining at higher average order sizes compared to previous dealers. Finally, despite these larger initial order sizes, new dealers are accelerating their spending faster than earlier cohorts. We see these positive trends in the more established U.S. market, and we are very proud of this progress. The same opportunities exist internationally, albeit at an earlier stage.
Marvin Fong, Analyst
Those are great insights. I have a follow-up question, perhaps directed at Sam. Jason mentioned that you're targeting a $4 billion solutions market. Is that how you're communicating this to dealers? I understand that dealers generally consider costs on a per sale basis. Are you discussing the new analytics with them in a way that indicates they won't need to pay for vendor A or vendor Z anymore? Is that the perspective dealers have? And is it clear to them that you're offering both a listing service and a software solution?
Samuel Zales, President and Chief Operating Officer
Marvin, I'll step in and then let Jason provide additional insights. Every day, we are engaging with customers to maximize their profits. This can arise from our marketplace business, as we've mentioned during the call, where we start to develop solutions like DDI that we have discussed before, which aids dealers in converting more of the leads they receive, thereby enhancing their profitability. Furthermore, with product-led growth, we observe that customers are adopting these products—our pricing tool led us to create a software product named PriceVantage. What we're offering to dealers with this tool is assistance in boosting their profitability by decreasing turnaround times and enabling them to price their inventory more effectively. All of this is rooted in the Marketplace business, which subsequently leads to other products such as inventory, marketing, conversion, and data. They all integrate under the value proposition that states we are here to help dealers enhance their profitability through our marketing tools, data, and now software that allows for more efficient business operations, ultimately resulting in growth and customer retention. Jason, do you have anything to add?
Jason Trevisan, Chief Executive Officer
They are all connected. Historically, dealers have viewed them as separate steps in the workflow and have assigned different wallets to each step. These products enable us to access those new wallets. What makes them particularly compelling is that we are not offering a stand-alone product here and another stand-alone product there. When Sam mentions that they are integrated, he means that if you adjust a price, you can predict the impact on leads and turnaround time. This provides dealers with recommendations and the ability to act on them with a strong forecast of the results, as those results are reflected in our Marketplace.
Operator, Operator
Our next question comes from John Colantuoni with Jefferies.
Vincent Kardos, Analyst
This is Vincent on for John. Just one with a few parts for me. So it looks like some of the investments you've talked about in recent quarters is really paying off, given both U.S. and international dealer rooftops saw accelerated growth during the quarter. At the same time, CarrID growth slowed a little bit across both geographic segments despite the traction you called out for the product suite. Maybe talk a bit about what the growth algorithm between rooftops and CarrID ought to look like going forward, touching a bit on the drivers of slightly slowed CarrID growth as well as the relative contributions of improved dealer retention versus net new adds to rooftop growth?
Jason Trevisan, Chief Executive Officer
Sure, Vincent, it's Jason. The relationship between rooftops and CarrID is based on the calculation of CarrID, which is revenue divided by the average active rooftops. When we increase the number of rooftops at a faster rate, it creates a natural headwind for CarrID. Last quarter, CarrID grew about 8% year-over-year, while rooftops increased by about 5% year-over-year. When combined, these figures reflect our total marketplace revenue growth of roughly 13% year-over-year. In looking at recent quarters, that relationship becomes evident, though it's not perfect. Our retention has been improving significantly over the last few quarters and even years, due to several factors. We have made investments in account management and in product development, particularly in dealer data insights that enhance our core Marketplace, many of which we haven't yet charged for. Through better account management, enhanced feature functionality, and more insights that enable our dealers to perform better on our platform, we aim to improve their success on CarGurus, which encourages them to stay. The cohort data shows they're actually ramping up at a faster rate, and as mentioned in the adoption numbers from the script, we are seeing broad adoption of these new features.
Operator, Operator
Our next question comes from Ron Josey with Citigroup.
Jamesmichael Sherman-Lewis, Analyst
This is Jamesmichael Sherman-Lewis on for Ron. First here, on CG Discover, now more deeply embedded, can you help us understand how this new car buying journey and purchase funnel differs from traditional car buying? Clearly, we're seeing traffic and conversion ramp, but curious how you see user engagement in this channel's contribution evolve longer term?
Jason Trevisan, Chief Executive Officer
Happy to share. This is Jason again. Discover represents a new experience that is gaining significant traction. While it’s still early, we’re seeing remarkable growth. It's important to note that this platform operates outside the traditional search results page, resembling more of a conversation than a single-query filter. I encourage everyone to try it out if you haven't already. You can pose questions in a natural manner, receive explanations, and continue building on your inquiries. The discovery process extends beyond mere listings and actually engages with the shopper, clarifying the reasoning behind car rankings, providing side-by-side comparisons, and offering contextual information such as market value, ownership costs, confidence scores, and relevant videos. Unlike a standard search that might only show sedans, this system may suggest small or midsized SUVs based on your preferences, broadening the recommendations beyond your initial prompts. This creates numerous opportunities for our platform and gives dealers valuable insights into consumer preferences through the dialogue. It truly fosters a two-way conversation. Users of this feature typically engage in almost three follow-up prompts, transforming the vehicle detail page into leads at significantly higher rates, with these leads being more informative for dealers. This system is advantageous for consumers, dealers, and us, and it is designed for future expansion. Its architecture easily supports personalized deal alerts, watch lists, and comparisons across different trims and markets as new vehicles are introduced. It will effectively act on behalf of the consumer for future opportunities based on their interactions. We are genuinely excited about this development. It is not just a sophisticated filter like what some others are offering. We believe this presents a major scaling opportunity for us.
Jamesmichael Sherman-Lewis, Analyst
That's helpful color. Follow-up, if I may. As we look out to 2026, can you unpack the key investment areas across product, international brand or other areas? And any changes to relative investment intensity versus 2025's investment year?
Jason Trevisan, Chief Executive Officer
I wouldn't say there's a change in relative intensity. We're really excited because a couple of quarters ago, we mentioned that we would be increasing our investment, and this quarter is demonstrating the benefits of that. We've shown a quick speed to market with many of our introductions, and we're seeing much deeper engagement with initiatives like PriceVantage, New Car Exposure, Dealership Mode, and Discover. We plan to continue investing in product development, go-to-market strategies, international expansion, and increasing adoption across the four dealer pillars while enhancing consumer engagement. This experience reinforces our confidence to keep growing our investments in AI-centric innovations for both dealers and consumers, but we will approach it wisely. We have demonstrated discipline, ensuring that execution follows innovation, and we take pride in being a company that balances long-term sustainable growth and high-quality revenue with margin.
Operator, Operator
Our next question comes from Ryan Powell with B. Riley Securities.
Ryan James Powell, Analyst
It's Ryan on for Naved. I wanted to ask on Dealership Mode. Obviously, you mentioned some good metrics on initial adoption. What kind of consumer insights are you able to generate from users engaging with Dealership Mode? Does this have anything to do with improving recommendations for users? And then I have a follow-up.
Jason Trevisan, Chief Executive Officer
Sure. First, it's important to note that we're gaining valuable insights about who visits the dealership, which may seem straightforward but was previously challenging to determine. This enhanced data gives us much clearer visibility. Second, it aids both us and the dealers—perhaps the dealers more—by revealing what other vehicles a consumer is interested in for comparisons and assisting dealers in cross-selling. Notably, a significant portion of consumers who utilize our platform to connect with a dealer often end up purchasing a different car than the one they initially expressed interest in. This tool also provides clarity on financing needs, with a calculator for various financing options being beneficial, as dealers want to secure the best loan for their customers. It's largely driven by AI, allowing consumers to interact effectively with it. All the aspects I mentioned regarding Discover are also applicable in Dealership Mode. We refer to this process as lead enrichment, continually enhancing our leads with more consumer data. Customers frequently report that their experience at the dealership involves processing a lot of information, and this tool facilitates that, while also enabling dealers to better understand their clientele. Only paying dealers can access this service, giving them deeper insights into their customers.
Ryan James Powell, Analyst
Great. That's very helpful. And then secondly, on CG Discover. So it was also live in the second quarter. What do you think led to the pretty significant increase in adoption amongst users?
Jason Trevisan, Chief Executive Officer
I mean the biggest thing is we made it more available. It was in testing mode, an earlier form of testing mode as we gain more confidence and saw the increased engagement of consumers, saw all the stats that we shared on improved conversion rate, all the rich data that we were getting, we made it more available and realized pretty quickly that it was helping both consumers and dealers. And so I would say that's the primary one. It's definitely improved. We continue to work on it. It's gotten better. But I would say the biggest thing is just exposure to our audience. Like this quarter, we released it in the app. It had not been in the app before. And app is our fastest-growing channel. And so putting it on that really accelerated things.
Operator, Operator
Our next question comes from Rajat Gupta with JPMorgan.
Rajat Gupta, Analyst
I wanted to ask about the industry landscape. There are clearly signs of profitability stress among some large used car dealers, as well as issues with smaller independent dealers. Additionally, it seems that publicly listed franchise dealers are also experiencing profit pressure in the short term. However, inventory levels are rising, which should benefit your business. I'm interested in what you're hearing from customers regarding their budgets. In response to a previous question, you mentioned that they might be consolidating their vendors. I'm curious about the latest insights on their planning as we approach 2026. I also have a quick follow-up.
Jason Trevisan, Chief Executive Officer
Yes, I can begin, and Rajat and Sam might provide additional insights. We often aim to simplify macro factors into a few key points. As we’ve noted, our subscription business model allows dealers to sell cars during both good and challenging times, making it quite resilient to various cyclical, even seasonal, trends. Being the largest marketplace with dealers consolidating their spend, we are even more insulated in this environment. Furthermore, used cars experience fewer fluctuations in price compared to new cars, providing us with a degree of protection. That said, we still acknowledge macro factors: first, retail sales for used cars have seen a slight increase; second, while days on market have decreased a bit, they are mostly stable year-over-year, with a slight increase recently; third, prices have risen slightly. Inventory, however, is up significantly, with a year-over-year increase of 10%. The major factor to note is that consumer sentiment has declined. Although interest rates have dropped recently, they remain relatively high. With down consumer sentiment, elevated interest rates, stable pricing, and increased inventory, dealers need to move cars. Frequently, it proves more beneficial for them to market smarter rather than lower prices. As we are the largest platform and often recognized for providing the best return on investment, dealers might experience some profit pressure. Their advertising spending has consistently risen year-over-year. Despite the margin pressures that dealers may encounter, we continue to gain market share quarter after quarter without facing significant pressure ourselves.
Samuel Zales, President and Chief Operating Officer
Rajat, sorry, I'll just add that the other immunity to short-term pressures that Jason mentioned is the breadth of our dealer base. We appeal to the small independent to the multi-sized independent and franchise dealer and those national accounts you speak to. Our consumer base will buy from all of those types of dealers. And so our breadth, and we're not tied to one particular segment. We have the largest base of dealers that continues to grow. And I'd just add, again, the New Car Exposure product that we launched just in the last quarter was a relevance to dealers saying, hey, there's a high price point for new cars. Can you help us be more profitable selling those new cars? So giving them an opportunity to win their make in a local market, convert consumers who are coming in saying, I might want a used car, I might want a new car. Oh, my payments might be similar on both. I'm going to buy that new car. We're helping them create the profitability in a market trend that we saw coming very quickly and built a product to get there and make them more profitable. So I think it's that breadth of dealer base that also adds to the immunity of short-term impacts and our constant growth through those cycles in the macro environment.
Rajat Gupta, Analyst
Understood. That makes a lot of sense. And just one quick follow-up. I hear a reiteration of the double-digit revenue growth exit rate unless it was meant to be just a fourth-quarter number when you mentioned that last call. Could you just give us an update on that? And then how should we think about as we head into '26, the trade-off between growth and margins like you had in the last two, three quarters?
Jason Trevisan, Chief Executive Officer
Rajat, I understand the second part of your question regarding relationship growth and margins in '26. Could you please repeat the first part about Q4?
Rajat Gupta, Analyst
It was on a Q4 question. I think you mentioned on the last two earnings calls that you expect to exit the year at double-digit revenue growth for Marketplace. I wasn't sure if that was an implied fourth-quarter number or you meant exiting the year into '26 with double-digit revenue. I did not hear an update on that today. So I'm just curious if that is still on track.
Jason Trevisan, Chief Executive Officer
Yes. I think the comment made was referring to Q4's year-over-year revenue growth rate. However, if you look at what that suggests for the entire year, the numbers would indicate a year-over-year double-digit growth rate as well. So, I believe the Q4 guidance addresses both of those questions. We haven't provided any comments on '26 yet. Regarding growth and margins, I would refer back to the positive remarks we've made over the past few quarters, including this one, about our excitement regarding investments, the growth they are driving, the CarrID trends we've discussed, and the pace at which we are launching new products.
Operator, Operator
We move to our next question from Andrew Boone with Citizens.
Unknown Analyst, Analyst
This is Briana on for Andrew Boone. You mentioned that 80% of managed leads in October chat and text were handled by AI and that 91% of employees are using AI internally, which has reduced reliance on outsourced teams. Where do you see still the biggest friction points either internally or across dealer workflows where AI can further improve efficiency within the business? And how should we see that coming through on the margin?
Jason Trevisan, Chief Executive Officer
And is your question related to friction in our business or at dealers' businesses?
Unknown Analyst, Analyst
Within dealer businesses.
Jason Trevisan, Chief Executive Officer
I believe one of the significant opportunities in the dealer business has two key aspects. First, it's essential to see how the various stages of their workflow connect seamlessly. We've discussed this, and our focus is on how they can source and price vehicles more effectively based on retail signals they observe. Traditionally, dealers have relied on wholesale data for making purchasing and appraisal decisions, which is less beneficial to them. They are more focused on retail data, specifically the potential selling price and current demand for the vehicle. This also applies to conversion rates. The second area of focus is predictability. Many dealers have been utilizing wholesale data that is outdated, often by 30 or 60 days, for appraisals. Our insights, aided by AI and tools like PriceVantage, help predict market conditions and the implications for pricing and merchandising vehicles in the future. These two aspects are crucial. Internally, we are concentrated on accelerating development and execution while ensuring product quality. This commitment is reflected in various aspects of product development and engineering, as well as in how we support our customers through our sales and account management teams, who are equipped with relevant insights for client interactions. I don't see internal friction; it's more about how quickly we can create internal solutions to enhance our speed. For dealers, it's about quickly adapting to these areas, and that's where our account management aims to assist them. This focus translates into our results, emphasizing growth and the pace of that growth rather than short-term margin enhancement.
Operator, Operator
Ladies and gentlemen, that concludes our question-and-answer session for today. I would now like to hand the conference over to Jason Trevisan for closing comments.
Jason Trevisan, Chief Executive Officer
Thanks. I would just like to thank all of our colleagues certainly here at the company, all of our customers and everyone who joined us on this call tonight. Have a great evening.
Operator, Operator
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.