Earnings Call Transcript - CARG Q2 2025

Operator, Operator

Good day, and welcome to the CarGurus Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Kirndeep Singh, Vice President and Head of Investor Relations. Please go ahead.

Kirndeep Singh, VP and Head of Investor Relations

Thank you, operator. Good afternoon. I'm delighted to welcome you to CarGurus Second 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 disclosed 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 M. Trevisan, CEO

Thank you, Kirndeep, and thanks to everyone joining us today. We delivered outstanding financial results in the second quarter, led by double-digit year-over-year revenue growth and expanding profitability in our U.S. and International Marketplace businesses, reflecting strong execution across our strategic priorities. We are innovating at a greater scale for our customers, delivering data-driven differentiated solutions that help dealers run smarter, more profitable businesses and make the car buying journey more seamless for consumers. These efforts have continued to drive better engagement and outcomes for our customers, which has translated into stronger financial performance for our business and has reinforced our market leadership. We ended the second quarter above the midpoint of our forecasted guidance range for total revenue and adjusted EBITDA. Marketplace performance was a key contributor. Revenue grew 14% year-over-year, adding $27 million, driven by the addition of 1,743 net new dealers globally, continued wallet share expansion among existing customers and improved retention. Marketplace adjusted EBITDA grew 31% year-over-year, underscoring continued strong operating leverage. Our international business sustained outstanding revenue growth, up 28% year-over-year with momentum in both Canada and the U.K. We added 711 net new dealers year-over-year across the regions while driving greater adoption of add-on products and listings upgrades. We delivered substantial year-over-year lead volume growth in both markets, driven by higher intent consumer traffic that further reinforced our ROI advantage and strengthened our competitive position. In the U.K., we were the #1 most downloaded automotive app in Q2, underscoring rising consumer engagement and brand traction. In Canada, our significant and growing scale was further reinforced by a multiyear deal with AutoCanada, one of the country's largest multi-location dealership groups, which named CarGurus its preferred digital retail and listings partner. Their commitment reflects the value of our performance-driven marketing, proprietary insights and hands-on dealer support. Last quarter, we announced a strategic reassessment at CarOffer. That effort was prompted by the fact that rising market volatility continued to expose structural limitations in the CarOffer instant trade transaction model despite the advancements we've made with predictive analytics, AI-driven insights and the many operational improvements. After that thorough assessment of strategic alternatives, we've made the decision to wind down the CarOffer transactions business. Through CarOffer's Wholesale focus, we built intelligent AI-driven technology and predictive analytics that empower dealers to make smarter sourcing decisions. And we saw that dealers who leverage our insights enjoy disproportionately better performance. Going forward, while we will no longer operate the CarOffer transactions business, we will retain and continue to build on the underlying technology we created for it, capabilities that we believe remain central to CarGurus sourcing strategy. Our priority at CarGurus remains providing dealers with data-driven, scalable solutions that not only help them manage their businesses more intelligently, but also have strong unit economics and clear competitive advantages. Therefore, our focus going forward will be to provide our dealers with technology and analytics that enable smarter sourcing, appraisal, stocking and pricing, but not facilitating the transactions themselves. We believe this will continue to position us as a valuable partner to our dealers, serving an increasing set of their needs and focus us on the types of products we have a strong track record of delivering. This decision follows extensive effort and a thoughtful evaluation of alternatives by our team, and we're grateful to the CarOffer and CarGurus teams who built and supported these capabilities. We're working closely with the dealers who relied on CarOffer to ensure a smooth transition. And more importantly, we're excited about the opportunity to partner with them on the next chapter of our sourcing strategy. With this foundational decision behind us and solid execution in Q2, we have continued to advance our 3 drivers of value creation. I'll now walk through our progress in each. Driver one, expanding our suite of data-driven solutions across dealers' workflows to help them drive more profitable businesses. A core focus of our platform strategy is giving dealers more granular control over how they manage, price and promote inventory to help them run more profitable businesses. One of the clearest signals of that is the strong sustained engagement with our dealer data insights suite. Dealers are not just accessing this data frequently, they're actioning our insights across pricing, inventory mix and marketing strategy. As of the end of Q2, nearly 18,500 dealers were subscribed to Next Best Deal Rating, our most widely adopted report. Our more specialized reports are scaling even faster, in part driven by successful international launches. Merchandising health rose nearly 30% quarter-over-quarter to 8,175 dealers and max margin grew approximately 70% quarter-over-quarter to 4,300 dealers. Just as importantly, we saw a notable uptick in actions taken per dealer with usage intensity rising across every report type. That growing engagement has translated into stronger dealer performance. Historically, dealers using these insights have seen higher audience reach via VDPs, more prospects from leads and faster turn times, leading to higher profit potential. We believe this kind of measurable impact is driving more dealer engagement and higher retention by giving our listings customers a competitive advantage in their markets. An actionable example of giving dealers more sophisticated control of their marketing is our introduction of VIN level targeting for both our highlight and real-time performance marketing products, giving dealers greater precision over how they promote inventory. This added level of recommendations, coupled with granular control is driving results. Highlight adoption is up 33% year-over-year and real-time performance marketing is seeing stronger engagement and improved retention. While still early, we believe the momentum underscores clear demand for precision marketing tools. Building even further on giving greater control to dealers is our launch of New Car Advantage in Q2, our first product specifically designed for new inventory. While the majority of our leads still go to used cars, we have the largest inventory of new vehicles when compared to other marketplaces with over 2 million listings. This market-leading new car inventory asset matters because 53% of shoppers begin their search undecided between new and used. And according to a 2024 Clarivoy study of U.S.-based new car shoppers, over half of all new car shoppers visited CarGurus during their shopping journey. New Car Advantage gives dealers precise control to promote new inventory in the most relevant high-traffic used searches, while also surfacing monthly payments to spotlight affordability, a key factor among used car shoppers. Early results show a 34% increase in VDP views, a double-digit lift in new car leads and 33% more new car searches from shoppers who engage with the title. As we advance our existing dealer products and introduce new ones, we're also making it much easier for dealers to access the growing value our platform offers via major upgrades to our dealer mobile app, a key workflow tool designed to support dealers wherever they work, whether pricing cars on the lot or monitoring performance off-site. In addition to core dealer app functionality such as monthly connections data, pricing notifications, VIN scanning and real-time lead alerts, in Q2, we added 2 more capabilities, barcode IMV scanning to facilitate pricing vehicles at auction and access to Top Dealer Offers to enable mobile inventory intake. Our rapid expansion of dealer app functionality has driven impressive dealer adoption with daily active users up 71% year-over-year, illustrating the CarGurus app's role as a go-to workflow tool. Together, these innovations are deepening dealer engagement across our platform. By giving dealers more control, intelligence and flexibility in how they manage and market inventory, we're helping them run more efficient, more profitable businesses. That value has translated into higher usage, stronger customer acquisition and retention and a growing reliance on CarGurus tools as part of their day-to-day workflow. Driver 2, meeting the evolving needs of car shoppers by powering a more intelligent and seamless journey. We continued extending our reach across more stages of the car shopping journey from early research to post lead engagement. In Q1, we launched CG Discover, our AI-driven conversational experience designed to guide consumers toward more confident decisions. Users who engage with Discover now spend three times more time on site compared to those who do not, and usage has grown over 70% month-over-month in the second quarter. Building on that momentum, we integrated CarGurus produced video reviews into CG Discover in Q2, giving shoppers richer content to move from consideration to decision with greater confidence. To further support early-stage research, we launched our first sponsored content hub in partnership with a major OEM. The hub provides trusted resources to demystify the car buying process from model comparisons and financing insights to broader automotive trends. We believe this format builds trust and influences brand consideration at the point when consumers begin exploring their options. As we've expanded research tools like CG Discover and the sponsored content hub to support shoppers across more stages of their journey, traffic to our research content has grown 170-fold year-over-year. We also continue to invest in high-impact user experience product enhancements that make the shopping experience more intuitive and personalized. In Q2, we launched multi-make and model search on web, enabling broader exploration without narrowing the search too early, which drove a measurable increase in mobile conversion. On the app, which now drives one-third of our leads, we introduced several usability improvements, including a full design and performance overhaul, a redesigned save cars and searches experience and the launch of dark mode, one of our most requested features. We are innovating across the consumer journey, and it has translated into deeper engagement and higher intent. CarGurus remained the #1 most visited listing site in the U.S. and had nearly 85 million average monthly sessions and 34 million monthly unique visitors. But our advantage goes beyond scale. Consumers now spend 74% more total minutes on our site than our closest competitor and 47% of our monthly unique visitors do not visit our competitor sites. That engagement has driven performance. CarGurus-led sales continued to grow year-over-year, supported by lead growth and sustained close rates. These gains reflect progress in addressing more consumer needs from discovery through transaction and earning their time and trust as a result. Driver 3, enabling dealers and consumers to complete more of the transaction online, streamlining the final steps of the deal. In Q2, Digital Deal reinforced its role as a high-impact online to offline solution, enabling consumers to complete more of the transaction online before visiting the dealership. This creates a more seamless shopping experience for consumers and delivers more efficient, higher intent opportunities for dealers. Adoption has grown to approximately 12,000 dealers globally. And today, Digital Deal leads account for over 27% of the dealer's email leads. By embedding high-intent actions such as applying for financing, placing a deposit or scheduling an appointment directly into the core site experience, we're driving a higher volume of quality leads. This growth reflects rising consumer demand to do more online and dealer preference for leads that signal stronger down funnel intent. Appointments are up 60% year-over-year. 47% of Digital Deal leads now include at least one high-value action, and we've seen a 68% year-over-year increase in shoppers that complete the full Digital Deal submission flow. To build on this momentum, we introduced a prequalified finance-based shopping experience that helps consumers discover vehicles that are already approved to finance. This allows shoppers to stay within budget and move forward with greater confidence. Combined with our recently built capability, allowing dealers to receive full shopper credit applications directly in their finance management, these features are driving higher financing activity. Nearly 30% of Digital Deal leads now include financing. Collectively, by embedding more financing, scheduling and decision-making tools directly into the shopping flow, we're driving stronger intent signals, higher quality leads and improved close rates for dealers. Supporting more comprehensive transaction enablement in Q2 involves significantly bolstering Digital Deals role in powering online to offline transactions as well as assessing how we support dealers' Wholesale sourcing and fulfillment. That latter focus is what led to our decision to wind down the CarOffer transactions business, including both dealer-to-dealer Wholesale and Instant Max Cash Offer, but still support their sourcing through technology, analytics and insights. The CarOffer instant trade transaction platform performed exceptionally well during the price rising chip shortage period. However, it has struggled in today's more volatile and unpredictable pricing environment, where dealers require more flexibility and broader automation to streamline fulfillment. We believe the underlying technology, analytics and intelligence developed to support those transactions remain valuable capabilities. Sourcing is a foundational part of the dealer workflow, deeply linked to a dealer's retail success and one where we believe CarGurus can deliver a competitively advantaged solution by continuing to provide the data connectivity and predictive intelligence that is only made possible by connecting retail and sourcing activities. We plan to concentrate our future sourcing offerings in 2 key areas, which together, we believe, offer a differentiated market solution and the opportunity to create long-term value. One, we'll continue to deliver AI-powered inventory intelligence through our sourcing insights platform, backed by the industry's largest retail data and consumer insights mode, delivered in ways that will make it easy for dealers to act on those recommendations. These insights drove the highest usage and customer satisfaction across the CarOffer platform. And two, we will continue to enable consumer vehicle sourcing at scale through Top Dealer Offers, the preferred channel for both consumers and dealers. These decisions will allow us to leverage our retail and wholesale data to provide differentiated sourcing offerings to dealers that we believe have proven product market fit and clear alignment with our platform capabilities. In Q2, we delivered strong performance while realigning our focus around our core capabilities and ability to differentiate, where our data, technology and audience enable us to deliver tremendous value to customers, which we believe will help drive predictable and growing financial results. We are building with greater precision across the platform to help dealers operate more efficiently across their workflows and empower consumers to navigate their journey with greater clarity and control. As we enter the second half of the year, we plan to execute against a clear set of priorities, align capital to our strongest product foundations and invest in the parts of the platform positioned to drive durable, profitable growth. Now let me walk through our second quarter financial results, followed by our guidance for the third quarter of 2025. Second quarter total revenue was $234 million, up 7% year-over-year, just above the midpoint of our guidance range as double-digit year-over-year growth in our Marketplace business was partly offset by declining wholesale and product volumes. Marketplace revenue was $222 million for the second quarter, up 14% year-over-year, in line with the midpoint of our guidance range. Marketplace revenue growth was driven by strength in our subscription-based listings revenue. In Q2, U.S. QARSD grew 9% year-over-year. We added 1,032 paying U.S. dealers year-over-year, marking 6 straight quarters of positive net dealer adds as well as the second consecutive quarter of the highest year-over-year dealer growth since before the pandemic. While this rapid dealer growth can moderate the pace of QARSD expansion, these trends underscore our ability to grow our footprint while increasing wallet share across our expanding base, driven by upgrades, broader adoption of add-on products, like-for-like price increases and higher lead quantity and quality. Our international business continued to demonstrate strong growth in the second quarter with revenue up 28% year-over-year and international QARSD up 19% year-over-year. Wholesale revenue was approximately $6 million for the second quarter, down 52% year-over-year, and product revenue was roughly $6 million for the second quarter, down 45% year-over-year. These declines were driven by transaction volume decreasing 55% year-over-year. I will now discuss our profitability and expenses on a non-GAAP basis. Second quarter non-GAAP gross profit was $207 million, up 14% year-over-year. Non-GAAP gross margin was 89%, up approximately 510 basis points year-over-year. The year-over-year margin expansion continued to be driven primarily by the revenue mix shift toward our higher-margin Marketplace business. Marketplace non-GAAP gross profit was up 13% year-over-year, and non-GAAP gross margin was roughly flat at 93%. In our Digital Wholesale segment, non-GAAP gross margin was up about 460 basis points year-over-year. On a consolidated basis, adjusted EBITDA was above the midpoint of our guidance range at approximately $77 million, up 39% year-over-year. Adjusted EBITDA margin was 33%, up about 760 basis points year-over-year, reflecting the strong revenue growth and operating leverage. Marketplace adjusted EBITDA grew 31% year-over-year to approximately $80 million, with margin up about 470 basis points year-over-year. The higher margins were driven by leverage across our operating cost base. Digital Wholesale adjusted EBITDA loss was approximately $3 million. The decline was driven by the year-over-year decline in transaction volumes and deteriorating unit margins. Moving to OpEx. Our second quarter consolidated non-GAAP operating expenses totaled $136 million, up 3% year-over-year. The year-over-year change primarily reflects higher general and administrative and sales and marketing expenses, partly offset by modestly lower product and technology expense. During the second quarter, we recorded $32.6 million in total impairment charges associated with our CarOffer business. The impairment charge included $2.9 million booked in cost of revenue and $29.6 million in operating expenses in the Digital Wholesale segment. Non-GAAP diluted earnings per share attributable to common stockholders was $0.57 for the second quarter, up $0.18 or 46% year-over-year, reflecting primarily the increase in adjusted EBITDA and lower diluted share count. We ended the second quarter with $231 million in cash and cash equivalents, an increase of $58 million from the end of the first quarter. The higher cash balance was primarily driven by higher adjusted EBITDA as well as working capital inflows of about $4 million, partly offset by $8 million in CapEx and capitalized website development costs. I will now close my prepared remarks with our guidance and outlook for the third quarter 2025. Due to the wind down of CarOffer, we will no longer be guiding to consolidated revenue and consolidated adjusted EBITDA. Instead, we are guiding to Marketplace revenue and Marketplace adjusted EBITDA as that is representative of our go-forward operations. We expect third quarter Marketplace revenue to be in the range of $228 million to $233 million, up between 12% and 14% year-over-year, respectively. Last quarter, we guided to exit the year at a low double-digit growth rate. We are now tracking modestly ahead of where we previously expected we'd be. For the third quarter, we expect our non-GAAP Marketplace adjusted EBITDA to be in the range of $76.5 million to $84.5 million, up between 9% and 20% year-over-year, respectively. Our guide reflects Marketplace absorbing approximately $1 million in ongoing quarterly CarOffer expenses as a result of the wind down. At the midpoint of the EBITDA range, we expect margins to contract modestly on a sequential basis. As we explained last quarter, Q3 will include sequentially higher investments in sales and marketing, international and product innovation. We still expect annualized margin expansion in 2025 relative to 2024. We expect to substantially complete the wind-down activities related to the CarOffer transactions business in the second half of 2025. We expect to incur total wind-down related charges in the range of $14 million to $19 million. We expect third quarter non-GAAP consolidated earnings per share to be in the range of $0.50 to $0.58, up between 14% and 32% year-over-year, respectively, and diluted weighted average common shares outstanding to be approximately 101 million. Finally, I'm pleased to share that with only $15.5 million remaining under our $200 million 2025 share repurchase authorization, the Board has approved a $150 million increase to the existing program, reinforcing our commitment to returning capital to stockholders and our confidence in the strength of our performance, balance sheet and disciplined capital allocation strategy. The authorization is available through July 31, 2026. Since the fourth quarter of 2022, we have repurchased nearly 25 million shares at an average price of $22.39 for a total of about $553 million. With that, let's open the call for Q&A.

Operator, Operator

Our first question comes from Chris Pierce with Needham & Company.

Christopher Alan Pierce, Analyst

I was just curious, how should we think about dealer count or revenue per dealer, the way it lines up into Marketplace revenue growth with your existing product suite or the need to kind of drive adoption of yet to be introduced products? Like, I just want to get a sense of the white space available. And you sort of hit on it with Digital Deal being uptake of 12,000 dealers versus 33,000 total, but I just kind of want to get a sense of white space with your current product suite.

Jason M. Trevisan, CEO

Sure, Chris, it's Jason. There are significant opportunities for our existing products. We have shared some data on cross-sell penetration for a few of our products, particularly among our core group of approximately 26,000 paying dealers in the U.S. There is definitely potential for growth among the total of about 42,000 rooftops in the country based solely on our core offerings. Additionally, for our other monetizable products, we see substantial potential, with over 50% opportunity for most of our cross-sell items. From a DDI perspective, engaging dealers with our insights and analytics has shown promising results; for instance, our best deal rating reached 18,000 while the others were considerably lower, indicating good growth potential. As we roll out new products, features, and insights, we are optimistic about our pipeline. We have proven our ability to gain adoption, which excites us about what's ahead, especially given the high level of engagement we are currently witnessing from dealers. In this market, they are keen for solutions that help them navigate effectively. Therefore, the predictive analytics and features like VIN-level targeting and new car offerings present valuable opportunities for them.

Christopher Alan Pierce, Analyst

Thank you. I have a question about the macro environment. While I understand that nobody can predict the future, how should we approach the increase in used vehicle supply as off-lease units return? It seems to be becoming more competitive for dealers. What are your thoughts on what the future may hold, considering you have products that could assist dealers in becoming more efficient, along with a growing pool of vehicles available for them to sell?

Jason M. Trevisan, CEO

Yes, totally. I mean used inventory is up year-over-year, but it's not where it was pre-COVID. And so we think there's still runway for it. And as you've heard us often say, the best way to make money selling a car is to buy it right. And so that's why we're so excited about the sourcing intelligence that we talked about having built the CarOffer because the CarOffer dealers that used it there showed how much they appreciated it and how well it worked for them. And so if we can parlay that into the much broader base of the 26,000 paying dealers, then we think there's huge upside there.

Operator, Operator

Our next question comes from Rajat Gupta with JPMorgan.

Rajat Gupta, Analyst

I just wanted to ask one. Just following up on Chris' question, just a little more broader macro-type question. Given we have a little more certainty around the tariffs, the manufacturers have some certainty, the dealers perhaps have more certainty. Are you seeing some easing in terms of anxiety when it comes to how your customers are viewing the backdrop going forward? Are they more willing to open up their budgets and have more clarity on those budgets? And are you starting to see that with your sales force on the ground that they're more willing to have those conversations and just go ahead with the subscriptions? Just curious to get your thoughts on like what your customers are telling you? And I have a quick follow-up.

Jason M. Trevisan, CEO

Thank you for the question. There may be a bit more certainty regarding tariffs that could reduce some anxiety, but I wouldn't say that concern has disappeared. Tariffs have impacted consumer demand, causing a surge in purchases in March and April, which then stabilized. Currently, there is another surge as consumers worry about tariffs. Although tariffs haven't led to significant increases in new car prices, original equipment manufacturers are mentioning substantial losses due to tariffs. We believe that eventually, these costs will need to be absorbed somewhere. Consumers are feeling uncertain, especially with high interest rates, used car prices that are higher than last year, and elevated inventory levels. Days on market remain steady, and dealers sense ongoing uncertainty in the new car market while having a surplus of high-priced used cars that they need to sell. These macro factors are influencing the adoption of our services. When dealers anticipate challenges in selling cars, they tend to collaborate with marketing partners like us. We feel well-positioned as the market leader, increasing engagement with our insights. Our value proposition is centered on return on investment, which makes us well-placed for dealers amid these macro conditions, and we expect this uncertainty to persist for some time.

Rajat Gupta, Analyst

Got it. Got it. That's helpful. And just again, zooming out even more, I wanted to talk about agentic AI, GPT 5 launch today. Just with the rise of these tools that can search and transact on behalf of users, I mean, how do you see this affecting your Marketplace model? Are there plans to integrate or partner with such tools just to stay central in the car buying journey? Just curious to get your thoughts on how you see yourself participating, navigating as this evolves.

Jason M. Trevisan, CEO

Sure. I have a lot of thoughts on this. First, our CG Discover tool, which you can use on our site, is a significant step in the right direction. It goes beyond simply applying freeform search to SRP filters. Our AI Discover, or CG Discover, is truly autonomous and conversational. It employs reasoning and supports the user across multiple steps, evolving into more of an advisor for consumers searching. More generally, AI is a crucial part of our strategy, particularly in audience acquisition. We are deeply integrating AI into our existing channels, which has led to significant efficiency gains. We are fine-tuning our generative engine optimization, which involves both practical measures and improving data accessibility. Additionally, AI on our website, combined with direct traffic, focuses on enhancing the consumer experience. A key component of this experience is providing content for the upper funnel and utilizing AI discovery, as well as improving decision-making points and connecting with dealers. Engagement from dealers plays a vital role here. The trust and collaboration we maintain with dealers, along with the data they share, enhance the overall user experience and build trust with consumers, which is essential and challenging to achieve with general-purpose or agentic AI. Lastly, the shopping experience for cars carries an important human element. The emotional aspects and personal opinions about cars and homes are difficult to convey in an AI format. We've observed this on platforms like VLAs and Google—they serve specific purposes, but the deep emotional journey that consumers undergo on our site is hard to replicate.

Operator, Operator

Our next question comes from Joe Spak with UBS.

Joseph Robert Spak, Analyst

Just first one, just a clarification. All the costs related to the wind down of CarOffer are excluded. I think you mentioned $14 million to $19 million of expenses in the second half, and there was a reference to a significant portion of the cash payments. Are the cash payments equal to that expense, or are there also some noncash write-downs included in that figure? Additionally, the $1 million quarterly expense that you mentioned being absorbed into the remaining business, can that amount be reduced over time?

Jason M. Trevisan, CEO

I'll address the latter part first. The estimate of $1 million per month, or $3 million per quarter, reflects our recurring expenses related to the Marketplace business. While some items may have a future end date, they should be considered recurring for now. Regarding the breakdown of the estimated $14 million to $19 million, around $5 million to $7 million will be spent on one-time restructuring costs, severance, and associated expenses. Additionally, $8 million to $10 million pertains to actual wind-down operations, which we anticipate will be mostly completed in the second half of this year. Finally, the remaining $1 million to $2 million consists of noncash charges such as brand amortization, capital debt, and inventory.

Joseph Robert Spak, Analyst

Okay, super helpful. And then Jason, when I first asked about Amazon, I think all the way back on your fourth quarter '24 call, you said you would never underestimate them as a formal competitor, but that you found it understandable that they'd focus on new vehicles to start and that's a cleaner market value chain that use is quite different. And so with the recent news that they're moving into used and CPO, just wondering if we can get your updated thoughts there on them as a competitive threat or change the competitive landscape and maybe if you have any feedback you can share from dealers or customers that you've heard from on their initiatives.

Jason M. Trevisan, CEO

Sure, I can start with this. Sam, you can then share what feedback we’ve received from some of our dealer partners. I want to emphasize that neither we nor anyone else should ever underestimate Amazon. However, we believe we have significant advantages and are aware of their recent launch of used cars in the L.A. area. Our strengths include our selection, data, and the trust and engagement we have from dealers, which creates a mutually beneficial experience for both dealers and consumers. This builds a sense of trust in what they receive, ensuring quality leads and meaningful introductions to dealers. Growing our dealer ecosystem is crucial, and it requires their commitment and trust. For consumers, purchasing a vehicle is a deeply emotional and time-consuming process. We believe we have done an excellent job by focusing on practical elements like selection, transparency, and data, and we’ve been able to tailor the shopping experience based on our extensive experience understanding consumer behavior. We are personalizing the journey more and ensuring a positive overall experience, reflected in our high Net Promoter Score. While we don’t dismiss any competitors, we are confident in our position by enhancing the experience and the trust between both sides. We will keep monitoring them and all other competitors, and we anticipated their move into used vehicles. Sam, would you like to discuss what you’ve heard from dealers, or should I continue?

Samuel Zales, President and COO

I would only add that we are very vigilant about the competition. We are really proud of our current position in the Marketplace. Jason articulated it well; the liquidity of our Marketplace stems from the trust we've built with consumers and dealers, as well as our continuous use of data to enhance the effectiveness and efficiency of the purchase process, which sets us apart. Customers we've spoken to, particularly within the Hyundai community working with Amazon, have indicated low volume so far, and we're monitoring that closely. It's important to remember that consumers desire both online and in-store experiences. Our effort to partner with dealers has been refined over the years, and the Digital Deal initiative in our business effectively guides consumers down the sales funnel and into dealerships prepared to purchase. This process we've developed makes us confident in our competitive position within the Marketplace.

Operator, Operator

The next question comes from Marvin Fong with BTIG.

Marvin Milton Fong, Analyst

I apologize, I hopped on a little bit late, but I understand that you're winding down CarOffer and the limitations of that platform. Just would love to know though, how do you plan to kind of continue to attack the dealer-to-dealer side of the business? I understand you still have Top Dealer Offer. But in terms of sort of addressing the D2D space, is that something you will be finding an alternative way to do? That's my first question. And I have a follow-up.

Samuel Zales, President and COO

Marvin, thanks. It's Sam Zales. I'll jump in and then let Jason follow on. We absolutely do plan to provide D2D capabilities that we already have been providing in the sourcing arena. You said it well, we're providing Top Dealer Offer, which we're really proud of the growth of that business and expect that it will continue to be or believe that, that will continue to be an important channel for dealers to access consumer vehicles. But in the arena of sourcing, the biggest learnings out of the CarOffer platform for us was we truly believe we have differentiation in the data-driven technology tools and insights we provide in the sourcing arena, which allows you to help dealers provide insights for inventory management and pricing, which ties very directly from wholesale to retail, our core business. And I think the real differentiation here is predictive analytics, and that's what we see as differentiated in the Marketplace. Why predictive? One, we provide more information on consumer demand than any other marketplace in the industry. So where is that consumer demand going in a local market? What are the turn times and market day supply in those markets so we can optimize stocking experiences for our dealers and help them find the vehicles that will make the biggest difference in their profitability. Number two, retail pricing. So we have more information with more inventory on retail pricing than any Marketplace. And so the effort there is to help dealers get the spread that they need or loss mitigation on the vehicles they're holding to know what they can do with those vehicles in the market and price them effectively to win. So we think that inventory management and pricing in our intelligence and our predictive analytics is going to be differentiated and continue to be an important part of our offering in the sourcing arena.

Marvin Milton Fong, Analyst

Got it. And I think I actually asked you, Jason, this a couple of years ago. But now that you're seeing so much success in the international business, I mean, would you ever reconsider going into beyond just Canada and U.K.? Or does that kind of remain the focus of your international efforts?

Jason M. Trevisan, CEO

That remains the focus for now, Marvin. We are doing, as you heard, really well in those markets. We think we're at pretty interesting points in time in those markets in terms of our lead volume relative to some of our competitors, our lead quality, our dealer satisfaction, our consumer NPS. And so we want to stay focused there because those are big markets and have a lot of enterprise value to go get, and we feel extremely good about those countries for now.

Operator, Operator

The next question comes from Andrew Boone with JMP Securities.

Andrew M. Boone, Analyst

I wanted to go back to AI search. But instead of talking about agentic, I just wanted to talk more about today. As we do transition to AI overviews and eventually AI mode, what are you guys seeing in terms of the change in traffic? Is there anything that we should be aware of as Google makes that transition?

Jason M. Trevisan, CEO

Sure. Thanks for the question, Andrew. Nice to connect. We are observing relatively low adoption of AI search among our target audience, but it's growing rapidly from a small base. We understand that when Google provides AI responses, the click rate is much lower because users often find the answers they need within that response and don’t seek further information. In contrast, with auto-related searches, users typically want to visit a destination where they can compare options, conduct research, and browse in depth. We are seeing growth in this area with Google and platforms like ChatGPT, but it hasn't yet impacted our audience acquisition. Despite this, we are investing heavily in maximizing AI integration into our experience. Additionally, Google, along with Meta and Amazon to some degree, has developed impressive AI tools for traditional search, which helps us operate more efficiently, as a significant majority of search activity remains relevant to our audience, primarily those who are actively looking to purchase a car and are developing a clear idea of what they want.

Andrew M. Boone, Analyst

And then just as a follow-up, you guys highlighted retention rates that improved last quarter. Can you just double-click on that and just update us for this quarter? How is retention with dealers? Are you guys seeing any changes there?

Jason M. Trevisan, CEO

Sure. I'll maybe give a disappointing start, which is to say we don't give actual retention data, but we did give the trend that we're improving. But Sam, do you want to talk about some of the things that we think are driving the improved retention, largely sort of based in engagement?

Samuel Zales, President and COO

Happy to, Andrew, thanks. The results continue to improve. We look at our monthly recurring revenue and recognize the need to acquire new business, expand existing business, and retain our current customers. All these strategies have proven successful, as evidenced by the growth of the Marketplace business. We're really proud of those results. The engagement Jason mentioned is primarily centered around dealer data insights, which we’ve introduced to the market. We offer dealers a chance to operate their business more profitably, which is what every dealer aims for. Our focus is on leveraging data and information to help them set the most effective pricing. In some instances, this means lowering prices to attract a larger audience, and we've seen excellent results from that approach. In other situations, it might involve increasing prices to remain competitive within key segments of our search results, thereby winning more business and boosting profits. The CarOffer Acquisition Insights report helps dealers identify the right vehicles that align with market trends and opportunities to enhance turnaround times. These strategies also encompass merchandise health; how effectively am I marketing my vehicles against the competition? All these factors position us as a consultative partner to dealers, contributing to our new acquisition numbers, the addition of dealers, our expansion of QARSD, and record retention results, which demonstrate the quality of consultative feedback we provide. Additionally, we have an in-market engagement team that visits our dealers to share best practices tailored to their regional needs, covering aspects like lead management, marketing, merchandising, and pricing. This collaboration fosters wins across the industry, leading to greater liquidity. More liquidity translates to better ROI, which encourages dealers to continue using our Marketplace and sustains our Marketplace revenue growth.

Jason M. Trevisan, CEO

I would like to summarize a bit on the key notion of engagement that we often discuss. It distinguishes between a dealer who views leads in their CRM and merely processes them and several people at the dealership, such as the general manager and sales managers, who actively use our insights on a regular basis. When these habits are formed, dealers become very integrated with our system and are less likely to disengage. This leads to longer-term contracts, which we are seeing increase, as well as growth in app usage. We have noted frequent app usage, and as we add new features, we are experiencing significant growth and adoption. Ultimately, it's about fostering habits and behaviors among dealers that deepen their relationship with us.

Operator, Operator

Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Jason Trevisan for the closing remarks.

Jason M. Trevisan, CEO

Thank you very much. So I'd just like to thank everyone for joining the call today and for your interest in CarGurus. As always, I want to give special thanks to our employees and their passion and commitment every day as well as to our customers who put their trust in us. Thanks very much, everyone. Have a great evening.

Operator, Operator

Ladies and gentlemen, the conference of CarGurus, Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.