Cars.com - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue was $180.4M, up slightly year-over-year; Adjusted EBITDA was $55.5M with a 30.8% margin, the strongest quarter of 2024 on both dollars and margin.
• OEM and National revenue rose 15% YoY, while subscription Dealer revenue fell 1% YoY due to pressure on dealer profitability and marketing spend; adjusted operating expenses were flat YoY, reflecting cost discipline.
• Management introduced 2025 guidance: Q1 revenue of $178–$181M and Adjusted EBITDA margin of 25.5%–27%; FY 2025 revenue of $745–$755M and Adjusted EBITDA margin of 29%–31%.
• Capital return and platform expansion were key catalysts: a new $250M share repurchase authorization targeting $60–$70M in 2025, and the January acquisition of DealerClub to add a transactional wholesale revenue stream; near-term margin headwinds reflect integration investments.

What Went Well and What Went Wrong

What Went Well

• OEM and National revenue grew 15% YoY, reflecting strong automaker marketing as inventory levels normalized; the business posted its highest quarterly OEM/National revenue since 2021 and meaningfully higher 2025 upfronts.
• Adjusted EBITDA margin reached 30.8% in Q4, with sustained marketing efficiency and cost discipline; free cash flow for FY 2024 was $128.1M, the highest since 2018.
• AccuTrade reached ~1,000 subscribers with eight to ten OEM endorsements by January; management emphasized cross-selling across Marketplace, AccuTrade, and DealerClub to lift ARPD and transaction revenue: “customers… appraise, source, retail, and wholesale vehicles all within the Cars Commerce platform”.

What Went Wrong

• Dealer revenue declined 1% YoY, with marketplace softness from seasonal churn and fewer upgrades; ARPD fell 2% YoY to $2,475.
• Q1 2025 margin guide (25.5%–27%) implies a sharper-than-usual seasonal dip due to DealerClub integration costs and Q4 dealer revenue exit rate; margins expected to ramp in 2H with back-half-weighted growth initiatives.
• Average Monthly Unique Visitors fell 5% YoY amid seasonal trends, though repeat visitation rose 6% YoY; traffic was down 7% sequentially to 143.8M visits.

Transcript

Operator (participant)

Good morning, ladies and gentlemen. Welcome to Cars' Fourth Quarter 2024 Earnings Conference Call. I would now like to turn the conference over to Ms. Katherine Chen, Vice President of Investor Relations. Please go ahead.

Katherine Chen (VP of Investor Relations)

Good morning, everyone, and thank you for joining us. It's my pleasure to welcome you to the Cars.com Inc Fourth Quarter and Full Year 2024 Conference Call. With me this morning are Alex Vetter, CEO, and Sonia Jain, CFO. Alex will start by discussing the business highlights from our fourth quarter and full year. Then Sonia will discuss our financial results in greater detail, along with our 2025 outlook.

We'll finish the call with Q&A. Before I turn the call over to Alex, I'd like to draw your attention to our forward-looking statements and the description and definition of non-GAAP financial measures, which can be found in our presentation. We'll be discussing certain non-GAAP financial measures today, including Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Operating Expenses, Adjusted Net Income, and Free Cash Flow.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the financial tables included with our earnings press release and in the appendix of our presentation. Any forward-looking statements are subject to risks and uncertainties. For more information, please refer to the risk factors included in our SEC filings, including those in our most recently filed 10-K, which is available on the IR section of our website. We assume no obligation to update any forward-looking statements, and now I'll turn the call over to Alex.

Alex Vetter (CEO)

Thank you, Katherine. We had a strong 2024, delivering record full-year Adjusted EBITDA growth, and powerful product innovation that fueled the expansion of our leading digital automotive platform. Revenue of $719 million was up 4% year-over-year, and we drove nearly a full point of margin improvement. Free cash flow of $128 million also reached a multi-year high, reflecting operating discipline and the strength of our asset-light business model.

For the fourth quarter, we extended our track record to 17 consecutive quarters of year-over-year revenue growth. OEM and National meaningfully outperformed, up 15% year-over-year to its best quarterly revenue since 2021. On the bottom line, our strong cost discipline enabled us to exceed our adjusted EBITDA margin expectations. more broadly, we're seeing increased dealer engagement and usage of our solutions and just crossed the 1,000 subscriber mark for AccuTrade.

For Cars.com, we're also seeing continued robust traffic gains heading into 2025, reinforcing our marketplace leadership. Altogether, the momentum behind our diverse growth drivers gives us confidence that we can operate through dynamic economic conditions and accelerate growth throughout the year. Our platform vision is differentiated and clear, with best-in-class solutions that enable automotive retail and wholesale operations with tangible results.

We've made significant progress to bring new and innovative products to market in the past year, culminating in our most recent acquisition of DealerClub. Each solution on our platform is connected and empowers dealerships to participate in a race to the top, focused on efficiency, quality, and reputation to win consumers rather than a race to the bottom on lead arbitrage and forced price cuts that lure consumers but erode dealer profitability.

In 2025, we're focused on accelerating our growth by increasing sales velocity, improving our packaging and value delivery, and continuing to bring new innovative products and enhancements to market. Our execution in 2024 and early Q1 provides us with a strong springboard to achieve these goals. To support these initiatives, we are pleased to announce the appointment of Lisa Gosselin as our new Chief Commercial Officer. Lisa is a transformative leader with a proven track record of accelerating revenue growth and go-to-market strategies across SaaS, ad tech, and data.

We're excited to have her guide the next phase of our commercial strategy, focusing on key growth drivers such as dealer customer growth and unlocking the cross-sell. We're also grateful to Doug Miller, who oversaw the expansion of our platform through multiple acquisitions, launched our unified Cars Commerce commercial brand, and created an inspiring sales culture that we're proud to build upon. Now, let's turn to a review of our Q4 performance and our 2025 growth priorities across each area of our business.

Starting with AccuTrade, we're now in over 1,000 dealerships, changing how the industry acquires used cars. Dealers increasingly view AccuTrade as a valuable tool to source trade-ins, driving annual appraisal volume up 35% year-over-year, and the number of vehicles being acquired post-appraisal per dealer was up 23% year-over-year in Q4. As we build our sales pipeline, we're pleased to announce eight new OEM endorsements for AccuTrade from Maserati, BMW, MINI, Subaru, and Genesis, just to name a few. Endorsements play a key role in driving dealer adoption of new tools.

Close to 30% of AccuTrade franchise dealer launches in Q4 were associated with dealers who had the option to utilize AccuTrade as an endorsed trade-in and appraisal solution. Based on a typical two to three-month AccuTrade sales cycle, these recent endorsements from December and January should begin to contribute more meaningfully to launch volume in the Q2 and lift ARPD. And we're excited to expand AccuTrade's capabilities, which I'll talk about in a moment.

Our Cars.com Marketplace continues to dominate consumer mind share and deliver in-market shoppers and high-quality traffic and leads to dealers at scale. In the fourth quarter, we reached over 23 million shoppers who collectively drove over 143 million visits to Cars.com. Repeat visitation was up 6% year-over-year and has been up each quarter of 2024 as we win high-intent buyers through continuous product innovation.

In fact, in December, we led our competition on monthly unique visitors and average time on site, giving us a strong start to 2025 and a powerful signal that our brand investments, AI-enhanced shopping tools, leading user experience, and proprietary content are winning over consumers. Recall, over 60% of our traffic mix is also organic, and we're invested to sustain this leadership through editorial and brand marketing, such as our annual Best of Awards that were just announced in February.

This strategy yields greater long-term benefits and sustained advantages for our brand. Based on this consistently strong marketplace performance, our primary goals this year are to help dealers better understand attribution from Cars.com traffic and leads, enhance packaging with complementary features, and align pricing with value delivery.

Helping dealers gain clarity on attribution immediately elevates our impact, embeds us within dealership operations, and highlights the competitive advantage of utilizing our proprietary data insights. For instance, Cars.com delivers more traffic to dealer websites than our peers, and that traffic converts 70% better than Google, where dealers spend the majority of their budgets.

We anticipate packaging more of our platform value, like additional media, into our dealer offering to drive optimal outcomes for customer needs, especially knowing that customers who adopt more than one solution see double the volume of leads and consumer engagement. For dealer websites, we see parallel growth opportunities to our marketplace initiatives. We powered over 7,600 Dealer Inspire and D2C websites in the fourth quarter, and D2C specifically has reached 1,100 customers in Canada.

Based on the product enhancements we have made with websites, our focus for the year is on repackaging, legacy agreements, and migrating customers into higher-tier packages that better capture the true capabilities and synergies of our platform. We also expect our OEM and National business to be an important contributor to total enterprise growth in 2025.

In Q4, OEM and National revenue was up 15% year-over-year, handily exceeding our expectations and pushing full-year growth to 18%. As inventory levels normalize, we believe more manufacturers will increase marketing investments to reach in-market shoppers. Already in 2025, upfronts, which are marketing dollars committed to us by OEMs at the start of the year, are up double digits year-over-year.

We expect to win incremental OEM dollars on top of committed spending, not only through media but also with products like New Car Hub, which the majority of our OEM partners have expressed interest in testing during 2025. Looking ahead, our 2025 product roadmap aims to deepen differentiation and stimulate cross-selling across our platform, particularly with our newly expanded trade, appraisal, and now connected wholesale marketplace.

In January, we announced the acquisition of DealerClub, a reputation-based dealer-to-dealer wholesale marketplace that strategically augments our platform capabilities. This deal launches us into a $10 billion wholesale market with clear and distinct value proposition. First, our transparent auctions with seller ratings create more successful transactions while lowering arbitration risks and costs. Since inception, less than 1% of DealerClub's auctions have resulted in meaningful arbitration or goodwill expense.

Second, integration with AccuTrade's market-leading valuation algorithms and condition reports are superior to manual inspections for appraisal velocity and accuracy, and finally, scaling with technology, rather than a legacy labor model, means a faster path to sustainable, profitable growth. DealerClub also unlocks the full potential of our Inventory Intelligence Platform, or IIP, a disruptive inventory management system that offers AI and ML-powered inventory pricing and market insights drawn from our unparalleled first-party demand data.

IIP's predictive analytics can estimate time on lot, daily depreciation, and other variables, which are used to create customized vehicle acquisition and exit strategies that optimize profit per vehicle. In other words, dealers can leverage IIP's real-time insights to evaluate the profitability and health of their on-the-lot inventory and quickly determine which vehicles should be retailed on our consumer marketplace or wholesale through DealerClub auction.

As we look at the dealer inventory on our marketplace and dealer websites, we can identify, on average, over 200,000 cars on dealer lots that are over 90 days old. By leveraging Inventory Intelligence Platform, we can reduce the risk of diminishing returns on aging inventory and solve a real and persistent problem for dealers, and capturing even 1% of the wholesale market opportunity by directing these vehicles to DealerClub would mean a $100 million-plus transactional revenue stream for the business.

Ultimately, we believe the ecosystem consisting of our Cars.com Marketplace, AccuTrade, Inventory Intelligence Platform, and now DealerClub will make us essential for success. There's still meaningful product work to be done, but our teams are laser-focused on hitting critical development and integration milestones to speed our revenue capture, attract new dealers to our platform, and disrupt traditional auctions to drive the industry forward. Collectively, new sales leadership, ongoing repackaging work, and accelerated product innovation and expansion are the basis for achieving sustained organic growth for 2025 and beyond.

These initiatives also position us for improvement in dealer count and ARPD as overall growth compounds in the second half of the year. We have numerous opportunities ahead and are committed to driving continuous improvement on both the top and bottom line as we grow our industry-leading platform and solutions while scaling DealerClub and adding a new transactional revenue stream to our mix. Now, I'll turn the call over to Sonia to discuss fourth quarter financial performance and our outlook. Sonia?

Sonia Jain (CFO)

Thank you, Alex. Our 2024 performance reflects our ability to deliver sustained profitable growth through focused execution in this dynamic operating environment. We ended the year with fourth quarter revenue of $180.4 million, a new quarterly record, powered by OEM and National growth of 15% year-over-year. Around half of our OEM partners increased their spending year-over-year, and five partners reached their highest-ever fourth quarter spend. We believe there is still opportunity for continued growth.

OEM demand for our marketing and advertising products strengthened each month in Q4. As Alex mentioned earlier, this momentum has translated into meaningfully higher 2025 upfronts. While dealer revenue was robust, it was down slightly year-over-year in the fourth quarter. We continued to experience some pressure on dealer advertising revenue while our solutions performed well. AccuTrade sales were particularly strong throughout the quarter, and December was the second-highest month of AccuTrade net launches for the year.

Marketplace performance was affected by some expected seasonal softness, with slightly elevated churn and fewer upgrades in Q4, weighing on both dealer counts and ARPD. We are closely monitoring these trends and see leading indicators in January that better reflect our marketplace value delivery. The strong consumer metrics that Alex previously mentioned give us confidence in our ability to grow marketplace in 2025.

Moving to operating expenses, fourth quarter expenses were at $161 million compared to $165 million a year ago, down over 2% year-over-year, primarily from lower marketing and sales spend. Fourth quarter Adjusted Operating Expenses were $150 million, roughly flat to the same period a year ago. Product and technology expenditures increased $4 million year-over-year on both a reported and adjusted basis. The majority of this increase supported compensation for new technical talent, enhanced investment in information security and infrastructure, and additional back-end software.

Marketing and sales costs decreased $5 million year-over-year on both a reported and adjusted basis, reflecting continuous improvements in marketing efficiency that allow us to maintain brand leadership even with reduced paid marketing investment. General and administrative expense was $2 million lower year-over-year on a reported basis and up slightly on an adjusted basis. As a reminder, G&A includes $2.6 million of the D2C earnout, which is deemed compensation expense under GAAP and therefore including reported operating expenses.

Net income for the fourth quarter was $17 million or $0.26 per diluted share, compared to $8 million or $0.12 per diluted share in last year's fourth quarter, with the increase primarily attributable to the gain on sale of RepairPal in November. Adjusted Net Income for the fourth quarter was $33 million or $0.49 per diluted share, substantially similar year-over-year.

Turning Adjusted EBITDA, our fourth quarter results of adjusted EBITDA margin of 30.8% in the fourth quarter was consistent with the prior year period due to strong cost discipline to preserve profitability despite softer-than-expected growth in the fourth quarter. On to key metrics. Dealer count of 19,206 dealer customers was down 49 dealers quarter over quarter, as expected, given seasonally slower dealer spend late in the fourth quarter.

While we are optimistic for dealer growth in Q1, particularly given the strong pipeline of prospects that we built at NADA and are now actively closing, we may experience some pressure from targeted rate increases implemented at year-end, which will elevate churn in the near term. In addition, we expect DealerClub to widen our sales funnel and attract new customers to our platform.

Wholesale is an integral part of dealership operations, and we expect our transparent reputation-based approach to buying and selling vehicles will be compelling for dealers who seek a superior alternative to current opaque and expensive processes. Our goal is to efficiently scale DealerClub by leveraging existing sales resources while investing in integrating our front-end and back-end systems. As such, we're prudently not factoring in a steep DealerClub revenue ramp in 2025 at this time.

However, we are pushing hard to sign up dealers with initial focus in the Southeast region, and we'll keep providing updates in future calls. Switching to ARPD, fourth quarter ARPD of $2,475 was effectively flat quarter over quarter. ARPD was down $48 year-over-year, reflecting the aforementioned lower customer count and less upgrade activity in the quarter.

We believe we can return to ARPD expansion in the year ahead with multiple initiatives underway across the breadth of our business to package more value into our marketplace, dealer websites, and media subscriptions. The wave of AccuTrade endorsements that we won in Q4 also opens up meaningful opportunities to drive further product adoption. Approximately 35% of our customer base is affiliated with OEMs who have endorsed our trade and appraisal technology, providing us with a robust sales pathway.

And finally, new dealers acquired through DealerClub will also be funneled into our cross-selling opportunities, especially for complementary solutions like Marketplace and AccuTrade, providing yet another lever for ARPD growth. Now, shifting to our balance sheet, net cash provided by operating activities totaled $153 million for the year. Free cash flow with a $128 million for the same period, the highest level since 2018 and roughly $12 million higher year-over-year.

Free cash flow increased primarily from Adjusted EBITDA growth of $15 million year-over-year. During the fourth quarter, we repurchased approximately 800,000 shares for $13.5 million and achieved our commitment to return approximately 50% of second half free cash flow to shareholders via share repurchases. in 2024, we repurchased 2.8 million shares for $49 million. I'm also pleased to announce a new share repurchase authorization of $250 million over a three-year term, which refreshes and increases our prior $200 million authorization.

Returning capital to shareholders remains a capital allocation priority, and we are targeting share repurchases totaling $60 million-$70 million for 2025. In terms of our liquidity and leverage, we repaid $30 million of debt for the full year, reducing total debt outstanding to $460 million as of December 31st, 2024.

Our total net leverage remains at two times, the low end of our target range of two to two and a half times. Total liquidity increased to $341 million as of December 31st, 2024, providing ample resources to fund our growth strategy and create sustainable value for shareholders. Now, I'll conclude with Q1 and full-year 2025 guidance. For first quarter, we expect to deliver revenue between $178 and $181 million.

Recall that dealer revenue expectations are premised on our fourth quarter exit rate, which was slightly down year-over-year, and that our most significant repackaging work for 2025 is slated for mid-year. OEM and National revenue is expected to continue growing on a year-over-year basis based on sustained demand for our marketing and advertising solutions. Based on quarter-to-date performance, we expect Q1 revenue to be consistent with the prior year period.

For the full year, we anticipate revenue of $745 million-$755 million, driven by growth initiatives related to product adoption, the aforementioned repackaging work, and new launches, including DealerClub. I also want to note that several of these initiatives, while ongoing, are also more likely to be back-half weighted, and as such, we anticipate first-half adjusted EBITDA margin for first quarter of 2025 is expected to be between 25.5% and 27%, down slightly year-over-year, and reflecting our revenue guidance and investment in DealerClub as we look to quickly integrate the business into our platform.

Adjusted EBITDA margin outlook for fiscal 2025 is between 29%-31%, Adjusted EBITDA growth of 7% year-over-year when taking the midpoint of the range. We expect improvements in sales velocity, coupled with sustained cost discipline, will continue to deliver strong operating leverage.

We are well-positioned to drive accelerated organic growth, adjusted EBITDA margin, and thoughtfully return capital to shareholders as we execute on our platform strategy. We look forward to updating you on our progress as we push our industry forward. And with that, I'd like to open the call for Q&A. Operator?

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. One moment, please, for our first question. Our first question comes from Mr. Tom White of D.A. Davidson. Please go ahead.

Tom White (Managing Director and Senior Equity Analyst)

Two, if I could. Just, I guess, on the full-year revenue guidance, so I think the midpoint is like a 4% growth. Can you maybe just talk a little bit about what your kind of implied expectations or what that reflects about marketplace growth in 2025 or maybe just kind of total dealer revenues? And then in terms of DealerClub impact, I heard a couple of different things.

I thought you said that in the beginning, maybe with the prepared remarks, that there wasn't going to be a contribution kind of baked into the outlook, but then it sounded like maybe there is. So just what's the impact from DealerClub? And then I just have one follow-up on the quarter. Thanks.

Sonia Jain (CFO)

Thanks for the question, Tom. So I think regarding full-year revenue growth, we're expecting roughly 2/3 of our incremental growth in 2025 to come from dealer revenue. It will be a combination of marketplace as well as our upsells, including websites, AccuTrade, and media products. Obviously, as you can imagine, we have a huge opportunity to continue to push cross-selling opportunities, given the already large and solid marketplace base.

But we would expect, again, two-thirds of the revenue growth to be coming from marketplace. And as you probably took away from our guidance, it is a little bit back-half weighted for 2025 given the timing of initiatives and the time it takes for those to ramp into a fully quarterized, annualized number.

Tom White (Managing Director and Senior Equity Analyst)

Okay. And then just, and I'm sorry, was there any presumed kind of DealerClub contribution there?

Sonia Jain (CFO)

Oh, sorry. I didn't mean to forget that question. So on DealerClub, we're focused right now on really getting the business integrated. As mentioned, we're actively targeting a handful of regions to really drive depth and take with dealers. Our launch at NADA or our announcement at NADA was really well received, so we feel really optimistic about the business. To your point, no, we have not baked in a ton of revenue at this point in time, just as we focus on getting the business going.

Tom White (Managing Director and Senior Equity Analyst)

Okay. Understood. Then just on the quarter itself, I was hoping you could just unpack a little bit kind of what happened to dealer revenues. If I remember from your last earnings call, I think you talked about October, you seeing kind of month-over-month dealer additions kind of across all product lines. So just trying to kind of understand what happened as the quarter progressed. I don't know, maybe it was something in kind of media solutions. Maybe just explain if it was sort of core listings, softness, or other parts of what's in dealer revenue. Thanks.

Alex Vetter (CEO)

Yeah, Tom, typically we do see seasonal softness in Q4. And as inventory levels normalized and dealers started to see profit compression on gross profit, there's always a natural pushback, pullback. So we did see a lot of our media solutions get pulled back in the fourth quarter, which had a little impact, obviously, on Q1 because of our Q4 exit rate. But we've seen this cycle before. And now that inventory levels are back up on dealer lots, there is a return, and we're seeing good momentum in the first quarter, just like we've seen in prior cycles.

Tom White (Managing Director and Senior Equity Analyst)

Okay. Thanks. I'll get back in the queue.

Operator (participant)

Thank you. Our next question comes from Mr. Naved Khan of B. Riley Securities. Please go ahead.

Naved Khan (Managing Director of Technology Research)

Great. Thank you very much. I have two questions. One on AccuTrade customer count growth. So you added 15 net for the quarter. It seems like December was a strong month. But just talk about maybe the retention in the base that you are seeing, and how much of that is going to be contributed to growth going forward, versus these, obviously, the endorsements should help. And usually, what's your sort of success in terms of an OEM and winning an endorsement from an OEM and then having it translate into sales? So that's on AccuTrade.

The other question I had is around margins. At the midpoint, I think your guidance assumes like a 100 basis points improvement year-on-year. And I'm just trying to think what are the drivers for that? Is that mostly marketing expense or other lines, other OpEx items? Talk about that a little bit. And DealerClub, obviously, you said you're not assuming much of a revenue contribution there, but does it affect margins at all?Thank you.

Alex Vetter (CEO)

Sure, Naved. Thank you for your questions. Well, first of all, on AccuTrade, we were really pleased with the momentum that we demonstrated with the business in Q4, not only on gross sales and the pipeline expansion there, but obviously to your comment on the retention front. Appraisal volume, which we track closely, is up a healthy 5% quarter over quarter.

But as I mentioned on the call, from Q1 to Q4, appraisals were up 13%. So we're seeing the dealers are averaging 14% higher vehicles appraised via AccuTrade in Q4. And they're also buying more cars. Average dealer, we can see through the appraisal technology that are buying about 19 cars a month through the platform.

And so when you think about the auction fees for that kind of volume of vehicle acquisition and the fact that that inventory is fresher and creates a new sales opportunity, we think this product and platform is very disruptively priced and has tons of headroom on value. We believe there's pricing opportunities with AccuTrade over time, but it starts with increasing usage.

I think the reason that DealerClub was so well received at NADA is AccuTrade dealers now having one-click injection to a wholesale marketplace for any vehicles that they don't want to retail is going to be a huge benefit once we integrate that technology and provide that capability so that a dealer can appraise a car and then launch it in a retail or wholesale market, depending on its desirability without any rekeying of the data, is a massive operational benefit that the AccuTrade dealer network will appreciate.

I think the OEM endorsements, as we sit on the call, 30% of our volume in Q4 came from OEMs that had previously endorsed AccuTrade, and so the fact that we've added eight new OEM endorsements certainly gives our salesforce a fortified reason to get dealers to lean into this solution.

And we think that will build closer towards Q2 because it just takes time for dealers to implement AccuTrade in their store. And so the endorsements now are important, but we think that'll have a bigger impact on second half. I'll let Sonia, if you want to take the comment on the margin midpoint and the drivers there.

Sonia Jain (CFO)

Yeah. No, happy to. So related to margins, you're right. We did not bake in a huge revenue contribution from DealerClub. However, we have, in my opinion, prudently built in costs associated with integrating and scaling the business. So that is having an impact on margins and putting a little bit of downward pressure on margins because we have baked the cost side into the equation here.

In terms of overall, on a full-year basis, the improvement in margins and the margin expansion, I would probably describe this as a natural flow-through benefit from the platform strategy. So as we're able to scale revenue and grow revenue, we would expect to see an increasing portion of that revenue then flow down to the bottom line.

Naved Khan (Managing Director of Technology Research)

Thank you, Alex. Thank you, Sonia.

Alex Vetter (CEO)

Thank you.

Operator (participant)

Thank you. Another question comes from Mr. Gary Prestopino of Barrington Research. Please go ahead.

Gary Prestopino (Managing Director)

Good morning, all. I just want to be clear on with the DealerClub integration, when will you have that fully completed? Are you looking for a launch or the full integration to be completed by the end of 2025?

Alex Vetter (CEO)

I certainly would hope so, Gary. We actually have been taking pre-orders and getting dealers to register. And by the way, the product is functional today. Dealers are selling cars on the club every day. In fact, we had over 900 dealers register based on our debut at NADA. So compare that to AccuTrade, which has taken us a year to get to 1,000 dealers. The fact that we had 900 enrollments for DealerClub at the onset is pretty incredible. So we're scaling dealers every day, and vehicles are being transacted on the platform today.

As to the AccuTrade integration and the ability to one-click eject cars into the auction, we expect that integration work to be done in the first half of this year. So you'll see some margin compression as we ramp up technology investments to integrate DealerClub and AccuTrade together. But I would hope that to be completed in the first half of this year, which is why we get back to great margin profile for the full year.

Gary Prestopino (Managing Director)

Okay. That's helpful. It just seems to me that this acquisition and the ability now, as you have a headline on one of your slides, to manage the vehicle lifecycle on a unified platform could really be a game changer. I mean, one-click, you can appraise. One-click, you can put the inventory or value the inventory. Then you can either put it in the wholesale or retail channel. Is that what's exciting your dealer customers? And then I just have another question on how you're going to bundle this with AccuTrade to drive sales growth.

Alex Vetter (CEO)

Thanks, Gary. Our competition has a sort of a one-trick pony, which is to recommend to dealers to lower the price of the car constantly, which just erodes dealers' profits. And our model is definitively different, where we're rolling out Inventory Intelligence that shows dealers what the propensity for a vehicle to retail is depending on the price point, the market. And as you know, some market geographies have a higher desirability for certain inventory than others. And so giving dealers the tools to be able to move vehicles to the highest yield outcome, whether that be retail or wholesale, we do think and know is a major differentiator of our level playing field and our platform.

And so the integration, we've got our AccuTrade dealers helping provide feedback to it. The Inventory Intelligence was co-developed with dealer partners, providing us insights on what they dislike from existing IMS tools. And so we know we've got market-leading technology both on Inventory Intelligence, AccuTrade, and DealerClub. Bringing that together is going to provide tremendous benefit. So obviously, we know that gives us pricing power once we have dealers using the technology at scale.

And so again, our choice right now is to be very low cost because we want to win adoption. But I think when you think about the value of eliminating auction fees or being able to source inventory from your customers as opposed to the traditional auction, we're dropping massive savings to our dealers' bottom lines. And so our technology solutions, we think, have tremendous upside in price.

Gary Prestopino (Managing Director)

Yeah. And I guess the question I would have is, AccuTrade is a subscription. DealerClub is a transaction. As you package this, are you contemplating just bundling it and maybe getting an upcharge on the entire monthly fee for the subscription if you bundle? Or is it still going to be subscription and transaction for each product?

Alex Vetter (CEO)

It's premature to signal exactly where we're going to go, but we have talked about one of the benefits of DealerClub is that we pay sellers to sell on the platform and that there's an opportunity for us to say that your seller fees are higher if you're a marketplace customer, so we want to incentivize dealers to use more of our platform.

I think when we look at our pricing model, we have a great opportunity to provide incentives for dealers to consolidate more of their technology into our system because we're going to protect their data as if it was our own. And then we're also going to be able to provide them operational benefits and ease that spot solutions can't deliver on, so yes to the bundling question. We have opportunities. It's just premature for us, and we'll test some different models in the first half of this year and hopefully align on a model that really motivates dealers to put more of their technology in our hands.

Gary Prestopino (Managing Director)

Okay. Thank you.

Alex Vetter (CEO)

Thank you, Gary.

Operator (participant)

Our next question comes from Mr. Marvin Fong of BTIG. Please go ahead.

Marvin Fong (Director)

Great. Good morning. Thanks for taking my questions. I guess I'll just start on the quarter. It looked like, if I'm not mistaken, website solution customers dipped down quarter over quarter. I just was hoping you could shed some light on the dynamics we should be aware of there. And then I guess I'll just ask the bigger picture question that's on the minds of pretty much everyone. Just, I think, even this morning, some more saber rattling about tariffs. How did you incorporate the macro uncertainty into your full-year guidance? I mean, how should investors kind of interpret your confidence in achieving the range given all the volatility?

Alex Vetter (CEO)

Sure, Marvin. Well, look, our website business was relatively flat in the quarter, but we still see tremendous upside, particularly as OEMs increase the requirements from a security and data standpoint. It's going to be very hard for a lot of the long-tail players to keep up with the OEM requirements. And so we're well-positioned, being endorsed by all OEMs, to continue to build on this business. We're nowhere close to 50% of the TAM here.

And so we see tremendous upside. Our Canadian business, obviously, is growing at a faster clip, which has got even more headroom. And we're the number one provider in Canada today. So I think OEM relationships are very key here.

We're going through a repackaging exercise with the manufacturers to show them how we can integrate more technologies like trade-in, like instant finance that can eliminate cost for dealers because right now they're spending extra money for standalone solutions that siphon traffic away from the platform, and our technologies are native and integrated directly into the system of record, so this industry is going to move towards consolidation, and we're positioned to be the market leader, I guess, would be the short answer on it.

I also think that integrating our technology will be key here. Inventory Intelligence Platform, giving dealer website customers added benefits that provide them diagnostics on their inventory, is certainly a higher-order value prop than just building their website.

And so, again, you're seeing the platform come to life, where now DI customers are going to have access to retail predictive data to run their business as being part of the Cars Commerce platform. And so I just think that the value that we're adding to our website platform, plus the OEM endorsements, give us tons of headroom here as well. And I'll let Sonia comment on the tariffs and full-year guide. My general belief, Marvin, is that this business has proven super resilient through all economic cycles.

And the macro changes in OEM and supplier relationships have never in the past impacted our applicability to consumers or the industry. And so I don't see any impact there on the tariff side, but maybe Sonia could comment on the full-year guide.

Sonia Jain (CFO)

Yeah. I mean, I think we're assuming a relatively stable macro environment. Like most others out there, we're actively watching key macro indicators: consumer affordability, interest rates, inventory levels. All of those things can impact both dealer budgets as well as OEM budgets as well. As you probably have noticed from the guide we provided for the first half, and particularly Q1, we are expecting dealer profitability to be a bit under pressure as you look at the beginning of the year.

But we're also very confident in the initiatives that we have planned for the back half of the year, specifically related to repackaging, bundling more of our platform for dealer customers to make it accessible, which will strengthen value delivery and retention of our products over the long term. So we're monitoring actively. We're assuming a relatively stable macro, and we do have a lot of confidence in the initiatives we have planned for the year.

Marvin Fong (Director)

Got it. That's great. And if I could just maybe sneak in one more, just on DealerClub, it looks to me, if I am not mistaken, you grew dealers from the time you announced the deal by several hundred, about 250. I mean, just to level set expectations, I mean, should we kind of think of how should we kind of think about the expectations for dealer account growth in that product line for 2025? Thanks.

Alex Vetter (CEO)

Well, look, it's early here. So I guess I'd want to temper expectations to a degree. However, the founder of DealerClub is a proven operator who's scaled a similar dealer-to-dealer marketplace exchange to $300 million in just a matter of a few short years. And so we have pedigree knowledge in-house, who has a track record of success and has scaled marketplaces. Importantly, DealerClub, we're doing it asset light, right?

We're not carrying huge inspector costs or building in huge arbitration operations because we're relying on dealer reputation to govern the marketplace. And so what I'm thrilled about DealerClub is we really see a path for a low-cost, disruptive technology play as opposed to one that requires tremendous labor costs and can really generate platform efficiency. And then when you look at just the opportunity, DealerClub needed scale.

And when we showed them that we have tremendous listings or access to inventory with accurate aging data where we can target our opportunity to the vehicles that we know are growing beards on dealer lots, we can help dealers target inventory and say, "We need to move this inventory down market to wholesale." And that opens up a massive opportunity. Just 1% of this market is a $100 million revenue stream. And it's very early on, though.

But we think the technology is incredible. And the dealer feedback to the technology has been very affirmative in terms of this being a better way to transact inventory dealer to dealer than all the established players that occupy this market today.

Marvin Fong (Director)

Got it. That sounds great. Thanks, Alex. Thanks, Sonia. Appreciate it.

Operator (participant)

Thank you. Another question comes from Joe Spak of UBS. Please go ahead.

Joe Spak (Managing Director)

Thank you so much. Sonia, maybe just to go back to the margins and the guidance. The first quarter EBITDA margin guidance is like 450 basis points of quarter-over-quarter degradation, which is, I think, more than that sort of seasonal average over the past five years. I think it's been closer to about 200 basis points. So what's really driving that? And then I guess to maybe flip it around a little bit, even on a year-over-year basis, it's 300 basis points.

So to get to that 80 basis points for the year, that's like you need to average almost 180 over the next three quarters. And it sounds like the revenue's back-end weighted. So my guess it's an even larger number as you get to the back half. So can you just help us unpack and understand what's really driving the cadence of margins through the year?

Sonia Jain (CFO)

Yeah. So Q1 margins are reflective of kind of the Q4 exit rate, particularly the dealer revenue exit rate. So I would say that's one factor. And since it was down slightly on a year-over-year basis, that's going to have some impact into our starting point margins for the year. In addition, as we've mentioned, we are heavily investing in the DealerClub integration. We want to get this done as quickly as possible.

So that is also weighing a bit on the Q1 margin guidance. I would say those are the primary reasons. Otherwise, other than that, typically, we do see Q1 margins as being our lower margins of the year, with margins typically steadily ramping over the course of the year. But I would say that's the specific callout related to Q1. In terms of expansion over the course of the year, that follows our typical seasonal trends. And given that some of the growth in the year is back-half weighted, we'll expect margins to tick up fairly significantly as we get to the second half of the year.

Joe Spak (Managing Director)

Okay. So it's basically just some additional spending early on and then sort of a ramping of some of the initiatives with dealers that helps drive the revenue growth in the back half, effectively.

Sonia Jain (CFO)

That is correct.

Joe Spak (Managing Director)

Okay. Then second question is, Alex. I mean, we haven't. I don't think the AI question has sort of come up in a while. I know you've been dabbling or sort of more than that, I guess, in AI for a while. But I was wondering if you could just update us on dealerships either inquiring or taking a plunge on GenAI solutions. And is it anything beyond sort of consumer-facing chatbots? Are you working on, or are they looking for solutions that can actually help more dealer operation efficiencies? And maybe just update us on what you're investing annually in AI.

Alex Vetter (CEO)

Joe, thanks for the question. I'm smiling at the opportunity to talk about it. So one of the biggest trends that we're seeing with AI is dealerships finding ways to eliminate their back-office cost and expense. And many dealerships operate business development centers that handle lead gen.

In a couple of the pilots that we've tested with dealers who've cited low lead quality or low closing ratio, we've replaced that dealership's lead volume with AI to handle lead volume. And in some cases, we're seeing 20% lifts in appointments set and sales attributed to our platform, which I think both underscores the quality of our audience being understated in the minds of dealerships because lead handling is such a critical component to realizing and attributing value back to our platform.

And it's obviously a big cost center for dealerships. And so those are some of the pilots that we're working on right now that we think can really help us combat churn when dealers say that our leads don't close. Let's take a challenge and let AI manage the volume on behalf of the dealer and see if we can deliver a better appointment setting and show rate. And it really shows the quality of our audience.

And so that's got me very excited. Certainly, from a product standpoint, right, Inventory Intelligence and leveraging retail demand data in real time to predict the best exit path for a vehicle retail or wholesale is powerful disruptive tech. And so dealers are excited the fact that we're using real-time retail demand data. Most dealers rely on Manheim's MMR data, which is wholesale backwards-looking failure rate data. We're showing them forward-looking predictive data. And so I think the industry is going to take some time to adopt new technologies that allow them to run their business much more proactively. But the opportunity here is huge.

Joe Spak (Managing Director)

Any commentary on how much you're spending annually and directionally, maybe even for 2025 versus 2024, if you're spending more or similar amounts?

Alex Vetter (CEO)

It's hard to break it out because we want our employees to be embracing AI across the whole platform and don't have a separate team experimenting with AI. We're challenging the whole workforce to apply AI to everything that we do and to find efficiencies in the way we work. And so it would be hard for me to quantify a dedicated investment to it. But my hope is that it's pervasive throughout the business over time and we get leverage in every functional area in the company.

Joe Spak (Managing Director)

Okay. Thanks for that. I appreciate it.

Alex Vetter (CEO)

Thank you.

Operator (participant)

Another question comes from Rajat Gupta of JPMorgan. Please go ahead.

Rajat Gupta (VP)

Great. Thanks for taking the question and squeezing me in here. I had a follow-up on the second-half revenue growth ramp. You mentioned some areas, like the full benefit of AccuTrade endorsements as one of the drivers. Can you elaborate a bit more on other drivers that will help with the second-half ramp? Maybe any more granularity on dealer count, ARPD?

What is going on in the repackaging initiatives? Anything in terms of what percentage of the dealers are on lower tiers versus higher tiers? How many of them do you expect to upgrade? Any more granular color that you could give us would be helpful, that's baked into the guide. And I have one follow-up on the buyback.

Alex Vetter (CEO)

Yeah. Well, what's exciting to me is a lot of our AccuTrade growth is coming from dealers expanding the number of stores in their groups to use the technology, right? The fact that AccuTrade is proving to be successful in one store is giving owners confidence to standardize this across all of their dealership operations. With industry consolidation being a reliable trend, the expansion of AccuTrade rides on that consolidation. It benefits from it. Dealerships are looking to standardize processes and get leverage off of a wider footprint of dealerships.

Our technology can enable that. Not to mention just the labor savings in being able to use porters to appraise vehicles as opposed to high-priced specialists. There are multiple economic benefits to using technology to appraise vehicles as opposed to human curation. That would be one. The OEM endorsements certainly are going to help. I really believe embedding added benefits like the Inventory Intelligence Platform.

In some cases, dealerships are spending $3,000-$5,000 a month for a standalone Inventory Intelligence tool that doesn't integrate. So the fact that we're providing Inventory Intelligence as part of that platform is certainly another reason to believe.

And then finally, integrating wholesale auctions so that dealers can launch a car they appraised in real time to a wholesale marketplace before they've even taken ownership of the car, and get that marketed on a wholesale marketplace is another benefit. So the product's going to lead the way here. And dealer usage trends, as we shared on the call, are all up double digits. And so that gives a lot of fortification for this platform, having tremendous upside.

Sonia Jain (CFO)

Maybe, Rajat, also to add a little bit more context. As we look at 2025, I would say there are a couple of primary drivers of growth. Maybe we can break it down between dealer count and ARPD. We do expect to grow dealer customers in 2025. I think it's a couple of different drivers that I would point to there. Obviously, we're making some organizational changes that we believe will help accelerate our sales velocity.

So that would be one. But I think when you look at just the core marketplace, we are really pleased to see how we exited the year from a competitive perspective in terms of traffic trends, which we believe are a leading indicator of marketplace health. And we were number one in UVs at the end of the year. In addition, from a product perspective, as Alex mentioned, product is going to lead the way here. We're heavily focused on ensuring that we're getting appropriate attribution for the value we're delivering. We've shared some stats in the past.

We know when we get access to dealer DMS data that we're influencing in the neighborhood of 30% of their retail sales. And so when you do the math there, it actually leads to the second driver of revenue growth, which is ARPD, that the value we deliver is undeniable. So yes, we believe there is an opportunity, and it is included in our guide to enhance our marketplace packaging structure. 75% of our marketplace customers are in Premium and Preferred packages today, which means that we have headroom to elevate the packages.

We've talked a lot in the past about the addition of additional products into marketplace to create a higher-tier solution. And that's something that we'll be looking at later this year to go live in the market. And then I think Alex alluded to this as well. We've done a few of these over the last year or two in terms of renegotiating our legacy website agreements with OEMs. That's still something that's underway.

And while we do believe there's opportunity to continue to grow website units, we also believe there's sort of a still relatively untapped opportunity for us to grow ARPD through these contract renegotiations and, B, move our website package tiers north. So when you look at the website mix of who's in good, better, best tiers, we have a lot of opportunity to move the portion in good to better and best. So I hope that helps in terms of color a little bit.

Rajat Gupta (VP)

No, definitely. Thanks for all the detail. And just on the buyback, I mean, the pickup in 2025 is definitely encouraging, especially given where the stock is. I guess, given where you are from a leverage standpoint at the low end free cash flow in the business, is there room to be a lot more aggressive versus the range you've provided? Obviously, the earnouts free cash flow. But i'm just curious how you're looking at that, especially with some of the more recent pullback here in the share price. Thanks.

Sonia Jain (CFO)

Yeah. No, great question. Appreciate it. I think we put a target out there to help everyone kind of size what that looks like. But certainly, when it comes to share repurchases, we will be opportunistic in terms of how we put that capital to work. And certainly, at current valuation and given our guide, we see a lot of upside in the business.

Rajat Gupta (VP)

Understood. Thanks and good luck.

Operator (participant)

Another question comes from Mr. Doug Arthur of Huber Research. Please go ahead.

Doug Arthur (Managing Director)

I got to jump on a 10:00 A.M. call, so I will hold off until the follow-up. Thank you.