Good morning and welcome to the Cars.com Third Quarter 2018 Earnings Conference Call. Hosting the call this morning are Alex Vetter, Chief Executive Officer and Becky Sheehan, Chief Financial Officer. This call is being recorded, and a live webcast can be found at investor.cars.com. A replay of the webcast will be available at this website until Wednesday, November 21, 2018. A copy of the accompanying slides can be found on cars.com IR website. Following today’s presentation, there will be a question-and-answer session with Alex and Becky. I would now like to turn the call over to Jandy Tomy, Vice President of Investor Relations.

Good morning, everyone and welcome to our third quarter 2018 earnings conference call. During today’s call, we will be referring to our earnings presentation, which is available on the Investor Relations portion of our website. Before I turn the call over to Alex, I would like to draw your attention to our forward-looking statements and the description and definition of our non-GAAP financial measures found on Slides 2 and 3 of the presentation. We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA, adjusted net income and free cash flow. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measure can be found in the financial tables included with our third quarter 2018 earnings press release and in the appendix of the presentation. For more information, please refer to the risk factors included in our SEC filings, including those in our registration statement and our annual, quarterly and current reports. Cars.com assumes no obligation to update any forward-looking statements or information as of their respective dates. At this time, I would like to turn the call over to Alex.

Thank you, Jandy. Good morning, everyone and welcome to our conference call for the third quarter of 2018. The third quarter had a number of positive indications that we are executing a sound and differentiated business strategy, tampered by the impact of changes in ad spend strategy for select OEMs, along with continued softness in dealer count. On the positive side, consolidated third quarter revenue in ARPD increased 6% and 8% year-over-year respectively. Traffic increased 12%, unique visitors grew 10% and mobile traffic grew 28%. We are obviously aware that dealer count dropped 2% since June, despite our progress with audience and value-added solutions. However, various achievements including important ones I just mentioned support our confidence in our online platform and the intentional strategic shift from a listings business into a digital solutions provider. Our robust and relevant solutions portfolio is an important pillar of our strategy and the third quarter demonstrates that our social, website and review products are providing meaningful value across the range of dealer customer segments. This is proving to be a key competitive differentiator for us as we improve dealer sales and increasingly make progress by attracting and engaging a larger consumer audience as a result of our integrated marketing and product focus. Our momentum with consumer audience has continued. Traffic grew 12% in the third quarter driven by growth in SEO and supported by incremental product and marketing investments and the unrivaled strength of our brand. Organic traffic made up 80% of our total traffic in the third quarter. Monthly unique visitors increased 10% year-over-year and mobile traffic now makes up 68% of our total traffic. In October, these trends continued. We have now experienced 10 months of strong traffic and unique visitor growth, including 7 months of accelerating growth in SEO. Google updated…

Thank you, Alex. Revenue for the third quarter of 2018 was $169.3 million, reflecting $9.4 million or 6% growth compared to $159.9 million in the prior year period. Retail revenue was up $32.8 million driven by the conversions of the Tronc McClatchy and Washington Post markets and the addition of the dealer inspired business. The affiliate conversions resulted in the addition of $25.6 million to direct revenue and we are also responsible for the $22.6 million decline in wholesale revenue for the quarter. These amounts reflect only the uplift from wholesale to retail rates. Dealer Inspire has continued double-digit growth in the third quarter growing 42% year-over-year on a pro forma basis to $15.8 million of revenue. This growth is driven by increased product sales across all of the Dealer Inspire products. Dealer Inspire now has 2,200 website customers. We expect to continue to grow this metric as well as increase the penetration of the conversations chat tool and the online shopper product, which are currently at approximately 25% and less than 10% penetration respectively. Excluding the affiliate market conversions and the Dealer Inspire business, our organic direct business declined $4.4 million or 5%, driven by softness in dealer count. Compared to June 30, 2018, total dealer count of 20,407 declined 2%. Direct dealers of 17,011 increased 419 resulting from 744 dealers that converted from the affiliate markets during the quarter offset in part by higher cancellation rates in legacy affiliate territories and lower overall sales. We completed the McClatchy affiliate market conversions on October 1. This leaves just three affiliate relationships remaining or 3,300 affiliate dealer customers to convert. As Alex outlined improving sales force efficiency, sales and dealer retention are among our top priorities and we’re taking steps to grow value and improve retention. Direct ARPD grew 8%…

Thank you, Becky. As we look ahead, we are focused on five key areas: continuing traffic growth, increasing conversion and value delivery, growing our solutions business, improving our sales force effectiveness, while continuing to drive operational efficiencies. In 2018, we reversed a 2-year traffic decline. And in October, we hit record growth of 17% growth in unique visitors. Our growing strength of our audience gives me confidence that dealer count and OEM revenue will follow. Our brand strength, high-quality growing audience and valuable portfolio of solutions is the right path to growth and shareholder value. At this time, I would like to open up the call for your questions. Operator?

Thank you very much. [Operator Instructions] Your first question comes from the line of Tom White from D.A. Davidson. Tom, your line is open.

Great. Thanks for taking my questions. So audience growth continues to be pretty solid. How should we think about how that audience growth and traffic growth translates into downstream connections growth for dealers and how much opportunity do you guys have still to maybe make product enhancements to optimize for connections growth for dealers? And then I was just hoping you could update us on kind of how you rank your priorities around capital deployment between either kind of early conversion of the remaining affiliates, more M&A, R&D around product or the buyback or anything else? Thanks.

Thank you, Tom. Good morning. First of all, the traffic growth has been steady and consistent and I know a consistent question that we have been asked is how do you correlate that to revenue, which is harder to do, but we can and do see a direct line to conversion and value delivery. So we are actually hitting record leads per dealer for the quarter. We have got our highest overall traffic growth ever in October, which is up 17% in unique visitor count, which I think is a more pure and more reliable metric, because it’s not just repeat visitors, it’s actual unique and then we see that correlation in terms of value delivery to our advertisers. So increased phone calls to dealers, increased lead generation dealers and most importantly, we are seeing a ton of increases in traffic to dealers websites. Unfortunately, as we have talked, some dealers don’t always map that value directly into their systems and see it, but we can see the increase in conversion and value delivery very vividly. I think on the product side, we do see continued opportunities. Our app enhancements in the quarter have been really good in growing our conversion rate. Specifically, our mobile conversion rate has grown about 20% in the period. So we are doing a much better job in UX getting consumers to the cars that they want and then converting those to measurable or tangible forms of leads to dealers. And so we think those things have certainly bolstered our sales force confidence and we know we will soon translate into dealer confidence as well. On the capital deployment side, we have been reserving our capital for affiliate conversions so that we can – and then also investing for growth. And obviously our share repurchase program or paying down our debt, those would be the four primary areas.

Thank you.

Your next question comes from the line of Gary Prestopino from Barrington Research. Gary, your line is open.

Hey, good morning everyone.

Good morning.

Several questions. When you are talking about the shift in national advertising by certain OEMs, are they – is it a shift, are they just pulling back, I mean are they moving away from digital advertising or just in general of reducing their advertising expenditures?

Well. Good morning Gary. Thanks for the question. First off all, the two OEMs really were responsible for the bigger part of the loss in the quarter. Our business macro shift that they are making, pulling all advertising out of the market, specifically for specific makes and/or models that they historically had provided support for. So we see that macro shift across all media and not endemic or specific to our business. Most OEMs are increasing the rate of investment in digital, so we know that with growing traffic, our opportunity continues to rise. But I think that certainly OEMs – there are OEMs that are shifting towards programmatic or trying to buy traffic in social or other larger horizontal platforms and buy around third-party marketplaces. We typically see those OEMs come back to us in big ways. We have had large OEMs pullback advertising in prior years only to follow them a few periods later come back much stronger and bigger than they were prior because it’s hard to beat our cost efficiency, our audience who are people actively shopping for the very products we are trying to sell. And so by and large Gary the bigger pullback is a macro one and mostly OEMs have already started talking to us about the ‘19 plans.

Okay. And then in terms of the social sales life which is getting some good uptake on dealers and then Cars Social, could you just refresh my memory are you bundling social sales drive in your package and then for Cars Social charging an increment from the Cars Social?

That’s right Gary. So as you know most of our cancellations tend to speak to either perceived value or price value to price ratio, so we made the decision at the end of Q2 to bundle the Facebook marketplace inclusion of all of our franchise dealerships into that system. We have got 5,200 dealers that have enrolled for that and that’s where we are seeing profound up-ticks in our retention rate, because the dealers appreciate that we are doing more for them year-over-year. I would caution it takes both the dealer and Facebook to accept our invitation to this and so averaging about 2,000 dealers a month in terms of getting their enrollment. There is a dependency of both on the dealer to approve the credentials and then there is an approval at Facebook for them to accept the inventory, otherwise we would have flip to switch and put them all in there. But it’s more of a manual process. And again about 2,000 dealers a month that were getting into that platform. With independents, we are actually selling this is an up-sell. We have good value delivery for independents. We didn’t feel like we needed to flood them with more traffic and leads at our current price points and so we are now starting to sell this is an upsell to independents and it’s started to see a nice up-tick in revenue with independent dealers on that solution.

Okay. And then could you just talk a little bit more of the changes in go to market strategy that you have been working on?

Sure. I mean I think ultimately what we have been talking about is optimizing the sales channels for the customer segments. I think first and foremost Gary, if dealers are spending lower levels, we think we can more cost effectively support them through a call center approach. And we have been testing and optimizing our inside sales teams, optimizing territories and customer segmentation. And then for our biggest dealers who are buying across our portfolio of solutions, we want to be in those stores working hand in hand with them to optimize their business. And so I think the first thing is really optimizing our sales channel based on customer segmentation. I think obviously the bigger change that we have had to undertake this year is converting and absorbing the affiliate channels that we have moved from wholesale to retail. We have converted almost 3,500 dealers, that means we have to right size the territories and eliminate some of the duplication and management layers between our channel and direct sales. But we have gone from 14,000 dealers in our direct channel to over 17,000 and keeping our cancellation rate roughly the same. Affiliate losses were much higher when they were purely managing our affiliate network. And so strategically very important for us to convert that customer relationship into our direct channel and we’ve done a lot of that work this year.

Right. Thank you.

Your next question comes from the line of Dan Kurnos from The Benchmark Company. Dan, your line is open.

Great. Thanks. Good morning. Alex, can we just help frame up a little bit of the dealer customer decel sort of what’s driving that? And just kind of in conjunction a little bit with the last question, if you think some of the reversal on that trend is going to be your ability to sell through the inorganic products via bundle or whatever it is to turn these guys back on? And then I’ll follow-up with the guidance question.

Sure, Dan. Good morning. Thanks for being here. Looking – in Q1 we had an 822 dealer loss and in Q2 if you back out the DI dealer count that we added to our mix in Q2, our dealer count loss has dropped to 262. in Q3, I know we see 300 dealers dropping from the platform, but we had a couple of inorganic things there, including a billing challenge with about 72 dealers that weren’t paying their affiliate invoices and then we’ve got about 18% of our dealers out of business. But if you were just to back out the 72 that were – weren’t paying their invoices, our dealer loss in Q3 was 241. So I look at that on a trend basis. We are moving the cancellation number in the right way perhaps not strong enough and we want that to be a grower, not a net loss, but we see incremental improvements in the trend and we know those improvements are due to things like our Social Sales Drive initiative in new dealer reporting and some of the sales transformation work that we’re doing. So I think overall the trend we wanted to improve, but we also know that some of the recent turndown in sales particularly NewCar is adding a lot of margin compression to the dealers, and so they’re looking to cut costs.

So – so let me just follow-up on that. I mean, look for the Q4 guide then, I’m just trying to kind of flush out exactly sort of the puts and takes here. We’re going to – obviously national is going to continue to be soft, OEMs just shifting from brand to incentive, I think that’s pretty clear anyway. So that’s not that challenging. I don’t know if you want to give some incremental color on wholesale in Q3, I know that Becky said it was mostly due to the affiliate conversion. I don’t know that that’s not struggling in their markets and that might be weighing at the margin. But if you’re going to come in at sort of the low-end of your guide for the year, it kind of implies understanding of a slightly tougher comp sort of further decel in the organic business. So I’m just trying to understand kind of the puts and takes, Alex, and when that sort of reverses based on some of the initiatives that you’re making?

That’s right. Well, look typically dealer count churn is usually highest in the fourth quarter, that’s been a pretty consistent trend year-over-year with probably one exception over the last 10 years, because dealers tend to cut back in Q4 to try to deliver sort of year-end targets. Conversely Q1 tends to be the strongest quarter in terms of dealer enrollment or investment, but we do still see continued choppiness in the dealer count. And the national softness we know is again mostly isolated to a couple of accounts, but with the traffic growth that we’re getting in terms of total volume of audience, our opportunities increasing there. And again, OEMs are talking to us about stepping up their investments in ‘19. Becky what would you add to that?

I think that’s a good summary, Alex.

Okay.

Alright, Alex. And let me just ask one more if I could just on the traffic side. Visitors, we’re still kind of flattish sequentially, but you have sort of an opportunity now with the new platform to go out there. How are you thinking about ROI in the marketplace brand versus paid performance and when do you think that you can – are you trying to use that as a leading tool now to drive reengagement kind of pre-year remarks or is it more of a balanced approach, where you’re still working on reengagement regardless of whether or not the traffic accelerates materially near-term?

Well, look first of all, one clarification. Our Q1 traffic was up 7% in Q1, 8% in Q2, 12% in Q3, and October was up even higher, around UVs, those numbers are – go from 9% in the first quarter all the way to 17% growth in October. So our traffic growth has been our primary strategy. We had a turnaround, a multi-year decline in traffic and we’re doing that and have done that. I think translating that as Tom White asked about how does that translate into dealer value. We are now seeing record leads per dealer and increased connections to our dealer body and that that we think is a very positive sign that shows that we are generating more value year-over-year and that we think will translate into both dealer growth and certainly the raw traffic counts will translate into OEM spending just not in the current period.

And more Alex from your perspective of going after market opportunity for traffic growth, are you going to press on that a little bit and in which channels are you pressing?

Sure. If you look at our sales and marketing expense, it hasn’t grown that dramatically, because you have to remember we even added all of the tronc sales force to that number, which is about 69 folks. So on a relative basis, particularly vis-a-vis competitors, we’ve had modest growth in our sales and marketing, and that has turned into an outsized growth in traffic. We contribute a lot of that to our SEO progress, right. We finally have really made marked improvements in our organic and SEO traffic contribution. Our marketing strategy has always been a mix, a combination of both brand campaigns followed by heavy digital has been our formula. And I think you will see more of that with hopefully continued growth in SEO.

Got it. Thanks Alex. Thanks Becky.

Your next question comes from the line of Steve Dyer from Craig-Hallum Capital Group. Your line is open.

Hi guys. Ryan Sigdahl for Steve Dyer, it’s hard to beat a dead horse here, but with the improving traffic and user trends what is the primary pushback from dealers that are leaving the platform, it just – it seems a little odd that you have record leads per dealer, you are generating more value, but now they are deciding to drop their cars…?

Thanks Ryan. Look it’s the competitive environment out there. And look we would like to have no cancels, but I would also just add that not all cancels are equal. We have had large dealer groups who are paying below rate card, demanding rate concessions from us. In some cases, we are walking away from those and losing dealers in the short-term. Our own data shows that about 20% of our dealers re-sign with us within a six month window. So they feel the pinch of not being on our platform. We have got to be deliberate here about protecting our pricing and not just reducing our rate because certain competitors are either dropping their prices, we think our value is very clear. And we have to build value for the mid to long-term. And just dropping price to save dealer count, I don’t think is the right way to create value. We certainly know that that we will continue to invest in traffic growth, attribution systems, value delivery systems and I think our sales transformation all will help to make our value more clear to dealers.

And then can you break out the sequential decline in dealer count between recently converted affiliates versus the previously legacy direct dealers?

Sure. So in Q3 and Alex mentioned this a few minutes ago we fund in some of affiliated converted markets about 72 cancellations that related to dealers who we are not paying. And although they converted to us from the affiliate and we worked with them to try to I would say remedy those relationships. At some point if they are not going to pay their bills then we need to turn them off the system. So in Q3 that’s a relevant decline in those affiliate converted markets. However, having said that, what I would also tell you is that we are seeing growth overall in the converted markets. We reported that in the second quarter and in Q3 particularly if I take out the 72 non-payers. We are still seeing 5% growth from the date revenue grows, when you look at what revenue converted to us and where it is at the end of the quarter, so still very pleased with that progress.

Sure. I would just add – also add to that, I mean certainly as we look forward continued growth in ARPD is a huge part of the strategy. And while we don’t want to have a net 200 dealer decline in any quarter, we reassured that our solution strategy is continuing to bear fruit. There are many dealers that love the platform that know we generate meaningful sales and are investing more with us year-over-year which is reflected in the ARPD growth and we hope to sustain that on a go forward basis.

Great. Last one for me, with the sales transformation process, is this primarily focused on efficiency or not as much on the cost side, but more on the go-to-market strategy? Thanks.

I think it’s really both. I mean. certainly we want to optimize the sales channel in both cost and – but obviously with the growing solutions business, where we want to penetrate to our best clients more products and services and grow our ARPD, it’s really more about optimizing it for growth.

Your next question comes –

Thanks a lot. I’ll pass it.

Your next question comes from the line of Sameet Sinha from B. Riley FBR. Sameet, your line is open.

Yes. Thank you very much. So Alex, I guess the question is just thinking about dealer growth, the way I look at it is the three, I guess, represent the arsenal that you have to drive that, first one is product, second is proving attribution and of – the increased traffic, and the third is the go-to-market strategy. Can you help us think about which of these are the primary weapons that you would use or which of these would be the key drivers of dealer growth maybe starting sometime next year? And if you can potentially help us think about kind of a timeframe around that, that will be helpful as well? My second question is just looking at kind of the gross margin cadence and seems like it’s been coming down. Is that primarily related to the national – weakness in the national business or is it something else and then I have another follow-up?

Sure. Well I’ll answer the first and Becky can answer the question on the gross margin side. Look I think you nailed Sameet the primary leverage we have to go-to-market which is our product, our attribution and our go-to-market transformation. I think we’re delivering on the product side, that was our first priority was to reverse the turnaround or the decline in traffic, that’s been a combination of product improvements, site experiences, SCO turnaround and marketing investments. And so we feel very confident that we’ve got momentum there, but we obviously have to sustain it. It’s a very competitive category and there isn’t a data that goes by that we’re not talking about future product innovation. I think attribution and sales transformation are – take a little bit longer. I think attribution is obviously the hardest one because the vast majority of consumers prefer to shop online and buy offline. We’ve got great initiatives there in terms of our on-the-lot tracking, our new online shopper, which takes leads and drops them closer into monthly payments and we’re doing work there to move into digital retail, that will be an exciting achievement and advancement in Q1 with our friends from Dealer Inspire. But the sales transformation is a big and important move. We think that we can optimize our value delivery, make it more clear for our dealers and how it ties to pricing and get more efficiency out of our sales channel. We know some of our biggest clients who measure us effectively continue to increase their spending year-over-year, which is driving our ARPD growth. We need to replicate that formula down to the single-point store and that’s going to require us to make big improvements in our value capture and delivery systems, which is why we brought in Doug Miller to help us transform that team.

And then on the gross margin question, Sameet. I would say it’s two things. Certainly, product mix that we’re selling will impact gross margin, but it’s really more about the addition of the Dealer Inspire business into the portfolio. More of their costs given the – the type of business that it is more of their costs are oriented through that cost of revenue line item and therefore it carries a higher cost of goods.

Alright. One follow-up, and Alex, you spoke about Dealer Inspire and General Motors. Can you help us think about how that sort of – once you get that account, once you get that approval, what is the progression from your end about going out to the dealers in selling, and in your experience how long does it take, can you help us think about that process?

Sure. Well first of all, it was exciting to get included in GM’s preferred provider list for Performance Marketing Solutions through DI. One of the benefits of integration as well as that even though we’ve had a couple of OEMs pullback in their advertising, we’ve now opened up the available inventory to DI’s Performance Marketing Group to resell that inventory at the local dealer level as well. So I think DI – DI is excited now to tap in to that open opportunity that came from the OEM pullback. Just one example of good integration, I think obviously on the performance marketing side now that those investments are co-operable by GM, it means less money out of the dealer pocket and improves the value prop of why dealers should work with us. And the program just kicked off last week. So it’s too soon to tell, but we are watching the program closely and bringing it out to the dealerships as we speak.

Thank you very much.

Your final question comes from the line of Doug Arthur from Huber Research. Doug, your line is open.

Yes. Thank you. Alex, just a couple market related questions, you mentioned the pressure on retail sales at the dealer level, are you – is that a function of higher financing costs, is it sort cyclical exhaustion I mean what do you sort of ascribe that to?

Doug, truly don’t have a crystal ball, but I know that the increased financing rates is certainly a trend I hear from our dealers, right. There are no more dealers at zero percent financing today. You are hearing rates still have 4.5%, 5% and the price to buy a new car is higher in some cases than a late model used – I am sorry, is growing in terms of the purchase price and so consumers are feeling the need to push down towards late model used. I think the other one though, obviously, I think the election has pulled back in consumer confidence. I am looking forward and I am really reassured by the snap in traffic growth for us in October and now that we have got this election behind us, typically we have seen in prior years like this that consumer confidence rebounds and you see more people head to the showrooms in the fourth quarter. And I know many OEMs and dealers are betting on that as well.

And then just as a follow-up, I thought you made reference to dealer bankruptcies, are you seeing an up-tick in that or is that – is sort of steady state?

Our independent dealer churn, we feel about 18% of our dealer cancellations are from dealerships closing their doors are going out of business or in some cases folding into other stores. They were acquired and sort of closed one outlet and migrated the inventory to another store. So it’s picked up a little bit, but it’s held steady at about 18% of our cancellations are those types of losses.

Okay, great. Thank you. We have no further questions at this time. I will turn the call back over to Alex Vetter for closing remarks.

I would just like to say thank you everybody for participating in this morning’s call. We look forward to speaking with you again soon. Thank you.

Ladies and gentlemen, this does conclude today’s conference. You may now disconnect.