Good morning, and welcome to the Cars.com's Third Quarter 2019 Earnings Conference Call. Hosting the call this morning is 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 November 20, 2019. A copy of the accompanying slides can be found on the Cars.com IR website. Following the presentation, there will be a question-and-answer session with Alex and Becky. I'd now like to turn the call over to Jandy Tomy, Vice President of Investor Relations. Please go ahead.

Good morning, everyone and welcome to our Third Quarter 2019 Earnings Conference Call. 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 our non-GAAP financial measures, which can be found in our presentation. We will be discussing certain non-GAAP financial measures today including adjusted EBITDA, adjusted EBITDA margin, 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 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 annual quarterly and current reports. Cars.com assumes no obligation to update any forward-looking statements or information as of their respective dates. And at this time, I'd now 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 2019. In this morning's call, I'll be discussing our third quarter business performance and then hand the call over to Becky, who will discuss our financial results. Our third quarter results were in line with expectations that we laid out on our last call. There are a few highlights that I like to discuss today. First, we completed our final affiliate market conversions which gives us complete control over our entire customer network. With our affiliate sales model now behind us our sales team is able to support dealers in these markets directly and more effectively, increase our sales and service in these territories. Second, we took over as the number one player in SEO, which reinforces the strength of our brand and demonstrates our technical sophistication and validates our product strategy to deliver high-quality content. Third, this quarter we announced a partnership with General Motors, which opens the door for us to sell our website solutions to over 4,000 new dealers across the country. And this creates more opportunities to sell a broader set of products and solutions. And lastly, we achieved these milestones, while generating significant operational efficiencies, most notably our sales and tech transformations. As we discussed on our last earnings call, we're further along with dealer retention and cancellation rates, which have stabilized. Our investments in product and audience are improving value delivery for our customers, and we believe these investments will yield positive results moving forward. Importantly, with the affiliate conversions now behind us our entire sales team is in control and focused on growth across all markets. I'm pleased to report that we delivered a strong October with nearly 100 net new dealer's subscriptions. In fact, it…

Thank you, Alex. Revenue for the third quarter of 2019 was $152.1 million, compared to $169.3 million in the prior year period. The decline was primarily driven by fewer dealer customers and lower national advertising revenue, offset in part by incremental revenues from the newly converted affiliate market and growth in our Dealer Inspire solutions business. Direct revenue was up $3.4 million year-over-year, driven by $14.2 million in revenue uplift from the affiliate markets conversions and 25% growth from our Dealer Inspire solution sales. Wholesale revenue of $5.4 million declined $12.3 million compared to the prior year, of which $9.6 million was the result of a conversion of the affiliate markets. Excluding the affiliate market conversions, wholesale revenue was down $2.7 million, driven by a decline in affiliate dealer customers. As a reminder with the final conversion of the dealer market that took place on October 1st, we no longer have a wholesale channel. In addition, the unfavorable contact liability is now fully amortized and the $6.3 million quarterly benefit from this amortization has ended. Our national advertising business was down $7.9 million or 28% in the third quarter compared to the prior-year period. As Alex mentioned while traffic growth increases our advertising opportunity, we are also taking a number of steps to improve our current product offerings and introduce new solutions. Now let me move into a discussion of our operating expenses in the quarter. Although our goodwill impairment analysis is normally performed in the fourth quarter, we determined there was a triggering event in the third quarter, primarily caused by a sustained decrease in the company stock price after the completion of the strategic alternatives review process. Therefore, we performed an interim quantitative impairment test during the third quarter. As a result of that test, we recorded a…

Thank you, Becky. While our building blocks for the future remain unchanged, we're focused on four key priorities as we close out this year. First, we will continue to take share in traffic and improve our overall value delivery. Second, with the affiliate channel now complete we're fully focused on serving all of our customers directly. Third, we're focused on securing as many of the 4,100 GM dealers as we can taking advantage of our semi exclusive opportunities. And finally, we will continue to innovate new solutions to drive growth and customer success. And with that, I'd like to open up the call up to your questions. Operator?

Thank you. [Operator Instructions] And our first question comes from the line of Tom White from D.A. Davidson. Your line is open.

Thank you for taking my questions. Good morning everyone. Just Alex on dealer count it sounds like October's been a strong start to the quarter. I think you said nearly 100 net adds. Can you extrapolate that you guys are going to be able to grow dealers again net dealers for the full quarter now that given affiliate conversions are behind you, the traffic trends are very strong. And then just on the traffic growth obviously very impressive. Any sense you can give us of what downstream lead volume growth is looking like or looks like in the quarter? And then just lastly the Dean Evans' hiring announcement, there's some discussion in there around digital video, which I just hope you could elaborate there a bit about how that kind of fits into your broader solution strategy and product portfolio.

Sure Tom thanks. Well, look we certainly are reassured on the dealer growth in October having the first full month where we've had no focus on affiliate conversions and have complete control of the dealer network, it's not lost to me that after the first month we hit our full stride. And what I'm also going to say is that Q4 typically is a tough season in the auto industry as dealers try to make short-term decisions to meet bottom-line. So, we don't want to declare victory yet on dealer growth in Q4, but certainly to your second point, the traffic trends are moving in all the right ways. And I think your point is how does that translate to dealer value, our leads are up for the quarter. Obviously, growing traffic translates to advertisers' satisfaction. So, we're pleased with what we're seeing in our dealer pull surveys as well in terms of their overall satisfaction. Your final question was about Dean and I'll just remind you that Dean's been a client. Dean has been on the other side of the desk buying media from everyone in the industry and as we approached Dean in about 2020 and using data as our superpower and helping them with their television -- advertising, I think his eyes lit up and saw a bigger opportunity to not only do this for OEMs, but for dealers. And I think that that solution strategy is one of the key reasons that Dean is here. Tom, you will recall that when we bought Dealer Inspire, one of the hidden gems inside that business was a programmatic advertising platform called FUEL. And that allows us to run advertising solutions at scale in a programmatic fashion. And these ads that I've seen in technology in the past years been the advent of digital video. And we think there is a massive opportunity to help dealers become more efficient and migrate traditional and linear TV budgets towards more effective and accountable digital channels. And so Dean's here to help us realize that vision.

And Tom, it's Becky. Just to add one more comment to what Alex said to your first question. I'll remind you that although dealer growth is certainly an important metric that we have for ourselves. It's not necessary for us to grow dealer count in Q4 to achieve the guidance that we've provided.

Got it. Thank you very much.

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

Good morning everyone. Hi, Alex, Becky. With these -- the ability to go after these websites from the dealerships, how does those contracts shake out? Are they well up for grabs in the current year or is it a lot like the DMS that they renew every five years or something like that?

Thank you, Gary. First of all, I think you're specifically to GM and that new opportunity, but also just point that both Hyundai and Mitsubishi were additions in the quarter. And we've also got agreements now with Subaru and Lexus. And they all have some uniqueness, but dealers tend to be free to move from one website provider to another without much contractual overhead. The GM opportunity is a little bit slower role, because there's multiple sign-up phases for dealerships. GM's doing a road show for dealers where they're educating them on the four partners that are available to them to choose from. And so we're actively out meeting with all the GM dealers and showing them what we can do for them in the New Year. And so the dealer count gains we've seen there initially are pleasing. We know we're in the number one position as the most requested vendor in the semi exclusive bunch. But again, it's going to be slow rolling and that revenue really won't hit until 2020, because we're just in the sign-up phase.

Okay. And then can you wrap some metrics around for us with just selling pure technology solutions in the quarter? What kind of revenues was that generating on a recurring annual basis? And what was the growth in that? Do you have those metrics handy?

The solutions growth was over 20%, Gary. Becky will have to give you the closer numbers, but we continue to see increased pacing as we ramp that business. Becky I don't know if you have a point estimate.

Yes. So for the quarter our Dealer Inspire solutions business was almost $20 million of revenue that's up 25% year-over-year. And importantly, within there is our website business, which is up 40% on a year-over-year basis. So we continue to see very strong growth. The difference between the website growth and the total growth is simply that the performance, marketing solutions that we also bring to our dealers to help them drive their local business that has more ins and outs during any particular period of time, but we're certainly continuing to see this strong growth that we had earlier this year as well.

Okay. And then lastly somebody asked this on the -- a prior question, did you give a number for how much leads were up this quarter you're making that public?

We didn't disclose it, but leads are upward in the quarter. And they're following a strong both Q2 as well. So Q2 and Q3 leads per dealer are up as are our total leads.

Okay. Thank you.

Thanks, Gary.

Our next question comes from the line of Lee Krowl from B. Riley FBR. Your line is open.

Hey, guys. Thanks for taking my question. And good to see some of the trends are trending up. Last quarter you guys kind of provided some guidance for 2020. I noticed, it wasn't kind of in the prepared remarks. Just curious is there is any changes to the commentary from the last call as to you expect to return to revenue growth in 2020 and double-digit EBITDA growth?

I think obviously we were affirming our 2019 and then we're going to be on our regular cycle now and give guidance for 2020 at our typical time.

Okay. And then just on the affiliate conversions. Certainly exciting to see October off to a good trend, but is there may be a way of -- you've had enough conversions to this point to maybe handicap some anticipated churn or maybe quantify the anticipated churn of the affiliates. Obviously, it seems like there's some natural attrition, but is there a way to kind of think about how as you get all these guys fully onboarded. How that churn kind of trends out over the next couple of quarters?

Sure. I think we do have a lot more experience I think we pointed to ARPD in the quarter being a solid one, which is important for investors to also realize is that the final affiliate conversions were from media markets that tend to be on the lower end of our rate card. Our pricing models skews by both market size and dealer size and most of the final affiliate conversions were to dealers in ruler and smaller markets with smaller lots. But I think going forward what investor should be excited about is our growing solutions strategy that will emphasize ARPD and increased dealer spending as well. So we know we will continue to have some churn, it's been pretty durable in our business and competitors as well. And so I think -- but we've really cut the cancellation rate that's probably been the biggest achievement this year as we brought cancellations down into a much more manageable volume. And we're really focused now on total growth sales. We haven't declared victory yet, although October certainly points to a new muscle that we're getting much better at, but we still have some more work to do there candidly.

Got it. And then last question from me. Pretty exciting developments that you guys kind of highlighted with Roxanne. Can you maybe just talk to kind of the data privacy laws that are coming on and perhaps how Roxanne is future-proof from that? And then also just kind of as this continued shift to mobile perhaps how that plays into the strategy around Roxanne as well?

Sure. Well from a data privacy standpoint, what's key about Roxanne is we're largely using non-TII level data to validate our performance. But we see very vividly in the data is that users that go to a dealer's website that originate on Cars.com are converting to dealer metrics at four times the rate of all of their other traffic sources combined. And so this is the date that dealers have needed to validate that migrating website traffic from Cars to their environment is perhaps their best money in. Your second question though beyond the privacy concerns. I may have missed. So if you could just run it passively one more time.

Just the strategy with Roxanne in the context of the continued shift in your traffic to mobile?

Yes. Actually, I think it provides the same visibility in all environments. And there isn't any degradation in our visibility with mobile.

Got it. Thanks for taking my question guys.

Thanks.

Thank you.

Our next question comes from the line of Daniel Powell from Goldman Sachs. Your line is open.

Great. Thank you. Appreciate the time. Two questions. One just wanted to get your view on kind of the cadence of ARPD as we go into the back part of this year and into next year, you called out mix as being a reason for some of the pressure on the year-over-year growth in the quarter. As you guys go out with your reorg sales force. Are you expecting to continue to see negative impacts from mix? Are you sort of further down the tale of dealers that you can add at this point in time? And then the second question if I was reading the numbers correctly, it looks like spend went from about up 15% last quarter to about up 4% this quarter, but you saw a nice acceleration in traffic based on some of your SEO strength. Just curious, if the lead number -- did it accelerate from the up 9% last quarter or like your traffic did, or did it decelerate from that up 9% last quarter like your spend did? Thanks.

Sure, thank you. Well first of all on the ARPD mix, we're not projecting growth in that between now and year-end. We'll give a better outlook on that for 2020 as we lay in our different solutions and we redo dealerships by product type. And so that will be a data that we'll give you on our 2020 outlook. But we aren't projecting ARPD growth in Q4. I think as to lead volume, we did see sequential quarter drop which is I think more reflective of the new car traffic where we saw a stronger drop in the new car volume than used, which I think reflects the seasonal cycle that we experienced every year. And Q4 tends to drop down and then comes back in a stronger quarter in the first quarter. And our marketing spend you noted, right? We were able to drop the marketing spend considerably, but the scaling of our SEO strategy has probably been the most exciting trend in our value delivery, which I think dealers know that traffic is the most valuable kind of traffic that they can acquire, because they're not competing for it in search. And they're actually tapping into a new source of incremental sales as opposed to an arbitrage player who is bidding up search.

Great. Thanks.

And our next question from the line of Marvin Fong from BTIG. Your line is open.

Great. Thank you for taking my questions. First one, I guess just revisiting something we talked about last quarter with dealers little skittish, because gross profits on the used car side were down. And the upsell of some of your ancillary products are getting a little tough. Can you just kind of update us on what the macro environment looks like with respect to dealers and how they're thinking about their ad spend? Thanks.

Sure. I think -- Marvin thanks. I think dealer profitability continues to be the headline theme in the industry as I travel the country and meet with dealers that is their primary focus, which I think by the way sets us up great to introduce new alternatives to traditional advertising. Our video opportunity I think can really help dealers find a more profitable way to grow sales in 2020. That said, I think they also are recognizing that the year has turned out to be not as catastrophic as one would have thought probably two months ago. And that there is still a healthy used car market that's growing and new car sales, while dipping are also still at very healthy level. So I think the mood has improved and dealers have started to focus more on what we can do differently heading into 2020.

Great. Thanks. Alex. And two quick follow-ups. Becky, perhaps you have this, what was the listings in the quarter? And then other question's just on National Advertising I think you had said before, you've tried to get more aggressive on the up fronts. Could you just kind of update us like remind me when the timing of that -- those upfronts are and how you're thinking about capitalizing on that opportunity which this coming year? Thanks.

Yes, sure. So on the listings front we have 4.4 million listings on our marketplace. So a very strong number. And as it relates to National Advertising, we're in the midst of the upfront discussions and proposals with the calendar year OEM. So that's happening literally as we speak. We'll have more insights as to how that's progressing as we get closer to the year-end. And then of course, the fiscal OEMs where that happens closer to year-end timeframe and into the first quarter.

Okay, great. Thank you. Thank you, Alex. Thank you, Becky.

Thank you.

Thanks.

Our next question comes from the line of Nick Jones from Citi. Your line is open.

Hi, thanks for taking my questions. First one, can you kind of give an update on your capital allocation strategy, given the increase in the net leverage ratio? And then secondly, as traffic continues to grow nicely and leads are growing. Have the conversation with dealers changed at all? They're looking for more tools internally on Cars.com's platform in addition to some of the new products. I guess the attribution's becoming more important or less as your traffics starts to ramp back.

I'll start with the second question and turn it for Becky on our capital strategy. I think the conversation has definitely turned with franchise dealers. I think independent dealers continue to hold the line and look for just cost efficiency at the independent level, but franchise dealers absolutely are looking for technology solutions that can eliminate vendor costs and/or automate solutions for their dealerships to run more efficiently heading into next year. And I would also say just more broadly on our R sales team front, I definitely feel like we've moved more to front foot in terms of our value delivery, our data around attribution and the evidence that we have that we're a higher-quality source of sales than other providers. And that has been a welcome shift in the conversation.

And then on capital allocation, in the near term, our focus is that, we think it's more prudent to pay down some of the debt. You'll see we did a bit of that in the third quarter. The credit environment has tightened. And as we've talked with investors, we also have been encouraged to prioritize some deleveraging, which is what we're doing. We do still have an active share repurchase program. I think that's a proven tool to have as a public company, but in the near-term our focus is on taking down some of the debt.

Great. Thank you for taking my questions.

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

Thanks. Good morning. Most of mine have been answered. Just one more kind of on churn, down 1% in the quarter, much, much better than it's been. And Alex, you noted kind of swung that positive in October. Can you give us sort of the cadence of how that trended throughout the quarter? And in other words did you see linear improvement throughout the quarter and then positive in October or no?

Yes. I think, we did see fairly consistent improvement, particularly going Q1 to Q2 to Q3. The trend on the cancellation rate has continued to stabilize and improve. And on the gross sales front, mostly, I think we had one and looking at the data right now, one month in the quarter that didn't sequentially improve, but overall if you look at the trend, gross sales volume has been steadily improving and the cancellation rate has been much more dramatically improving.

Got it okay. And then in the release you talked about affiliate conversions are expected to generate an incremental $50 million of free cash flow in 2020. Can you sort of deconstruct that provide a little bit more detail on what makes that amount up?

Yeah. That's two components. So the first component is the wholesale to retail revenue uplift that we realized with the conversions complete. So, we get the actual retail revenue that's being built for the dealers instead of collecting that $0.60 on the dollar which is wholesale revenue. So that's the first component. The second component is the end of the payments that we're making to the former affiliate partners to have achieve the early conversion. So you'll recall that we've been incurring extra payments to those former affiliate partners as part of our agreement to convert the markets early. So in the first half of next year, we still have some of those payments particularly to the most recently converted affiliates but by the midpoint of next year those payments will end. And obviously, there'll be more significant uplift once that happens.

Thank you.

And our next question comes from the line of Doug Arthur from Huber Research. Your line is open.

Yeah. Thanks. Becky, I'm wondering, if you can sort of just aggregate direct revenues in the quarter. You said Dealer Inspire I think was up 25%. And you said, I believe the incremental impact of the affiliate conversions was $14.2 million. So that's over a year ago I assume. Can you speak to what that incremental impact was sequentially from Q2 for starters?

So, apologies, I'll have to look I don't have Q2 in front of me. But you were right the $14.2 million is the – I'll call it the uplift in retail revenue, a large portion of which of course comes out of the wholesale line that's the first part that's an increment for Q3 on a year-over-year basis. The Dealer Inspire growth on a year-over-year basis is 25% that equates to approximately $4 million. And so the offset of course to get to the $3.4 million that we grew on that direct line, which would be excluding National Advertising is the lower revenue we achieved from the notion that the subscription business has less dealers today than it did a year ago. So those are the key components. I don't have in front of me apologies what those year-over-year changes were for Q2. Certainly, we can get that and provide that as well. National Advertising in the quarter is down 28%. So that's a $7.9 million decline on a year-over-year basis. So I think those are the key elements of the revenue.

So, excluding Dealer Inspire obviously very impressive growth and the affiliate conversions, I mean the baseline figure I was using for direct excluding all that last year in the third quarter was $78 million. So that – I don't know whether that's right or not but that's the number I was using sort of the underlying direct number. That I assume was down sort of high double-digits then in the quarter is that fair? Excluding the impact of the conversions?

Yes.

Okay. Terrific. Thank you very much.\

We have no further questions in queue. I'll turn the call back to Alex Vetter for closing remarks.

I simply want to say thanks for joining today. We'll talk to you soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.