Cars.com - Earnings Call - Q1 2018
May 9, 2018
Transcript
Speaker 0
Good morning and welcome to the cars. Com twenty eighteen First Quarter Earnings Conference Call. Hosting the call this morning are Alex Bedder, 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 May 2438.
I'd now like to turn the call over to Jandy Tomy, Vice President of Investor Relations.
Speaker 1
Good morning, everyone, and welcome to our twenty eighteen first quarter 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'd like to draw your attention to our forward looking statements and the description and definition of our non GAAP financial measures found on Slides two and three 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 first quarter twenty eighteen 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 now like to turn the call over to Alex.
Speaker 2
Thank you, Jandy. Good morning, everyone, and welcome to our conference call for the 2018. I am pleased with the progress we're making in our strategic initiatives as we continue to take steps forward in positioning the company for growth. In 2018, our traffic has grown in each of the first four months of this year. We've continued investments in product and technology.
And since November 2017, we've converted nearly 2,600 dealer customers into our direct sales network with our successful implementation of early affiliate conversions. In addition, we closed on the strategic acquisition of Dealer Inspire and launched digital marketing and even completed our first integration project with the launch of Conversation Starter, an AI messaging engine on cars.com in just six weeks from close. We continue our leadership in the industry, starting the quarter by hosting our annual Best of Awards at the Detroit Auto Show, where we announced the best vehicles in six different categories. And we ended the quarter at NADA, the auto industry's largest event each year, where we debuted new offerings from cars.com, DealerRater and Dealer Inspire. In the first quarter, traffic was up 7% and unique visitors were up 9%, driven by planned incremental investments aimed at consumer acquisition and engagement combined with product innovations that make cars.com a better experience.
Mobile traffic is also up and now accounts for 65% of total traffic compared to 57% a year ago. And our app continues to lead the competitive set. For Q1, we had the most downloads and the highest active user accounts as measured by both Android and iOS environments. Improvement in direct traffic and SEO, site performance improvements, new creative and product innovation are all working together to start the year off on very solid ground. This has also been an exciting quarter for product launches.
At NADA, we launched Cars Social and sold over 120 campaigns in the first weekend alone and continues to be incredibly well received. Cars Social enables our dealers and OEM customers to reach an unduplicated, unique audience on Facebook and Instagram. By leveraging our high quality cars.com audience, this product targets consumers on social media who previously searched inventory or showed interest in similar vehicles in the market. In our testing prior release, data shows cars.com Social drives an 80% unique audience compared to social campaigns modeled from a dealership's own website audience. This unique offering delivers a truly incremental lift in exposure and sales.
We also added Conversation Starter to our preferred and elite dealer customer packages, providing more value to these customers while incenting customers to upgrade. In addition to using AI to provide instant answers, Conversations turns more than 70% of chats into identifiable opportunities by letting car shoppers connect in a way that's most convenient for them. We're excited about the potential of this product to better measure consumer activity while connecting dealers and consumers in an engaging and innovative way. Conversations is the first AI chatbot that integrates seamlessly onto a third party site and a dealer website, so that dealers can immediately connect with consumers whenever and wherever they're shopping. And this now gives us a new form of tracking to tie more sales back to our platform.
And more recently in April, we launched our newest addition to our price badging suite Powered by our proprietary machine learning algorithm, the new technology called Hot Car helps to identify vehicles which are most likely to sell fast. Hot Car represents one way that we're investing in artificial intelligence to solve complex problems and build products that are more accurate and predictive in nature in order to improve the car shopping and selling experience. This utility should drive repeat visitation and improve our user experience. In February, we closed on the acquisitions of Dealer Inspire and launched digital marketing. This strategic acquisition improves our product position to dealers by expanding our range of solutions to support dealer sales.
It also furthers our strategy of integrating new and relevant capabilities and talent to accelerate organic growth, strengthen the retail experience and deepen dealer connections and improve attribution. Dealer Inspire is an innovative technology leader that has been rapidly increasing its market share by providing progressive dealer websites, digital retailing and messaging platform products. And Launch Digital Marketing provides digital automotive marketing services, including paid, organic, social and creative services. These proprietary solutions are complementary extensions of our online marketplace platform and our current suite of dealer solutions. This allows us to participate in a meaningful way in the fastest growing channels in the industry.
Dealers advertising spend on first party sources such as their own websites, paid search and social media, all of which are projected to continue to grow at double digit rates. And in the first quarter, Dealer Inspire grew its business 58% year over year. Dealer Inspire's technologies, like Conversations, also allow us to strengthen our attribution capabilities by more closely tracking consumer engagement at a local level, thus furthering our strategy of finding opportunities to prove our value to our dealers. I'm thrilled to share that the integration has gone very well. Our product and tech teams work rapidly to complete our first integration project.
And in fact, within just six weeks of closing, we were able to integrate Conversation Starter onto the cars.com platform. In addition to the progress we've made in the product and technology area, a big step in Q2 will be further building out the sales team at Dealer Inspire. In addition, we are leveraging our current robust sales teams and existing relationships to accelerate growth in this exciting new category. Exciting things are happening in our backyard and with even more on the way. We're excited about new opportunities with OEMs, new dealer product innovation and our shared commitment to strengthening the retail system.
I'd like to take a few minutes to walk you through the dynamics of the affiliate structure and remind you the value we're unlocking as we convert these markets into our direct sales structure. Due to the legacy structure of our company, our direct sales team has been unable to sell in certain markets throughout The U. S. Rather, we have our affiliate relationships where the affiliate sales teams have exclusive rights to sell our products in defined geographies. And as a result, we only recognize the wholesale rate on this revenue, billing the affiliates to 60% of the retail value of cars.com products.
There is a significant opportunity in converting these affiliate markets to increase revenue and profitability over time. As we convert affiliate markets, we immediately begin billing dealers at the current local market retail rate, resulting in an immediate uplift in revenue for us. In addition, will come through improved service levels and product sales. We also expect to gain efficiencies in the cost structure of our sales network as we convert these markets. These efficiencies coupled with the end of the transition payments will result in significant cash flow uplift.
That brings me to the next highlight for the quarter, which is the significant progress we've made in converting our affiliate markets consistent with our strategic priorities. In the first quarter, we announced agreements to convert nearly 60% of our wholesale revenue into our direct sales channel, much earlier than the agreement's original expiration in October 2019. We continue conversations with the remaining four affiliates. I'd now like to turn over our specific performance results for the 2018. Revenue grew 4% year over year.
This was driven by the Dealer Inspire business and the uplift in revenue realized from the early conversion of affiliate markets. In addition, our national advertising business grew 7.5 on a year over year basis, reflecting the timing of certain OEM campaigns and strong product sales. As I mentioned, traffic had been strong this quarter and was up 7% and unique visitor count grew 9% year over year. We've established our highest number of phone leads in nearly two years and dramatically improved our on-site conversion rates, allowing us to improve our overall efficiency. Dealer customers declined 4% since December 31.
More than 70% of the decline was related to DealerRater only customers and affiliate losses. First, DealerRater. The decline was driven by a decision we made in respect to DealerRater. We had a number of DealerRater only customers who subscribed to a lower price legacy DealerRater product, which we decided to sunset. In the first quarter, we successfully migrated majority of these dealers on this legacy product onto our new and improved DealerRater Connections platform, which includes access to Salesperson Connect.
And strategically, this is the right move, achieving growth in average revenue per dealer, streamlining our product set and focusing sales on products that provide more value to dealers. A key pillar of our long term strategy is providing relevant value add digital solutions to the dealer community. Second, affiliate dealer losses were elevated in the quarter consistent with our historical experience that affiliate markets reflect higher cancellation rates and lower sales performance than our direct markets, underscoring the strategic value of converting markets to our direct sales force. The remaining dealer decline of approximately two thirty dealers was driven by low cost competition and dealer reaction to our traffic declines over the last several quarters. Dealer sales improve as traffic improves and our first quarter twenty eighteen traffic increases are encouraging.
In addition, dealer sales improve as we offer leading digital solutions, both internally developed and recently acquired. Our average revenue per dealer or ARPD grew 5% compared to the prior year due to the concentration of affiliate dealers in large demographic areas and quality improvements in our products and services. And finally, our average vehicle listings were 4,900,000 compared to $5,000,000 a year ago. Recall that last year inventory levels at dealerships were at all time highs, in particular with new car inventories. This quarter, our average used car listings grew 6% compared to a year ago, offset by a 6% decline in average new car listings.
I'd now like to turn the call over to Becky to go through our financial results for the 2018.
Speaker 3
Thank you, Alex. Revenue for the 2018 was $160,000,000 reflecting $6,800,000 or 4.4% growth compared to $153,200,000 in the prior year period. Retail revenue was up $20,100,000 driven by the conversion of the Tronk and McClatchy markets and the addition of the Dealer Inspire and LDM businesses, which is classified within direct revenue. Dealer Inspire and LDM contributed $5,700,000 of revenue since the February 21 closing date. On a full quarter basis, Dealer Inspire and LDM grew 58% year over year.
During the quarter, we saw gains in our national advertising business, which was up $1,900,000 or 7.5% compared to the prior year. Keep in mind that our national advertising business has more volatility quarter to quarter. Wholesale revenue of $27,600,000 was down $13,300,000 compared to the prior year, reflecting the early conversion of the Tronc and McClatchy markets. Total operating expenses for the 2018 were $152,800,000 reflecting a $26,800,000 increase compared to the prior year period. This increase was driven by a $14,400,000 of non recurring costs comprised principally of $4,400,000 of transaction costs associated with the Dealer Inspire and LDM acquisition, dollars 5,700,000.0 of costs associated with the settlement of outstanding equity awards related to the acquisition, which under the accounting rules was required to be expensed and $3,800,000 associated with the stockholder activist campaign.
In addition, operating expenses increased due to the addition of Dealer Inspire as well as public company costs of $3,100,000 During the quarter, we realized cost efficiencies within cost of revenue and operations, product and technology and sales. These efficiencies were reinvested in planned marketing initiatives to drive consumer acquisition and engagement. Net income for the 2018 was $900,000 or $01 per diluted share. Adjusted net income for the quarter was $28,500,000 or $0.39 per diluted share. Please keep in mind that comparisons to the prior year are impacted by changes in our capital structure, including the addition of interest and tax expense.
Adjusted EBITDA for the 2018 was $47,000,000 exceeding our internal plan. The $3,100,000 decline compared to the prior year was driven by planned marketing investments and incremental public company costs in the current year period, which I described a moment ago. Net cash provided by operating activities was $26,700,000 compared to $43,700,000 in the prior year. Free cash flow was $24,100,000 compared with $38,100,000 in the same quarter last year. During the current year period, we paid $5,600,000 of interest and $11,700,000 in nonrecurring payments related to the Dealer Inspire and LDM acquisition and the stockholder activist campaign, all of which was incremental compared to the prior year.
As of March 3138, cash and cash equivalents were $11,500,000 and debt outstanding was $708,100,000 representing net leverage of 2.9x as defined by our credit agreement. During the quarter, we borrowed $165,000,000 in connection with the acquisition, and we also repaid $40,600,000 of which $35,000,000 represented voluntary payments on the revolver. Our strong cash position gave us the flexibility needed to make the strategic investments this quarter that Alex reviewed at the beginning of the call. Our acquisition, affiliate conversions, investments in product, technology and marketing represent execution of the strategy we laid out nearly a year ago at Investor Day to use capital in a thoughtful and deliberate way to achieve our strategic goals and create long term shareholder value. Overall, we remain committed to continuing negotiations with the remaining affiliates, and we also continue to identify opportunities to accelerate organic growth, strengthen our retail experience, deepen dealer connections and improve attribution.
As part of our plan to deliver further returns to shareholders, we announced a $200,000,000 share repurchase plan at the March in connection with our regularly scheduled Board meeting. We, of course, did not buy any shares during the closed period between the announcement and the first quarter earnings release date. Our outlook for the year is to deliver 10% to 11% revenue growth and 34% adjusted EBITDA margin, consistent with the outlook we provided on our fourth quarter earnings call. While this overall guidance is consistent, there are a variety of puts and takes to build up to the consolidated growth, which may differ from the original buildup we provided. We continue to expect capital expenditures to be approximately 10,000,000 stock based compensation expense of approximately $10,000,000 and an effective tax rate of 25% with a cash tax rate of approximately 13%.
Finally, cash interest expense is expected to be 27,000,000 With that, I'd like to turn the call back to Alex for some closing remarks before your questions.
Speaker 2
Thank you, Becky. Looking forward, we're going to continue to strengthen our commitment to the retail dealer industry, enabling our partners with the technology and tools they need to drive sales and manage their business more efficiently. Our relentless focus on consumer product innovation and traffic will continue in parallel with integration of affiliates and our recent acquisition, both of which are expected to deliver efficiencies across our operating structure. Our top priority has been focused on improving product experience and traffic, and I hope you heard the great progress we've made on both of these fronts in the quarter. Our second priority has been focused on strengthening our overall value proposition through meaningful affiliate conversions.
And we will have converted nearly 60% of our wholesale revenue this year. We are laser focused on integrating the affiliates, leveraging the opportunities from our Dealer Inspire acquisition and winning with consumers and dealers alike to connect buyers and sellers in new and innovative ways. Advertisers love the fact that 83% of our audience plans to purchase a car in the next six months. And once they've decided on a dealership, two out of three consumers plan to purchase within seventy two hours. And consumers love the strength of our brand, as evidenced by the fact that the vast majority of our traffic comes to us directly.
With that, I will open up the call for questions. Operator?
Speaker 0
Your first question comes from the line of Gary Prestopino from Barrington Research. Just
Speaker 4
a couple of things here. Just on the tax rate non GAAP, is it going to be 26% as well? When you're citing that tax rate, is that both for GAAP and non GAAP tax rate?
Speaker 3
25%, yes. It's for both, Gary.
Speaker 4
So it's 25% for both? Okay, great. And then in terms of these planned marketing expenditures that you did in Q1, are those going to continue at the same level throughout the rest of the year or do those start dropping off?
Speaker 3
So the Q1 period, Gary, is always when you look back at our history, it's a really important period where we do spend higher levels on marketing. There's a variety of reasons behind that. It's an important quarter from an industry perspective with all of the large industry events and our participation there. It also tends to be the highest seasonal quarter from a consumer traffic perspective across the category. So our investments tend to be higher driven by both of those reasons.
And importantly, in our case, we also had communicated that investing in consumer acquisition and engagement is one of our foundational strategies. So we do expect incremental investments throughout the year. They may not be quite to the same level, but they certainly will be incremental.
Speaker 4
Okay, that's fine. And then Alex, you've rolled out a number of products over the last twelve months. Really a lot of them dealing with attribution. Would you mind, could you just possibly kind of rank order them as how you feel in terms of their contribution to the attribution that you're trying to develop at Cars?
Speaker 2
Sure. Well, first of all, I don't think there is a silver bullet in this. Most consumers do the vast majority of the research online, and then they prefer to tell the dealership that they don't intend to buy a car even when they walk in the store. So, there's no real incentive for clarity and transparency here, which is why we've taken a multi pronged approach. I think our on the lot tracking, Gary, is the most closest thing we have to being bulletproof because we're showing a cars.com user physically standing on the lot using the product.
It's proof of life. It's proof of human arrival. But we're increasingly doing new things. For instance, in the second quarter of this year, we're planning on launching using the geolocation phone technology as well to be able to append the caller ID and the first and last name of the user on our phone leads, as well as the car that the caller was looking at when they called in and feed that directly into the dealer's CRM. So I view this as sort of, you know, guerilla marketing at its finest, and there isn't gonna be one silver bullet here.
I also will tell you, you know, we're early into our work with Conversations, the new AI chat messaging tool from Dealer Inspire. I can tell you, not only is that showing strong engagement, but again, obviously, we're getting the transcripts between users and dealers. And so arguing over who drove the sale is pretty nice when you've got a public record of conversation. So we're going to keep chipping away at this one, and I don't think there'll be a silver bullet.
Speaker 4
Does conversations take the place of Salesperson Connect? Or is that or Salesperson Connect still out there and also can be used as an attribution proof of attribution?
Speaker 2
So thank you for bringing that one up. I'll tell you, Dealer20 Group was speaking recently to me and said that they had thought about canceling cars.com because of the CRM data. But when polling his sales team, they were outraged at the notion because they knew that most of their customers were referencing, finding them and their specific profiles on cars.com. And that is distinct to us and therefore has no room for misattribution. And so the dealer said that he knows his CRM data is flawed.
He's now relying on his salespeople more for evidence of what's driving their results. And that communication between general managers and owners and their frontline sales staff, we think is going to help validate our efficacy in the market.
Speaker 4
Okay. And then I know Trunk has been converted. Is McClatchy under your roof totally or does that go ratably throughout the year?
Speaker 2
That will be on a phased basis. Obviously, we have a contract to convert all in 2018. But I will tell you, they are pleased with the transition work that we're doing because we've stopped their losses. And now we're even seeing revenue growth in our affiliate transition markets of around 4%. And so I think they've got an incentive to actually convert more markets to us sooner this year.
So I hope and look forward to sharing more good news on that potential with you shortly.
Speaker 5
Okay. Thank you.
Speaker 0
Your next question comes from Tom White from D. A. Davidson. Your line is open.
Speaker 6
Great. Thank you for taking my questions. Just on the guidance, so kind of the headline growth and EBITDA margin outlook is unchanged. But can you just kind of give a bit more color on some of those moving pieces? Is it fair to assume that given the decision you guys made about that kind of legacy DealerRater product that maybe the outlook for the core is a little bit lower and maybe the new acquisitions are your expectations there are higher?
And then just on the unique user growth, obviously a nice pickup. I think you'd said that in early March that it was up 6%. So implies that exiting the quarter and entering 2Q was significantly higher. Just kind of curious about how that looks over the course of the next year. Can we accelerate further?
And just at a high level, like what's sort of the right rate of audience growth for you guys? It seems like all the platforms in this space, you have a pretty wide range of growth rates in terms of audience. Should you guys any kind of color you can give us on that would be helpful. Thanks.
Speaker 2
Sure, Tom. Let me try to answer in reverse order and then Becky maybe also can chime in here. First of all, a stew point on your part on the traffic side, we think unique visitors is a very durable metric for investors to get behind because many of our competitors will cite throttling of visits as being superior when really they're recirculating the same users to multiple dealers. Visits don't buy cars, unique visitors do. And we think our unique visitor growth rate is a much more qualitative measure of our progress and success there.
And I'll emphasize that the majority of our growth is coming in mobile properties where Google's SEO indexing systems are starting to point more and more. So I think we're well positioned there as well. On the growth side and on the mix, certainly, the DealerRater cancellation decision was something we took seriously, but we also felt that we saw the organic improvement in Salesperson Connect, not only in growing that product line, but in what it's doing on helping with retention. Our DealerRater Salesperson Connect customers are experiencing higher retention rates on the core. And so we wanted to incentivize the legacy DealerRater dealers to migrate into the core premium product and subscription.
Our overall direct average revenue per dealer is up 6%, and we want to continue to drive that migration. So we made the decision to sunset their legacy offering. It was a low price point, fractional in value to our core. And we certainly know the value delivery on the premium product is much superior. But we did have dealer cancellations in the quarter.
I think some of that's due to competitors selling low cost subscription providers and putting pricing pressure on the market. But we also know that that's a very short term game. We've got distinct value, a unique audience and clear ROI in our offering and certainly our premium destination for users and dealers to participate. So the mix has changed. We are seeing great growth in Dealer Inspire, 58% growth in the quarter year over year.
Strong momentum there coming out of OEM endorsements and lots of momentum on the OEM side, who are looking to break these legacy agreements with established players in the category. And I think Dealer Inspire is really well positioned. We're all seeing great growth in our social offering. And again, we see some great progress on the attribution work we're doing. So the mix is changing a bit.
New car traffic, obviously down. Our new car inventory down 6%, but used car seems to be surging. So a little bit of mix change there. Becky, what would you add? And I want to make sure we got all of Tom's multi part question.
Speaker 3
Yes. No, I think that you covered it. The only other thing I would point out is we're taking some of our cars.com salespeople and they've been moved over to Dealer Inspire as well. We think that gives us a lot of opportunity from a cross pollinization perspective and also helping that business further accelerate in the market. We're taking our sales teams and obviously doing some things looking at territories, what used to be affiliate territories and what are direct territories and combining go to markets and places where we can.
So puts and takes, but still moving forward.
Speaker 2
Still on track. Absolutely. Great. Thanks.
Speaker 0
Your next question comes from the line of Samit Zinha from B. Riley FBR. Your line is open.
Speaker 5
Yes. Thank you very much. So a couple of questions. Alex, first, starting with the new used split, you talked about number of listings going down. And I think part of the pricing schema that you use for pricing your product depends on number of listings.
So can you elaborate for us what percentage of listings are new and used? And I guess the trends that you expect during the year for that? And would it have any impact on the way you price your product? Secondly, if you could also just kind of go through the breakdown of direct dealers or the total number of dealers and how that has declined. And if you can help us kind of piece through what the organic direct dealer number is excluding DI LDM and excluding some of these affiliate conversions?
Then I have a follow-up question. Thank you.
Speaker 2
Sure. Well, first of all, our franchise prices are higher than our pure used car subscription because we know we do deliver and have a lot of value in our new car side of our house. And so there are differences in our used only programs versus the programs that we sell into the franchise dealer system. And the franchise dealer product is packaged together. On the inventory side, we actually have more new cars listed on our website than we do used.
The inventory split is about sixtyforty, but that's just because, obviously, manufacturers are rolling out high volume production systems that are occupying dealer lots. And we are seeing some slowdown there, although it's positioned to be a great year. I don't see any cyclical challenges this year that would give me cause or concern. And particularly with strong new car advertising growth in the quarter, we know that OEMs view us as a very reliable, high quality marketplace to convert buyers into their brands. So we always see ebbs and flows in the inventory mix, and it tends to mirror predictive of the market.
Right? So I guess if one thing I would remind is that most users come to cars.com well in advance of making their decision. And so, you know, we do watch those search patterns go. We're seeing great growth in truck sales and SUV, lower volume on smaller lower priced inventory. And so that impacts the mix as well.
But nothing, I think, to point to any real major cyclical change in the market.
Speaker 3
Dealer count.
Speaker 6
Oh, and
Speaker 2
then dealer count, sure. So your question, Sumit, there was on just total dealer count and what was the specific question, though?
Speaker 5
I want so dealer count obviously went down by about 800. I wanted to see if you could help me piece out the direct dealer count as it conventionally used to be counted. So if you exclude Dealer Inspire, if you exclude McClatchy and Tronck,
Speaker 2
what Great would be clarification. Importantly, we're not including Dealer Inspire's business into our total dealer count. So that's a very important clarification to make. They've got about 2,000 dealers. We're not reporting that as part of our subscription business.
We'll talk about that further down the road in terms of when and if we include that. But I think it's a different business altogether. Importantly, with the affiliate migrations, our direct dealer count now is over 16,000 dealerships. And so even though we had cancellations in the quarter of around 200, I believe, in terms of net loss. It's on a base now of 16,000 because we've migrated a fairly large substantial amount of affiliate dealers into our direct channel.
Becky, what else would you add?
Speaker 3
Does that answer your question, Samit?
Speaker 5
Yes, it definitely does. Guess one follow-up is, as you Becky mentioned the buildup towards the full year guidance. Can you obviously, given the flavors, but would you say that due to the sun setting of certain products, the organic growth, which is supposed to be 0.5% to 1.5%, is that probably towards the lower end?
Speaker 2
I think the organic business will be a little bit harder because of some of the cancellations in the first quarter. But that's why we still think the overall mix is on track because of the improvements. Direct average revenue per dealer is up 6%. That's on a much bigger base as well. So we're seeing strong growth there that can offset some of the dealer count.
But really, the mix has changed. Again, for the reasons I mentioned before, dealer inspire, building momentum, OEM endorsements, inactive discussions there, lots of new initiatives around attribution. And importantly, I think the most important metric which we've been consistently stating is traffic is our leading indicator. And we've had traffic losses for most of 2016. The fact that we've turned the tide in a highly competitive environment in the first quarter of this year across all channels, we think is a really strong bellwether for what's to come.
Speaker 5
Okay. Perfect. Thank you very much.
Speaker 0
Your next question comes from Steve Dyer from Craig Hallum. Your line is open.
Speaker 7
Thanks. Good morning. Along those lines, Alex, just it was a good segue. Would you anticipate the increased traffic now that that's going in the right direction in a fairly convincing way over the last several months? Would you expect the dealer count to start heading in the right direction as soon as Q2 potentially?
Speaker 2
I would. The traffic growth does not equate to revenue growth in our model immediately. We're a subscription business that's more of a slow roll and it tends to follow our overall value delivery and traffic trends. And so that's why traffic's been our number one priority is if we can restore traffic, that will build confidence in both our dealers and the value delivery systems. And so part of our strategy is to identify costs elsewhere in the business so that we can continue to reinvest in marketing and growth in the brand as well as product innovation.
So that's our strategy to continue to invest there. Our customer satisfaction is up 5% in the quarter, which is the highest consumer satisfaction we've had in our product experience. Combine that with our increased marketing investments, I would like to think that we can absolutely start moving the dealer count forward.
Speaker 7
Okay. So you feel relatively confident that maybe Q1 will end up marking the low watermark for dealer customers?
Speaker 2
Yes, I do. I mean, certainly affiliate conversions are a little bit of a wildcard. We had some challenges in the quarter with dealers that hadn't been serviced in large periods of time and or being unaware of a lot of our product innovations. And then certainly, obviously, if there is continued affiliate degradation in the remaining affiliates, that's a risk. You know, we're actively in discussions with other affiliates about improving their performance and or following the program that we've established with the some of the existing affiliates that we've converted.
And that would remain a variable that we don't necessarily control, but certainly are eager to strengthen.
Speaker 7
Got it. And then how much incremental revenue did you guys recognize in the quarter just from the transition of the two big affiliates? In other words, what was what sort of incremental move from wholesale to retail?
Speaker 3
So we moved from wholesale to retail just under $13,000,000 of revenue.
Speaker 7
So it was $13,000,000 incremental that wouldn't have been recognized under the old wholesale method?
Speaker 3
No, no, no. So what we did was we moved $13,000,000 from wholesale revenue to direct revenue. The increments between the two was just over $1,000,000 In terms of what we build in the direct channel, once we took over those accounts compared to what was in the wholesale revenue line, including revenue amortization.
Speaker 7
Got it. Okay. So a little bit around $1,000,000 uplift selling Yes. To them Okay. Got it.
And then I guess just quickly, how do you think about capital allocation going forward? You obviously have good free cash flow. You've got a share repurchase. You're about three times levered. There's M and A.
How do you think about sort of priorities there going forward?
Speaker 3
So I think that you've just summarized it. The Board has consistently spent time on capital allocation since the time of the spin. We had an intentional strategy around it in 2017, and that became more clear in 2018 as we started the year with the affiliate conversions and the acquisition. In our March Board meeting, the Board in normal course, relooked at capital priorities and we put in place the share repurchase program. So it's 2.9 times net leverage.
We're certainly comfortable with that given the free cash flow of the business and the business model. We have the $200,000,000 share repurchase program. We're going to continue to look for affiliate conversions, which haven't to this point required upfront capital, but we'll see where the negotiations with the other affiliates land us. So those will remain our priorities for now.
Speaker 2
And Craig, I only add that just keep in mind that the affiliate conversions, while the revenue uplift is immediate, the payments are in place, that presents an opportunity in 2019 and 2020 as those economics start to now come fully into the cars.com business.
Speaker 7
Got it. Thank you.
Speaker 0
Thanks. Thanks, Steve. Your next question comes from the line of Dan Kurnos from Benchmark. Your line is open.
Speaker 8
Thanks. Good morning. All the questions are kind of in the same vein. Everyone's sort of dancing around the question of what was organic ex acquisition, ex affiliate revenue growth in Q1. And Becky, gave guidance before on sort of what you expected that to be for the year.
It sounds like that's a little bit more of a tougher outlook. So maybe if you want to just start with if you could just give us that Q1 number and kind of get past all of that. And then the other piece of this is on the your results in Q1 were a beat and it looks like it most had to come mostly from pricing given the incremental churn. I'm curious, Alex, in the marketplace you've talked about organic pricing headwinds. So if you can just talk about sort of the underlying package pricing versus the upsell that you're getting from your acquisitions and how that's flowing through?
And if there was any decision at all to take maybe either level set pricing or do or take some pricing action in Q1 that will have an impact on the balance of the year?
Speaker 2
So I'll start with the marketplace pricing question and then let Becky answer the guide. The we've always had low cost competition. That's not a new phenomenon. That's been a consistent phenomenon over the years. And as a leader in the market, it's certainly not a new dynamic for people to try to undercut us on price or our perceived or real value.
Our philosophy is that we're generating far more sales activities for our customers today than we're charging. And know that with improved visibility of our value delivery, we're a no brainer investment. In most cases, cars.com is occupying less than 5% of our dealers' advertising budgets and generating far more sales activity than that percent And don't set our prices based on what someone else is willing to give away or to try to perceive as similar in terms of value. Certainly, we know that if we continue to invest traffic and our brand, as well as improve the value proposition by improving the product, we think our advertisers are looking for partners that are going to continue to demonstrate their commitment to the retail system. We haven't done any price bundling with our recent acquisitions, but that's a great example of how we're improving the product.
We had a third party chat provider, which we had to pay subscription basis, we were able to eliminate that cost and embed now a proprietary superior AI messaging engine that gives us better visibility in terms of the conversations happening between buyers and sellers. So that's just an example of us strengthening the offering. It certainly helps that if you're a dealer inspired dealer, now that your chat engine is almost native to your own website. And so we're gaining even operating efficiencies at the dealer level. But there's many competitors in this category.
Some use fictitious attribution models to get credit for every sale. Cars.com is the home of the undecided shopper. 90% of our audience doesn't know where they're going to buy their car. And this is the incremental audience we know dealers need to be reaching. And therefore, know our price points are very fair for them to get incremental sales.
I'll let Becky comment on the revenue mix side, unless there's other questions on the dealer pricing dynamics.
Speaker 3
Yes. So obviously, Dan, what we said is we are providing consolidated guidance that makes the most sense for us. In Q1, when you look at it, we of course reported that we added $5,700,000 of revenue associated with the Dealer Inspire acquisition. We also talked about the affiliate uplift on a net basis being just over $1,000,000 So if you strip those things out, the organic business ex the acquisition and the affiliate uplift is about flat on a year over year basis.
Speaker 8
Got it. And that includes, of course, growth at DealerRater too. But that's all right. That's pretty much where we were coming out. All right.
So that's helpful on that. And just, Alex, just to kind of close the loop on the pricing situation, I was just really also more referring to maybe even your longer term thoughts. I mean, you gave some color around your considerations ability to take pricing. Do you have kind of underlying sort of annual, I don't know, low mid single digit pricing growth baked into your packages? Obviously, bundling will drive average revenue up over time.
Have you included DealerRater in sort of the upsell yet? Or is it really more the DI LDM packaging that you were talking about a second ago?
Speaker 2
Thanks for that clarification. I totally get you now. Certainly, we're looking at different pricing and bundling strategies now that we have a broader suite of offerings, and we think we can help provide further efficiencies for dealers that participate across our suite of businesses. So that is one work stream that we're working at. I would also tell you that as the attribution model becomes clearer for the more sophisticated dealers who aren't relying just on a CRM pull of their ROI of leads, they want to buy more.
And so, we think we can start to tier our packages to offer premium offerings at the higher end of the market. And so, we do see some growth in our pricing, particularly for the more sophisticated tier, who are going to start taking share from those dealers that are still stuck in sort of what I'd call these legacy attribution models that are counting email lead gen as the sole value delivery. And so we're intentionally going to migrate the market to the more digitally savvy dealers. So we'll get stronger growth there. And that may mean that we lose a little bit on the low end.
But we think that's where the market's moving, and we think there's a bigger opportunity in a much broader part of the market that we're pursuing.
Speaker 8
Perfect segue into a customer question for me. Just on mix, guess, you're having some churn issues, obviously, is some competition in the space. You made the DealerRater commentary already. Can you just talk about the mix of churn that you were seeing in sort of your net adds versus net losses, large versus small, where you're seeing traction and where you're seeing the declines?
Speaker 2
Sure. Great question. We did see more churn in the smaller end the market with independent dealers than we did franchise on a year over year basis. So again, think also what I've noticed on the total sales for the year, smaller price sedans are coming down in terms of sales volume and again growth in luxury and pickup. Our market does tend to skew and our franchise dealer network does skew more upmarket.
Some of our competitors are more penetrated in the smaller independent segments. That's a smaller segment of the market for us in terms of total revenue. But we did see some losses more on the independent side year over year than we did on the franchise side.
Speaker 8
Got it. If I could just sneak one more in, sorry to go on with this. Just on the traffic side, look, I know this was asked kind of high level, but can you just talk about your thought process on marketing here with brand versus customer acquisition spends? Clearly, you're going to start I think you guys mentioned, although it didn't really come up on the call yet today, that you guys have sort of developed your own traffic acquisition algorithm. We know that marketing spend was up pretty significantly in the quarter.
So if you can just talk about really the two things, brand versus customer acquisition spend, ROI in those channels, if you're seeing any pressure in paid ROI channels and how you think kind of over time that plays out for you guys balancing those two things? And maybe even some of the LTV kind of metrics you're seeing around customers that you're acquiring through some of the improved tech stack? Thanks.
Speaker 2
Sure, Dan. Thanks. Certainly, we see a lot of increased competition in the performance channels. I think our category growth in their spending is actually much faster growth than ours, which I think underscores the strength of our brand and our existing position in the market. I would tell you that dealer and OEM increases there are equally aggressive.
I think that's part of the thesis behind the Dealer Inspire and launch digital marketing acquisitions is that we don't just want to fight that trend, we actually want to help the industry capitalize on it. So, part of our outlook, we're excited about some of the things we're seeing with Dealer Inspire, being able to provide those services directly to both OEMs and dealers directly. And our marketing strategy, to your point, we certainly want to have the optimum mix because our brand is part of our strongest high ground that we own, and that we're truly reaching an incremental audience. Many of our competitors actually just bid against other dealers in the marketplace in search and then try to sell that traffic back to the dealer community. We think over time, dealers are going to figure that out.
They're going to realize that why am I spending money where I'm just only competing with myself and I should be migrating my investments to independent platforms that directly acquire traffic and have unique and distinct audiences than just adding friction and cost to my existing business operation. And so we're not going to go all in in search because we feel like that's a hyper competitive market. We do see growth in social, not only in growing our business, but in extending that reach and that opportunity to our local dealers. And that's been a fantastic innovation that we've gotten into this year, where now we're helping dealers tap into this growing platform. Cost per customer acquisition and search, I think is approaching north of $7 for generic keywords.
In our environment, we can get dealers down to VIN level users on specific cars in their lots for under $1 So we know we're superior in investment. We think there's some tracking challenges that dealers have got to get past. And once the sophisticated dealers realize this is a more efficient marketplace than the usual search engine marketing game, I think we stand the game.
Speaker 8
Got it. Thanks for bearing with me, Alex. Appreciate it.
Speaker 2
Always here.
Speaker 0
Your next question comes from Doug Arthur from Hubert Research. Your line is open.
Speaker 9
Yes, thanks. It's getting late. I'll just two quick questions. Becky, you mentioned $1,000,000 incremental from the conversion of the wholesalers. You also mentioned transition costs.
Did the transition costs equate to the incremental revenue in this quarter?
Speaker 3
I'm pausing, Doug, because I'm transition costs. Help me with
Speaker 9
Well, in the sense that you I think Alex mentioned some as you went into some of these wholesale regions to convert them, there were some issues with dealer
Speaker 6
retention and
Speaker 9
getting the sales staff integrated. I'm just wondering if the transition costs in converting these wholesalers equated to the incremental revenue uplift this quarter.
Speaker 3
Doug, as we move into these markets and do the affiliate conversion in 2018, both because of the transitional nature of moving our sales team there as well as the payments that we're making to the affiliate partners in connection with the early conversion, we're not expecting the revenue uplift this year to materialize into EBITDA uplift, although we do expect that EBITDA uplift coming in future periods for sure. So I'll start there. The other clarification I'd make is that our sales team during first quarter, actually, we achieved some good cost efficiencies holistically across the team when we think about taking some of our cars, our strong car salespeople, redeploying them over to Dealer Inspire to help accelerate the work that's being done there. We look at how we've combined certain territories as we've moved into these affiliate markets combined with our direct team. So we are making progress on the kinds of structural efficiencies that we've been talking about.
But specific to the affiliates themselves, this year, I'm not expecting the EBITDA uplift for the reasons I described.
Speaker 9
Okay. And just one quick follow-up. You may or may not have this number right now. I mean you onboarded the Tronc sales group, a very small sales group from the acquisitions. What sort of year over year, what is the sales staff headcount today versus a year ago?
Speaker 3
We onboarded just under 60 people from Trunk. I'm looking at Alex just to make sure I have that correct, About
Speaker 2
It was a little bit higher, but we're obviously down from that as we're gaining some efficiencies in the structure. But on total, Becky, we may have to get back to you on that one.
Speaker 3
I'll need to look, Doug. I know that we added some people, of course, with Trunk. I also know that we've been combining markets and again moving some people over to DI. So let me take a look at that.
Speaker 9
Okay. Thank you very much.
Speaker 3
Thank you.
Speaker 2
Thank you, Doug.
Speaker 0
I'm showing no further questions at this time. I'll turn the call back over to the presenters.
Speaker 2
Thank you very much, everyone, for participating in today's call, and we look forward to speaking with you again. Have a great quarter.
Speaker 0
This concludes today's conference call. You may now disconnect.