Cars.com - Earnings Call - Q2 2018

Transcript

Speaker 0

Good morning, and welcome to the cars. Com twenty eighteen Second Quarter Earnings Conference Call. Hosting the call this morning are Alex Vetter, President and 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 August 2338.

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 second 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 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 second 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. We celebrated our twentieth anniversary in June, but this past year has been more transformative than the prior 19. In just one year as a public company, we've gone from being primarily a listings business to an automotive marketplace solutions provider. We help consumers navigate retail and provide the industry's most innovative digital solutions sold through a national network of automotive digital consultants.

In this inaugural year, we've made significant progress in advancing our long term strategy, But the initiatives we are undertaking to grow revenue are yielding slower results than planned. Today, I'd like to update you on our quarterly results and initiatives, both around the areas of success and where we have made changes for improved results. First, our successes with affiliate conversions. We continue to execute on our promise of fast tracking affiliate conversions. This has been a top strategic priority since the spin and we now serve 84 of our dealer customers directly.

Most recently, we converted the Washington Post dealer network, bringing approximately three fifty dealers into the cars.com direct sales channel. In addition, I am pleased to announce today that we accelerated the early conversions of both Kansas City and Charlotte markets, converting them on August 1 ahead of the original October 1 date. This leaves less than 100 McClatchy dealers to convert by October 1. Not only are we getting uplift by moving from a 60% wholesale rate to full retail, we also gained the ability to sell directly to our customers in these underserved markets. In addition, by shifting resources to better serve these customers, we've been able to grow revenue in these markets 6% since conversion, representing combined growth in both retail average revenue per dealer and in dealer count.

And finally, because affiliate locations tend to be in large metropolitan areas such as Chicago, Los Angeles and Washington DC, retail average revenue per dealer in these markets is substantially higher, up to 45% higher than in our direct markets. In the second quarter, our direct average revenue per dealer grew 6%. Overall progress with affiliate and other core initiatives, growth in the second quarter fell short of our expectations as a result of higher dealer churn and shortfalls in our national advertising business. Our actions improved revenue in June, giving us confidence that we're on the right track. However, the full impact of our actions will not be immediate.

Combined with new car sales trends and OEM spend softening, we revised our full year outlook. Our key initiatives are innovative and will drive traffic, product sales and create efficiencies with long term sustained advantages. Let me walk you through some of the immediate actions we've taken around traffic, sales and product innovation. First, traffic growth. Growing and maintaining a large engaged audience is a key principle of our business in general and in delivering more value to our customers.

Our number one brand drives our organic traffic, which accounts to 75 of our total traffic today. Overall, our traffic has experienced strong growth in each month of 2018. We have also now seen four consecutive months of year over year SEO traffic growth, following investments in content optimization and technology improvements. Building on this momentum, we expect consistent double digit SEO growth for the full year. For the quarter, total traffic and unique visitors were up 8% year over year with mobile traffic up 25%.

This strong growth in traffic has continued in July. In addition, this week, we launched a reimagined shopper experience called Matchmaker, which is being supported by a major national multimillion dollar brand campaign, which I'll talk more about in a few minutes. These initiatives will support continued growth in traffic and unique visitors. More traffic generates more connections, which we deliver to our dealers, creating more value for them in their cars.com subscription. Next,

Speaker 3

let

Speaker 2

me talk about the changes we're making to improve sales more directly. In June, we launched a JoinNow program to stimulate sales growth. Under the program, we doubled monthly subscription sales to independent dealers compared to any other month this year. We also launched a special friends and family offer to our Dealer Inspire only customers to expand our customer base as another step in our integration initiatives. Still, we see substantial opportunity to leverage and improve our sales effectiveness.

As you may have seen this morning, I appointed Doug Miller as our new Chief Revenue Officer. Doug is a former sales leader at Expedia and Living Social, and he brings a proven track record of building high performing sales teams. The move fuels our company's growth agenda, adding a seasoned executive with deep experience growing, scaling and expanding multiple marketplace businesses. Doug is a key addition to our executive leadership team, bringing expertise from technology, media and data businesses to unlock new sources of revenue. Doug's strength is running large global sales teams and transforming organizations for growth.

I am confident he will be instrumental in delivering our growth strategies to expand our suite of digital solutions and increase our customer network. Doug is focused on making strategic go to market improvements to lift the performance of each rep and territory, which will allow us to better leverage our differentiated sales team. Our sales team is a key competitive advantage and we believe that continued traffic growth and sales force optimization will generate growth and decrease churn in the coming quarters. In addition to our sales force improvements, our strategy continues to be founded in product innovation and value creation. We believe that investment in product development will allow us to demonstrate dramatically more value to our dealer customers when compared to our competitors.

In our ongoing efforts around attribution, we launched our Visible Connections initiative in Q2, which focuses efforts to demonstrate the value that our platform brings to dealers that is not automatically captured by dealer systems. Utilizing mobile IT technology, we now append vehicle data with user data flow directly into the dealer CRM systems, removing the manual effort required by dealers to ensure that cars.com is an attributed source. Even bigger news is the unveiling of our new social solutions, which are tapping into new channels with strong demand, while realizing synergies from our Dealer Inspire and LDM acquisitions. Our leadership in social will allow us to retain dealers, further differentiate ourselves within our competitive set and support our growth strategy to increase average revenue per dealer. We have two new products.

Cars Social is a product that serves native ads featuring real time inventory to a more than 70% unique and unduplicated cars.com audience on social media platforms. The solution uses first party data that cannot be purchased or accessed anywhere else. It is among the company's fastest ever selling products. And just last week, we launched Social Sales Drive, which is a powerful new product that enables automotive retailers to maximize the impact of their cars.com advertising with seamless integration on Facebook Marketplace. This product extends the reach of the dealers' vehicle listings to the 1,000,000 daily car shoppers on Facebook Marketplace, driving more exposure to active car shoppers and building the dealer's social brand.

Social Sales Drive is the only Facebook Marketplace integrated product that directly connects the dealer's inventory to its business page on Facebook. Our biggest competitive advantage is that it leverages Dealer Inspire's AI empowered chatbot, Anna, on Facebook Messenger to provide support to users looking to connect with a dealer twenty four hours a day. Our product is a turnkey solution combining our powerful advertising and targeting with the easy to reach in market shoppers on Facebook. Let me walk you through a few of the reasons why this sets us apart from our competition. Although dealers can go directly to Facebook, it is easier to subscribe through cars.com since we already have the dealers' inventory feeds making it turnkey.

Dealers also see a huge advantage to subscribe through cars.com and leverage our audience of in market undecided shoppers versus utilizing their own dataset, which is smaller and less targeted. Cars Social provides particularly compelling opportunity, especially given that Facebook is in the process of discontinuing the managed custom audiences tool. Of note, all managed custom audiences will be disabled on Facebook as of August 15 and partner categories will be disabled in less than two months. The social sentiment from our customer network around these new products has been overwhelmingly positive. The managed chat functionality does an amazing job of getting shoppers basic information and then handing them off to us.

We sold 10 cars in the first six weeks using this product, said one of our clients. Another dealer told us, the Cars Social platform allows us to be specific in attracting users back to my inventory. I view this as a dynamic retargeting feature and my zones are overproducing. Our social strategy was enabled by tight collaboration between DI and cars.com product teams and is a shining example of speed, agility, alignment and a relentless focus on value creation for our customers. Dealer Inspire has reinforced cars.com's reputation for creating the most respected dealer technology solution.

On its own, Dealer Inspire has grown 49% in the first half of the year. Now over 2,000 DI website dealer customers thus far, we expect continued rapid growth in customers and customer penetration. In addition to the product growth at DI, we invested in sales infrastructure in the quarter, which will allow us to continue to take share. We recently won OEM endorsements with both Porsche and Infinity, and we continue to pursue this area of tremendous opportunity and are actively engaged with other large OEMs. Lastly, I would be remiss if I neglected the important work that we are doing to strengthen our core product.

I'll start with price badging. Our badging tool is more accurate and detailed than our competitors, period. Certain competitors only use make model data to merely badge a listing. Our tools leverage additional data, including geography and trim level detail to provide truthful guidance. Customers benefit more from our accurate and complete pricing guidance and dealers prefer it because it doesn't mislead shoppers.

Our pricing tools demonstrate our automotive industry pedigree and follow our company strategy to provide consumers the most open, honest access to information. And finally, to highlight our commitment to innovation, just this week, we launched our matchmaking matchmaking experience, along with an integrated brand campaign, building momentum for the balance of this year and the future. Matchmaker represents the future of online car shopping far beyond simply listings. We can help shoppers find their perfect match. Powered by machine learning, this tool helps early stage shoppers narrow their selection to the vehicle that best suits their lifestyle and finances.

Research shows that 70% of all car buyers do not know the make and model they are seeking when they start to shop for a car. Matchmaker solves this problem. Early indication shows that increased consumer engagement for those who use the tool, including a seven times increase in profile creation and more than 80% increase in return visitors. We launched a major national multimillion dollar brand campaign across network television, national media with social and digital campaigns to propel our business in the second half of the year. We believe this will drive continued growth in overall traffic, unique visitors, while supporting dealer retention and sales.

By focusing on points of differentiation like this, moving beyond listings to provide meaningful guidance and advice, we will further solidify our position as the number one product and brand in our category. Before I turn the call over to Becky to go over our financial results for the second quarter, I want to reinforce that we're taking material steps to retain and expand our dealer network and I'm making changes that will yield positive long term results. At this time, I'd like to turn the call over to Becky to walk through our financial results for the quarter.

Speaker 4

Thank you, Alex. Revenue for the 2018 was $168,500,000 reflecting $11,900,000 or 8% growth compared to $156,600,000 in the prior year period. Retail revenue was up $31,100,000 driven by the conversions of the Tronky McClatchy markets and the addition of the Dealer Inspire and LDM businesses, which are classified as direct revenue. The conversion of the Tronky McClatchy markets resulted in the addition of $21,200,000 to retail revenue in the second quarter as well as a decrease of 18,900,000 from wholesale revenue. These amounts reflect only the uplift from wholesale to retail rates.

Dealer Inspire and LDM continued their rapid growth this quarter, growing 45% year over year on a pro form a basis. This growth was driven by growth in units across all of DI's products. Our direct business declined $3,400,000 driven by the year over year decline in direct dealer count. Compared to March 3138, total dealer customers grew 1% due to the addition of five zero eight incremental Dealer Inspire customers, offset by an affiliate dealer decline of 135 and a direct dealer decline of 72. While these declines represent considerable improvement from the Q1 decline of eight twenty two, dealer retention and sales remain a top priority.

Direct ARPD grew 6% on a year over year basis, driven by our direct access to the larger geographies, which carry major market rates and new product sales. Direct ARPD does not include Dealer Inspire. Our national advertising business was down 4% in the second quarter compared to the prior year, reflecting both the volatility and cyclicality in the business. On a year to date basis, national advertising was up 1%. Wholesale revenue of $21,700,000 was down $19,300,000 compared to the prior year.

As I just mentioned, dollars 18,900,000.0 of the decline was related to the early conversion, which includes $4,400,000 reduction in the amortization of the unfavorable contract liability. For the markets that are converted early, the related amortization is recorded as a benefit in the affiliate revenue share expense. Affiliate dealer customers were down 13% compared to the prior year, excluding the affiliate conversion, and down 3% compared to the March 31 dealer count. Total operating expenses for the 2018 were $144,000,000 an increase of $16,200,000 compared to the 2017. This increase is attributable to $18,000,000 of expenses associated with Dealer Inspire, which includes $4,000,000 of depreciation and amortization, 1,000,000 of stock based compensation and $1,000,000 of non recurring costs.

Excluding the impact of Dealer Inspire, we achieved cost efficiencies in product and technology of $3,000,000 and a reduction in non recurring expenses of $8,000,000 excluding those related to Dealer Inspire. We invested those savings in the early conversions of the Tronk and Metlatchy markets, which is reflected in both sales expenses as well as the marketing support payments or affiliate revenue share, a $3,000,000 increase in marketing costs and a $1,000,000 increase in public company costs this quarter. Net income for the 2018 was $12,700,000 or $0.18 per diluted share. Adjusted net income for the quarter was $34,300,000 or $0.48 per diluted share. The decline from the prior year is primarily due to changes in our capital structure, including the additions of interest and tax expense, which incurred in conjunction with the spin off that took place on 06/01/2017.

Adjusted EBITDA for the 2018 was $57,300,000 down $4,800,000 year over year, driven by incremental expenses related to the early conversion, planned marketing investments and incremental public company costs in the current year period, offset by efficiencies in product and technology and the contribution from Dealer Inspire. Net cash provided by operating activities for the six month period was $70,600,000 compared with $96,700,000 in the prior year. Free cash flow was $64,200,000 compared with $77,800,000 in the same period last year. Impacting the current year cash flow is incremental interest paid of $12,000,000 additional non recurring payments of $6,000,000 offset in part by lower capital expenditures. As of June 3038, cash and cash equivalents were $18,400,000 and debt outstanding was 7 and $27,500,000 Our net leverage ratio was three point zero times calculated in accordance with our credit agreement.

In July, subsequent to the quarter end, we made a $10,000,000 voluntary payment on our revolver. And as a result, we currently have $160,000,000 of capacity on our revolver. We utilized our share repurchase program in the second quarter to buy a total of 2,000,000 shares at an average price of $24.84 for a total of $50,000,000 Our capital allocation strategy is currently centered around affiliate conversions, utilizing the share repurchase program and debt pay down. While I remain confident in our strategy and the numerous initiatives underway, we are lowering our full year revenue outlook primarily due to two things. First, our initiatives are yielding results slower than we had planned.

And second, our national advertising business has declined as new car sales soften and a number of our OEM clients are trimming their full year outlook and plans. These changes are across the entire ecosystem and not specific to us, making our full year targets more difficult to achieve. As a result, we are revising our 2018 revenue outlook to account for these changes. We now expect to deliver six to 7% annual revenue growth, while maintaining 34% adjusted EBITDA margin in 2018. We expect capital expenditures to be approximately $14,000,000 higher than our prior guide of $10,000,000 due to the increase in capital expenditures related to product innovation and incremental investments connected to the rapid growth at Dealer Inspire.

We expect $10,000,000 in stock based compensation expense, interest expense of $28,000,000 and an effective tax rate of 25%. We expect cash taxes to be approximately 13% or 10,000,000 to $12,000,000 for the year. With that, I'd like to turn the call back to Alex for some closing remarks before your questions.

Speaker 2

Thank you, Becky. I just wanted to add a few more steps we're taking in our transformation. We recently engaged a consulting firm to accelerate our pursuit of technology transformation to optimize and migrate our systems to drive further cost efficiency. This transformation will be led by Fred Li, our new Senior Vice President of Technology, who has deep experience optimizing systems towards growth and innovation. In addition to Doug as our new Chief Revenue Officer, I also have added Matthew Gold as our new Chief Strategy Officer and Julian Schneider as VP of Business Transformation.

Matt is a former Alphabet leader who brings in deep experience in strategy development and execution and Julian comes to us from BCG and brings data driven expertise around sales and account management effectiveness. All of these changes will continue to accelerate our transformation and the execution of our strategy. I am incredibly excited about where we stand. We have put into place a fantastic team that's going to grow this business and drive the category forward. I would now like to open the call up for your questions.

Operator?

Speaker 0

Thank you. Our first question comes from the line of Tom White with D. A. Davidson. Your line is open.

Speaker 5

Great. Thanks for taking my question. One on the direct dealer count. So sort of another quarter of kind of net declines there, 72 down 72 versus down two thirty one last quarter. You talked

Speaker 3

a little bit about some

Speaker 5

of the kind of sales force execution and efficiency initiatives you're pushing through. But can you maybe just give us a bit more color there on kind of going forward? Where do you think you can kind of make improvements to things like maybe sales force incentives or other ways that the sales force is run? And then just on the comments on new car sales trends and OEM budget cuts, just curious to hear your thoughts on kind of what's driving that? Thanks.

Speaker 3

Thank you, Tom. As you noted, right, our Q1 direct dealer losses were $231,000,000 for Q1. And while we're pleased that we've made progress on turning that trajectory, only losing 72,000,000 in the quarter, We had expected the quarter to be a gain. And so it fell short of our expectations in the initiatives that we had deployed to grow traffic and value and sales. So we still have some more work to do.

But what I would also tell you is that, on the sales force incentive side, what Doug and I have envisioned is a much more tailored approach to every local market. We've got markets of varying degrees of penetration. And by optimizing the sales force to provide incentives for our teams to focus on various initiatives, in certain markets, we need market share growth. In others, we're heavily penetrated and we need pursuit of our upsells. And so I think what you'll see from us is a much more tailored approach that aligns our incentives at the local market level as opposed to a more broad based national approach.

On the OEM side, certainly, we're seeing the same headlines that you are in terms of OEMs, sales slowing and cutbacks. And we know much of the challenge we have there is category and not specific to the company. And we've talked to our clients about this as well, and they're pulling back. And I think it's that pullback we're seeing in Q2 and also on a full year basis that gives us caution on a full year.

Speaker 0

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

Speaker 6

Hi. Good morning, everyone. Series of questions here. Just picking up the lowering the guidance. Is that is the majority of that lowering really a function of the advertising business?

Or is it evenly spread between some of the other issues you discussed?

Speaker 3

Gary, I'll start. First and foremost, we do see more softness in national than we had expected for the full year basis. Certainly, with growing traffic, we felt that, that would be a much bigger growth engine for the business this year. And while it's still up, I think we see some of the macro challenges in the new car market and the pullbacks again. And so much softer on new car and the OEM pullbacks are the reason for concern.

I think when we look at the dealer business, our Q1 numbers were tough, but we thought we had enough momentum in traffic and value increases that would turn that number around in Q2, but it didn't quite get to positive where we thought it would be in Q2. And so when you take the full half subscription number that we started the year with and you roll that forward, even though we've got some improvements in the business in the second half of the year, the rolling subscription nature really makes it tough to catch up. I think dealers are pulling back right now, and so we're seeing that in a slower ramp of some of our new initiatives. But I think most of our change is a function of national and lower subscription sales in the first half.

Speaker 6

Okay. And then in terms of the affiliate conversion, what markets are left?

Speaker 3

Well, really three affiliates, but one is just a singular market. Bilo out of Dallas is a single DMA. And then the remaining would be TEGNA, which is due in 2020 and Gannett. The reason we have focused on the other affiliates is that they really come from the largest geographies, where our average revenue per dealer is substantially higher, even higher than in our direct business, in some cases 45% higher in terms of both of our value delivery and our effective pricing. And so that's the prioritization we've done is to pursue the biggest opportunities.

And you see that translate in our growth in average revenue per dealer of 6%. And so, while we're continuing to focus on affiliate conversions, I'm pleased that we've converted the largest opportunities first.

Speaker 6

Okay. And then in terms of your cost efficiencies that you cited underway, is that across the board throughout the organization? Or did I hear you say that you're basically looking at the IT technology area?

Speaker 3

Well, look, started in 2017, our priority was on product and marketing efficiency. And we've made substantial changes and progress there. I think now moving into 2018, we have focused more on the back end side of the organization. And our front end replatforming work that was done pre that enabled us to pursue product innovation at a much faster level. So the engagement with our consultant and Fred Li's appointment is really to attack the back end operational efficiencies where we can get more control and efficiency there.

Certainly, Becky and I are looking at every place we can to fund both traffic and sales growth. So I wouldn't ever say anything isn't up for discussion or evaluation. But the tech engagement has got a very clear set of priorities on back end operational efficiencies that impact the entire system.

Speaker 6

Okay. Thank you.

Speaker 0

Our next question comes from the line of Dan Kurnos with Benchmark Company. Your line is open.

Speaker 7

Thanks. Good morning. Alex and or Becky, just look, still want take this in a couple of pieces. So one, I think maybe my math is off, but I think if you pull out Doctor, Inspire and LDM, the core business was down six or so, call it mid single digits. There's obviously some noise in there.

And listings were kind of down sequentially and traffic visits were kind of flattish. So I don't know, can you kind of address you talked about dealer attrition a little bit. It was better, obviously, and from while your other competitor doesn't sound like they're maybe competing as hard as we first thought directly against you. So if you can kind of talk to some of the underlying metrics there. And then Alex, just from kind of a high level here, I don't know if I want to call this a pivot point for you guys.

I know last quarter you guys talked about inorganic growth driving more of the outlook. So you kind of gave us the heads up on that. But if you could give us a little bit more color on in the script you talked about shifting towards more of a product based experience away from sort of the traditional classified listings platform. So is that we should see this more new product launches, better consumer experience, that's really more necessarily pickup in pricing on sort of the underlying organic business, the legacy business?

Speaker 3

Well, two things. One, I want to correct one thing. First of all, traffic in both UVs and visits are up, both at 8% on the quarter, and those numbers are accelerating into July. So we see very strong fundamental trajectory changes in our traffic and even double digit gains in our SEO. So we think that is the lead measure.

I think we would like to see the revenue trail the traffic numbers quicker, but clearly, we think it's taking more time for us to get our market to realize the investments and the improvements we've made in traffic. I'll comment on the shift in the business, and then Becky can talk about the core and the different lines of growth. But certainly, we think we've got decent market share across the country and strong average revenue per dealer. Part of the shift in the business is to start building out new lines of growth, and we couldn't have found a better business than Dealer Inspire to do that. In the quarter, we've shifted our sales force composition to bring more resources towards that business.

It's largely been product and technology driven and has lacked the distribution. So now we've stood up in the quarter 25 folks that are dedicated to building out the DI business and to take share from various players in that segment of the market. And we're pleased with the pacing on that business. So if we can not only stabilize the core, but get some growth out of the core while accelerating growth in these new businesses, I think that clearly is the strategy and also is part of the reason to bring in someone like Doug, who has both B2C and B2B commercial product experience and go to market experience. And that's more of the shift in moving beyond listings into more of a solutions provider leveraging our robust sales network.

Becky, you want to comment on some of the core trends?

Speaker 8

Yes. The only clarification I would make there is if you look at our retail business in the second quarter and you do, think, Dan, what you're trying to do, which is take out Dealer Inspire and the affiliate conversion uplift, you'll see about a 4% decline on a year over year basis when you do that. And everything Alex just described is right, whether it's DealerRater, Dealer Inspire, our new social products, etcetera. And the strategy is around product sales to our dealers and creating more valuable solutions for them.

Speaker 7

Got it. That's helpful color. I was also pulling out Doctor, but that's right. That's down four matches. So then Alex, let me ask you this.

Obviously, you still think that traffic is an important key component to this. It sounds like you're probably going to increase some brand spend here, get awareness out. Can you just talk about kind of expected ROI on that since you did talk about traffic being a leading indicator? And then sort of quality of traffic, obviously people in the space care a lot more than just about branding, but also conversion and with lead attribution having been maybe an issue in the past, how some of the tools are starting to address that, the quality of traffic you're starting to see from your marketing campaigns and how that's being received by the dealer group? Thanks.

Speaker 3

Sure. Thanks for asking. Well, The innovation has been our foundation and where we continue to place our bets. Our new matchmaking experience has gotten phenomenal traction from a user standpoint, not only getting usage up, but more people creating profiles and anchoring their shopping experience with us. As we know, users tend to go to multiple destinations, and part of our matchmaking technology is getting users to register.

And we're seeing strong repeat engagement and return rates and even email lead submissions up substantially. In fact, our conversion rate improvements in the business have grown almost 15% to 20 year over year, and that includes even with a shift towards mobile, where conversion rates are harder. So we've made demonstrative improvements in our UX and experience. On the brand and traffic investment, we feel we've turned the corner on the SEO. We're projecting double digit growth in our SEO traffic for the full year.

So we felt that the changes we've made to our user experience to improve our site speed and overall usability, now is the right time to invest in the brand. And so we are anticipating strong growth in overall traffic throughout the year. We think that will drive stronger dealer engagement. And when I look at the competitive landscape, while I know people look at just the public companies, there are several players in our competitive set, and we are certain we are taking material gains away from others in our category. And so we continue to make progress here.

We're certainly not satisfied until we reach the top. But we know our traffic and marketing investments are designed to consolidate the market more in our favor.

Speaker 7

Great. Thanks for all the color. Appreciate it.

Speaker 0

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

Speaker 9

Thanks. Good morning. Just a question on ARPD in the quarter. It looks like it was up 6% year over year. Does that include the affiliate conversions or is that kind of organic?

If it does include affiliate, any color as to what would what that would have been on sort of an apples to apples basis?

Speaker 8

Yes. Thanks, Steve. That's a great question. So yes, the ARPD uplift of 6% does include the affiliate conversions. And really, again, that speaks to the size of the markets and the opportunities that exist in those markets to serve larger dealers as we move forward with these affiliate conversions.

So that is reflected there. And what I would describe as more of a same store sales basis, so excluding those converted dealer relationships, ARPD is more flattish, so consistent on a year over year basis.

Speaker 9

Great. That's great color. Thank you. As it relates to dealer count, I know it's been a little bit harder to sort of stabilize the ship maybe relative to your expectations. But do you feel like you have kind of a handle on that now in July and the August based on what you're seeing sort of real time?

Would you expect that that number has sort of bottomed out? Or would you expect some more attrition perhaps here in Q3?

Speaker 3

Well, in July, we didn't see the gains we had expected, which also leads to our full year revision. I think the traffic improvements are important there. And obviously, migrating more of the affiliate risk into our direct channel where we've got a better track record of stabilizing and growing dealer count is key to that. I think bringing Doug in will provide the most improvement in the trajectory on dealer count because of a tailored approach to how we look at dealer subscriptions, pricing and our plans to grow the dealer count.

Speaker 9

Okay. And then I guess, as it relates to guidance for the remainder of the year, the 10% moving to six to seven I think embedded within the 10% was an expectation that organic was kind of a plus 1%. So Dealer Inspire the acquisitions are seem to be performing better than expected. And so does that sort of imply organic for the year being down mid single digits, something like that? Is my math in the ballpark?

Speaker 8

That is in the ballpark. Again, I'll amplify what Alex said earlier. Dealer Inspire has really started the year on a quite strong note, where we're seeing growth across all of its lines of business. And on a year to date basis, seeing that 49% gain on the compared to last year means as we look forward in the year, we do think that their performance will be stronger than we originally anticipated. And having said that as well, I mean, again, remember in the subscription business, it just takes a longer period of time, right, to take what Alex described in terms of that first half of the year book of business and improve on it from there as we move forward in our sales efforts.

And then lastly, what I'm also going to point to is national. So we mentioned that a few times on the call, national in Q2 was certainly softer than we had originally planned. And our outlook in that business or in that particular line of business is certainly tempered from where we had started the year in light of the OEM pullbacks than what we see in the new car market.

Speaker 9

Okay, great. And then lastly for me, obviously a lot of chatter that I'm sure you've seen in the press about an acquisition and so forth, which I don't expect you to comment on. But I was hoping you could just sort of remind us of the sort of the threshold or the things that can and can't happen under the tax free TEGNA spin just in terms of I think something about the first two years that the capital structure can't be significantly altered, you can't be sold etcetera. Is that anything you can sort of shed any light on just to refresh our memory?

Speaker 8

So there is a tax rule that exists following a spin off for a two year period of time. There certainly are some specific rules about how that gets evaluated. And we typically leave those kinds of questions to the tax accountants and the attorneys.

Speaker 0

There are no further questions at this time. I'll turn the call back to you.

Speaker 3

Thank you everyone for participating in today's call and we look forward to speaking with you again soon.

Speaker 0

This concludes today's conference call. You may now disconnect.