Cars.com - Earnings Call - Q3 2019
November 6, 2019
Transcript
Speaker 0
Good morning, and welcome to the cars.com Third Quarter twenty nineteen 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 2039. A copy of the accompanying slides can be found on the cars.comir 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.
Speaker 1
Good morning, everyone, and welcome to our third quarter twenty nineteen 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.
Parts.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.
Speaker 2
Thank you, Jandy. Good morning, everyone, and welcome to our conference call for the third quarter twenty nineteen. On this morning's call, we'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'd 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 are 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 subscriptions. In fact, it was our second highest gross sales month in over two years.
Our dealer customer decline in Q3 was due to the declines in both direct and affiliate markets. Cancellation rates in affiliate markets were higher than direct, emphasizing the importance of early conversions to stop the heightened attrition experienced during periods when those markets were not under our control. The declines in the third quarter were partially offset by the growth in solutions only customers. The improvement in dealer count is more of a marathon than a sprint, and the initiatives around traffic and lead growth, product innovation and sales effectiveness, like our turnaround with SEO, takes time, but ultimately makes our subscriptions much stickier. We are using the same playbook that was successful in reversing our traffic declines to the record growth we are experiencing today through investments in quality audience, technology and a cohesive go to market strategy.
The progress we continue to make on our attribution initiatives will also support our dealer retention strategy. We now have several quarters of Roxanne data, which shows that consumers who are cross shopping between cars.com and a dealer's own website are far more engaged and likely to buy a car from that dealer. These analytics and tools and solutions are unlike any offered by our competitors and put cars.com in a unique position. Gaining complete control over affiliate markets has been a key tenet of our strategy to better address the needs of dealer customers and unlock value of our solution strategy through dedicated experienced sellers. I'm proud to say that in October marked the end of the affiliate network for Cars, and we have successfully converted the last affiliate dealers to our direct control.
This is not only expected to drive $15,000,000 in incremental free cash flow uplift beginning in 2020, but it also gives us complete control over our go to market capabilities in all markets for the first time in our history. I spoke with one of our recently converted franchise dealers, and he said to me, and I quote, When we were pitched by the newspaper, cars.com and DealerRater were being sold to us as part of a bundle of print products. So honestly, we didn't want or understand the value proposition. The affiliate rep couldn't explain to us how they could help our business. And after a few calls with our dedicated rep, we are now going to be customers of Dealer Inspire, cars.com and DealerRater, and I feel much better about my investment.
This feedback is very typical of what we hear when we convert a market to direct. Having direct control of all of our customer relationships going forward is a big step in our sales transformation and positions us for growth. Another success we've had in executing our strategy is around audience growth, which continues to accelerate, reaching our highest levels of unique visitors this past quarter. In a marketplace such as ours, audience is truly a key reflection of consumer preference, and the data clearly illustrates that we're a leader in consumer acquisition. Our growth continued in Q3 with unique visitors and traffic up 2227% year over year, respectively.
Combined with the superiorcars.com brand, organic and acquired audience strength have resulted in notable market share gains at the expense of competitors throughout the year. Furthermore, our investments in product and technology continue to pay off, including a 30% year over year increase in SEO traffic. Steady and persistent focus on SEO has yielded market leading results, which has produced the highest number of SEO visits and leads in twenty years. Achieving market leadership takes time, but I'm pleased that our diligent SEO strategy has now earned us the highest SEO performance in our category. Translating these notable audience achievements into market leading dealer count is the ultimate objective.
And to do this, we have to drive high quality leads to our customers, which will improve their ROI from our platform. And our organic sources of traffic are very valuable to our customers because they are getting quality traffic that they can only get from cars.com. We are also making strategic shifts in our marketing investments that are making us far more efficient. For example, our traffic generated through paid channels nearly doubled in the third quarter. However, our media spend only grew 4%.
And we continue to generate the vast majority of our traffic from organic sources. Now let's talk about our national advertising business, which continues to face headwinds in the current environment. However, as we talk to OEMs, there is no shortage of demand to reach end market undecided car shoppers, the very audience in which we are taking share. Combined with traffic share gains, we continue to innovate in solutions and formats that meet the evolving OEM needs. To help drive this strategy forward, we welcomed a new team member in September, and I'm incredibly excited to welcome Julie Scott to cars.com.
Julie is an experienced digital marketing leader who will drive growth in our national advertising channel, focusing on business driving media solutions for OEMs. One of the most exciting developments this quarter is our new opportunity to work directly with GM dealers nationwide. We also are excited about our new partnerships with Hyundai and Mitsubishi. Our OEM relationships continue to grow across our portfolio, which reinforces our digital solutions strategy and our differentiation as an online marketplace and solutions provider. Our portfolio now includes a total of 28 OEM partnerships.
For GM, we are one of only four certified providers and can now sell our leading edge digital website services to more than 4,100 GM dealers who now have a choice of providers for the first time in fifteen years. The GM program is currently in the dealer enrollment phase, with the first websites expected to launch in Q1 twenty twenty. We expect subscription based website development revenue to be an important growth driver for us for years to come. Ultimately, we believe this is much more than just websites. These new relationships that we are building with OEMs like GM create a halo effect, cascading into longer term conversations both with our traditional and emerging data driven advertising and marketing solutions.
To that end, as you may have seen, we announced this morning that Dean Evans, an accomplished auto industry innovator, has joined Cars as Executive Vice President. Dean is an important addition to our leadership team as he sees the bigger solution strategy that we're driving to help sellers be more effective with technology. We have substantial automotive industry know how and digital technology that can be further leveraged for growth. Dean's expertise, leadership and impressive track record for ramping auto sales is unprecedented. Our vision is to create a competitive advantage for our customers and further evolve the business from a traditional marketplace to a full service marketing and technology solutions provider.
Before I turn the call over to Becky, let me just reinforce that our team is laser focused on execution. With the strategic alternative review process now fully behind us, I'm confident in our ability to devote our full attention to driving the return to growth expected in 2020. I'd now like to turn the call over to Becky to go through our financial results for the 2019.
Speaker 1
Thank you, Alex. Revenue for the 2019 was $152,100,000 compared to $169,300,000 in the prior year period. The decline was primarily driven by fewer dealer customers and lower national advertising revenue, offset in part by incremental revenue from the newly converted affiliate markets and growth in our Dealer Inspire Solutions business. Direct revenue was up $3,400,000 year over year, driven by $14,200,000 in revenue uplift from the affiliate market conversions and 25% growth from our Dealer Inspire Solutions sales. Wholesale revenue of $5,400,000 declined $12,300,000 compared to the prior year, of which $9,600,000 was the result of the conversion of the affiliate market.
Excluding the affiliate market conversions, wholesale revenue was down $2,700,000 driven by a decline in affiliate dealer customers. As a reminder, with the final conversion of the B. Rowe markets that took place on October 1, we no longer have a wholesale channel. In addition, the unfavorable contract liability is now fully amortized, and the $6,300,000 quarterly benefit from this amortization has ended. Our national advertising business was down $7,900,000 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 offering 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's 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 noncash goodwill and intangible asset impairment charge of $461,500,000 because the book value of our assets exceeded the estimated fair value.
We do not expect this noncash impairment charge to have any impact on our operations, liquidity, or cash flows or affect compliance with our financial covenants under our credit agreement. The cash benefit from the deductible goodwill and intangible assets for tax purposes remains intact. Excluding the impairment charge, total operating expenses for the 2019 were $138,300,000 compared to $141,000,000 for the prior year period. This reduction was primarily due to lower headcount related costs. Net loss for the 2019 was $426,200,000 or $6.38 per diluted share.
Adjusted net income for the 2019 was $21,300,000 or $0.32 per diluted share compared to $38,400,000 or $0.55 per diluted share in the 2018. Adjusted EBITDA for the 2019 was $45,900,000 or 30% of revenue compared to $62,200,000 for the prior year period. As Alex mentioned, we continue to set new records in our audience growth with unique visits growing 22% and traffic growing 27% year over year. ARPD was up 1% sequentially from last quarter, driven by our successful conversion of the affiliate market. Last year, we did not include revenue from our website products and ARPD, and on that basis, ARPD declined 2%, primarily driven by dealer mix.
Dealer customers were 18,635 at September 3039, down two fifty six or 1% compared to June 3039. This decline was primarily driven by a decline in direct marketplace dealer customers and dealers who canceled in the affiliate converted markets. Digital solutions only customers grew in the quarter. Net cash provided by operating activities for the nine month period ending September 3039 was $80,600,000 compared to $121,100,000 in the prior year. Free cash flow for the nine month period ending September 3039 was $65,100,000 compared to $111,100,000 in the same period last year.
Keep in mind that in the nine month period, we incurred $23,600,000 of costs associated with affiliate revenue share payments, which is $4,300,000 higher than we incurred in the prior year period. Cash and cash equivalents was $19,800,000 and debt outstanding was $666,600,000 as of September 3039. During the nine month period, we reduced our indebtedness by 29,700,000 Net leverage at September 3039, was 3.4 times, calculated in accordance with our credit agreement. In October, we announced an amendment to our existing credit agreement that resets our total net leverage covenant for the remaining term of the agreement. This amendment increased our maximum total leverage ratio to 4.5 times with incremental step downs in that ratio through maturity on 05/31/2022.
This amendment provides increased financial flexibility and an ample capacity to respond to market changes. We are reiterating the guidance we communicated last quarter of revenue declines between 69% year over year with adjusted EBITDA margins between 2729%. At this time, I'd like to turn the call back to Alex for some closing remarks.
Speaker 2
Thank you, Becky. While our building blocks for the future remain unchanged, we are 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 are 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 opportunity.
And finally, we will continue to innovate new solutions that drive growth and customer success. And with that, I'd like to open the call up to your questions. Operator?
Speaker 0
Thank you. And our first question comes from the line of Tom White from D. A. Davidson. Your line is open.
Speaker 3
Thank you for taking my questions. Good morning, everyone. Just Alex on dealer count, it sounds like October has been a strong start to the quarter. I think you said nearly 100 net adds. Can we extrapolate that you guys are going be able to grow dealers again, net dealers for the full quarter now that given the 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 looked like in the quarter? And then just lastly, the Dean Evans hiring announcement, there's some discussion in there around digital video. I was just hoping you could elaborate there a bit about how that kind of fits into your broader solution strategy and product portfolio? Thanks.
Speaker 4
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 that's the first month we hit our full stride. And what I also though say is that Q4 typically is a tough season in the auto industry as dealers try to make the 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 advertiser satisfaction.
So we're pleased with what we're seeing in our dealer pulse 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 the biggest advent I've seen in technology in the past year has been the advent of digital video. And we think there's 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.
Speaker 5
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.
Speaker 3
Got it. Thank you very much.
Speaker 0
Our next question comes from the line of Gary Prestopino from Barrington Research. Your line is open.
Speaker 6
Morning, everyone.
Speaker 3
Morning, Gary. With
Speaker 6
these the ability to go after these websites from the dealerships, how do those contracts shake out? Are they all up for grabs the current year or is it a lot like the DMS that they renew every five years or something like that?
Speaker 4
Thank you, Gary. First of all, think you're speaking specifically to GM and that new opportunity. Also just point that both Hyundai and Mitsubishi were additions in the quarter, and we've also got agreements now with Subaru and Lexus. 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 a sign up phase.
Speaker 6
Okay. And then can you wrap some metrics around this 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?
Speaker 4
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, don't know if you have a point estimate.
Speaker 5
Yes. So for the quarter, our Dealer Inspire Solutions business was almost $20,000,000 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 the strong growth that we had earlier this year as well.
Speaker 6
Okay. And then lastly, somebody asked this on a prior question. Did you give a number for how much leads were up this quarter? Are you making that public?
Speaker 4
We didn't disclose it, but leads are up in the quarter and are following a strong both Q2 as well. So Q2 and Q3 leads per dealer are up as all our total leads.
Speaker 6
Okay. Thank you.
Speaker 0
Thanks, Gary. Our next question comes from the line of Lee Krowl from B. Riley FBR. Your line is open.
Speaker 7
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. Noticed it wasn't kind of in the prepared remarks. Just curious if there's 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?
Speaker 4
I think obviously we're affirming our 2019 and then we're going to be on our regular cycle now and give guidance for 2020 at our typical time.
Speaker 7
Okay. And then just on the affiliate conversions, certainly exciting to see October off to a good trend. But is there maybe 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, 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 turns out over the next couple of quarters?
Speaker 4
Sure. I think we do have a lot more experience. I think we pointed to ARPD in the quarter being a solid one. What's 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 model skews by both market size and dealer size, and most of the final affiliate conversions were to dealers in rural and smaller markets with smaller lots.
But what I think going forward, what investors should be excited about is our growing solution strategy that will emphasize ARPD and increase 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, is we brought cancellations down into a much more manageable volume.
And we're really focused now on total gross 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.
Speaker 7
Got it. And then last question for 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?
Speaker 4
Sure. Well, from a data privacy standpoint, what's key about Roxanne is we're largely using non PII level data to validate our performance. What 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 data 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 past me one more time.
Speaker 7
Just the strategy with Roxanne in the context of the continued shift in your traffic to mobile.
Speaker 4
Yes. Actually, I think it provides the same visibility in all environments, and there isn't any degradation in our visibility with mobile.
Speaker 7
Got it. Thanks for taking my question, guys.
Speaker 0
Thanks. Thank you. Our next question comes from the line of Daniel Powell from Goldman Sachs. Your line is open.
Speaker 8
Great. Thank you. Appreciate the time. Two questions. One, just wanted to get your view on kind of the cadence of ARPID 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 tail of dealers that you And can
Speaker 0
add at this point in
Speaker 8
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 leads number, did it accelerate from the up 9% last quarter like your traffic did? Or did it decelerate from that up 9% last quarter like your spend did? Thanks.
Speaker 4
Sure. Thank you. Well, first of all, on 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 dedup dealerships by product type. And so that will be data that we'll give you on our 2020 outlook, but we aren't projecting RPD 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 new car volume than used, which I think reflects the seasonal cycle that we experience every year. Q4 tends to drop down and then comes back in a stronger quarter in the first quarter. And our marketing spend, you noted, right? It was we were able to drop the marketing spend considerably, but the scaling of our 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 are actually tapping into a new source of incremental sales as opposed to an arbitrage player who's bidding up search.
Speaker 8
Great. Thanks.
Speaker 0
And our next question comes from the line of Marvin Fong from BTIG. Your line is open.
Speaker 9
Great. Thank you for taking my questions. First one, I guess, just revisiting something we talked about last quarter with dealers, a little skittish because gross profits on the used car side were down and the upsell of some of your ancillary products was getting a little tough. Could 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.
Speaker 4
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, 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 levels. So I think the mood has improved and dealers have started to focus more on what they can do differently heading into 2020.
Speaker 9
Great. Thanks, Alex. And two quick follow ups. Could Becky perhaps you have this, what was the listings in the quarter? And then other question just on national advertising, I think you had said before you've tried to get more aggressive on the upfronts.
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 this coming year? Thanks.
Speaker 5
Yes, sure. So on the listings front, we have 4,400,000 listings on our marketplace, so a very strong number. And as it relates to national advertising, we are in the midst of the upfront discussions and proposals with the calendar year OEMs. 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, there are the fiscal OEMs where that happens closer to year end time frame and into the first quarter.
Speaker 9
Okay, great. Thank you. Thank you, Alex. Thank you, Becky.
Speaker 0
Thank you. Thank you. Our next question comes from the line of Nick Jones from Citi. Your line is open.
Speaker 10
Hi, thanks for taking the questions. First of 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, I mean, have the conversations with dealers changed at all? Are they looking for more tools internally on cars.com's platform in addition to some of the new products? Like is attribution becoming more important or less as your traffic starts to ramp back?
Speaker 2
I'll start with the second question and
Speaker 4
then 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 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.
Speaker 5
And then on capital allocation, in the near term, our focus is and 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 prudent tool to have as a public company. But in the near term, our focus is on taking down some of the debt.
Speaker 10
Great. Thank you for taking my questions.
Speaker 0
And our next question comes from the line of Steve Dyer from Craig Hallum. Your line is open.
Speaker 11
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? In other words, did you see linear improvements throughout the quarter and then positive in October or no?
Speaker 4
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 I'm 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.
Speaker 11
Got it. Okay. And then in the release, you talked about affiliate conversions are expected to generate an incremental $50,000,000 of free cash flow in 2020. Can you sort of deconstruct that, provide a little bit more detail on what makes that amount up? Thanks.
Speaker 5
Yes, 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 billed to 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 achieved 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.
Speaker 9
Got it. Thank you.
Speaker 0
And our next question comes from the line of Doug Arthur from Huber Research. Your line is open.
Speaker 12
Yes, thanks. Becky, I'm wondering if you can just sort of disaggregate direct revenues in the quarter. You said Dealer Inspire, I think, was up 25. And you said, I believe, that the incremental impact of the affiliate conversions was 14.2%. So that's over a year ago, I assume.
Can you speak to what that incremental impact was sequentially from Q2 for starters?
Speaker 5
So apologies,
Speaker 1
I'll have to look.
Speaker 5
I don't have Q2 in front of me. But you were right, the 14,200,000.0 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 $4,000,000 And so the offset, of course, to get to the $3,400,000 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, what those year over year changes were for Q2. Certainly, can get that and provide that as well. National advertising in the quarter is down 28%, so that's a $7,900,000 decline on a year over year basis.
So I think those are the key elements of the revenue.
Speaker 12
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 $78,000,000 So that would 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. Terrific.
Thank you very much.
Speaker 0
We have no further questions in queue. I'll turn the call back to Alex Feder for closing remarks.
Speaker 4
I simply want to say thanks for joining today. We'll talk to you soon.
Speaker 0
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.