Cars.com - Earnings Call - Q3 2020
November 9, 2020
Transcript
Speaker 0
Good morning, and welcome to the kires.com Third Quarter twenty twenty Earnings Conference Call. Hosting the call this morning is Alex Feder, Chief Executive Officer and Sonia Jane, Kires Chief Financial Officer. This call is being recorded, and a live webcast can be found at investors.cars.com. A replay of the webcast will be available until November 23. A copy of the accompanying slides can also be found on the company's Investors site.
Following today's presentation, there will be a question and answer session with Alex and Sonia. I'd now like to turn the call over to Kamal Hamid, Director of investor relations.
Speaker 1
Good morning, everyone, and welcome to our third quarter twenty twenty 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, 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 in our earnings press release 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.
We assume no obligation to update any forward looking statements or information as of their respective date. At this time, I would
Speaker 2
like to turn the call over to
Speaker 3
Alex. Alex? Thank you, Kamal. Let me start by saying that I'm very proud of our performance this quarter as it demonstrated the resilience of our business and the dedication of our team. We remain relentless in our focus on customer ROI and value delivery, expansion and execution of our digital solution strategy, and a disciplined focus on profitability.
This resulted in momentum across the business and is apparent in our results, strong traffic growth and quality lead conversions, increased dealer customers, and ARPD expansion, and we're back to adjusted EBITDA growth. It was an impressive quarter and building on that success. Just two weeks ago, we achieved another significant milestone by refinancing our debt. We now have greater flexibility to make appropriate investments in the business going forward. Sonya will comment further on the refinancing in a few minutes.
Although operating in a pandemic environment presents challenges, the upside is an accelerating trend of digital adoption by consumers and dealers that play to our core strengths and product solutions. Consumers increasingly want to complete more of their car shopping online from the convenience of their homes, and dealers are quickly ramping up their solutions to capture this opportunity. Our business is well positioned to enable our industry to accelerate the shift to a digital first strategy. We delivered two consecutive quarters of dealer customer growth and had momentum behind us to deliver a third if not for COVID. We grew our customers in 2019 and q one twenty twenty, and we also managed the pandemic better than most.
After the second quarter COVID impact, we added 97 new dealers in the 2020, including growth in both marketplace and web solutions customers. We exited the quarter growing to 18,130 dealer customers as competition went backwards. Retention rates are at an all time high and improved sequentially each month throughout the quarter as dealers increasingly benefited from the reliability of our high quality traffic, sales leads, innovative digital solutions. Throughout the pandemic, online shopping soared. Leads and contacts through our digital platforms also increased, bringing record value to our dealer partners.
Historically, we have consistently driven walk in traffic that dealers didn't capture in their CRMs. But with physical showrooms closed, consumer volume naturally shifted to more visible digital channels, making our value even more obvious to dealers. Dealers comment that caused that despite dropping Google search spending and all traditional media, cars.com replaced that volume on a fraction of the cost. This digital dynamic opened up even more opportunity for our digital solution strategy as dealers wanted to know what else can we do to help them capture more sales. Our digital solutions continue to grow significantly with website customers now totaling over 4,000, including more than 250 GM websites launched as of September 30.
We expect to launch half of the contracted GM websites by the end of the year. With every new dealer website launch, the accumulation of subscription revenue builds throughout the year and establishes a strong starting point for 2021 revenue growth. Further uptake on our FUEL product continues to accelerate since its launch this past February. FUEL is ARPD accretive and on track to be the fastest growing new product launch in our company's history. Online shopper and conversations also continue to grow as dealers are now proactively seeking these digital tools.
The number of website solution customers purchasing conversations for online shopper increased substantially on a year over year basis. With ARPD up 4% quarter over quarter adjusted for second quarter invoice credit, it is increasingly clear that our diversified suite of products is offering meaningful value to our dealer customers and contributes additional economic value to cars. We continue to deliver strong traffic growth with 10% year over year increase in both average monthly visits and unique visitors. We also delivered continued robust lead growth despite reduced marketing on a year over year basis. The percentage of our traffic generated organically in the third quarter increased by five percentage points year over year to 76%, demonstrating the strength of our brand, which consistently ranks number one amongst our competitive set in Millard Brown's total brand awareness scores.
Editorial content also continues to be an important driver of our high value organic traffic and a key differentiator in delivering a robust user experience for car shoppers and sellers. Sellers. Our original content strategy is winning favor with dealers as competitors just bid up search volume and sell it back to the dealer where cars.com has a unique audience that can't be replicated and is incremental to the dealer's bottom line. This is most evident in our high concentration of organic traffic and our overall marketing efficiency, which is a sustainable advantage. That said, we judiciously increased our investment in marketing relative to q two, but the spend remained well below normalized levels due to our strong organic traffic momentum.
We will continue to make deliberate marketing investments focused on high quality channels to ensure our dealers finish the year with strong results. The retail sales environment shows signs of continuing strength in both the new and used car markets. While new car sales for the first nine months of the year were down 19% compared to the prior year period, September new car sales were up 6%, and SAAR estimates for 2020 are inching back up to the 16 plus million level we saw at the beginning of the year. Used car demand also remains robust, supporting double digit year over year pricing growth. New and used car demand is being driven by buyers choosing car ownership over mass transit and ride sharing services and improved credit conditions that make car payments more affordable.
Our roughly fifty fifty inventory split between new and used cars in our marketplace provides us with resiliency and the ability to meet the demands of all shoppers and support our dealers and OEMs with reliable value that's vital to their success. Dealers are leveraging our digital solutions, allowing them to operate on reduced staffing levels and are reporting record profits. Our business model continues to perform well in this environment with dealer customers becoming more adept and operating virtually. Our high quality, largely organic traffic, strong lead conversion, and expanding suite of high ROI solutions have driven all time high retention rates. And the q three increase in net new marketplace and solution customers is a resumption of our pre COVID momentum.
Growth will come from both ARPD expansion as dealers adopt more of our solutions and continued improvement in dealer customers. This quarter, ARPD rebounded back to pre COVID levels and grew slightly on a year over year basis. Our differentiated strategy to bring digital solutions to our dealer base through a robust sales platform is best demonstrated by the success of Fuel. Fuel is a unique high ROI targeted video advertising solution which generates higher returns than the expensive, dated, and wasteful linear TV on which the auto industry spends approximately 10,000,000,000 a year. Since its launch early this year, FUEL has proved to be Cars' fastest growing new product introduction and is selling out in certain geographies.
FUEL takes the high quality pure end market audience generated from cars.com and allows dealers to run targeted video messages via OTT and social media platforms, providing alternative to broadcast TV that is far less expensive, far more effective, and far more efficient. Continued fuel sales growth and the penetration of dealers and OEMs positively contributes to revenue and profitability with ARPD rates that are substantially higher than the car's overall average revenue per dealer. Take a listen to what one of our large franchise dealer customers has to say about the impact fuel has had on its market share in his own backyard.
Speaker 4
By taking that exclusive cars.com in market shopping audience overlaid now with a video message, what was the data that you saw?
Speaker 5
A really great way to measure the success from a metric standpoint, the digital standpoint would be branded search terms. We said, hey. Are we actually getting more people talking about WALZERT? More importantly, because you probably have dealers on the line that are going Don't want to hear about these metrics.
Did you sell more cars? Yes. We not only sold more cars, but more importantly, we dominated in market share. When we got our first two full months into fuel in market video, we saw a market share increase of the first month at 4.52%. So, 5% market share gain.
And then the next month, I hope everybody's sitting down, it was like 6.89% market share gain year over year. Highest 5% and then 7%. I mean, these are meaningful numbers.
Speaker 3
Turning to our OEM business, we are beginning to see not just stability, but also some green shoots. While national revenue was down 12% on a year over year basis, we saw substantial sequential improvement with revenue up 11% over q two. We saw signs of strength towards the end of the quarter in OEM advertising and see further opportunities with auto adjacent advertisers to capitalize on our growing traffic trends. In a post COVID world, as OEM production normalizes and new products are launched, we believe OEMs will once again be drawn to advertise to our huge, largely organic end market audience. While Sonya will provide more detail on other operating results for the quarter, I do want to call out the meaningful improvement in our profitability and adjusted EBITDA on a year over year basis.
We did this despite tough operating conditions by maintaining very strict cost discipline and remain focused on the bottom line while driving value to our users and customers. Our strong results in the third quarter are consequence of actions we have taken to position ourselves for differentiated and sustainable growth. With the strongest brand in the industry, the highest value organic traffic, and the demonstrated success of our solution strategy and resilient business model, we believe that we are well positioned to build on our model, delivering strong results for our customers and our shareholders. Before I turn the call over to Sonia, I wanna provide an update on the actions we have taken in diversity, equity, and inclusion in the quarter.
Speaker 0
Okay.
Speaker 3
Unfortunately, conspicuous examples of inequality and social and racial injustice continue, but the Cards team remains committed to taking sustainable action in our company, our industry, and in our community. This quarter, we began our partnership with the National Association of Minority Automobile Dealers. This is an important partnership where we can advantage minority owned dealers with technologies and tools to better drive business results. And we're partnered with Facebook to help enable these dealers with compelling co op programs to drive digital sales. As we told you last quarter, this truly is a great opportunity to bring more diversity to the industry.
There are only 1,243 minuteority owned dealers in The US. We hope to help accelerate faster growth of this small segment of dealers with our technology expertise, and the initial response has been extremely promising. At this time, I'd like to turn the call over to Sonya to discuss our financial results for the quarter. Sonya?
Speaker 6
Thank you, Alex. Revenue for the 2020 was $144,400,000 compared to $152,100,000 in the prior year period. The decrease was primarily due to a 12% decline in national advertising revenue and dealer cancellations in the 2020 largely attributable to COVID and partially offset by continued growth in solutions revenue compared with the prior year period. Turning to expenses. Total operating expenses were $125,300,000 9% lower than the prior year period if you exclude the four and sixty one point five million dollars goodwill and intangible asset impairment charge.
The decrease in total operating expenses compared to the prior year period is primarily due to reduced marketing spend and the cessation of our affiliate revenue share obligations in the second quarter. GAAP net loss for the 2020 was $12,300,000 or $0.18 per diluted share compared to a net loss of $426,200,000 or $6.38 per diluted share in the 2019. The net loss is primarily due to the $30,900,000 previously disclosed non cash charge for the correction of an error related to the calculation of the Q1 valuation allowance. The valuation allowance for income taxes had been established in connection with an impairment recorded during the three months ended 03/31/2020. Adjusted net income for the 2020 improved to $34,600,000 or 50¢ per diluted share compared to $21,300,000 or 32¢ per diluted share in the third quarter of twenty nineteen.
Adjusted EBITDA for the 2020 was $49,000,000 or 34% of revenue, an increase of 7% compared to $45,900,000 or 30% of revenue last year. The increase in adjusted EBITDA is primarily due to reduced expenses largely attributable to a prudent level of marketing spend in a period of strong organic traffic growth and the elimination of our affiliate rev share obligations in the second quarter. We expect fourth quarter adjusted EBITDA to be higher on a year over year basis as we continue to benefit from the end of rev share payment. We also expect adjusted EBITDA margin in Q4 in the 28% to 31% range as we continue to invest in marketing and talent in order to drive long term growth. For the third quarter, average monthly unique visitors and total traffic grew 10% year over year.
The gains were driven by continued efficiency in SEO, consumer demand for vehicles and continued adoption of online car shopping. Organic traffic as a percentage of total traffic grew to 76% compared to 71 in the prior year period. We had 18,130 dealer customers as of 09/30/2020, an increase of 1% compared to 18,033 as of 06/30/2020. This increase is primarily due to an all time high retention rate coupled with new sales. Of note, we grew marketplace dealer customers in the period.
We also continue to grow website customers and currently have over 4,000, up 33% compared to the prior year period. ARPD grew to 2,183 in the 2020, snapping back from the second quarter and up year over year. Net cash provided by operating activities for the nine month period ending 09/30/2020 was $96,900,000 up 20% compared to $80,600,000 in the prior year period. Free cash flow for the nine month period ending 09/30/2020 was $84,300,000 up 29% compared with the $65,100,000 in the prior year period. Our strong free cash flow generation enabled us to pay down $48,000,000 of debt in the third quarter bringing net leverage down to 3.8 times.
As Alex mentioned, in October, we completed a strategic refinancing of our debt taking advantage of favorable market conditions. Our new structure includes a $430,000,000 credit facility composed of a $200,000,000 term loan and a $230,000,000 undrawn revolver. We also raised $400,000,000 in senior unsecured notes which have a coupon of six three eight. The refinancing extends our maturity dates from 2022 to 2025 on the bank debt and to 2028 on the new bonds. From a capital allocation perspective, we remain committed deleveraging as evidenced by the sequential step down in our net leverage ratio from 4.1 times in the second quarter to 3.8 times in the third quarter.
Our goal is to bring that leverage down inside of 3.5 times while continuing to invest in the business. While we expect to grow our suite of solutions through internal innovation, opportunistic tuck in acquisitions could provide compelling complement to our portfolio. In summary, our strong top line trend coupled with focused execution and cost discipline drove year over year growth in adjusted EBITDA and free cash flow. Increased investments in the business together with new digital solutions sales will position us to exit the year with a strengthened competitive and financial position. In addition, the recapitalization of our balance sheet improved our flexibility to invest in and grow our business.
And now I'd like to turn the call back to Alex.
Speaker 7
Thank you, Sonia. As I
Speaker 3
said at the top of the call, I'm pleased with our Q3 results and the momentum we demonstrated on dealer count, traffic growth and growth in ARPD. We continue to build on that strength with dealer growth in October as well. Despite the uncertain pandemic environment, we are exiting 2020 with strength in our brand, appreciation adoption of our digital solutions, all of which positions us for a strong start to 2021. With that, we'll now open the call for Q and A. Operator?
Speaker 0
Your first question comes from the line of Tom White from D. A. Davidson. Your line is open.
Speaker 8
Great. Good morning, Thanks for taking my questions. Two, if
Speaker 7
I could. Alex, you talked about how the pandemic is accelerating the trend of digitization of the automotive retail space. You guys clearly had some kind of foresight there when you when you bought Dealer Inspire, but kinda curious to hear if you can give us any color on sort of how you're thinking about the product road map here. Is it is it kinda just reinforcing the core competencies of CI? Are you focused on, you know, maybe more the marketing side of things given the success of things like fuel?
Or maybe are there other parts of the dealer, operations, where you think you guys could add value and innovate? And then just a quick follow-up on, traffic to lead conversion. It sounds like that, continues to improve. Just curious how sort of sustainable that is. Is that benefiting from from the pandemic, with people just kind of not going into showrooms until maybe later on in the in the process?
Or are there things that you guys are doing that's, that that's impacting that and and could sustain those improvements? Thanks.
Speaker 3
Sure, Tom. Thanks. Well, first of all, you know, I think the consumer trend towards private vehicle ownership is going be the lasting impact on COVID. Our consumer surveys consistently show that users don't feel safe getting back on mass transit or ride sharing services and are and are upgrading their personal or private fleet. So we think that vehicle sales is gonna have a prolonged strengthening as a result of the pandemic.
On the dealer side, a grand experiment was run during COVID, and and that was dealers cutting back all of their marketing budgets. But yet seeing these virtual marketplaces accelerate growth. And and so dealers were realizing that they were generating the same number of sales, if not higher, on a much more radically reduced marketing and advertising investment. And and dealers are realizing they're not gonna buy around marketplace experience. Consumers are gonna do heavy research prior to purchase, and marketplaces are the best place to do that, because of the market wide and content view.
I think on the, dealer behavior, part of COVID has been dealers now proactively contacting us about our digital solutions. So you noted Dealer Inspire who you know, we've been growing the business on a steady basis, but there's been an acceleration there because of COVID as dealers are wanting to upgrade their website and or use more technology. In fact, we launched more websites in the last quarter than we had in in any prior. And so dealers are realizing that these digital storefronts, you know, are their primary channel. And so we are seeing a nice pickup on that business as well that we see as sustained.
I think the final point I'd, you know, say is that, ultimately, the business is is performing extremely well virtually. The the traffic to lead conversion, you know, both has been organic and inorganic. COVID certainly shutting down showrooms, you know, is driving people to communicate directly through these channels, which is giving our value a lot more visibility. But at the same time, we're continuing to make tremendous product improvements that are also helping us get further credit and and visibility in the eyes of dealerships. So, yes, I think lots of sustained advantages because of COVID.
Speaker 8
Great. Thank you, guys.
Speaker 0
Your next question comes from the line of Gary Prestopino from Barrington Research. Your line is open.
Speaker 3
Sorry. I have my phone on mute.
Speaker 8
Can you can you hear me now?
Speaker 3
Yes. We can, Gary. Go ahead. I'm sorry. Good morning, everyone.
Sorry. Have my phone on mute. Hey. When you talk about a, back to a historical or a level of operating expenses in in in the going into q four. I mean, could you give us maybe a range of what that may be?
Speaker 6
Yeah. Sure. Thanks for the question. This is Sonia.
Speaker 1
Hi, Sonia.
Speaker 6
Areas where we're really looking to invest in in q four are in in marketing and then really in talent around our solution strategy, completing data and innovation, oddly speaking. I think when you think about marketing in particular, we expect in q four to have marketing spend kind of consistent with what you might have seen from us in in q one. Now bear in mind that that that number, the sales and marketing line, there's a sales component to that. So when you look year over year at the sales and marketing line, you know, it it may appear to be flattish, but it's a little bit of a mix shift with some permanent savings in sales, and some potential additional investment in marketing. I mean, bear in mind, right?
It's a highly competitive environment, and we evaluate marketing on a regular basis. And so to the extent there are opportunities to gain additional efficiency there, we absolutely will. And as Alex mentioned, we think we have a lot of, you know, just built in benefits with the strength of our brand and content. But that that might be helpful color.
Speaker 3
Yeah that that that does help and are you giving the dealer inspire revenues on a quarterly basis anymore.
Speaker 6
You know we're we're expecting to continue to see that business. Grow. And frankly, you know, that that that is that is one of the growth engines of the business. I I point out that while it comes it does come with slightly lower margin. So it it does impact margins a little bit as we continue to grow that business.
What we believe that longer term, it is part of our diversified strategy, and it's a very sticky business that will continue to provide value to dealers and, frankly, to us as we continue to build out relationships there.
Speaker 3
Okay fine I want to just ask a couple of questions on these digital solutions would seem to be accelerating but you know the websites- you talked about the number of placements there. Far as- things like fuel online shopper conversations, those are coming off fairly low basis. Could you maybe just share how many dealers have adopted each of these solutions? Yeah. I mean, on fuel, which just started this year, we're talking just under 200 dealers, but significantly higher average revenue per dealer, Gary.
So very accretive to the business. And, again, we're not having to add more sales expense to bring these new solutions to market. We're running them through our existing platform. Right. I think online shopper and conversations got a lot faster acceleration during the COVID pandemic.
And so, you know, you're talking about about a thousand plus dealers using those solutions.
Speaker 2
Okay.
Speaker 3
Part partially bundled with the website offering. So that's that's that's very good traction. I guess the the question I have for you is this, Alex, because, again, they're not making more dealerships and, you know, going out and trying to trying to gain market share among dealerships is, you know, very difficult thing to do. But if you take your average revenue per dealer just based on your subscription, your your model, and then what would be the lift if a dealership took a website, fuel online shopper in conversation. But I was trying to get an idea of how revenue accretive are these solutions to your your, you know, to a to a dealership, to your average revenue per dealer or just the dealer that took your card cars.com listing offering.
Speaker 6
Yeah so if you if you think about that the ARPD of some of our D. I. Products you know the website on average is going to bring you call it in the neighborhood of $1,100 of incremental ARPD And with the add ons that we have between conversations and online shopper, you could easily double that that amount. So if you're thinking about an existing, dealer substantive opportunity to improve the ARPD through just the incremental website and upsell sales. Fuel, as Alex mentioned, has an ARPD at a minimum that is multiples higher than our average monthly ARPD.
That's that's a product that's actually sold on a ZIP code basis. So Right. You know, if our PD can flex up substantially depending on the number of, you know, ZIP codes that individual dealer is interested in.
Speaker 3
Right. So it it seems to me that that, you know, your your your marketing thrust, your sales thrust here has gotta be to cross sell these these solutions. It it is, and and it's coming through in the numbers, Gary. I mean, you look at the sequential improvement in ARPD, the strategy is working. We're getting incremental take rate and dealers wanting to spend more money with us to garner higher share of opportunities and sales.
And so we're seeing a nice steady acceleration in our ERPD growth. That's great. Thank you so much.
Speaker 0
Your next question comes from the line of Daniel Powell from Goldman Sachs. Your line is open.
Speaker 8
Great. Thanks so much for taking the question. First question around the net adds that you saw in the quarter. Just curious if you could help us kind of break down if there was, you know, sort of even distribution across marketplace and, solutions that adds in that number, and sort of how that compares to the net growth, that you're seeing so far in October? And then a follow-up.
Speaker 3
You know, we we grew both marketplace and solutions only customers in the quarter, so we were pleased to see both businesses step up in terms of dealer count. The net dealer additions skewed more towards franchise dealers than independent. We saw bigger gains in our franchise dealer mix.
Speaker 8
Got it. And then, Sonya, as it relates to the the guidance around margin for for q four, realized, you know, there's reinvestment around around sales and marketing. But just just curious how much of the sort of negative mix shift to some of the solutions is is also weighing on, the margin expectations for April? Thanks.
Speaker 6
Yeah. No. That's certainly gonna be a contributor here. The solutions business does require upfront investment in terms of, the launch launch of website before we can really start start recognizing the revenue associated with that. As that business scales, you know, we'll we'll expect to see an improvement, improvement there.
But for the for the near term, we're really excited about the growth and the long term health, of the business that's going to drive, but it it does it does have, it does flow through to, margin.
Speaker 3
Great. Thank you, Beth.
Speaker 0
Your next question comes from the line of Lee Crowell from B. Riley Securities. Your line is open.
Speaker 9
Great. Thanks for taking my questions, guys. Just want to start out on the national advertising business. You kind of hinted at sequential improvement, but just kind of want to nail that down with improving inventory and OEMs re upping their ad budgets for q four. Would you expect the national business to be up sequentially?
Speaker 3
You know, the national business is a little bit spottier and harder to predict because OEMs come in and out. The business does, lead tie a little bit more to model launches with OEMs. So as OEMs launch new makes or models, you know, in a period, we can see an increase in overall spending. And we saw some nice sequential month over month pickup in in national for September and heading into October. So we feel good about the signals we're getting.
And then a big percentage of that business also is bought on an upfront basis for next year where manufacturers are committing to us, you know, set times of the year that they wanna promote new products. And we're seeing a very healthy, discussion happening there for 2021 as well. So we feel good about the stability of the business and then hopefully moving it towards growth.
Speaker 9
Got it. And then, you know, in the slide deck, you put out some, you know, fairly significant double digit growth drivers to kinda highlight the shift to digital. You know, as we layer in kind of all these incremental revenue drivers on top of a fairly stable, marketplaces business, when would you guys kind of expect to see, year over year revenue growth inflection?
Speaker 3
You know, when we started the year, we were on a path for growth in the second half of this year, until COVID hit. And, obviously, that delayed all of our plans temporarily. But if you look at the trend on what we have been doing, we grew our dealer count in q four of last year. We grew it again in q one, even with some of the pandemic starting in in the first quarter. And then to to see the business snap back both from our discounts and now accelerated growth.
We think we're back on track. Obviously, the COVID period delayed our achievement of of that growth objective in the second half of this year and will push us closer towards 2021. We're we're just not giving revenue guidance at this time because with the pandemic still being so unsure, it makes, predicting that revenue trends much more difficult.
Speaker 6
Yeah. And the the only other thing maybe I would add there is that, you know, in our subscription model, you do need to see that revenue build So to Alex's point, the improvement in ARPD, you know, growth in dealer count, in three of the last four quarters, right, and one of those with the COVID quarter, all point to to really strong strong underlying strength.
Speaker 9
Got it. And then last question. You know, you've seen, kind of the secular shift to online and consumers, you know, obviously, browsing a lot more and that that uses traffic for sure, especially on an organic basis. But do you guys get the sense that you're continuing to see traffic share gain? I know in prior quarters you kind of have highlighted that as well, but noticed it was missing from the commentary.
Maybe quantify or qualitatively speak about perhaps the share gains you're seeing across, just the net traffic growth, from your peers?
Speaker 3
Yeah. The share gains have been very vivid throughout the past year and change. We've grown particularly when you look at just SEO growth. There's been nobody that's taken more market share in terms of organic traffic, which that traffic has incredible conversion and is of the highest quality. So Mhmm.
Set aside the fact that it's coming to us free in in an organic capacity, but it's it's converting extremely well. And so the right mix of traffic has been in our favor now for a year, and we hope to sustain that when we launch our new beta platform early next year. So that remains where we're obsessed, is continuing to generate high quality content that wins a disproportionate share of organic traffic. I think the larger traffic picture is somewhat hard to predict. I know there are lesser competitors that don't have diversified strategy or differentiation in their business, and I think they will have a hard time sustaining growth next year, particularly if vehicle sales start to fall a bit.
There's gonna be a more intense competition for a lower, volume of sales. And because we have a differentiated strategy, we just think we're really well positioned to take more share from others who say, basically rely on search engine marketing arbitrage to generate value. We don't have that problem. With majority of our traffic coming to us organically or directly, we're able to sustain our revenues and our customer relationships based on our own merits as opposed to having to to drive up spending, to generate volume. And so I think that's one of the material advantages that'll set us up well for 2021.
Speaker 9
Great. Thanks for taking my questions, Casey.
Speaker 0
Your next question comes from the line of Nick Jones from Citigroup. Your line is open.
Speaker 2
Great. Thank you for taking the questions. I guess just first on these traffic share gains. Can you talk about, I guess, the lead conversion to cars.com and then the conversion at the dealership to actually selling a car. And I guess, you know, how is how do you bridge kind of the the traffic volume against kind of, you know, supply constraints we've heard of in in the industry?
And how are these conversations coming up in terms of ARPD when you are talking to dealers? Thank you.
Speaker 3
Sure, Nick. Well, first of all, the lead conversion improvements have been substantial. And again, I'll point to the high concentration of organic traffic. So we're capturing a natural spring, if you will, of car buyers who are using the platform and contacting dealers directly coming in through organic channels. And so we're seeing our value delivery increase substantially.
And then keep in mind, with dealer showrooms closed for a huge part of the country, all of that activity that was physical traffic has now shifted to digital conversion as well. So dealers are getting almost a two four lift in terms of our our traffic value and visibility. I think the third thing is dealers have cut back a lot of their direct spending, most notably on Google. And so they're able to look at our volume and how it converts and attribute more of those sales to our platform versus, say, last click attribution or attributing sales to their own website because they lost sight of where that traffic source originate from. And so I just think dealers are are understanding our value better today than ever before.
You that comes through in our our our record retention rates, you know, lowest cancellation rates we've ever seen in the business. And now you're seeing some dealerships come back because it's certainly a lot cheaper to advertise on a marketplace than to try to drive all the traffic directly to the store. And and so, you know, those things have really come through in our value delivery. And on the traffic share gain, I mean, we have a differentiated strategy. We're we're laying down meaningful lines of new product revenue, whether that's through Dealer Inspire, our fuel business, and generating that revenue allows us to reinvest back into the business and the brand on a more sustainable way.
And so I think we're really well positioned in the in the marketing war chest department, so to speak, and are really pleased with the organic trends and how we're generating our value vis a vis our competition.
Speaker 2
Great. Thank you.
Speaker 0
Your next question comes from the line of Steve Dyer from Craig Hallum. Your line is open.
Speaker 10
Thanks. Most of might have been answered at this point, but I just want to make sure I have the math on GM correct. So it's my math is just under 200 or so GM sites launched during q three, which to sort of get to the the the about half that you talked about, that would imply north of 500 that need to be launched in q four, which seems
Speaker 1
like
Speaker 10
a steep ramp. Is that right? And then, you know, assuming that's that's doable based on where we are in the quarter.
Speaker 6
Yeah. So let me let me clarify a little bit. You know, we had we had come out with just over 800 incremental GM website. We've launched over 200 of those, and we expect to, you know, be at kind of the halfway mark by the by the end of the year. Obviously, slight delays related coveted during Q.
Two but we're plowing ahead there with- good traction. Okay
Speaker 10
and then just as it relates I guess to Q. Four you know revenue guidance here you you don't seem to- you know, understandably, I guess, to some degree, but you don't want to give revenue guidance or or, you know, dealers, you know, net adds, net net churns. But the business seems to have a lot of momentum. We're halfway through the quarter. It is a, you know, a subscription business.
So I guess just, you know, directionally, would you anticipate being, you know, up vis a vis q three? Any any color there would be great.
Speaker 6
Yeah. You know, we ended, obviously, really excited to have ended q three up on dealer count. I think importantly, seeing that dealer count improvement on both the marketplace as well as the solution side of the business. DI is back to be a nice nice, nice way to start q four. And as Alex mentioned, we had strong October from a dealer count perspective.
DI has, it continues to grow, and we saw some good traction in the national business when you look sequentially at performance from Q two to Q three. So a lot of really positive signs when you look at, you know, just the last couple months of performance.
Speaker 10
Got it. And then just sort of the dearth of inventory. You seeing do you think that there's still a negative impact to you guys just because a lot of dealers don't have anything to sell, not or enough to sell. So certainly not a lot reason to to go out and spend significantly, whether that's national or on the individual dealer level.
Speaker 3
You know, I think, keeping the industry turn rate going is something that everybody's trying to to contribute towards. We've seen an increased demand from dealers to buy trade in products so that they want to source vehicles directly through our marketplace. We have a higher concentration of private sellers listing their car for sale than than most of our competitors. So dealers are talking to us about buying those opportunities and getting access to that inventory. So that's an opportunity.
I think the second thing is we're seeing just record dealer profitability. So dealers aren't in a typical q four mindset, which is about cutting back. They hit a year end profit profit target. They've been able to hold their retail pricing, you know, and generate extraordinarily high profits because they're not spending to the degree they have in the past. But they're also cognizant that these marketplaces are are rich sources of opportunities and and and certainly are very affordable to to spend a few thousand dollars to list on a marketplace.
So even with the inventory shortages, you know, there's a battle for market share out there, and and we're a a fertile ground for it.
Speaker 0
Your next question comes from the line of Doug Arthur from Huber. Your line is open.
Speaker 11
Yes, thanks. Just on the ARPD strength, Alex, and you sort of touched on this in your remarks, but is there a way to sort of ballpark the contribution from new services as opposed to traditional listing services in terms of both the absolute level and the growth of that number.
Speaker 3
Sure. I'll, you know, I'll point to just the ARPD growth is is mostly driven by product mix and and and franchise dealer mix. So we are getting more franchise dealers subscribing not only to our marketplace, but also to our solutions platforms. And so you're getting two two mix shifts happening there in our ARPD, which is leading to sequential quarter growth, as well as we saw that continue into into October. And, you know, we were pleased to also grow our dealer count in October, and that followed that same trend.
Speaker 6
Yeah. And maybe just to add there might be might be helpful as you roll some of the numbers. You know, we ended with about 4,000, web customers in q three. And, you know, if you if you think about DI, the business, it's always been growing on the customer side. We did see kind of a return to growth on the top line as well in the high teens.
So as you think about the revenue we're generating there, just wanted to make sure you have that piece of information.
Speaker 11
And I guess just as a follow-up to mix, I mean, are you still seeing the small independent dealers struggle that's been mentioned by some of your competitors? And are some of them still churned off at this point because they just don't have they can't get inventory and they don't have marketing budget? Or is that looking a little bit better going into the fourth quarter?
Speaker 3
I think we've always skewed towards the larger independent dealers as opposed to the long tail smallest independent. Know, Hertz should be probably the best example of losing, you know, smaller dealerships because Hertz has, I think, like, almost a 100 locations with very few few cars and them declaring bankruptcy. You know, that'll hurt us on dealer count, but but not very much on revenue. Right? Because hurt stores have very few pieces of inventory per location.
So, no, besides that one example, we're seeing healthy independent dealer base driven by the strength in used cars and retail pricing. Great. Thank you.
Speaker 0
Your next question comes from the line of Marvin Fong from BTIG. Your line is open.
Speaker 2
Great. Thanks for taking my questions. Just to kind of build on that last question. So we are still down, I guess, 100 dealers on on on net basis from last quarter. Just curious, you know, how are those conversations going in terms of winning some of those dealers back?
What do you feel is is holding them back now that the environment is a lot better than I think we would have guessed a couple of months ago? And then I have a follow-up.
Speaker 3
Yeah. Mean, the conversations are actually going quite well. In fact, one of the big shifts that's happened in the past, call it, one hundred and twenty days is the number of inbound dealer inquiries we get. We used to be a 100% outbound sales focused. And, again, part of the COVID response is now we're actually getting dealers calling us directly
So I would I would signal that as a real shift in dealer awareness on what's working out there. And this is a small community. Dealerships talk. They actually understand value really well, and and dealers are are starting to realize that we are much better than some of the competitive services, are just search arbitrage offering offerings where we have high organic traffic concentration that dealers can't buy elsewhere. And so that's leading to, I think, a very healthy discussion about visibility of our value vis a vis other services.
What was your second question there?
Speaker 2
It was on fuel. I know it's early days, it looks like it's doing very well. Just curious if you're already able to, kind of calculate and compare, how efficient it is, say, from a cost per lead or a cost per sale basis. You know, very difficult to even track that for, like, traditional media. But how does, you know, cost per lead, for field compare to, you know, perhaps other forms of digital marketing or or even a lead through the marketplace?
Thanks.
Speaker 3
Yeah. We we wanted to feature the example on the call of how a dealership is looking at their market share overall, pre and post fuel. And and, they shared some pretty amazing results in terms of how they saw material share shifting in those geographic markets, and that's an important distinction for fuel. Because we sell it on a geographic exclusivity, dealers can actually benchmark their market share down to the ZIP code level. And we've seen enormous renewal rates already from the dealers who started with us in fuel in q one and and largely not seen much, if any, attrition yet because dealers are able to see notable share shifts in their overall market share as measured by retail sales.
And it's video messaging, so we're not demanding consumers fill out forms, and we are very upfront about that with dealers is that, look. You're tapping into the cars.com marketplace audience ID. And by doing that, you're able to message with frequency about why buy from your dealership vis a vis someone else's. And so, you know, this is gonna be a a smaller segment of dealers, call it 2,000 dealerships who actually know digital works and won't be obsessive about a digital KPI, but more will trust that this will shift market share in their favor. And that's why we're commanding, you know, materially high higher ARPD.
An average fuel subscription could be anywhere from 8 to $10,000 a month for a geographic zone, and dealerships aren't balking at it because they know how much a a share point would cost them to generate on their own.
Speaker 2
That's terrific. Thanks, Alex, for all that. Appreciate it.
Speaker 3
Thank you.
Speaker 0
Your next question comes from the line of Tom White from D. A. Davidson. Your line is open.
Speaker 7
Great, guys. Thanks for letting me back in the queue here. Alex, you mentioned a couple of times this dynamic where dealers maybe during kind of the height of the pandemic cut a lot of their marketing in areas, kind of direct marketing in areas like Google. And then, you know, we're able to replace that traffic via cars.com, and I think you said sort of at a fraction of the cost. And I guess I'm curious whether that dynamic has you rethinking at all how you think about unit pricing in the core listings business.
It seems like a lot of the growth you're kind of forecasting in revenues for the future come from kind of new product adoption. But is it possible that you guys might be able to kind of find or extract some pricing power, out of out of what's happened here recently?
Speaker 3
Thanks, Tom. Well, certainly, the restoring of our our our rate strategy post pandemic shows a lot of durability in our pricing. Right? We were able to restore after the the COVID discounts, go back to full pricing relatively quickly. And then we saw dealers increasing take rate of new solutions.
And so, you know, the fact that we're growing our dealer count and you're also seeing sequential period improvement in ARPD shows that we're not having to discount to generate volume. We're we're we're holding our rates, and we're getting more product sell through at the same time while we're growing dealerships. And that's that's gonna produce a very healthy trend going into 2021. I think in terms of the marketing experiment, you know, dealerships cut back heavily across all their advertising and marketing, but saw these these marketplaces generate much more volume during the COVID period and and also beyond. And so I think they have a greater appreciation that this is traffic that they have to compete for.
And keep in mind, Tom, we see very clearly through Dealer Inspire. I've basically got 4,000 dealers where I can look at competitive traffic and what is converting for dealers. And we see very vividly, number one, that cars.com generates two to three times as much traffic into the dealer's website versus other marketplaces. And number two, what we see is our traffic is converting at almost four times the rate of all the dealers' other website traffic sources combined. So we see both our value in volume and in quality through the dealers' own website analytics.
And so I think our team feels very front foot with our pricing and our value.
Speaker 7
Great. Thank you.
Speaker 0
Your next question comes from the line of Dan Kurnos from The Benchmark Company. Your line is open.
Speaker 1
Great. Thanks. Good morning. Alex, I just want to go back to something you said about creating basically a source of inventory on on trade and on the marketplace. I know that there's been a lot of talk in the industry about, trying to figure that out.
Obviously, things being the way they are now is probably not the way things will be twelve months from now where you can get a the used car basically sells in, twenty four hours once it hits a lot. But just to the extent that you have an opportunity to expand that if that is a thought process, I'd love to hear that. And then I wanna ask you some yet more questions about traffic and needs. But let's start with that.
Speaker 3
Sure, Dan. Well, first of all, even though the retail dealer network sells 44,000,000 used cars a year, as you know, there's still almost 11,000,000 cars that are sold private party peer to peer that sit outside retail system. And we get a very natural organic stream of those people listing their car for sale on our website every day. And dealerships, to your point, needing to acquire inventory, we see that as a new revenue opportunity. In fact, we're we're in beta right now with, pretty healthy degree of dealerships testing, you know, vehicle acquisition products from private parties listing on our website.
And so dealers now are are looking to us to accelerate the digitization of their buying strategy. I'd rather buy a car from a private seller than go to the auction and compete with 20 of my dealer friends is a common phrase we hear playback to us. We can be a reliable source of inventory for dealerships. And and, again, we're in pilot right now with that solution and expect to see more from us there.
Speaker 1
Got it. Super helpful. And then I know you're excited. Super excited to talk more about, lead growth and traffic growth. I just you said continue robust lead growth off of 10% traffic growth.
I mean, could you look at the lead growth faster or slower than the traffic growth without giving us an absolute number? And then I just want to understand because it sounds like we're getting, you know, into Q four. You know, we're not obviously not back to normalized inventory levels yet. It sounds like you need you're starting to lean a little bit back more into marketing as is, the broader peer group. With the strength you have organic, are you pressing different channels this time?
You know, are there different ways to market? Because I think the differentiation point, as you pointed out, is to see here. And to the extent that you can tell us, you know, I I know it's really to drive the lead to have any kind of visibility, but to the talk about, that we tend to buy now that you are seeing with your organic traffic how long do you believe it takes in this would be helpful.
Speaker 3
Sure. You broke up a little bit there, but I think I got the essence of both questions. So, yes, our value delivery and our lead growth has outpaced our traffic growth. And that that was driven partially by, you know, the COVID elevation to all these digital channels. So we got, a a much higher growth in our lead counts and our conversion rate, which translates to dealer value.
I think on the traffic side, you know, keep two things in mind that we have a robust new car, business as well. So consumers still vacillate between new and used even up until the day they buy. And so we have a ton of of phenomenal new car content. So as the new and used car market shift back and forth, cars.com is being heavily sought out for advice. And then I think also just our differentiated reviews and and content strategy.
Know, You our expert editorial team is generating critical assessments of all new cars being sold today, and then we've got more reviews than than any other platform out there, not only for for cars, but for dealerships as well. And so that content is what's helping us generate a higher degree of organic traffic concentration than any of our peers. And so as dealers look to who do I get incremental sales from, cars.com becomes much more valuable because they know that they can't buy that traffic directly where other competitors who just take the dealer's money and bid up search and sell it back to the dealerships, that's not gonna net them the incremental sales that say tapping into, organic traffic well is gonna generate for the dealership. And so I think our traffic strategy is starting to be rewarded, which is why we had dealer growth in q four, again in q one, snapback dealers in Q3, and saw dealer growth again in October this past month.
Speaker 1
Got it. That's really helpful. Thanks, Alex.
Speaker 0
There are no further questions. I would like to thank everyone for joining the cars.com third quarter twenty twenty earnings call. You may now disconnect.