Good morning, and welcome to the Cars.com 2018 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 23, 2018. I'd now like to turn the call over to Jandy Tomy, Vice President of Investor Relations.

Good morning, everyone, and welcome to our 2018 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 2 and 3 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 2018 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 report. 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.

Thank you, Jandy. Good morning, everyone, and welcome to our conference call for the second quarter of 2018. We celebrated our 20th 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 our national network of automotive digital consultants. In this scenario here, we've made serious progresses advancing our long-term strategy, but the initiatives we're 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 350 dealers into the Cars.com direct sales channel. In addition, I'm 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 140 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 the 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…

Thank you, Alex. Revenue for the second quarter of 2018 was $168.5 million, reflecting a $11.9 million or 8% growth compared to $156.6 million in the prior year period. Retail revenue was up $31.1 million, driven by the conversions of the tronc and McClatchy markets and the addition of the Dealer Inspire and LDM businesses, which are classified as direct revenue. The conversion of the tronc and McClatchy market resulted in the addition of $21.2 million to retail revenue in the second quarter as well as a decrease of $18.9 million 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 forma basis. This growth was driven by growth in units across all of DI's products. Our direct business declined $3.4 million, driven by the year-over-year decline in direct dealer count. Compared to March 31, 2018, total dealer customers grew 1% due to the addition of 508 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 822, 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 $21.7 million was down $19.3 million compared to the prior year. As I just mentioned, $18.9 million of the decline was related to the…

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 Lee, our new Senior Vice President 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 Julien Schneider as VP of Business Transformation. Matt is a former [indiscernible] leader who brings in deep experience in strategy development and execution. And Julien comes to us from BCG and brings data-driven expertise around sales and account management effectiveness. All these changes will continue to accelerate our transformation and the execution of our strategy. I'm incredibly excited about where we stand. We've 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?

[Operator Instructions]. Our first question comes from the line of Tom White with D.A. Davidson.

One on the direct dealer count. Sort of another quarter of net declines there, 72 -- down 72 versus down 231 last quarter. You talked a little bit about some of the kind of sales force execution 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 forces run? And then just on the comments on new car sales trends and OEM budget cuts, just curious to hear your thoughts on what's driving that.

Thank you, Tom. As you noted, right, our Q1 direct dealer losses were 231 for Q1. And while we're pleased that we've made progress on turning that trajectory, only losing 72 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'd 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 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 more broad-based national approach. On the OEM side, certainly, we're seeing the same headlines that you're in terms of OEMs sales flowing 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.

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

Series of questions here. Just picking up on 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've discussed?

Gary, I'll start. First and foremost, we do see more softness in national than we have 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.

And then in terms of the affiliate conversions, what markets are left?

Well, really three affiliates, but one is just a singular market, [indiscernible] out of Dallas is a single DNA. And then the remaining would be TEGNA, which is due in 2020 and Gannett. The reason we're 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 as to pursue the biggest opportunities. And you see that translate in our growth and 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.

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

Well, look, when we started in '17, our priority was on product and marketing efficiency, and we've made substantial changes and progress there. I think now moving into '18, we have focus more on the back-end side of the organization. And our front-end replatforming work that was done pre-spin that enabled us to pursue product innovation at a much faster level. So the engagement with our consultant and Fred Lee's appointment is really to attack the back-end operational efficiencies where we can get more control on efficiency there. Certainly, Becky and I are looking at everyplace we can to fund both traffic and sales growth. So I wouldn't ever say anything is in up for discussion or evaluation, but the tech engagement has got a very clear sort of priorities on back-end operational efficiencies that impact the entire system.

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

Alex and/or Becky, just look, so I want to take this in a couple of pieces. So one, I think, maybe my math is off, but I think if you pull out DR, Inspire and LDM, the core business was down 6% 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 what your other competitors, it doesn't sound like they may be 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 products-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 of the growth driver than necessarily pickup in pricing on sort of the underlying organic business, the legacy business?

Well, look 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 it's lacked the distribution. So now we 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, do you want to comment on some of the core trends?

Yes. The only clarification I would make there is, if you look at our retail business in the second quarter and you do -- I think, Dan, what you're trying to do, which is takeout 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, et cetera, the strategy is around product sales to our dealers and creating more valuable solutions for them.

Got it. That's helpful color. I was also pulling out DR, but that's right. It's down 4%, 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 this 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 been received by the dealer group?

Sure, thanks for asking. The -- well, product 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 are 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 e-mail 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're 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.

And our next question comes from the line of Steve Dyer with Craig-Hallum.

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

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. On 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.

Great. That's great color. As it relates to dealer count, I know it's been a little bit harder to sort of stabilize the shift maybe relative to your expectations, but do you feel like you have kind of a handle on that now in July, in the first part of 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?

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. It's 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.

Okay. And then I guess, as it relates to guidance for the remainder of the year, that the 10% moving to 6% to 7%, I think, embedded within the 10% was an expectation that organic was kind of a plus 1%. So Dealer Inspire, the acquisitions seem to be performing better than expected. So does that sort of imply organic for the year being down mid-single-digit or something like that as my math in the ballpark?

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 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 effort. 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.

Okay, great. And then lastly, from 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 2 years that the capital structure can't be significantly altered, it can't be sold, et cetera. Is there anything you can sort of shed any light on just to refresh our memory?

So there is a tax rule that exists following a spinoff for a 2-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.

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

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

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