Good morning, and welcome to the Cars.com Fourth Quarter 2019 Earnings Conference Call. Hosting the call this morning is Alex Vetter, Chief Executive Officer; and Jandy Tomy, Interim 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 March 11, 2020. A copy of the accompanying slides can be found on the Cars.com IR website. Following today's presentation, there will be a question-and-answer session with Alex and Jandy. I'd now like to turn the call over to Jandy Tomy, Interim Chief Financial Officer. Please go ahead.

Good morning, everyone and welcome to our fourth quarter and full year 2019 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 financial 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 this presentation. For more information, please refer to the risk factors included in our SEC filings, including those in our annual, quarterly and current reports. Cars.com assumes no obligation to update any of the 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.

Thank you, Jandy. Good morning, everyone and welcome to our conference call for the fourth quarter and full year 2019. On this morning's call, I'll be discussing business highlights from our year and fourth quarter before providing an overview of our expectations and priorities as we head into 2020. And then I'll hand the call over to Jandy, who will discuss our financial results. 2019 was a watershed year for our business, we achieved substantial progress on the most important priorities for our business transformation. In the process, we shed legacy structures and exit 2019 with confidence in our momentum that will propel our growth engine throughout 2020 and beyond. We finish the year with complete control of our dealer customer relationships, significant improvements in our national business, and accelerated growth in our audience and solution strategy. All of which led to a strong finish in the fourth quarter, where we grew our dealer base by nearly 200 dealers. More than ever, our offerings provide fundamental value for our dealer customers. We have a large and growing car buying audience and our digital tools empower dealers to cost effectively generate sales. We achieved our success in 2019 through smart investments, tenacious execution and a continued commitment to strong relationships with our dealer partners and more sustainable ROI. And we did this by taking the high road by supporting, listening to and providing a level playing field to our dealer partners. The industry is beginning to recognize our superior value proposition and our dedication to the local dealer community, which gives me confidence that we're well positioned for 2020 and beyond. In 2019, we grew our audience market share by a sector leading 33%, driven by record traffic levels. We are now number one in SEO amongst our competitive set, reflecting…

Thanks Alex. Revenue for the full year of 2019 was 606.7 million, compared to 662.1 million in 2018. This 8% decrease year-over-year with in line with our previously issued guidance, which we reiterated during our third quarter earnings call in November. This decline was primarily driven by a decline in dealer accounts and national revenue, as well as slightly lower ARPD, when you exclude dealer websites and related digital solutions. Direct revenue was up 19.4 million from the prior year, driven by 25% pro forma growth from our dealer inspire sales and 52.5 million related to the affiliate conversions offset by a 1,087 decline in dealer customers. Wholesale revenue of 34.4 million declined 48.6 million, compared to the prior year. 39.2 million of which was the result of the affiliate market conversions, and 9.4 million related to the client and affiliate dealer customers. Note, the last affiliate market conversions occurred on October 1st and this marks the end of our wholesale sales channel. Our national advertising business was down 24.6 million or 23% in 2019, compared to the prior year. This was primarily the result of lower upfront commitments and lower incremental sales. However, as Alex said we saw a healthy improvement in national sales in the fourth quarter, which is continued into 2020. We continue to work closely with our OEM partners to deliver products that meet their evolving needs. Total operating expenses for 2019 were 1.1 billion compared to 578.2 million for the prior year. As discussed in our third quarter earnings call, we performed an interim quantitative impairment test following a sustained decrease in the company's stock price after the completion of the strategic alternatives review process. And we recorded a non-cash goodwill and intangible asset impairment charge of 461.5 million, because the book value of our…

Thank you Jandy. As we close the year with momentum and a solid positioning for 2020 this is extremely gratifying to see that the execution of our strategy has created a platform for financial growth and market leadership. Our dealers and industry are beginning to recognize the quality of our solutions and the depth of our local dealer relationships. And we're on a strong competitive position to ramp in 2020. And with that, I'd like to open the call for your questions. Operator?

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

Good morning, guys. Thanks for taking my questions. One on ARPD if I could, it looks like kind of excluding the dealer inspire stuff, it was done 5% in the quarter, could you help us understand a bit more what's happening there? It seems like there should be a number of tailwinds to benefit that like some of the big urban markets that have been opened up the affiliate conversions and some of the new products like social. So I guess presuming I'm right about this tailwinds kind of what sort of offsetting them and maybe just a bit more color about why you expect that ARPD to pick up in 2020 and I think you said that Jandy in your comments, and kind of when. Is that also a second half weighted development or can we expect that sooner? Thanks.

Thanks, Tom. Certainly the dealer mix is the biggest piece I want to point to you for Q4. Keep in mind that the final affiliate conversions we executed were from the smallest markets and that if you look again at market footprint, yes they got like two large markets but the vast majority of dealers are coming in through what we classify our D, or C or D markets, which are rate card skewed by market size right? So the smallest markets like Muncie, Indiana, are fractional in value compared to Chicago or LA. So we brought over roughly 2000 dealers into our mix in the fourth quarter, which I think has more to do with the ARPD drag you're mentioning because we do see more upside in ARPD. Our product solutions upgrades are taking form, this is before we even launched things like FUEL, which we think will really bolster your question on ARPD. Yes, we think it's a second half uptake as our solution strategy ramps, keep in mind, we don't have the 800 dealers that have already signed up for the GM dealer inspire website platform in our dealer account or ARPD calculations yet. So we do see strength in that driver in the second half of 2020.

And just to put a final point on it to Tom, what you're remembering are the larger markets that we converted in 2018. So 2019, there were kind of fully in already there from a year-over-year perspective, there wasn't tailwinds. There's just been new affiliates that we did in 2019 and Alex is pointing to. In some of the pressure also is from Canada, the net of upsells and downgrade. So we are experiencing I think we've talked about it on the last couple of calls, pressure from dealers canceling some of the legacy products, more the display type of product. And that is being offset in part by cars social, car social launch, 2 years ago now, I think it was and we certainly are still in growth areas as we continue to fall for product, but we're kind of on the cost are ready at the beginnings of these new products that we're about to launch fuel in particular, right and then kind of, I will call it pent up demand with GM, because it's already been sold as a matter of actually just rolling it out. So those two things are coming and they'll really be more second half of events from any Rand revenue perspective.

Maybe just one related follow-up. Any comments you can make on just sort of pricing for the core listings product. Understand, maybe dealers canceling some of the legacy stuff. What about just core lifting power those kind of renewal discussions going with dealers. Any pressure there?

There's always a little bit of natural pressure with turn where, dealers that we've had for a long time we've had the ability to upsell and dealers coming in come in at more base level. But when you look at the average pricing of dealers to cancel compared to dealers that signed in, it isn't a very wide gap and frankly, over the last, I don't know call it 4 months, 5 months, 6 months, we've been very focused on price. Locking in contracts longer focus on less discounting, I mean we're feeling very good about where we are here to actually start out 2020 from a pricing perspective.

And certainly the traffic trends are the wind at our backs there, right. Our value deliveries improving, which makes our pricing more attractive.

Your next question comes from the line of Lee Krowl with B. Riley FBR. Your line is open.

First of all, I want to start off on a high level one. Obviously, as we sit here earlier in the year, I just kind of wanted to get baked into the drivers that you outlined. What is the overall industry assumptions that build up to the flat to down 4% revenue assumption. Obviously, you guys are part of an industry that's kind of flat to down is but just as curious your thoughts on the overall industry and how that impacts guidance for the full year?

I think that there's a macro factor in our guidance for 2020, it would be the uncertainty and volatility on national advertising. Whereas our dealer fundamentals we see as being extremely strong and completely turned around from where we were in '18 and even '19. So and that's where we've been focused. That's been our primary core marketplace. And I would also say, technology solutions is still in its infancy. Dealers are increasingly turning to marketing technologies to automate and remove operating costs in their business. And I think we're really well positioned there. So I think the growth in our solution strategy, we see is another big tailwind for the business. National, we're taking a more cautious outlook for 2020 just because of the uncertainty and the impact on the market, but the rest of the business, we see the opportunity.

And then, I think it was on the last call that you highlighted. There were, I believe, two to three other OEMs that were in the pipeline for dealer inspire solutions. Is there any sort of GM like assumption built into the guidance for any of these OEMs coming online?

There is not. Obviously GM being the largest, that's why we called it out, but there is no material step up in our trajectory due to any OEM additions in 2020.

And then the last one for me, just on the GM relations specifically, is there a set go live date or is that at the discretion of General Motors, just kind of put a finer point on what it means for revenue in terms of when you start to recognize?

Yes. So right now it is, there is a schedule, there's a plan and it is this summer so the websites beginning to roll out this summer. And just to make sure that piece of it is clear. There will be a schedule where the websites will roll out. GM is assigning each partner how many they can roll out on in each wave roughly monthly. And so we'll roll out one tranche one month and look at the revenue the next month, and then the following month will roll out another tranche, and you'll get the revenue for what you've rolled out thus far, right, so that's the build. But the schedule is in GM's hands at the end of the day. So that piece of it. We have a schedule right now we're certainly working with them to try to get more and faster. But as of right now, the expectation in this schedule would be this summer.

Your next question comes from the line of Daniel Powell of Goldman Sachs.

Two questions, if I could. On the first one, just wanted to get a sense for how dealer growth in the core product, so kind of excluding dealer inspire for a second compared to the lead growth that you saw in the quarter and the 40% growth in SEO traffic that you saw in the quarter? And then secondly, just want to get a sense of sort of where these investments behind dealer inspire and that products are coming in, sort of relative to your expectations in the back half of the year. Was there a sort of ramping in conversion of GM dealers that seems to be driving that kind of above expectations?

Thanks, Daniel. First of all, on the dealer growth sides, we're seeing a lot of positive momentum. Obviously, I go back to '18, we were down close to 2000 dealers, '19, we cut that loss to 1000, including growing dealer count by 200 dealers in the fourth quarter. And 2020 is starting off on positive footing that's just on the marketplace side before you include the great work we've done on GM and organic growth in website sales across all OEMs. So we feel pleased about that. And I would say largely attributable to that would be our strong traffic performance. The majority of our traffic growth is coming in through SEO. So it isn't traffic that you can buy elsewhere. And dealers are recognizing that this is some of the highest quality traffic that they can convert. We've been very focused on improving lead quality this year, and are getting strong feedback signals from dealers that that is working. And so the traffic growth doesn't correlate to lead growth, right, we're always going to have much higher traffic growth then lead count growth. But the correlation of the quality signals in traffic and leads is very vivid. I'll also point that, in the quarter we made the announcement of launching Prism, which gives dealers a better diagnostic of their total back end performance of not only Cars.com but all marketplace participants. And what we see very vividly in the data and this is on a large sample size of over 3000 dealers is that there is no marketplace driving more traffic and quality traffic into dealer websites and cars.com. And dealers consistently report that traffic is being the highest quality conversions that they can get their hands on. And so those quality signals we take very seriously and we're focused on continuing to improve them and we see positive trends. On the DI investments. Look, we're largely having to add headcount there and in the margin profile of our solution strategy, use some of the strong performance in the business, because we've got a ramp headcounts before we recognize revenue. Our headcount ramp is much lower than it was last year. But nonetheless, when you on-board 800 dealers, the production effort alone, and the support that we have to provide them is something that we have to get right and our goal is to get all in our dealer successfully launched and create a lot of positive momentum in the dealer community for GM dealers, who I think the first wave, I think a lot of dealers to the wait and see approach. And the 800 that made the switch where are really our brave innovators and are focused on growth. And so we're going to be successful with those 800. And that's going to bring more and more of the GM dealers in the second round our way.

Your next question comes from the line of Steve Dyer of Craig-Hallum.

So just kind of piggybacking on that question, Alex, it sounds like you think there's still a decent amount of GM dealers who have not made a decision yet. I guess, with the 800. You have what is your sense sort of as to market share their vis-à-vis the other providers?

Certainly we see the data that shows that nobody gained more share than us. In the first round so we were the market leader in terms of new dealer adoption. I think obviously the market is aware that the CDK the incumbent who owns the majority just sold the business. And so I think that will move more dealers to want to consider alternatives of companies that are very focused exclusively on this segment. And so I think that will only open more opportunity up as the second wave opens up.

And what is your sense maybe I missed this, but maybe rough numbers percentage of that have decided in percentage that have you had to decide?

I think it was less than a quarter for sure, less [indiscernible]. So I think it was sub 20% of the dealers actually elected to make a change. But Jandy, we should follow up and make sure.

I'm happy to follow-up. Like Alex said, we know that we were the leader of the 3 new providers as far as taking dealers over that there's still a good number that sort of defaulted and stayed with that he didn't make a decision to move, he stayed with CDK. So there is still nice opportunity for us later this year, when the enrollment window opens back out for us to go back after that group.

Nice to see the net dealer adds in the quarter. I guess I'm wondering if you're willing to sort of share what you saw in January and how February is looking and maybe is that something you would anticipate sequentially continues to add dealers throughout the year?

I'll point to a couple of data points. First and foremost, the very vivid improvement in our cancellation performance. In '19, we had cancellation rates as high as 4% and in the fourth quarter, we got those numbers down closer to 2. And that's been a durable improvement in our retention rate. In Q4, we only had 2 months where we were free from affiliate distraction. And that's not surprisingly that produced our strongest net growth of the year and that our sales team had no conversion work to do. And we're seeing some of that improvement in our sales pacing starting January and February as well.

So, have you been positive, I guess quarter to date or would you prefer not to share?

Yes, we are positive quarter to date. So, I would say we're certainly feeling good about the stabilization of the dealer base.

Your next question comes from the line of Doug Arthur of Huber Research.

Alex, I think you touched on this but when the next wave and window opens for the GM dealers are some of the costs that you built up the staffing. Will you get some operating leverage on the next ramp in dealer adds or will there be another wave of investment accompanying that?

Doug, thanks for asking. Yes, I think 2020 is a year, but we're not seeing the leverage in the financials. But I can tell you that we absolutely see it from scale. So we're making the investments in 2020, because we see a big opportunity not only with the existing GM dealers, but the future demand. And, but where we're getting the leverage is in our production cycles. We went from call it a 90 day development cycle to launch the dealership down to 60 days. And then our costs to serve, we continue to see operating improvement in those KPIs as well in terms of being responsive to dealer support. So we're seeing it, it doesn't appear in the financials in 2020, just because of the timing of the expense early and the revenue late and that's again points to our first half, second half dynamic that you see on our financials, but we actually do see good leverage in that business, as we model the business out over the next few years.

Yes, absolutely. I mean the big investments really are starting now. If you look at the numbers last year, last year, DI added 700 website customers for the full year 2019. This year, we continue to grow kind of with the excluding GM business, and then you add in the GM business on top of it. So we have some significant investments that we started last year and are continuing into this year. So, as we enroll and bring on more GM dealers incremental to this original wave, or this initial wave, there will likely be some investments, but not to the magnitude of what we're doing right now.

Okay. And then lastly, Jandy, you threw out a lot of numbers on the impact of the affiliate conversions for both the year and the fourth quarter. I guess, just focusing on the fourth quarter. Can you just run through those numbers again, sort of what was incremental versus wholesale, you lost? I just thought you get a sense of what the uplift was?

Yeah, sure. So let's see. So the net revenue impact on the fourth quarter was $2.7 million of incremental revenue in the fourth quarter. The thing to keep in mind, which I think there's a lot of confusion out there in the market is around the affiliate revenue share that expense line item. So in that line item, you'll see in Q4, we had $11 million of expense. And that's $11 million of payments that we made in total, in some total to all of those former affiliates. And what we didn't have importantly in the fourth quarter, is the benefit from the amortization of the unfavorable contract liability. So that that's the $6.3 million of benefits that's been running through our P&L and being additive included in adjusted EBITDA, the non-cash benefits that we've had every quarter since 2014, but it ended in Q3. So Q3, you would have seen 5 million of affiliate revenue share expense, but we had 6 million in there as a benefit and non-cash benefits. It's truly that run rate was 11 million in Q3 as well. So that's the piece I think that a lot of people fail to realize. That would be the other moving parts to keep in mind as we go forward.

And the affiliates share expense, you said will run out in Q2. So is that correct?

That's right. So we're expecting it to be about 12 million, so 6 million in Q1, 6 million in Q2 and then zero starting July 1st.

Next question comes from the line of Nick Jones of Citi.

I guess as you talk to dealers and human dealers. What are you learning about how they wanted to fly their budget as you shift into some other products like FUEL IMB? Is there less emphasis on kind of the referral network through cars.com and more towards winning leads through kind of off platform channels for the lack of a better term?

No, absolutely. Dealers are wanting to tap into strong organic sources of traffic. I think probably the number one reason that dealers are coming back to cars is realizing that when they subscribe to us are not necessarily competing with themselves in open search, and other channels where they currently spend more of their budget. So I see more progressive dealers, realizing that they're not going to buy around these marketplaces, but then within the marketplaces, they're getting much more shrewd about picking winners and losers and those that are advocates for their business versus more prey on or their business for gain. So we're seeing strong momentum in 2020 in dealer counts because of that commitment to dealer advocacy and keeping the dealer whole. I think the solution side is incremental. It isn't a switch for us. And many of the things that we're doing on the solution side, leverage the strength of our marketplace. So for instance, fuel is only available to cars.com dealers. You won't be able to buy our video offering unless you're a subscriber to our marketplace. And so I think that's part of the benefit of our differentiated strategies that we're working with the dealerships to optimize their business, no different than we're helping put their listings on Facebook marketplace. And I think the smart dealers are recognizing there's one partner out there that's helping them beyond just listings.

And one follow up we saw Ansira acquire CDK's digital marketing business. I mean do you expect agencies maybe lean into the auto tech offerings to try to combat some of the things. You're launching like FUEL IMB?

Look, I think agencies are always skating around the auto industry. What I'll tell you is that specialization is being required to be effective in this category. And so while many agencies have horizontal platforms and businesses and offer solutions. What we're finding is that the vertical focus and the specialization in auto is our competitive advantage. Video is been out for dealers for years. But the same problem with online video is with traditional video, it's largely untargeted to audiences that are in the market to buy. And so the benefit of our platform is that we're leveraging the strength of our consumer audience and driving greater efficiency than these generic solutions provide.

Your next question comes from the line of Marvin Fong of BTIG.

Sorry, my apologies. I was on mute. Thank you for taking my question. Most have been asked, but just on the uptick in marketing and sales expense in the fourth quarter, you said that that was planned. Could you dig a little more into what that spending was on? And then also, on the cost side, I know that several items are going to be rolling off. But you also mentioned that some technology costs associated with the beta test will also be rolling off. Could you kind of help quantify how much done might be?

So some of the marketing investments is the spend from kind of our program, our normal program, brand spending. You'll remember that we started the year off with the anticipation that we were going to spend an incremental 15 million in marketing this year. And with the successes that we saw within SEO, and also the efficiencies that we gained within our paid programs, generally, we didn't need to wind up spending that 15 million but we have seen the dramatic success and traffic without that spend. So some of that is spending. The other piece of it there is a piece related to DI so the growth in DI and GM and with the rest of the businesses just with kind of a compensation within the sales force for that business. And then the other question was on cost saves and costs throughout the year. Certainly on I'll just take a moment to relish in the savings that we found last year in 2019 and realized both from the sale transformation, product and stock. As we started the tech transformation, we saw some nice savings there as well, as well as other places throughout the organization. That was realized in 2019. As we look forward to 2020, we do have incremental cost saves associated with a tech transformation. And those are coming really in kind of the back half of the year. And, the full run rate is $10 million that we've been talking about, but specifically in this year, it's about 4 million based on the timing of the contracts that will wind down and as we bring up the new contracts with a new structure.

Terrific thanks. And just a second question on FUEL so it looks like you're already in your guidance embeds some costs as well as revenue benefits. Could you just kind of drill into that? You said you already had customers sign up for it is, is your guidance only embedding sort of the business you won already? Or are you anticipating further wins contemplated within your guidance? And if you could just hopefully just kind of, oh, go ahead. That's the end of the question.

Sorry Marvin, I didn't mean to interrupt you. So, it is early stage, right. We have customers that have been rolled in FUEL, we've obviously been through beta test with the products, but it is sort of pre revenue phase, where outlook around this product is great I'll say, but we're also very cautious this year because we are just rolling it out. So we've got assumptions in the budget beyond what we just pre enrolled, again with the positivity around this product and our expectations for success there. But it is relatively small for the full year. The cost associated with it and maybe you were asking about costs, and some of it is certainly people oriented. So the team that needed to support the growth in this new product and launch of this new product, but the majority of it really, is the media costs associated with it.

Your next question comes from the line of Daniel Kurnos of Benchmark.

This is Chad on for Dan. Could you talk about what the lead volume growth was in Q4 and give us a sense of how new traffic is converting to leads or what you're doing to help convert that strong traffic into a lead volume growth? Thanks.

From a lead volume perspective, it isn't the number that we are going to disclose. Rather, I'll point you back to the fact that we're very, very focused on the quality of the leads that we're generating. And the connection and value that we're delivering to our customers. I mean, at the end of the day, that quality is evidenced by the improvement in our cancellation rates and retention rates and the growth in our sales rate. So that that would be the evidence of the efforts that we've made to really take a very close look at where we're generating traffic. How much traffic we're generating, and how that's converting over through to connecting to our dealers.

Daniel, I'd also encourage you and any of your dealer markets. I think what we're finding back as dealers are saying. Overwhelmingly, nobody's doing a better job than cars. So our strategies being played back to us by the dealer community and the focus on quality is what they're asking for and we're delivering.

Your next question comes from the line of Steve Dyer of Craig-Hallum.

Just one follow-up for me. Just in kind of given the guidance in the cadence of which would suggest the Q1 revenue would be lower than Q4 by some amount. I'm just kind of trying to figure out the puts and takes of why that would be the dealer counts on the upswing. The DI would be incrementally higher. What are, where would cause the downdraft in Q1 relative to Q4?

Some of it is that the ARPD softness and the other piece of it is national. So national, again, we're feeling good about this business and what we're seeing in conversation. And the improvement in the fourth quarter still yielded declines year-over-year. The other piece of it is national is getting back to more of a stable place is a bit seasonal. So it's hard to see I know in our recent results, given what's happened over the course of the last year or 5 quarters, but typically national revenue is higher in the back half of the year. So it's a normal seasonal trends to see a little bit of a step in national from Q4 to Q1. And we're also cautious about that line of business. And like I said, improvement in Q4 was still a 9%, down, we saw a nice trend in December, we seen nice trend in January, we're not at double-digit declines anymore. But that would be the other piece of it.

Steve, this is Alex. I just also point, we're starting in 2020 with a much lower dealer base than then we were in '19. And so it will take us some time to lap that so the positive trend and dealer count in Q4 and that persisting in Q1. We see line of sight overcome that gap in the first half of the year which was makes the second half of 2020 so appealing. The top-line growth and more importantly the EBITDA expansion in the second half as affiliate payments wind down in June. So those are the big drivers.

I understand the year-over-year. I'm just more excited as it relates to Q4. So it sounds like ARPD. I mean, do you have some visibility or line of sight to that improving in Q2 onward then? Or are you just strictly sort of a matter of, making the bed and getting more dealers back in the fold?

It's really around product. So yes, dealers are one piece of it, also with a focus on larger dealers from a new sales perspective to get those larger dealers with the higher rate cars in. But it's also rolling out of new products and solutions right. So the continued growth at DI and the rollout of FUEL and the ramp up of FUEL as the new products and solutions and pointing back to our solution strategy. So it's more of a back half of the year. ARPD growing in the back half of the year as a result of those products in particular.

There are no further questions in queue at this time. I turn the call back to Mr. Vetter for any closing remarks.

Thank you, everybody for joining us today.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.