Q4 2019 Earnings Call
11 Twentytwenty.
A copy of the accompanying slides can be found on the cars dot 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.
Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the financial tables included in our earnings press release and in the appendix of this presentation.
More information please refer to the risk factors included in our SEC filings, including those in our annual quarterly and current reports.
Cars Dot Com assumes no obligation to update any of the forward looking statements or information as of their respective date.
At this time I'd now like to turn the call over Dallas.
Thank you too good morning, everyone and welcome to our conference call for the fourth quarter and full year 2019.
This morning's call I'll be discussing business highlights from our year and fourth quarter before providing an overview of our expectation from priorities, we headed into 2020.
Then I'll hand, the call over to JV, 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 exited 2019 with confidence in our momentum that we will propel our growth engine throughout 2020 and beyond.
We finished the year was complete control over 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 and power 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 rose 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 is a 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 and FCO amongst our competitive set reflecting the strength of our brand our technical sophistication and our differentiated product strategy that focuses on delivering high quality.
Content.
Im pleased that we've been able to consistently deliver audience growth high quality leads and high sales conversion for our partners.
In 2019 rebuilt thousands of new direct dealer relationships by taking back control from our former affiliate owners, giving us direct access to our entire customer base without involvement of intermediaries, nor the need to share substantial revenue with them.
We had been aggressively striving towards achieving this significant milestone since we became an independent only publicly traded company.
Later on today's call will talk more about the financial implications and uplift that we will unlock in mid 2020 once the last of the contractual payments are behind us.
This past year also saw an expansion of our leading suite of digital solutions as part of our unique strategy to provide valuable innovations to dealers. The strength of the strategy was demonstrated by our new OEM endorsements from 2019, including our partnership with General Motors, which opened the door for us to sell our web site solutions on a semi.
Just a basis to over 4000, new franchise dealers across the country.
Finally, we generated significant operating efficiencies through transforming our sales network and technology platform.
We are poised to continue realizing the benefits of these initiatives in 2020 and beyond.
Let me now turn our results for the fourth quarter I'm incredibly pleased with the continued improvement in our dealer base, which grew by nearly 200 dealers in the fourth quarter.
Despite the fact that the fourth quarter historically, the slowest period for sales. This marked the strongest quarter for dealer growth since 2015.
Our growth in the quarter was the result of both new customer sales and improve retention. Our average cancellation rate was the lowest for the year counter to historical trends and is attributable to the rapid audience growth improved salesforce effectiveness and now having direct access to all of our customers.
The increases in the dealer base in the fourth quarter and continuing into early 2020 are among the most tangible evidence that our strategy is yielding material results that will drive our topline and ultimately category leadership.
And dealer growth isn't the only way will drive growth dealers want and need our digital solutions as well.
Revenue from dealer inspired products grew 22% and DIY website products alone grew nearly 30% in the fourth quarter.
We now have 3200 website customers at the end of this year and this was before we all started billing for the web sites sold under the GM program, which will deliver incremental subscription revenue beginning in mid 2020.
The GM partnership we announced the ended the third quarter is well underway with our first dealer enrollment phase now complete we have contracted for more than 800, GM websites that will begin to roll out this summer subject to Jim's release schedule development and launch of these websites are actively underway and revs.
New recognition builds throughout the second half of 2020.
There was also the opportunity to sign more GM dealers in the future as the program continues we expect the subscription revenue generated from this partnership to be a key growth driver for the foreseeable future.
Audience growth continued to accelerate in the fourth quarter with unique visitors and traffic up 32% and 39% year over year, respectively.
Driven by content and organic momentum as well as increasingly efficient page search we continue to close the gap on market leadership growing our market share from 17% to 23% and firmly establishing us is the fastest growing player within our category.
Additionally, our market leading it feel performance continues as we saw a 40% year over year as Seo traffic growth in the fourth quarter.
An industry authority search metrics ranked the biggest FCO winners and losers of 2019 and cars Dot Com was the top winner for automotive.
On the National front OEM advertising revenue is stabilizing so the business decline year over year. The fourth quarter was our strongest of the year and as a number of clients return to spending with us.
We are now driving strong incremental onsite media sales and programmatic open auction revenue and our upfront commitments from Oems are generally consistent with last year further signaling a stabilization of our business and we're now seeing new momentum with our OEM clients as we seek new ways to partner with them on marketing solutions.
Clearly advertising from the Oems sector has been volatile and difficult to predict during the last two years across all of North America, but with what we see in front of US right now and our unique strengths, including audience data new OEM products in our auto industry knowledge, we have confidence in our ability to execute and deliver going into 2020.
Finally, before I dive into our expectations and guidance for 2020, I'd like to highlight our efforts to bring greater awareness to our environmental social and governance standards.
Corporate responsibility at cars is driven by our dedication to foster a culture and business that cares about our people our customers our community and our planet.
Pulling the highest standards of integrity inclusion responsible business practices is in our DNA.
We launched a new section on our website in the fourth quarter dedicated SG leadership that highlight some of the current policies and procedures within our business that support our culture people data security community and the environment.
Invite you to explore this at investor deck cars dotcom forward Slash SG.
Having exited 2019, a solid position our focus is now and the execution in 2020.
As we looked ahead, our focus will be on a relentless pursuit of category, leading traffic and customer growth innovating best in class solutions and growing our newly launched fuel end market video platform.
We continue to invest in digital solutions for dealers and Oems that leverage our traffic strength and ultimately translate into stickier dealer relationships that grow a RPD with the affiliate conversions now behind US we are able to market our solutions to our entire network of dealers on an unfettered basis for the full.
First time in our history.
Our digitally savvy and dedicated sales teams of dealer advocates are now able to work more efficiently to address the needs of our customers and unlock value that we're not able to under our affiliate model.
Combined with our dealer retention strategy, which focuses on introducing dealers to the range of latest tools and technologies. We are very well positioned to start growing subscription revenue immediately and lapping year over year comparisons later this year.
In particular I'm extremely excited about our launch of prism, our new proprietary reporting dashboard that we recently launched an important part of our attribution strategy. The tool attracts marketing performance across channels calculates weighted ROI and product conversion metrics and delivers group level reporting and offers auto.
Made it alerts.
Prism allows our salesforce to help dealers evaluate their entire marketing engine, establishing us as a true partner for dealer performance, what we see vividly through prism does that cars dot com is driving more traffic dealer website than other marketplaces and cars that com is four times higher quality than other traffic.
Sources.
Our level, playing field and commitment to being a dealer partner is becoming more evident as dealers are seeking true champions of their success.
One of the ways, we show our partnership with dealers nationally is through our 20 year support for any da the National Automobile dealers Association, which recently held its annual meeting in Las Vegas.
This year, we launched at any da our new end market video platform fuel.
Fuel is a unique alternative to traditional television advertising, which is inefficient and shrinking.
Those of you who are familiar with advertising trends are aware that traditional TV is losing viewership dramatically to over the top advertising platforms.
Only a fraction of the population is in the market to buy a car, but today the auto industry sends nearly $10 billion trying to reach that small population with mass market TV advertising.
In contrast, more than 80% of cars that time shoppers are in the market to buy a car now.
And fuel enables dealers to run targeted video messages to these highly qualified in market car shoppers on progressive video platforms.
This service was widely recognized as one of the most innovative new offerings at any da this year and we had many dealers pre enroll.
As a service that is available only to cars dotcom customers, we expect fuel to positively contribute to air PD in 2020, beginning in the second half.
We plan to provide more commentary during our earnings call next quarter.
By the second after 2020, many of the pieces of the strategy that we laid out and we went public two and half years ago will have been fully realized primarily because of churn in the first quarter of 2019, we started 2020, which subscription revenue from nearly 1100 fewer dealers than in the beginning of 2019.
Fortunately based on our strategy and business transformation will pay dividends in 2020, as we leverage our extraordinary increase in traffic our continuation of increasingly strong momentum with dealer retention and dealer sales for profitable revenue growth.
Year over year comparisons will improve sequentially each quarter due to the beginning dealer deficit, leaving us by the fourth quarter with impressive exit run rate for both revenue and especially EBIDTA as we end the year.
Confidence comes from factors such as the completion of affiliate payments on June 29.
Our cut over to the new beta site mid year and revenue from over 800 pre sold GM dealer web sites.
Our outlook also reflects confidence that comes from our ability to translate market leading increases in car buying traffic to increase dealers seeking to tap into that growing audience and using our innovative digital tools.
2020 will consist of two distinct pass for both revenue and EBITDA. This as a result of a number of factors, including the following.
First we will carry a lower dealer count in the first two quarters before net dealer sales yield favorable year over year comps.
Second the ramp in revenue recognition of our GM dealer website business that will begin to accumulate once the websites are set live and become billable.
Third the ending of our final affiliate payments in June.
Fourth significant savings from technology transformation after mid year cut over to the new platform and finally, an uptick in air PD from fuel in the back half of the year.
Momentarily Jenny will provide additional detail around the distinct drivers and assumptions for our first and second half.
For the full year, we anticipate revenue to be flat to down 4% year over year.
Overall, we anticipate subscription revenue growth to build sequentially throughout 2020, and that we will ultimately exit 2020 with a positive year over year revenue growth rate.
We will of course, the monitoring OEM advertising in particular and a built in a cautious downside risk due to the sectors Tas volatility and exaggerates factors to Oems such as for coated 19 virus. We also anticipate exiting 2020 with a positive year over year EBITDA growth rate and for the full year 2020, we expected.
Adjusted EBITDA margins between 25 and 27%.
In 2020, we anticipate growth in free cash flow to be flat to up 25% as we capture uplift from our solutions indirect dealer relationships.
I'd now like to turn the call over to Jandy to go through our financial results for the fourth quarter full year 2019, and additional details around our 2020 outlook assumptions and key drivers jandy. 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 inline with our previously issued guidance, which we reiterated during our third quarter earnings call. In November the decline was primarily driven by a decline in dealer count and national revenue as well as slightly lower air PD. When you exclude dealer web site and related digital solution 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 conversion offset by a 1087 decline in dealer customers wholesale revenue of 34.4 million decline.
Slide 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 decline in affiliate dealer customers note. The last affiliate market conversion 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 commitment and lower incremental sales. However, as Alex said, we saw healthy improvement in national sales in the fourth quarter, which has continued into 2000.
20, we continue to work closely with our OEM partners to deliver products that meet their evolving needs.
Operating expenses for 2019 were 1.1 billion compared to 578.2 million for the prior year as discussed on our third quarter earnings call. We performed an interim quantitative impairment test following a sustained decrease in the company stock price. After the completion of the strategic alternatives review process.
And we recorded a noncash goodwill and intangible asset impairment charge of 461.5 million because the book value on our assets exceeded the estimated fair value. We do not expect this noncash impairment charge to have any impact on operations liquidity, our cash flows or if that compliance with our financial covenants under our credit.
At agreement the cash benefit from the deductible goodwill and intangible asset for tax purposes remains intact.
Excluding the impairment charge total operating expenses in 2019 were 591.3 million. This 13.1 million increase compared to 2018 was primarily due to an increasing cost associated with growth in our solutions business and increase in affiliate revenue share payments as a result of the early conversion.
Planned marketing investments and increased depreciation and amortization due to the reduction of used for lives of certain assets related to our technology transformation and these increases were partially offset by a reduction in expenses, resulting from our continued focus on operating efficiencies.
Net loss for 2019 was 445.3 million or $6.65 per diluted share adjusted net income for the year was 104.2 million or $1.55 per diluted share compared to 135.3 million or $1.92 per diluted share in the prior year I'd.
Adjusted EBITDA in 2019 was 167.3 million or 28% of revenue, which was also inline with the guidance. We reiterated in November this compares to 227.6 million or 34% of revenue in the prior year.
Before I move onto the discussion of fourth quarter financial results I'd like to take a moment to review our key operating metrics, including our continued successes in audience growth as well as the fourth quarter growth, we achieved in dealer customers that Alex mentioned earlier.
Our traffic in audience growth has continued with the fourth quarter of 2019, being our highest traffic quarter to date with 146.2 million visits representing 39% growth year over year.
Average monthly unique visitors in the fourth quarter were 23.5 million, representing 32% growth year over year.
Hey, RPD was $2136 in the fourth quarter of 2019 and air PD, excluding revenue from dealer web sites and related digital solutions from dealer inspire with 2031 down 5% compared to the fourth quarter of 2018.
Dealer customers were 18834 as of December 31st 2019, reflecting an increase of 199, new dealers compared to September Thirtyth. At 2019. This was driven by higher new customer sales volume and continued improvement in retention rate cuts.
Paired to the end of 2018, our dealer customers were down 1087, as we enter 2019 and enter 2020.
Now turning to the financial results for the fourth quarter revenue was 152.2 million compared to 164.3 million in the prior year period. This decline was primarily due to a year over year decrease in dealer customers, partially offset by incremental revenue from the newly converted affiliate market.
And growth and our digital solutions business.
Direct revenue was up 6.8 million driven by 22% growth in our digital solution and 18.7 million of uplift from affiliate market conversion.
Wholesale revenues declined 16 million compared to the prior year of which is 12.8 million was the result of the affiliate market conversions and 3.2 million was due to the decline and affiliate dealer customers.
As Alex mentioned, our national advertising business began to stabilize during the fourth quarter on a year over year basis National advertising was down 9% in the fourth quarter and represented the highest revenue quarter for the year at 21 million.
Total operating expenses for the fourth quarter of 2019 were 147.5 million compared to 140.5 million for the prior year period. This increase was driven by cost increases associated with the affiliate market conversion the lack of a benefit from the amortization of the unfavorable.
Contract liability, which was fully amortized as of September Thirtyth 2019.
Planned marketing investments and increased depreciation and amortization due to the reduction of the useful lives of certain assets related to our technology transformation.
These increases were partially offset by a reduction of expenses, resulting from our continued focus on operating efficiencies.
Net loss for the fourth quarter of 2019 was 4.1 million or six cents per diluted share compared to net income of 9.4 million or 14 cents per diluted share in the fourth quarter of 2018 adjusted net income for the fourth quarter was 42.2 million compared to 34.1 million in the fourth quarter of 20.
18.
Adjusted EBITDA for the fourth quarter of 2019 was 39.3 million or 26% of revenue compared to 61.1 million or 37% of revenue in the prior year period.
Net cash provided by operating activities in 2019 was 101.5 million compared to 163.5 million in 2018 free cash flow was 80.2 million compared to 149.3 million in 2018.
2019, we utilized our free cash flow to repurchased 40 million shares and repay 48.1 million of debt net of borrowing.
Cash and cash equivalents were 13.5 million and debt outstanding was 648.1 million as of December 31 to 2019 net leverage at December 31, 2019 was 3.8 times comfortably below our maximum net leverage of 4.5 times.
As we mentioned on our previous call we announced in October that we had secured an amendment to our existing credit agreement that reset our net leverage covenant for the remaining term at the agreement. This provides us with increased financial flexibility and capacity to respond to market changes and our balance sheet remains strong.
Additionally, we have 190 million available on our credit facility, which provides us flexibility for continued reinvestments in the business in the near term our focus remains on deleveraging until we reach our target net leverage of approximately three times.
Earlier on this morning's call Alex discuss our expectations for 2020 at this time I'd like to provide some additional clarity around the assumptions of our outlook as I do sell I invite you to review the branches that we have provided within the earnings presentation posted on our Investor Relations website. This morning as.
Let's discuss the first and second half are fundamentally different due to several factors first remember that we begin 2020 with nearly 1100 fewer dealers than a year ago, and we won't anniversary the stabilization of our dealer base until the second half of 2020.
Second the subscription based revenue associated with the GM dealer web site business will build sequentially throughout the second half at the year, but our investments to ensure a successful rollout in servicing of the more than 800, new GM customers began in the fourth quarter of 2019, and this will negatively impact our EBITDA in the.
First half of 2020 these investments are necessary because the GM business is incremental to the rest of the growth anticipated from the dealer inspire business.
Therefore, EBITDA margins are expected to be depressed in the first half of the year due to these investments having begun before the GM websites are rolled out and the resulting revenue built into it full run rate.
In Q4 up 2019 over 800, GM dealers contracted with us for dealer inspire web site anticipated to be rolled out in waves. Beginning this summer of 2020, the us revenue and profit will progressively increase throughout the second half of 2020 and contribute to our strong exit rate.
In the fourth quarter.
In the second half a 2020 the completion of the affiliate revenue share payments will yield significant savings when it contractually and on June 29, 2020, which is just four months from now.
In 2019 these payments totaled 38 million in 2020, these payments will be approximately $12 million and will be completed in the first half of the year. Additionally, please keep in mind that in 2019. We also benefited from 19 million of noncash amortization related to the unfavorable.
While contract liability and was included in adjusted EBITDA as a benefit and Dampens the year over year positive impact on 2020, adjusted EBITDA of the completion of the payments to the affiliates.
Finally, we expect to see an uptick in air PD in the second half of 2020 as they continue to focus on further extensions of our digital solutions strategy, including our fuel initiative.
Keep in mind that our solutions products are profitable, but the margins are lower than our marketplace and national advertising products. Therefore, our EBITDA margin percentage will be impacted by are shifting revenue mix as deion fuel grow at a faster rate and become a larger portion of our total revenue moving forward.
And lastly, please remember the Oems to which we sell our national advertising products could be impacted by repercussions from the covered 19 virus, which could lead to a scenario that results in the low end of our guidance range and with that I'd like to turn the call back to Alex for some closing remarks.
Thank you Jay Andy as we close the year with momentum and a solid positioning for 2020, it's extremely gratifying to see that the execution of our strategy has created a platform for financial growth in market leadership.
Our dealers in 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.
That's around Minder to ask a question you will need to press Star then one on your telephone.
To withdraw your question press, the pound or hash key.
Your first question comes from the line at Tom White, a D.A. Davidson Your line is open.
Good morning, guys. Thanks for taking my question, a one on a or PD, if I could it looks like kind of excluding the dealer inspire stuff. It was down 5% in the quarter could you just 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 but it's really a conversions and some of the new products like social so I guess presuming I'm right about the tailwinds kind of what what sort of offsetting them and maybe just a bit more color about why you expect that to air PD.
To.
Pick up and 2020 and I think he said that Gen. David 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 didn't Ed. If you look again, that's a market footprint, yes, they've got like two large markets, but the vast majority of deal.
Dealers are coming in through a we classify our D.
Or C or D market.
Which are rate card skews by market size right. So the smallest markets like Muncie, Indiana or fractional in value compared to Chicago or away. So we brought over roughly 2000 dealers into our mix in the fourth quarter, which I think has more to do with the air PD drag you're mentioning because we.
We do see more upside in air PD or product solutions upgrades are taking.
Form this is before even launched things like fuel, which we think will really bolster your question on air PD. Yes, We think it's just a second half uptick 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 count nor.
ERP de calculations, yet until we do see strengthen that.
Driver in the second half of 2020, yeah, and just to put a finer point on it too Tom what your remembering our the larger markets that we converted in 2018, So 20 and 2019, they were kind of fully and already so from a year over year perspective, there wasn't tailwinds. There. It's just these new affiliates that that we.
Hit in 2019 that Alex is pointing show.
The in some of the pressure also is from you know kind of that the mix of Upsells and downgrades.
We are experiencing I think we've talked about it on the last couple of calls pressure from.
Dealers canceling some of the the legacy products more the display type of products and that is being offset in part by car social cars social line two years ago now I think at wise and we certainly are still think growth areas. We continue to evolve the product, but we're kind of on the cost per right at the beginning of that these these new products that were about two weeks.
On.
Fuel in particular, right and then as a kind of that I won't call. It pent up demand with GE I'm, because thats already been sold its a matter of actually just rolling it out for those two things are coming and no really be more more second half of event from in a RPD and revenue perspective.
Okay, maybe just one related follow up I mean, any comments you can make on just sort of pricing for for the core liftings product.
Understand maybe dealers.
Canceling some of the legacy stuff, but what about just core listings how are those kind of renewal discussions going with with dealers and any pressure there.
Yeah, there's always a little bit of natural pressure with with churn, where you know 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 that cancel compared to dealers that signed in it isn't a very wide gap and frankly over the last.
And I'll call. It a four month five months six months, we've been very focused on price locking in contract longer focused on less discounting and then we're feeling very good about where we are here at the as we start out 2020 from a pricing perspective, and certainly the traffic trends or the wind at our backs there right.
Well, you delivery is improving which makes our pricing more attractive.
Great. Thanks, guys.
Your next question comes from the line of lead Crown with B. Riley FBR. Your line is open.
Great. Thanks for taking my questions first just kind of start off from 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.
The build up to the the flat to down 4% revenue assumption.
Obviously, you guys are part of an industry, that's kind of flat to down issue, but just if just curious your thoughts on the overall industry and how that impacts.
Guidance for the full year.
No I think if theres a macro factor in our guidance for 2020, it would be the uncertainty and volatility on national advertising, whereas our dealer fundamentals. We see is being extremely strong and completely turned around from where we were in 18 and even 19. So so and that's where we've been focused thats been our pro.
Our americorps marketplace and I'd also say technology solutions is still in its infancy dealers are increasingly turning to marketing technologies to automate and remove operating costs from their business and I think we're really well position. There. So I think the growth in our solution strategy. We see is another big.
We'll win for the business I think you know national we're taking a more cautious outlook for 2020, just because of the uncertainty and the impact on on the market, but the rest of the business we see opportunity.
Got it 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.
But there is not obviously GM being the largest that's why we've called that out but there is no.
Material step up in our trajectory due to any OEM additions in 2020.
Got it and then the last one for me just on the GM relation specific specifically.
Is there a set a go live date or is that at the discretion of general Motors, just trying to put a finer point on what it means for for revenue in terms of when you start to recognize.
Yeah, Yeah. So so right now it is there there is a schedule there's a plan and it is this summer so the website beginning to roll out this summer and just to make sure that piece of it clear I'm there'll be a schedule, where the web sites will roll out GM is assigning each partner how many they can roll out on each wave roughly monthly and so you know will rollout.
One trial, one month and we'll get the revenue. The next month and then the following month will roll out another transcend you'll get the revenue for what you've rolled out thus far right. So that's the build but but the schedule is in G.M. hands at the end of the day. So that piece of that you know we have a schedule right now, we're certainly working with them to try to get more and fast.
But as of right now the expectation in the schedule would be this summer.
Got it thanks for taking my question guys.
Well thank you.
Your next question comes from the line of Daniel Powell of Goldman Sachs. Your line is open.
Great. Thank you 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 and Seo traffic that you saw in the quarter.
And then secondly, just wanted to get a sense of through where these investments behind dealer and sprite inspire in that product, they're coming in sort of relative to your expectations in the back half of the year was there a.
A ramp in conversion of GM dealers that seems to be driving that I'm kind of above expectations.
Hopefully here thanks.
Thanks, Daniel will first of all on the dealer group side.
We're seeing a lot of positive momentum obviously, you know I go back to 18, we were down close to 2000 dealers 19, we cut that lost 2000, including growing dealer count by 200 dealers in the <unk> in the fourth quarter and 2020 is starting off on positive footing. That's just on the marketplace.
Before you include the.
The great work, we've done on GM and organic growth in web site sales across all Oems. So we feel pleased about that and I would I would say largely attributable to that would be our strong traffic performance.
The majority of our traffic growth is coming in through FCO. 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 the from dealers that that is working.
So the traffic growth doesn't doesn't correlate to lead growth right. We're always going to have much higher traffic growth and then lead count growth, but the correlation of the quality signals and traffic in Leeds is very vivid I'll also point that during the quarter. We made the announcement of launching prism, which gets deal.
There's a better diagnostic of their total backend performance of not only cars dotcom, but all marketplace participants and what we see very vividly in the data and this is on a large sample size over 3000 dealers is that there was no marketplace driving more traffic and quality traffic into dealer web sites and cars dotcom and dealer.
It's consistently report that traffic as being the highest quality conversions that they can get their hands on and so those those quality signals, we take very seriously and we're focused on continuing to improve them and we see positive trends on the D. I investments look were largely having to add headcount there.
And the margin profile of our solution strategy mute some of the the this strong performance in the business because we've got to ramp headcounts before we recognize revenue.
Or head count ramp is much lower than it was last year, but nonetheless, when you onboard 800 dealers the production effort alone and the support that we have to provide them. You know is something that we have to get right. In our goal is to get all in or 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 took a wait and see approach and the 800 that made the switch where are really your 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.
Hi, Thanks appreciate the detail [noise].
Your next question comes from the line of Steve Dyer from Craig Hallum. Your line is open.
Thanks. Good morning, So just kind of piggybacking on their question Alex It sounds like like you think there's still a decent amount of GM dealers, who have not made a decision yet I guess of the 800 you have what is your sense sort of as to market share. There recently the other.
Providers.
Thanks, Steve certainly we see the data that shows that nobody gain more share than us a 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.
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 you know open more opportunity up as the second wave opens up.
[noise] and what is your sense, maybe I missed this but you know maybe rough numbers percentage that have decided in percentage that have yet to decide.
I think it was less than a good quarter for sure.
Piggy 800, so so I think it was sub 20% of the dealer is actually elected to to make a change, but jandy, we should follow up and make sure I'm happy to follow up you know like like Sadly, we know that we were that the leader of the three new providers as far as taking dealers over but there's still a good number that I'm sort of defaulted in stayed with stuff.
You didn't make a decision to move these stayed with CDK, whether it's still nice opportunity for US later this year when they enrollment window opens back out for us to go back after that group.
Got it okay nice to see them that dealer adds in the quarter I guess I'm wondering if you're willing to sort of sure. What you saw in January and February.
He is looking at maybe is that something you would anticipate sequentially continues to dealers throughout the year.
Well look all point to a couple of data points first and foremost the very vivid improvement in our cancellation performance you know in 19, we had cancellation rates as high as 4% and in the fourth quarter, we got those numbers down closer to two and that's been a durable improvement in our retention rate in Q4.
We only had two months, where we were free from affiliate distraction and that's not surprisingly the that produce our strongest SNET growth in 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 started in January and February as well yeah.
So have you been positive I guess quarter to date or would you prefer I'm sure.
Yeah, we are positive quarter to date. So you know I would say I, we're certainly feeling good about the stabilization of the dealer base.
Got it okay. Thank you.
[noise], Inc.
Your next question comes from the line up Doug Arthur I've Huber Research your line is open.
Yes, Thanks, Alex I think you touched on this but when the next wave and window opens for the GM dealers are some of the cost that you built up the staffing.
Will you get some operating leverage on that on the next ramp in dealer adds or or or will there be another wave of investment accompanying that.
Doug Thanks for asking yes, I think 2020 is a year, where we're not seeing the leverage in the financials, but I can tell you that we absolutely see it from scale right. So we're making the investments in 2020, because we see a big opportunity not only with the existing GM dealers, but but future demand.
And but where we're getting the leverages in our production cycles. We went from call. It a 90 day development cycle to launch a dealership down to 60 days and then our cost to serve we continue to see operating improvement in those Casey ice as well in terms of being responsive to dealer support so we're seeing it it does.
Appear in the financials in 2020, just because of the timing of the expense early in the revenue late and that's again points to our first half second half dynamic that you see in our financials, but but we actually do see good leverage in that business you know as we as we model the business out over the next few years, yes, absolutely I mean that the big in back.
That's really are starting now if you look at the numbers last year last year D. I added 700 website customers for the full year 2019. This year, we continued to grow I'm kind of with the excluding GM business and then you add in the you know the GM business on top of it that we have some significant investments that we started last year in our key.
Continuing into this year, so as we enroll and bring on more GM dealers incremental to this original away 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, Ah Jenny you threw out a lot of numbers on the impact of the affiliate conversions.
With 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 the wholesale you lost just so I can get a sense of what the uplift was.
Yeah sure.
Oh, 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 theres a lot of confusion out there I'm 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 sum total to all of those former affiliates and what we Didnt 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 Ben.
Perfect that's been running through our TNL and being additive included in adjusted EBITDA that noncash benefit that we've had every quarter since 2014, but it ended in Q3. So Q3, you would've seen 5 million of affiliate revenue share expense, but we had 6 million in there as a benefit a noncash.
Benefits it surely that run rate was 11 million in Q3 as well. So that's the piece I think that a lot of people failed to realize isn't it that would be the other moving parts you keep in mind, it's as we go forward.
It and the affiliate share expense you said, we'll we'll run out in Q2 like Q2. So if it is that that's right. That's right. So were expecting it to the about 12 million. So 6 million in Q1 6 million in Q2, and then zero starting July 1st.
Okay. Thank you.
Sure. Thanks, Doug.
Your next question comes from the line of MS. Jealous of Citi. Your line is open.
Hi, Thanks for taking my question.
Like I said, who as you talk to dealers and UN dealers that what are you learning about how they want to deploy their budgets as you shift into some other products like fuel I M B.
Is there are less emphasis on the kind of the car referral network through cars dot com and more towards winning leads through kind of off you know platform channels for the lack of a better term.
Nick Thank you no absolutely dealers are wanting to tap into strong organic sources of traffic I think probably the number one reason the dealers are coming back to cars is realizing that.
When they subscribe to us they're not necessarily competing with themselves in open search and other channels, where they currently spend more of their budgets I see more progressive dealers, realizing that they're not going to buy around these marketplaces, but then within the market places, they're being much more shrewd about picking winners and losers.
Errors and those that are advocates for their business versus more prey on there.
Their business for four gain so I think you know, we're seeing strong momentum in 2020 and dealer count because of that commitment to dealer advocacy and keeping the dealer hole I think the solution side, it's incremental it isn't a switch for us and many of the things that we're doing in the solution side leverage the strength of our Mark.
Get play so for instance, fuel is only available to cars dot com dealers, you won't be able to buy our video offering unless your subscriber to our marketplace and so I think that's part of the benefit of our differentiated strategy is that we're working with the dealerships to optimize their business no different than we're helping put their listings on Facebook market.
Please and I think the smart dealers are recognizing there's one partner out there that's helping them beyond just listings.
Great and one follow up what we saw it sera of acquire CDK digital marketing business or do you expect agencies, the baby blended into auto Tac offerings to try to come about some of the things.
Launching like you'll Ivy.
You know look I think agencies.
We're 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, it's been out for dealers for years.
But the same problem with online video is with traditional video it's largely on targeted 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. Then these generic solutions provide.
Great. Thank you.
Thanks.
Your next question comes from the line of Mark Marvin song as Pete BP I T. Your line is open.
[noise] Marvin you anything out there yet.
Sorry, My apologies I was on me. Thank you for taking my question.
Most have been asked but just a and 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 until into what that spending was on and then also on the cost side.
I know that.
Several items are gonna be rolling off but you also mentioned that some technology costs associated with a beta test will also be rolling off could you kind of help quantify how much that might be.
Yeah, Yeah. So some of the marketing investments is is that 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.
San STL and also the efficiencies that we gained within within our paid program generally we didn't need to wind up spending that 15 million that we achieved a dramatic success and traffic without that spend so some of that is spending the other piece of it there is a piece related to <unk>.
So the growth in D., I with GM and with the rest of the businesses, just with I'm kind of them and compensation within a sales force for or for that business and then the other question with on cost saves in cost throughout the year. You know certainly I'll just take a moment to <unk> relishing the savings that we found last year and.
Many 19 and realize both from the sales transformation product and pack as we started the tech transformation, we saw some nice savings there as well as well as other places throughout the organization I'm you know that that that was a realized in 2019 as we look forward to 2028, we do have increase.
A mental cost saves associated with attack transformation and those are coming really in kind of the back half of the year and Ah you know the full run rate is that $10 million that we've been talking about but specifically in this year. It's about 4 million based on the tightening up the contracts.
That will wind down as we bring up the new contracts for the new structure.
Terrific. Thanks, and just the second question on fuel, though it looks like you're already in your guidance Embeds. Some some.
Cost as well as of revenue benefit could you just kind of drill into that you said you already had customers sign up for it is does your guidance only embedding sort of the business you one already or are you.
Anticipating further wins.
Contemplated within your guidance and if you could just also just kind of.
Go ahead.
Nothing out of the question.
Im sorry, my read I didn't mean to interrupt you. So it is it is early stage right. We have customers that have enrolled and fuel. We've obviously been through beta tests and with the product. They just started pre revenue stage, where our outlook around this product is as you know 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 in our expectations for success there, but it is relatively small for the full year.
Cost associated with that and maybe you were asking about costs at some of it is certainly people oriented. So the team that that's you know needed to support that that the growth in this new product and launch of this new product, but the majority of it really is that the media costs associated with it.
Great. Thank you thanks to anything thanks, Alex.
Thanks, Mike [noise].
Your next question comes from the line of Daniel Kronos of Benchmark. Your line is open.
Hi, This is Chad on for Dan could you talk about what the lead volume growth was in Q4 and can you give us a sense of how new traffic is converting to leads or what you're doing to help convert that strong traffic until the lead volume growth. Thanks.
From a lead volume perspective, it isn't a number that we've that we are going to disclose rather I'll point you back to the fact that were very very focused on the quality of the leads that we're generating and and the connection and value that we're delivering to our customers right. I mean at the end of the day I'm that quality is.
Evidenced by the improvement in our cancellation rates and retention rates and the growth in our sales right. 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 converting over through two in connecting to our dealers. Daniel I'd also encourage you in any of your dealer market.
Checks I think what we're finding back to dealers are saying overwhelmingly nobody is doing a better job in cars. So.
Our strategies being played back to us by the dealer community and the focus on quality is what they're they're asking for and we're delivering.
Great. Thanks.
Your next question comes from the line of Steve Dyer from Craig Hallum. Your line is open.
Oh, Thanks, 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 would be lower than Q4 by by some amount I'm just kind of trying to figure out the puts and takes a why that would be the dealer count somebody upswing.
Yeah, I would be I would be incrementally higher what our where were where would what would cause the downdraft in Q1 relative to Q4.
Yeah, Yes, some of it is that the air PT 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 conversations and the you know improvement in the fourth quarter still yielded declines year over year. The other piece of it is national it that's getting back to more.
You know more of a stable place is a 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 five quarter, but typically national revenue is higher in the back half of the year. So it's a normal seasonal trends should be a little bit of aback step in national from Q4 to Q1.
And were also cautious about that line of business and you know like I said improvement in Q4 was still a 9% down we saw a nice trend in December we have seen nice.
Nice trend in January we're not at double digit declines anymore, but that that would be the other piece of that Steve. Steve. This is Alex I just also point.
We're starting 2020 with a much lower dealer base than than we were in 19, and so it will take us from time to lap that but with the positive trend and dealer count in Q4 and that persisting in Q1.
We see line of sight to overcome that gap in the first half of the year, which which makes the second half a 2020, so appealing the topline growth in a more importantly, the EBIT to expansion in the second half as affiliate payments wind down in June so.
Those are the big driver, Yeah, I understand the year over year I'm, just more thinking as it relates to Q4, so it sounds like ERP D. I mean, do you have some some visibility or line of sight to that improving.
In Q2 onboard them or or does it strictly sort of a matter of you know, making the bed I'm getting more dealers back in the full.
It's it's really around product. So yes dealers are one piece of that I'm also with the focus on larger dealers from a new sales perspective to get those larger dealers with a higher rate card in but it's also rolling out of new products and solutions right to the continued growth at D.
Hi, 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 about back half of the year RPD growing in the back half of the air as a result of those those are.
But those products in particular.
So thanks.
Good [noise].
Hi, there are no further questions in queue at this time I turn the call back to Mr. better for any closing remarks.
Thank you everybody for joining us today.
Ladies and gentlemen, this concludes today's conference call. Thank.
Thank you for participating you may now disconnect.
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