Q1 2020 Earnings Call

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[music].

Good morning, and welcome to cars Dot Com first quarter 2020, <unk> 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 in a live webcast can be found at investor Dot cars Dot com a replay.

I'm the webcast will be available at this website until May 20-F, 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 answer session with Alex and Jandy I'd now like to turn the call over to come all Hamid.

Director of Investor Relations. Thank you. Please go ahead Sir.

Good morning, everyone and welcome to our first quarter 2020 Conference call. My first call as cars, New director of Investor Relations.

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 won't be discussing certain non-GAAP financial measures today.

Adjusted EBITDA adjusted EBITDA margin, adjusted net income and free cash flow.

Reconciliations of these non-GAAP measures for the most directly comparable GAAP measures can be found at the financial tables included with our earnings press release and in the appendix in this presentation.

For more information please refer to the risk factors included in our FCC filings, including those in our annual ordinarily and current reports cars Dot Com assumes no obligation to update any forward looking statements were information hasn't their respective dates at this time I'd like to turn the call over to Alex.

Thank you come all it's great to have you on board <unk>.

Good morning, everyone and welcome to our conference call for the first quarter of 20 Twond.

This morning's call I'll briefly discuss our first quarter business highlights.

The actions, we've taken to manage our business the impact until did 19 and the support we have provided our dealer customers to help them whether this unprecedented store.

Ill, then hand, the call over to Jandy, who will discuss our financial results and provide deeper insight into our liquidity in the strength of our cash flow that will support us through this period.

Before I continue I would be remiss, if I didn't mention how proud I am of our employees for their impressive response to the Kobin 19 pandemic, if we shifted to a remote work environment and without missing a beat you were able to maintain productivity and provide proactive in strong support for our dealer customers at a time when they needed that's most.

Our employees are operating at the highest level the dedication professionalism and agilent.

I'm also confident how difficult the time that does for our industry overall and I. Appreciate those of you in the investment community. We're also participating in earnings call today.

Thank you all for your continued support and she worked through this time together and I wish all of you good health.

Operating in the pandemic period is foremost on all of our mine in order to understand how you're going to navigate through this period and beyond let's address the building blocks, we've put in place over the last several quarters that have contributed to the revenue and adjusted EBITDA performance that exceeded expectations in the first quarter and that will sustain a during this.

Second quarter and beyond.

Despite the challenge of recent event.

We built on our momentum in Q4 deliver solid first quarter revenue and adjusted EBITDA through double digit traffic increases that led to another quarter of dealer growth.

Solid OEM advertising revenue and a continuation.

Double digit web site solutions growth.

This service is evidence that our business strategy had strong momentum pre togut 19, and we'll continue to deliver benefits to customers and consumers in the near term and when we emerged from this crisis.

Delivering high quality traffic, if they cornerstone of our strategy.

January was the highest traffic month ever with visit the 56.9 million.

Total visits in the quarter were up 20% year over year, while monthly unique visitors were up 11%.

Organic traffic, which consists of direct.

CEO and traffic from our App represented approximately two thirds of our total traffic, even if we gained efficiencies and paid channels.

Mobile traffic represented 76% of total traffic up from 71% in the prior year.

Our track record of sustaining and building organic traffic is the result of our dominant brand position and unmatched editorial content, particularly the editorial reviews that are so critical to virtual car buying.

Unlike many of our peers, we aren't solely dependent on variable marketing expenses to build traffic.

These advantages continued help build a strong organic value and strengthen our competitive position within the industry.

Building on the positive dealer count trend, we delivered in the fourth quarter of last year, we added 100 and for dealers in the first quarter.

By almost complete the station of new sales during the last two weeks of March bringing our total dealer count 18938.

We believe that our continued success in growing or dealer count is due to three primary factors.

First he list appreciate the ROI from our organic audience in good times, and bad which delivers higher quality lead that result in higher gross profit per vehicle.

Second dealers also recognize our differentiated solution strategy in March they saw first hand, our ability to rapidly innovate and equip our customers with digital solutions to enable them to better target in market car shoppers on a diverse set of platforms.

And third the quality of our sales and service professionals, who understand dealers business need and the competitive pressures they fit.

Our teams are armed with digital tools to help dealers leverage technology to grow their business.

We are benefiting from last year Salesforce reorganization as our sales and service teams are better arm and able to strategically identified dealer opportunities and deliver vastly improved customer service.

This has resulted in lower churn rate and increased new dealer sales.

Turning to national we experienced a difficult OEM advertising environment through the first nine months of 2019.

Signs of stabilization became evident in the fourth quarter.

National advertising continued to stabilize in the first quarter 2020, and I believe that our strong growth in traffic and our position is the fastest growing new car marketplace has increased the advertising opportunity for Oems.

Our strengthen editorial content is also a key differentiator for cars. For example in 2020 remain the ramp 1500 pickup truck as the luxury car of the year and our annual best of War.

And Ram proudly feature the award in the refund National advertising campaign.

Innovation like this will continue to enhance our national advertising revenue.

And our teams continue to provide the content shoppers need more out in this environment.

Such as virtual test Strats.

Technology and innovation, our key Differentiators and we will discuss our continued strong dealer inspires solutions performance later in the call.

Let me sum up the first quarter by saying that prior to the impact of Kobe 19, we were well on her way delivering on expectations for robust growth in the second half of the year end to exiting the year with strong revenue and adjusted EBITDA growth rate as we discussed on our last earnings call.

In mid March the World changed it's covered restrictions were imposed across the country significantly impacting our customers auto sales and our company.

We immediately pivoted, our focus and took decisive actions to help our dealer and OEM customers engage with car shoppers in the current environment.

In mid March many large urban market shut down all businesses that were then defined is not essential including dealerships.

Car sales dropped 40% in the month of March and our internal data indicated that dealers were experiencing an unprecedented drop in foot traffic, 80% in Michigan for instance.

He spoke of thousands of our dealers in a very short period of time and probably traded in form set of solution designed to help them adapt to the digitally driven sales environment.

In some cases continue to operate entirely virtually.

We then put together a program to provide relief so our dealers throughout the second quarter by issuing significant discounts to the marketplace subscription.

We not only provided financial release to our customers, but more importantly, we equip them with the wider set of digital solutions that are more relevant to a dramatic shift to in home shopping as users spend even more time, considering our purchases online.

First in March after many indepth conversations with our dealer partners to understand their needs, we announced immediate financial release in the form of discounts.

There's made it clear that they were concerned about the potential impact across the second quarter and not just the month of April and Accordingly, we provided invoice credit a 50% for the month of April and 30% for both May and June.

Next knowing that dealers needed governmental permission to operate we also quickly initiated state and federal dealer abacus campaigns and lobbying efforts in less than 48 hours, we generated nearly 5000 petitions from auto dealers because the department of Homeland security as part of our successful effort to persuade the DHS.

And several local jurisdiction and automobile sales and leasing to the list of the central services.

Third we worked all out to further enable our dealer customers to sell cars under the new rules such as by appointment on the or be a home delivery and virtual test drives by leveraging our agility and digital product expertise to help dealers and Oems continue to reach car shoppers as users are clearly changing their buying.

Behavior.

In addition to our existing range of offerings. We also launched a collection of value added merchandising and digital retail solution, including home delivery and virtual appointment batching.

We also made our AI powered chat bought and online shopper available on a trial basis in order to facilitate more online conversation in the absence of in person dealer visits.

Dealers are also leaning in to our exciting new fuel end market video platform that allows them to more cost effectively targeted end market buyers, who are engaging with online content and streaming platforms now more than ever.

After establishing our dealer really program and providing them with digital tools. We then looked internal taking swift and decisive action to reduce our cost structure.

Our discount program will result in significant decline in revenue and cash flow and as a result, we took a number of operational action with the goal of offsetting at least 50% of the revenue in that.

We recalibrated our business to align with the coded banking environment and to enable us to exit the crisis from a position of strength. However, long this period might last.

Despite the challenges of this surreal environment because of the strength of our brand.

Effectiveness of our strategy in a subscription nature of our business. We are cash generative and we have substantial liquidity and a supportive bank group.

We made the prudent decision to draw down 165 million on our revolving credit facility to increase our liquidity and flexibility.

We also commenced collaborative discussions with our lenders about whether our credit agreement and covenant should be modified given the uncertainty of the current environment.

Later on today's call Jandy will provide additional color on the impact of the expense reductions we've taken any actions, we're taking to ensure continued financial flexibility and liquidity.

While the impact of coded 19 is severe we know that the past and recent digital solutions. We have brought to market are part of the antidote for the industry.

We worked in partnership with dealers to initiate efforts to get car sales classified as essential services selling safely through digital platforms.

Well dealers are looking to quickly cut operating costs and may eliminate untargeted advertising and marketing programs. They should not turned away from online marketplaces or end market consumers are shopping for cars.

Either website are also essential.

Dealers will continue to make investments leverage important tools to power their business.

Specialty virtual car buying.

This is an underlying reason our dealer inspires solutions continue to grow at double digit rate and this remains a unique and strong competitive differentiator for cars.

To that point, Jim has confirmed that the rollout of over 800 contracted web sites will begin as planned in June and are all currently scheduled to be launched by the end as the year.

As a result, the subscription revenue for this program will build throughout the second half of 2020 as discussed on our last earnings call.

We're also starting 2020 with our new end market video platform fuel.

We had a record sales launch an idea in February and continue to gain momentum.

With marketing budgets under pressure dealers need cost efficient advertising focus now more than ever in places where buyers are engaged.

We of course have a wealth of car shopper category data and by using the stated target in market shoppers fuel has a much higher ROI than traditional television.

We are seeing solid pickup and interest in fuel and is particularly relevant during the coded crisis.

In this uncertain environment, it's too early to quantify the impact of Coca 19, and what it means for the rest of the year.

Currently car buyers are engaging online and many are completing transactions having cars delivered directly to their homes.

Those car buyers have shown great interest in handling price negotiation and financing online.

And there is evident that coven 19 is created a new category of car buyers concerned with the more sanitary environment for those who historically relied on ride sharing services and public transportation.

Car solutions give our dealer customers the ability and can't digitally with these car buyers.

To that end I want you to hear directly from one of our dealers in New York City arguably the most difficult operating market in the U.S. today here I'll. He is relying on our solutions to sell cars. During this extraordinary time.

[music] Hi, this is Ryan Benton syndrome, as our vice President comparable Honda and Paragon Acura, Paragon Honda empower going acura or the number one selling certified dealerships in the world and we could not have done that without cars.

It's super important now as we're facing we've grown of ours to look at the vendors that we have had to eliminate the vendors that are not adding transaction dollars to the bottom line net profit to the bottom line and cars being more than a vendor is an actual marketing platform that we used to generate gross profit dollars.

I reached out to Alex and ask for some assistance and moving used cars. He told me about the fuel program that he was launching and this makes perfect sense right to reach customers, where they are within digital offerings.

Video for the vehicles, we were all in and we're really looking forward to moving forward with that product. So it's great to know that we have cars that come out as a vendor, but as a strategic partner in fact, they are in the central business.

Now, let me give you some more details and what we're seeing as we start for the second quarter.

Total visits for April were down 9% compared to the prior year. However in the last week of April and the first few days of May total traffic is growing again up year over year.

In addition to increased activity on cars Dot com. Other positive signs include an increase in walk in traffic at dealerships and deeper funnel shopping behavior on dealer websites.

However, these positive trends will not be enough to stave off the financial hardships dealers currently phase.

And that will significantly impact the second quarter and beyond.

We believe that the package, we have put in place for our dealer customers, including the broader set of digital solutions.

Coupled with a full quarter pricing discounts and strong organic traffic will help them sell cars online and rebuild their businesses in the current market conditions.

Over the last 20 years, one thing I've learned is never to underestimate the resiliency of local dealership operators.

Local businesses on the backbone of our economy and I've seen first hand, the tenacity of dealers survive and thrive in tough economic condition.

It is no surprise that many are moving quickly on leveraging digital solutions to sell cars virtually and we've heard from many dealers who had success in selling including a used car store in Syracuse, New York, who sold over 200 cars in April despite having a closed physical location.

We would like to believe that the projections for second half of the year recovery are accurate, but we aren't counting on therefore, we've organized ourselves to react if the situation evolves over time.

We are focusing on the things we can control, mainly our strong customer service and solutions offerings to dealers are highly disciplined expense controls and our continued focus on free cash flow and balance sheet flexibility.

We will continue to work with our customers and the industry to get through this time together.

Now I'd like to turn the call over to Jandy to discuss our financial results for the first quarter and future cash flow implications and preparedness.

Andy.

Thank you Alex.

Revenue for the first quarter of 2020 148.1 million compared to 154.2 million in the prior year period.

This decrease is primarily due to fewer dealer customers and lower RPD at the beginning of this year.

And if the prior year.

Year over year National advertising revenue declined 4%, representing a relative stabilization that the business driven impart by Oems 2020 upfront commitment being in line with the prior year.

Now, let me move into a discussion of our operating expenses in the corner.

And the first quarter of 2020, we recorded a non cash goodwill and intangible asset impairment charge of 905.9 million based on the determination that there was a triggering event primarily caused by the cobot 19 pandemic unrelated restrictions.

Impairment charge does not affect our liquidity cash flow from operating activities or compliance with the financial covenants set forth in our credit agreement. They can benefit from that deductible goodwill for tax purposes remain intact.

Total operating expenses for the first quarter of 20, 21.1 billion or 147.3 million, excluding the impairment charge compared to 158.3 million for the prior year period.

This decrease was primarily due to lower nonrecurring expenses as well as lower marketing cost due to planned production increased efficiencies and alignment of our marketing spend with shopper demand, resulting from the company's 19 pandemic unrelated restriction.

These reductions were offset in part by an increase in affiliate revenue share expense due to the lack of a benefit from the amortization of the on favorable contract liability, which ended September Thirtyth 2019.

We continue to deliver strong traffic and high quality lead to our dealer and OEM customers due to greater efficiencies and performance marketing and a better SCM pricing environment, given the market wide pulled back.

GAAP net loss for the first quarter of 2020, 787.4 million or $11.76 per diluted share compared to GAAP net loss of 9 million or 13 cents per diluted share in the first quarter of 2019.

Adjusted net income for the first quarter of 2020, 21.8 million or 32 cents per diluted share compared to 20.7 million or 31 cents per diluted share and the first quarter of 2019.

Adjusted EBITDA for the first quarter of 2020, let's 35.2 million or 24% of.