Cars.com Inc.

Good morning and welcome to cars.com first quarter 2020 earnings conference call. Hosting the call this morning is Alex Vetter, Chief Executive Officer and Jandy Tommy, 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 May 20th, 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 Kamal Hamid, Director of Investor Relations. Thank you. Please go ahead, sir.

Good morning, everyone, and welcome to our first quarter 2020 conference call and 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 will be discussing certain non-GAAP financial measures today, including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, and free cash flow. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measure can be found in the financial tables included with our 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 forward-looking statements or information as of their respective dates. At this time, I would like to turn the call over to Alex.

Thank you, Kamal. It's great to have you on board. Good morning, everyone, and welcome to our conference call for the first quarter of 2020. On this morning's call, I'll briefly discuss our first quarter business highlights, the actions we have taken to manage our business through the impact of COVID-19, and the support we have provided our dealer customers to help them weather this unprecedented storm. I'll then hand the call over to Jandy, who will discuss our financial results and provide deeper insight into our liquidity and 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 COVID-19 pandemic. As we shifted to a remote work environment and without missing a beat, we were able to maintain productivity and provide proactive and strong support for our dealer customers at a time when they needed us most. Our employees are operating at the highest levels of dedication, professionalism, and agility. I'm also cognizant of how difficult the time this is for our industry overall, and I appreciate those of you in the investment community who are also participating in our earnings call today. I thank you all for your continued support as we work through this time together, and I wish all of you good health. Operating in the pandemic period is foremost on all of our minds. In order to understand how we are going to navigate through this period and beyond, let's address the building blocks we have 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 us during the second quarter and beyond. Despite the challenge of recent events, we built on our momentum in Q4 to 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 of double-digit website solutions growth. This serves as evidence that our business strategy had strong momentum pre-COVID-19 and will continue to deliver benefits to customers and consumers in the near term and when we emerge from this crisis. Delivering high-quality traffic is a cornerstone of our strategy. January was the highest traffic month ever, with visits of 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, SEO, and traffic from our app, represented approximately two-thirds of our total traffic, even as we gained efficiencies in 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 a 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 continue to 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 104 dealers in the first quarter. Despite an almost complete cessation of new sales during the last two weeks of March, bringing our total dealer count to 18,938. We believe that our continued success in growing our dealer count is due to three primary factors. First, dealers appreciate the ROI from our organic audience in good times and bad. which delivers higher quality leads that result in higher gross profit per vehicle. Second, dealers also recognize our differentiated solution strategy. In March, they saw firsthand 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 needs and the competitive pressures they face. Our teams are armed with digital tools to help dealers leverage technology to grow their business. We are benefiting from last year's Salesforce reorganization as our sales and service teams are better armed and able to strategically identify dealer opportunities and deliver vastly improved customer service. This has resulted in lower churn rates and increased new dealer sales. Turning to national. We experienced a difficult OEM advertising environment through the first nine months of 2019. But signs of stabilization became evident in the fourth quarter. National advertising continued to stabilize in the first quarter of 2020. And I believe that our strong growth in traffic and our position as the fastest growing new car marketplace has increased the advertising opportunity for OEMs. Our strength in editorial content is also a key differentiator for cars. For example, in 2020, we named the Ram 1500 pickup truck as the luxury car of the year in our annual Best of Awards, and Ram proudly featured the award in their recent 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 of in this environment, such as virtual test drives. Technology and innovation are key differentiators, and we will discuss our continued strong dealer-inspired solutions performance later in the call. Let me sum up the first quarter by saying that prior to the impact of COVID-19, we were well on our way to delivering on expectations for robust growth in the second half of the year, and to exit in the year with strong revenue and adjusted EBITDA growth rate, as we discussed on our last earnings call. In mid-March, the world changed as COVID 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 markets shut down all businesses that were then defined as 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. We spoke of thousands of our dealers in a very short period of time and promptly created an informed set of solutions designed to help them adapt to the digitally driven sales environment. And in some cases, continue to operate entirely virtually. We then put together a program to provide relief to our dealers throughout the second quarter by issuing significant discounts to their marketplace subscriptions. We not only provided financial relief to our customers, but more importantly, we equipped them with a wider set of digital solutions that are more relevant to a dramatic shift to in-home shopping as users spend even more time considering car purchases online. First, in March, After many in-depth conversations with our dealer partners to understand their needs, we announced immediate financial relief in the form of discounts. Dealers 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 of 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 advocacy campaigns and lobbying efforts. In less than 48 hours, we generated nearly 5,000 petitions from auto dealers to the Department of Homeland Security as part of our successful effort to persuade the DHS and several local jurisdictions to add automobile sales and leasing to the list of essential services. Third, we worked all out to further enable our dealer customers to sell cars under the new rules, such as by appointment only or via 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 solutions. including home delivery and virtual appointment batching. We also made our AI-powered chatbot and online shopper available on a trial basis in order to facilitate more online conversations in the absence of in-person dealer visits. Dealers are also leaning in to our exciting new fuel in-market video platform that allows them to more cost-effectively target in-market buyers who are engaging with online content and streaming platforms now more than ever. After establishing our dealer relief program and providing them with digital tools, we then looked internally, 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 actions with the goal of offsetting at least 50% of the revenue impact. We recalibrated our business to align with the COVID-19 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, the effectiveness of our strategy, and the subscription nature of our business, we are cash generated, and we have substantial liquidity and a supportive bank group. We made the prudent decision to draw down $155 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 and the actions we're taking to ensure continued financial flexibility and liquidity. While the impact of COVID-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. While dealers are looking to quickly cut operating costs and may eliminate untargeted advertising and marketing programs, they should not turn away from online marketplaces where in-market consumers are shopping for cars. Dealer websites are also essential. Dealers will continue to make investments to leverage important tools to power their business especially virtual car buying. This is an underlying reason our dealer-inspired solutions continue to grow at double-digit rates, and this remains a unique and strong competitive differentiator for cars. To that point, GM has confirmed that the rollout of over 800 contracted websites will begin as planned in June and are all currently scheduled to be launched by the end of 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 are also starting 2020 with our new in-market video platform, Fuel. We had a record sales launch at NADA in February and continue to gain momentum. With marketing budgets under pressure, dealers need cost-efficient advertising focused now more than ever in places where buyers are engaging. We, of course, have a wealth of car shopper category data, and by using this data to target in-market shoppers, fuel has a much higher ROI than traditional television. We are seeing solid pickup in interest in fuel, and it is particularly relevant during the COVID crisis. In this uncertain environment, it's too early to quantify the impact of COVID-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 evidence that COVID-19 has 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 to connect digitally with these car buyers. For 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, to hear how he is relying on our solutions to sell cars during this extraordinary time.