Cars.com Inc.

THE END Thank you. Good morning and welcome to the cars.com third quarter 2020 earnings conference call. Hosting the call this morning is Alex Fetter, Chief Executive Officer, and Sonia Jain, Cars Chief Financial Officer. This call is being recorded and a live webcast can be found at investors.cars.com. A replay of the webcast will be available until November 23rd. A copy of the accompanying slides can also be found on the company's investor site. Following today's presentation, there will be a question and answer session with Alex and Sonia. I'd now like to turn the call over to Kamal Hamid, Director of Investor Relations.

Good morning, everyone, and welcome to our third quarter 2020 conference call. Before I turn the call over to Alex, I'd like to draw your attention to our forward-looking statement 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 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 in our earnings press release in the appendix of the presentation. For more information, please refer to the risk factors included in our SEC filings, including those in our annual, quarterly, and current reports. We assume no obligation to update any forward-looking statements or information as of their respective date. At this time, I would like to turn the call over to Alex. Alex? Thank you, Kamal. Let me start by saying that I'm very proud of our performance this quarter. It has demonstrated the resilience of our business and the dedication of our team. We remain relentless in our focus on customer ROI and value delivery, expansion and execution of our digital solution strategy, and a disciplined focus on profitability. This resulted in momentum across the business and is apparent in our results. Strong traffic growth and quality lead conversions, increased dealer customers and ARPD expansion, and we're back to adjusted EBITDA growth. It was an impressive quarter and building on that success, just two weeks ago, we achieved another significant milestone by refinancing our debt. We now have greater flexibility to make appropriate investments in the business going forward. Sonia will comment further on the refinancing in a few minutes. Although operating in a pandemic environment presents challenges, the upside is an accelerating trend of digital adoption by consumers and dealers that plays to our core strengths and product solutions. Consumers increasingly want to complete more of their car shopping online from the convenience of their homes, and dealers are quickly ramping up their solutions to capture this opportunity. Our business is well positioned to enable our industry to accelerate the shift to a digital first strategy. We delivered two consecutive quarters of dealer customer growth and had momentum behind us to deliver a third, if not for COVID. We grew our customers in Q4 of 2019 and Q1 of 2020. And we also managed the pandemic better than most. After the second quarter COVID impact, we added 97 new dealers in the third quarter of 2020, including growth in both Marketplace and Web Solutions customers. We exited the quarter growing to 18,130 dealer customers as competition went backwards. Retention rates are at an all-time high and improve sequentially each month throughout the quarter as dealers increasingly benefited from the reliability of our high-quality traffic, sales leads, and innovative digital solutions. Throughout the pandemic, online shopping soared. Leads and contacts through our digital platforms also increased, bringing record value to our dealer partners. Historically, we have consistently driven walk-in traffic that dealers didn't capture in their CRMs. But with physical showrooms closed, consumer volume naturally shifted to more visible digital channels, making our value even more obvious to dealers. Dealers commented to us that despite dropping Google search spending and all traditional media, Cars.com replaced that volume on a fraction of the cost. This digital dynamic opened up even more opportunity for our digital solution strategy, as dealers wanted to know what else can we do to help them capture more sales. Our digital solutions continue to grow significantly, with website customers now totaling over 4,000, including more than 250 GM websites launched as of September 30th. We expect to launch half of the contracted GM websites by the end of the year. With every new dealer website launched, the accumulation of subscription revenue builds throughout the year and establishes a strong starting point for 2021 revenue growth. Further uptake on our Fuel product continues to accelerate since its launch this past February. Fuel is ARPD-accreted and on track to be the fastest growing new product launch in our company's history. Online shopper and conversations also continue to grow as dealers are now proactively seeking these digital tools. The number of website solution customers purchasing Conversations or Online Shopper increased substantially on a year-over-year basis. With ARPDF 4% quarter-over-quarter adjusted for second quarter invoice credit, it is increasingly clear that our diversified suite of products is offering meaningful value to our dealer customers and contributes additional economic value to cars. We continue to deliver strong traffic growth with 10% year-over-year increase in both average monthly visits and unique visitors. We also deliver continued, robust lead growth despite reduced marketing on a year-over-year basis. The percentage of our traffic generated organically in the third quarter increased by five percentage points year-over-year to 76%, demonstrating the strength of our brand, which consistently ranks number one amongst our competitive set in Millard Brown's total brand awareness scores. Editorial content also continues to be an important driver of our high-value organic traffic and a key differentiator in delivering a robust user experience for car shoppers and sellers. Our original content strategy is winning favor with dealers, as competitors just bid up search volume and sell it back to the dealer, where Cars.com has a unique audience that can't be replicated and is incremental to the dealer's bottom line. This is most evident in our high concentration of organic traffic and our overall marketing efficiency, which is a sustainable advantage. That said, we judiciously increased our investment in marketing relative to Q2, but the spend remained well below normalized levels due to our strong organic traffic momentum. We will continue to make deliberate marketing investments focused on high-quality channels to ensure our dealers finish the year with strong results. The retail sales environment shows signs of continuing strength in both the new and used car markets. While new car sales for the first nine months of the year were down 19% compared to the prior year period, September new car sales were up 6%, and SAR estimates for 2020 are inching back up to the 16-plus million level we saw at the beginning of the year. Used car demand also remains robust, supporting double-digit year-over-year pricing growth. New and used car demand is being driven by buyers choosing car ownership over mass transit and ride-sharing services, and improve credit conditions that make car payments more affordable. Our roughly 50-50 inventory split between new and used cars on our marketplace provides us with resiliency and the ability to meet the demands of all shoppers and support our dealers and OEMs with reliable value that's vital to their success. Dealers are leveraging our digital solutions, allowing them to operate on reduced staffing levels and are reporting record profits. Our business model continues to perform well in this environment, with dealer customers becoming more adept at operating virtually. Our high-quality, largely organic traffic, strong lead conversion, and expanding suite of high ROI solutions have driven all-time high retention rates. And the Q3 increase in net new marketplace and solution customers is a resumption of our pre-COVID momentum. Growth will come from both ARPD expansion, as dealers adopt more of our solutions, and continued improvement in dealer customers. This quarter, ARPD rebounded back to pre-COVID levels and grew slightly on a year-over-year basis. Our differentiated strategy to bring digital solutions to our dealer base through a robust sales platform is best demonstrated by the success of Fuel. Fuel is a unique, high ROI, targeted video advertising solution which generates higher returns than the expensive, dated, and wasteful linear TV on which the auto industry spends approximately $10 billion a year. Since its launch early this year, Fuel has proved to be Cars' fastest-growing new product introduction and is selling out in certain geographies. Fuel takes the high-quality, pure in-market audience generated from Cars.com, and allows dealers to run targeted video messages via OTT and social media platforms, providing an alternative to broadcast TV that is far less expensive, far more effective, and far more efficient. Continued fuel sales growth and the penetration of dealers and OEMs positively contributes to revenue and profitability, with ARPD rates that are substantially higher than the car's overall average revenue per dealer. Take a listen to what one of our large franchise dealer customers has to say about the impact fuel has had on his market shares in his own backyard.

by taking that exclusive cars.com in-market shopping audience overlaid now with a video message. What was the data that you saw?