Cars.com’s (CARS) CEO Alex Vetter on Q1 2018 Results – Earn…


Cars.com, Inc. (NYSE:CARS) Q1 2018 Earnings Conference Call May 9, 2018 8:30 AM ET

Executives

Jandy Tomy – VP, IR & Treasury

Alex Vetter – Co-Founder, CEO, President & Director

Becky Sheehan – EVP & CFO

Analysts

Gary Prestopino – Barrington Research Associates

Thomas White – D.A. Davidson & Co.

Sameet Sinha – B. Riley FBR, Inc.

Steven Dyer – Craig-Hallum Capital Group

Daniel Kurnos – The Benchmark Company

Douglas Arthur – Huber Research Partners

Operator

Good morning, and welcome to the Cars.com 2018 First Quarter Earnings Conference Call. Hosting the call this morning are Alex Vetter, Chief Executive Officer; and Becky Sheehan, 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 at this website until May 24, 2018.

I’d now like to turn the call over to you Jandy Tomy, Vice President of Investor Relations.

Jandy Tomy

Good morning, everyone, and welcome to our 2018 first quarter conference call. During today’s call, we will be referring to our earnings presentation, which is available on the Investor Relations portion of our website. 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 found on Slides 2 and 3 of the presentation. We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA, 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 table included with our first quarter 2018 earnings press release and in the appendix of the presentation. For more information, please refer to the risk factors included in our SEC filings, including those in our registration statement and our annual quarterly and current report. Cars.com assumes no obligation to update any forward-looking statements or information as of their respective dates.

At this time, I would now like to turn the call over to Alex.

Alex Vetter

Thank you, Jandy. Good morning, everyone, and welcome to our conference call for the first quarter of 2018. I am pleased with the progress we’re making on our strategic initiatives, as we continue to take steps forward in positioning the company for growth. In 2018, our traffic has grown in each of the first 4 months of this year. We’ve continued the investments in product and technology. And since November of 2017, we’ve converted nearly 2,600 dealer customers into our direct sales network with our successful implementation of early affiliate conversions.

In addition, we closed on the strategic acquisition of Dealer Inspire and Launch Digital Marketing and even completed our first integration project with the launch of Conversations Starter, an AI messaging engine on Cars.com in just 6 weeks from close.

We continue our leadership in the industry, starting the quarter by hosting our annual Best of Awards at the Detroit Auto Show, where we announced the best vehicles in 6 different categories. And we ended the quarter at NADA, the auto industry’s largest event each year, where we debuted new offerings from Cars.com, DealerRater and Dealer Inspire.

In the first quarter, traffic was up 7% and unique visitors were up 9%, driven by planned incremental investments and the consumer acquisition and engagement, combined with product innovations that make Cars.com a better experience.

Mobile traffic is also up and now accounts for 65% of total traffic compared to 57% a year ago, and our app continues to lead the competitive set. For Q1, we had the most downloads and the highest active user accounts, as measured by both Android and iOS environments.

Improvement in direct traffic and SEO, site performance improvements, new creative and product innovation are all working together to start the year off on very solid ground.

This has also been an exciting quarter for product launches. At NADA, we launched Cars Social and sold over 120 campaigns in the first weekend alone and continues to be incredibly well received. Cars Social enables our dealers and OEM customers to reach an unduplicated, unique audience on Facebook and Instagram. By leveraging our high-quality Cars.com audience, this product targets consumers on social media who previously searched inventory or showed interest in similar vehicles in the market. In our testing prior to the release, data shows Cars.com’s social drives an 80% unique audience compared to social campaigns modeled from a dealership’s own website audience. This unique offering delivers a truly incremental lift in exposure and sales.

We also added Conversations Starter to our preferred and elite dealer customer packages, providing more value to these customers while incenting customers to upgrade. In addition to using AI to provide instant answers, Conversations turns more than 70% of chats into identifiable opportunities by letting car shoppers connect in a way that’s most convenient for them. We’re excited about the potential of this product to better measure consumer activity, while connecting dealers and consumers in an engaging and innovative way. Conversations is the first AI chatbot that integrates seamlessly onto a third-party site and a dealer website, so that dealers can immediately connect with consumers whenever and wherever they’re shopping. And this now gives us a new form of tracking to tie more sales back to our platform.

And more recently, in April, we launched our newest addition to our price badging suite powered by a proprietary machine learning algorithm. The new technology called Hot Car helps to identify vehicles, which are most likely to sell fast. Hot Car represents one way that we’re investing in artificial intelligence to solve complex problems and build products that are more accurate and predictive in nature in order to improve the car shopping and selling experience. This utility should drive repeat visitation and improve our user experience.

In February, we closed on the acquisitions of Dealer Inspire and Launch Digital Marketing. The strategic acquisition improves our product position to dealers by expanding our range of solutions to support dealer sales. It also furthers our strategy of integrating new and relevant capabilities and talent to accelerate organic growth, strengthen the retail experience and deepen dealer connections and improve attribution. Dealer Inspire is an innovative technology leader that has been rapidly increasing its market share by providing progressive dealer websites, digital retailing and messaging platform products. And Launch Digital Marketing provides digital automotive marketing services. Including paid, organic, social and creative services. These proprietary solutions are complementary extensions of our online marketplace platform and our current suite of dealer solutions. This allows us to participate in a meaningful way in the fastest-growing channels in the industry. Dealers’ advertising spend on first-party sources, such as their own website, paid search and social media, all of which are projected to continue to grow at double-digit rates. And in the first quarter, Dealer Inspire grew its business 58% year-over-year. Dealer Inspire’s technologies, like Conversations, also allow us to strengthen our attribution capabilities by more closely tracking consumer engagement at a local level, thus, furthering our strategy of finding opportunities to prove our value to our dealers.

I’m thrilled to share that the integration has gone very well. Our product and tech teams worked rapidly to complete our first integration project and, in fact, within just 6 weeks of closing, we were able to integrate Conversations Starter onto the Cars.com platform.

In addition to the progress we’ve made in the product and technology area, a big step in Q2 will be further building up the sales team at Dealer Inspire.

In addition, we are leveraging our current robust sales teams and existing relationships to accelerate growth in this exciting new category.

Exciting things are happening in our backyard and with even more on the way. We’re excited about new opportunities with OEMs, new dealer product innovation and our shared commitment to strengthening the retail system.

I’d like to take a few minutes to walk you through the dynamics of the affiliate structure and remind you the value we’re unlocking as we convert these markets into our direct sales structure. Due to the legacy structure of our company, our direct sales team has been unable to sell in certain markets throughout the U.S. Rather, we have our affiliate relationships, where the affiliate sales teams have exclusive rights to sell our products in defined geographies. And as a [indiscernible] opportunity in converting these affiliate markets to increase revenue and profitability over time. As we convert affiliate markets, we immediately begin billing dealers at the current local market retail rate, resulting in an immediate uplift in revenue for us. In addition, growth will come through improved service levels and product sales.

We also expect to gain efficiencies in the cost structure of our sales network, as we convert these markets. These efficiencies, coupled with the end of the transition payments, will result in significant cash flow uplift.

That brings me to the next highlight for the quarter, which is the significant progress we have made in converting our affiliate markets, consistent with our strategic priorities. In the first quarter, we announced agreements to convert nearly 60% of our wholesale revenue into our direct sales channel, much earlier than the agreement’s original expiration in October of 2019. We continue conversations with the remaining 4 affiliates.

I’d now like to turn over our specific performance results for the first quarter of 2018. Revenue grew 4% year-over-year. This was driven by the Dealer Inspire business and the uplift in revenue realized from the early conversion of affiliate markets.

In addition, our national advertising business grew 7.5% on a year-over-year basis, reflecting the timing of certain OEM campaigns and strong product sales.

As I mentioned, traffic had been strong this quarter and was up 7%, and unique visitor count grew 9% year-over-year. We’ve established our highest number of phone leads in nearly 2 years and dramatically improved our on-site conversion rates, allowing us to improve our overall efficiency.

Dealer customers declined 4% since December 31. More than 70% of the decline was related to DealerRater-only customers and affiliate losses. First, DealerRater. The decline was driven by a decision we made in respect to DealerRater. We had a number of DealerRater-only customers who’s subscribed to a lower-price legacy DealerRater product, which we decided to sunset. In the first quarter, we successfully migrated the substantial majority of these dealers on this legacy product onto our new and improved DealerRater Connections platform, which includes access to Salesperson Connect. And strategically, this is the right move, achieving growth in average revenue per dealer, streamlining our product set and focusing sales on products that provide more value to dealers. A key pillar of our long-term strategy is providing relevant value-add digital solutions to the dealer community.

Second, affiliate dealer losses were elevated in the quarter, consistent with our historical experience that affiliate markets reflect higher cancellation rates and lower sales performance than our direct markets, underscoring the strategic value of converting markets to our direct sales force. The remaining dealer decline of approximately 230 dealers was driven by low-cost competition and dealer reaction to our traffic declines over the last several quarters. Dealer sales improved as traffic improves, and our first quarter 2018 traffic increases are encouraging. In addition, dealers sales improved as we offer leading digital solutions, both internally developed and recently acquired. Our average revenue per dealer, or ARPD, grew 5% compared to the prior year due to the concentration of affiliate dealers in large demographic areas and quality improvements in our products and services.

And finally, our average vehicle listings were 4.9 million compared to 5.0 million a year ago. Recall that last year, inventory levels at dealerships were at all-time highs and particularly with new car inventories. This quarter, our average used car listings grew 6% compared to a year ago, offset by a 6% decline in average new car listings.

I’d now like to turn the call over to Becky to go through our financial results for the first quarter of 2018.

Becky Sheehan

Thank you, Alex. Revenue for the first quarter of 2018 was $160 million, reflecting $6.8 million or 4.4% growth compared to $153.2 million in the prior year period. Retail revenue was up $20.1 million, driven by the conversion of the tronc and McClatchy markets and the addition of the Dealer Inspire and LDM businesses, which is classified within direct revenue. Dealer Inspire and LDM contributed $5.7 million of revenue since the February 21 closing date. On a full quarter basis, Dealer Inspire and LDM grew 58% year-over-year.

During the quarter, we saw gains in our national advertising business, which was up $1.9 million or 7.5% compared to the prior year. Keep in mind that our national advertising business has more volatility quarter to quarter. Wholesale revenue of $27.6 million was down $13.3 million compared to the prior year, reflecting the early conversion of the tronc and McClatchy markets. Total operating expenses for the first quarter of 2018 were $152.8 million, reflecting a $26.8 million increase compared to the prior year period. This increase was driven by a $14.4 million of non-return costs comprised principally of $4.4 million of transaction cost associated with the Dealer Inspire and LDM acquisition; $5.7 million of cost associated with the settlement of outstanding equity awards related to the acquisition, which, under the accounting rules, was required to be expensed; and $3.8 million associated with the stockholder activist campaign. In addition, operating expenses increased due to the addition of Dealer Inspire as well as public company cost of $3.1 million.

During the quarter, we realized cost efficiencies within cost of revenue and operations, product and technology and sales. These efficiencies were reinvested in planned marketing initiatives to drive consumer acquisition and engagement. Net income for the first quarter of 2018 was $0.9 million or $0.01 per diluted share. Adjusted net income for the quarter was $28.5 million or $0.39 per diluted share. Please keep in mind that comparisons to the prior year are impacted by changes in our capital structure, including the addition of interest and tax expense.

Adjusted EBITDA for the first quarter of 2018 was $47 million, exceeding our internal plan. The $3.1 million decline compared to the prior year was driven by planned marketing investments and incremental public company cost in the current year period, which I described a moment ago. Net cash provided by operating activities was $26.7 million compared to $43.7 million in the prior year. Free cash flow was $24.1 million compared with $38.1 million in the same quarter last year.

During the current year period, we paid $5.6 million of interest and $11.7 million in nonrecurring payment related to the Dealer Inspire and LDM acquisition and the stockholder activist campaign, all of which was incremental compared to the prior year. As of March 31, 2018, cash and cash equivalents were $11.5 million, and debt outstanding was $708.1 million, representing net leverage of 2.9x as defined by our credit agreement.

During the quarter, we borrowed $165 million in connection with the acquisition. And we also repaid $40.6 million, of which $35 million represented volunteer repayments on the revolver. Our strong cash position gave us the flexibility needed to make the strategic investments this quarter that Alex reviewed at the beginning of the call. Our acquisition, affiliate conversions, investments in product technology and marketing represent execution of the strategy we laid out nearly a year ago at investor day, to use capital in a thoughtful and deliberate way to achieve our strategic goals and create long-term shareholder value. Overall, we remain committed to continuing negotiations with the remaining affiliates. And we also continue to identify opportunities to accelerate organic growth, strengthen our retail experience, deepen dealer connections and improve attribution.

As part of our plan to deliver further returns to shareholders, we announced a $200 million share repurchase plan at the end of March in connection with our regularly scheduled board meeting. We, of course, did not buy any shares during the closed period between the announcement and the first quarter earnings release date. Our outlook for the year is to deliver 10% to 11% revenue growth and 34% adjusted EBITDA margin, consistent with the outlook we provided on our fourth quarter earnings call. While this overall guidance is consistent, there are a variety of puts and takes to build up to the consolidated growth, which may differ from the original buildup we provided. We continue to expect capital expenditures to be approximately $10 million, stock-based compensation expense of approximately $10 million and an effective tax rate of 25% with a cash tax rate of approximately 13%. Finally, cash interest expense is expected to be $27 million.

With that, I’d like to turn the call back to Alex for some closing remarks before your questions.

Alex Vetter

Thank you, Becky. Looking forward, we’re going to continue to strengthen our commitment to the retail dealer industry, enabling our partners with the technology and tools they need to drive sales and manage their business more efficiently. Our relentless focus on consumer product innovation and traffic will continue in parallel with the integration of affiliates and our recent acquisition, both of which are expected to deliver efficiencies across our operating structure. Our top priority has been focused on improving product experience and traffic, and I hope you heard the great progress we’ve made on both of these fronts in the quarter.

Our second priority has been focused on strengthening our overall value proposition through meaningful affiliate conversions, and we will have converted nearly 60% of our wholesale revenue this year. We are laser-focused on integrating the affiliates, leveraging the opportunities from our Dealer Inspire acquisition and winning with consumers and dealers alike to connect buyers and sellers in new and innovative ways. Advertisers love the fact that 83% of our audience plans to purchase a car in the next 6 months. And once they’ve decided on a dealership, two out of three consumers plan to purchase within 72 hours. And consumers love the strength of our brand, as evidenced by the fact that the vast majority of our traffic comes to us directly.

With that, I will open up the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Gary Prestopino from Barrington Research.

Gary Prestopino

Just a couple of things here. Just on the tax rate non-GAAP, is it going to be 26% as well? When you’re citing that tax rate, is that both for GAAP and non-GAAP tax rate?

Becky Sheehan

25%, yes. It’s for both, Gary.

Gary Prestopino

So 25% for both. Okay. Great. And then in terms of these planned marketing expenditures that you did in Q1, are those going to continue with the same level throughout the rest of the year? Or do those start dropping off?

Becky Sheehan

So the Q1 period, Gary, is always — when you look back at our history, it’s a really important period where we do spend higher levels on marketing. There’s a variety of reasons behind that. It’s an important quarter from a industry perspective with all of the large industry events and our participation there. It also tends to be the highest seasonal quarter from a consumer traffic perspective across the category. So our investments tend to be higher, driven by both of those reasons. And importantly, in our case, we also had communicated that investing in consumer acquisition and engagement is one of our foundational strategy. So we do expect incremental investments throughout the year. They may not be quite to the same level, but they certainly will be incremental.

Gary Prestopino

Okay. That’s fine. And then Alex, you’ve rolled out a number of products over the last 12 months, really, a lot of them dealing with attribution. Would you mind — could you just possibly kind of rank order them as you how feel in terms of their contribution to the attribution that you’re trying to develop at Cars?

Alex Vetter

Sure. Well, first of all, I don’t think there is a silver bullet in this. Most consumers do the vast majority of the research online, and then they prefer to tell the dealership that they don’t intend to buy a car even when they walk in the store. So there is no real incentive for clarity and transparency here, which is why we’ve taken a multipronged approach. I think our on-the-lot tracking, Gary, is the most closest thing we have to being bulletproof because we’re showing at Cars.com user physically standing on the lot using the product. It’s proof of life. It’s proof of human arrival. But we’re increasingly doing new things. For instance, in the second quarter this year, we’re planning on launching using the geolocation phone technology, as well, to be able to append the caller ID and the first and last name of the user on our phone leads as well as the car that the caller was looking at when they called in and feed that directly into the dealer’s CRM. So I view this as sort of gorilla marketing at its finest, and there isn’t going to be one silver bullet here. I also would tell you, we’re early into our work with Conversations, the new AI chat messaging tool from Dealer Inspire. I can tell you, not only is that showing strong engagement, but, again, obviously, we’re getting the transcripts between users and dealers. And so arguing over who drove the sales is pretty nice when you’ve got a public record of the conversation. So we’re going to keep chipping away at this one, and I don’t think there’ll be a silver bullet.

Gary Prestopino

Does Conversations take the place of Salesperson Connect? Or is that — or Salesperson Connect still out there and also can be used as an attribution — proof of attribution?

Alex Vetter

So thank you for bringing that one up. I’ll tell you, a Dealer Twenty Group was speaking recently to me and said that they had thought about canceling Cars.com because of the CRM data. But when pulling his sales team, they were outraged with the notion because they knew that most of their customers were referencing finding them and their specific profiles on Cars.com, and that is distinct to us and, therefore, has no room for misattribution. And so the dealer said that he knows his CRM data is flawed. He’s now relying on his salespeople more for evidence of what’s driving their results. And that communication between general managers and owners and their frontline sales staff, we think, is going to help validate our efficacy in the market.

Gary Prestopino

Okay. And then I know tronc has been converted. Is McClatchy under your roof totally? Or does that go ratably throughout the year?

Alex Vetter

That will be on a phase basis. Obviously, we have a contract to convert all in 2018. But I will tell you, they are pleased with the transition work that we’re doing because we’ve stopped their losses. And now we’re even seeing revenue growth in our affiliate transition markets of around 4%. And so I think they’ve got an incentive to actually convert more markets to us sooner this year. So I hope and look forward to sharing more good news on that potential with you shortly.

Operator

Your next question comes from Tom White with D.A. Davidson.

Thomas White

Just on the guidance, so kind of the headline growth and EBITDA margin outlook is unchanged. But can you just kind of give a bit more color on some of those moving pieces? Is it fair to assume that given the decisions you guys made about that kind of legacy DealerRater product that maybe the outlook for the core is a little bit lower and maybe the new acquisitions are — your expectations there are higher? And then just on the unique user growth, obviously, a nice pickup. I think you’d said that in early March that it was up 6%, so implies that exiting the quarter and entering 2Q, it was significantly higher. Just kind of curious about how that looks over the course of the next year. Can we accelerate further? And just at a high level, like, what sort of the right rate of audience growth for you guys? It seems like all the platforms in the space, you have a pretty wide range of growth rates in terms of audience. Should you guys — any kind of color you can give me — give us on that would be helpful.

Alex Vetter

Sure, Tom. Let me try to answer in reverse order and then Becky maybe also chime in here. First of all, it’s good point on your part on the traffic site. We think unique visitors is a very durable metric for investors to get behind because many of our competitors will site throttling of visits as being superior when, really, they’re recirculating the same users to multiple dealers. Visits don’t buy cars, unique visitors do. And we think our unique visitor growth rate is a much more qualitative measure of our progress and success there. And I’ll emphasize that the majority of our growth is coming in mobile properties, where Google, SEO, indexing systems are starting to point more and more. So I think we’re well positioned there, as well. On the growth side and on the mix, certainly, the DealerRater cancellation decision was something we took seriously. But we also felt that we saw the organic improvement in Salesperson Connect, not only in growing that product line, but in what it’s doing on helping with retention. Our DealerRater Salesperson Connect customers are experiencing higher retention rates on the core. And so we wanted to incentivize the legacy DealerRater dealers to migrate into the core premium product and subscription.

Our overall direct average revenue per dealer is up 6%. And we want to continue to drive that migration. So we’ve made a decision to sunset their legacy offering. It was a low price point, fractional in value to our core. And we certainly know the value delivery on the premium product is much superior. But we did have dealer cancellations in the quarter. I think some of that is due to competitors selling low-cost subscription providers and putting pricing pressure on the market. But we also know that, that’s a very short-term gain. We’ve got distinct value, a unique audience and clear ROI in our offering. And certainly, our premium destination for users and dealers to participate. So the mix has changed. We are seeing great growth in Dealer Inspire, 58% growth in the quarter year-over-year, strong momentum there coming out of OEM endorsements and lots of momentum on the OEM side who are looking to break these legacy agreements with the established players in the category. And I think Dealer Inspire is really well positioned. We’re all seeing great growth in our social offering. And again, we see some great progress on the attribution work we’re doing. So the mix is changing a bit. New car traffic, obviously down. Our new car inventory, down 6%, but used car seems to be surging. So a little bit of mix change there. Becky, what would you add? And I want to make sure we got all of Tom’s multi-part question.

Becky Sheehan

Yes. No, I think that you covered it. The only other thing I would point out is we’re taking some of our Cars.com salespeople, and they’ve been moved over to Dealer Inspire as well. We think that gives us a lot of opportunity from a cross-pollinization perspective and also helping that business further accelerate in the market. We’re taking our sales teams and obviously doing some things, looking at territories, what used to be affiliate territories and what our direct territories and combining go-to-markets in places where we can. So puts and takes, but still moving forward.

Alex Vetter

Still on track, absolutely.

Operator

Your next question comes from the line of Sameet Sinha from B. Riley FBR.

Sameet Sinha

So a couple of questions and I supposed — starting with the new used split. You talked about a number of listings going down. And I think part of the pricing schema that you used for pricing your product depends on number of listings. So can you elaborate for us what percentage of listings in new and used and, I guess, the trends that you expect during the year for that? And would it have any impact on the way you price your product? Secondly, if you could also — and just kind of go through the breakdown of direct dealer — total number of dealers and how that has declined. And if you can help us kind of piece through what the organic direct dealer number is, excluding DI, LDM and excluding some of these affiliate conversions. Then I have a follow-up question.

Alex Vetter

Sure. Well, first of all, our franchise prices are higher than our pure used car subscription because we know we do deliver and have a lot of value on our new car side of our house. And so there are differences in our used-only programs versus the programs that we sell under the franchise dealer system, and the franchise dealer product is packaged together. On the inventory side, we actually have more new cars listed on our website than we do used. The inventory split is about 60-40, but that’s just because, obviously, manufacturers are rolling out high-volume production systems that are occupying dealer lots. And we are seeing some slowdown there, although it’s positioned to be a great year. I don’t see any cyclical challenges this year that will give me cause or concern. And particularly, with strong new car advertising growth in the quarter, we know that OEMs view us as a very reliable, high-quality marketplace to convert buyers into their brands. So we always see ebbs and flows in the inventory mix, and it tends to mirror predictive of the market, right? So I guess, if one thing I would remind is that most users comes to Cars.com well in advance of making their decision. And so we do watch those search patterns go. We’re seeing great growth in truck sales, in SUV, lower volume on smaller, lower-priced inventory. And so that impacts the mix as well. But nothing, I think, to point to any real major cyclical change in the market.

Becky Sheehan

Dealer count?

Alex Vetter

And then dealer count, sure. So your question, Sameet, there was on just total dealer count and — what was the specific question, though?

Sameet Sinha

So dealer count have been down by about 800. I wanted to see if you can help me piece out a direct dealer count as is conventionally used to be counted. So if you exclude Dealer Inspire, if you exclude McClatchy and tronc [indiscernible].

Alex Vetter

Great clarification. Importantly, we’re not including Dealer Inspire’s business into our total dealer count, so that’s a very important clarification to make. They’ve got about 2,000 dealers. We’re not reporting that as part of our subscription business. We’ll talk about that further down the road in terms of when and if we include that. But I think it’s a different business altogether. Importantly, with the affiliate migrations, our direct dealer count now is over 16,000 dealerships. And so even though we had cancellations in the quarter of around 200, I believe, in terms of net loss, it’s on a base now of 16,000 because we’ve migrated a fairly large substantial amount of affiliate dealers into our direct channel. Becky, what else would you add?

Becky Sheehan

Does that answer your question, Sameet?

Sameet Sinha

Yes, it definitely does. I guess, one follow-up is as you — as Becky mentioned, the buildup towards the full year guidance, can you — obviously, you’ve given the flavors, but what would you say that due to the sunsetting of certain products, the organic growth, which is supposed to be 0.5% to 1.5%, is that pointing towards the lower end?

Alex Vetter

I think the organic business will be a little bit harder because of some of the cancellations in the first quarter. But that’s why we still think the overall mix is on track because of the improvements. Direct average revenue per dealer is up 6%. That’s on a much bigger base as well. So we’re seeing strong growth there that can offset some of the dealer count. But really, the mix has changed. Again, for the reasons I mentioned before, Dealer Inspire building momentum, OEM endorsements in active discussions there, lots of new initiatives around attribution. And importantly, I think the most important metric, which we’ve been consistently stating is traffic is our leading indicator. And we’ve had traffic losses for most of 2016. The fact that we’ve turned the tide in a highly competitive environment in the first quarter this year across all channels, we think, is a really strong bellwether for what’s to come.

Operator

Your next question comes from Steve Dyer from Craig-Hallum.

Steven Dyer

Along those lines, Alex, just — it was a good segue. Would you anticipate the increased traffic now that, that’s going in the right direction in a fairly convincing way over the last several months? Would you expect the dealer count to start heading in the right direction as soon Q2 potentially?

Alex Vetter

I would. The traffic growth does not equate to revenue growth in our model immediately. We’re a subscription business that’s more of a slow roll. And it tends to follow our overall value delivery and traffic trends. And so that’s why traffic has been our #1 priority. As if we can restore traffic, that will build confidence in both our dealers and the value delivery systems. And so part of our strategy is to identify cost elsewhere in the business, so that we can continue to reinvest in marketing and growth in the brand as well as product innovation. So that’s our strategy, to continue to invest there. Our customer satisfaction is up 5% in the quarter, which is the highest consumer satisfaction we’ve had in our product experience. Combine that with our increased marketing investments, I would like to think that we can absolutely start moving the dealer count forward.

Steven Dyer

Okay. So you feel relatively confident that maybe Q1 will end up marking the low watermark for dealer customers.

Alex Vetter

Yes, I do. I mean, certainly, affiliate conversions are a little bit of a wildcard. We had some challenges in the quarter with dealers that hadn’t been serviced in large periods of time and are being unaware of a lot of our product innovations. And then, certainly, obviously, if there is continued affiliate degradation in the remaining affiliates, that’s a risk. We’re actively in discussions with other affiliates about improving their performance and/or following the program that we have established with the — some of the existing affiliates that we’ve converted, and that would remain a variable that we don’t necessarily control, but, certainly, are eager to strengthen.

Steven Dyer

Got it. And then how much incremental revenue did you guys recognize in the quarter just from the transition of the 2 big affiliates? In other words, what was — what sort of incremental move from wholesale to retail?

Becky Sheehan

So we moved from wholesale to retail just under $13 million of revenue.

Steven Dyer

So it was $13 million incremental that wouldn’t have been recognized under the old wholesale method.

Becky Sheehan

No, no, no. So what we did was we moved $13 million from wholesale revenue to direct revenue. The increment between the 2 was just over $1 million in terms of what we build in the direct channel once we took over those accounts compared to what was in the wholesale revenue line, including revenue amortization.

Steven Dyer

Got it. Okay. So a little bit around $1 million uplift selling to that direct.

Becky Sheehan

Yes.

Steven Dyer

Okay. Got it. And then, I guess, just quickly, how do you think about capital allocation going forward? You obviously have good free cash flow. You’ve got a share repurchase. You’re about 3x levered. There’s M&A. How do you think about sort of priorities there going forward?

Becky Sheehan

So I think that you’ve just summarized it. The board has consistently spent time on capital allocation since the time of the spin. We had an intentional strategy around it in 2017. And that became more clear in 2018 as we started the year with the affiliate conversions and the acquisition. In our March board meeting, the board, in normal course, relooked at capital priorities. And we put in place the share repurchase program. So it’s a 2.9x net leverage. We’re certainly comfortable with that given the free cash flow of the business and the business model. We have the $200 million share repurchase program. We’re going to continue to look for affiliate conversions, which haven’t, to this point, required upfront capital. But we’ll see where the negotiations with the other affiliates land off. So those will remain our priorities for now.

Alex Vetter

And I’ll only add that just keep in mind that the affiliate conversions, while the revenue uplift is immediate, the payments are in place. That presents an opportunity in 2019 and ’20, as those economics start to now come fully into the Cars.com business.

Operator

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

Daniel Kurnos

All the questions are kind of in the same vein. Everyone is sort of dancing around the question of what was organic ex-acquisition, ex-affiliate revenue growth in Q1. And Becky, you gave guidance before on sort of what you expected that — to be for the year. It sounds like that’s a little bit more of a tougher outlook. So maybe if you want to just start with if you could just give us that Q1 number and kind of get past all of that. And then the other piece of this is on the — on your results in Q1 were upbeat. And it looks like it most had to come mostly from pricing given the incremental churn. I’m curious, Alex, in the marketplace, you’ve talked about organic pricing headwinds. So if you can just talk about sort of the underlying package pricing versus the upsell that you’re getting from your acquisitions and how that’s flowing through. And if there was any decision at all to take maybe either level set pricing or do — or take some pricing action in Q1 that will have an impact on the balance of the year.

Alex Vetter

So I’ll start with the marketplace pricing question and then let Becky answer the guide. We’ve always had low-cost competition. That’s not a new phenomenon. That’s been a consistent phenomenon over the years. And as a leader in the market, it’s certainly not a new dynamic for people to try to undercut us on price or are perceived a real value. Our philosophy is that we’re generating far more sales activities for our customers today than we’re charging and know that with improved visibility of our value delivery, we’re a no-brainer investment. In most cases, Cars.com is occupying less than 5% of our dealer’s advertising budgets and generating far more sales activities in that percent and don’t set our prices based on what someone else is willing to give away or to try to perceive as similar in terms of value.

Certainly, we know that if we continue to invest in growing our traffic, in our brand as well as improve the value proposition by improving the product, we think our advertisers are looking for partners that are going to continue to demonstrate their commitment to the retail system. We haven’t done any price bundling with our recent acquisitions, but that’s a great example of how we’re improving the product. We had a third-party chat provider, which we had to pay for on a subscription basis. We were able to eliminate that cost and embed now a proprietary and superior AI messaging engine that gives us better visibility in terms of the conversations happening between buyers and sellers. So that’s just an example of us strengthening the offering. It certainly helps that if you’re a Dealer Inspire dealer, now that your chat engine is almost native to your own website, and so we’re gaining even operating efficiencies at the dealer level. But there’s many competitors in this category. Some use fictitious attribution models to get credit for every sale. Cars.com is the home of the undecided shopper. 90% of our audience doesn’t know where they’re going to buy their car, and this is the incremental audience we know dealers need to be reaching. And therefore, we know our price points are very fair for them to get incremental sales. I’ll let Becky comment on the revenue mix side, unless there’s other questions on the dealer pricing dynamics.

Becky Sheehan

Yes. So obviously Dan, what we’ve said is we are providing consolidated guidance that makes the most sense for us. In Q1, when you look at it, we, of course, reported that we added $5.7 million of revenue associated with the Dealer Inspire acquisition. We also talked about the affiliate uplift on a net basis being just over $1 million. So if you strip those things out, the organic business ex the acquisition and the affiliate uplift is about flat on a year-over-year basis.

Daniel Kurnos

Got it. And that includes, of course, growth at the DealerRater, too. But that’s all right. That’s pretty much what we were coming at. All right. So that’s helpful on that. And just — Alex, just to kind close the loop on the pricing situation. I was just really also more referring to maybe even your longer-term thoughts. I mean, you gave some color around your consideration’s ability to take pricing. Do you have kind of underlying sort of annual, I don’t know, low mid-single-digit pricing growth baked into your packages? Obviously, bundling will drive average revenue up over time. Have you included DealerRater in sort of the upsell yet? Or is it really more the DI, LDM packaging that you were talking about a second ago?

Alex Vetter

Dan, thanks for that clarification. I totally get you now. Certainly, we’re looking at different pricing and bundling strategies now that we have a broader suite of offerings. And we think we can help provide further efficiencies for dealers that participate across our suite of businesses. So that is one work stream that we’re working at. I would also tell you that as the attribution model becomes clear for the most — more sophisticated dealers who aren’t relying just on a CRM pull of their ROI of leads, they want to buy more. And so we think we can start to tier our packages to offer premium offerings at the higher end of the market. And so we do see some growth in our pricing, particularly for the more sophisticated tier who are going to start taking share from those dealers that are still stuck in sort of what would I call these legacy attribution models that are counting email lead gen as the sole value delivery. And so we’re intentionally going to migrate the market to the more digitally savvy dealers. And so we’ll get stronger growth there, and that may mean that we may lose a little bit on the low end. But we think that’s where the market is moving. And we think there is a bigger opportunity on a much broader part of the market that we’re pursuing.

Daniel Kurnos

That’s a perfect segue into customer question, for me, just on mix, I guess. If you’re having some churn issues, obviously, there is some competition in the space. You made the DealerRater commentary already. Can you just talk about the mix of churn that you were seeing in sort of your net ads versus net losses, large versus small, where you’re seeing traction and where you’re seeing the declines?

Alex Vetter

Sure. Great question. We did see more churn in the smaller end of the market with independent dealers than we did franchise on a year-over-year basis. So again, I think also what I’ve noticed on the total sales for the year, smaller-priced sedans are coming down in terms of sales volume and, again, growth in luxury and pick-up. Our market does tend to skew and our franchise dealer network does skew more upmarket. Some of our competitors are more penetrated in the smaller independent segments. That’s a smaller segment of the market for us in terms of total revenue. But we did see some losses more on the independent side year-over-year than we did on the franchise side.

Daniel Kurnos

Got it. And if I could just sneak one more in. Sorry to sort of go on with this, but just on the traffic side. Look, I know this was asked kind of high level, but can you just talk about your thought process on marketing here with brand versus customer acquisition spends? Clearly, you’re going to start — you — I think you guys mentioned, although it didn’t really come up on the call yet today, that you guys have sort of developed your own traffic acquisition algorithm. We know that marketing spend was up pretty significantly in the quarter. So if you can just talk about, really, the two things, brand versus customer acquisition spend, ROI in those channels, if you’re seeing any pressure in paid ROI channels and how you think kind of, over time, that plays out for you guys balancing those two things and maybe even some of the LTV kind of metrics you’re seeing around customers that you’re acquiring through some of the improved [indiscernible].

Alex Vetter

Sure, Dan. Thanks. Well, certainly, we see a lot of increased competition in the performance channels. I think our category growth in their spending is actually much faster growth than ours, which, I think, underscores the strength of our brand and our existing position in the market. I would tell you that dealer and OEM increases there are equally aggressive. I think that’s part of the thesis behind the Dealer Inspire and Launch Digital Marketing acquisitions is that we don’t just want to fight that trend. We actually wanted to help the industry capitalize on it. So part of our outlook, we’re excited about some of the things we’re seeing with Dealer Inspire, being able to provide those services directly to both OEMs and dealers directly. And our marketing strategy, to your point, we certainly want to have the optimum mix because our brand is part of our strongest, high ground that we own and that we’re truly reaching an incremental audience. Many of our competitors actually just bid against other dealers in the marketplace in search and then try to sell that traffic back to the dealer community.

We think, over time, dealers are going to figure that out. They’re going to realize that why am I spending money where I’m just only competing with myself and I should be migrating my investments to independent platforms that directly acquire traffic and have unique and distinct audiences than just adding friction and cost to my existing business operation. And so we’re not going to go all in, in search because we feel like that’s a hypercompetitive market. We do see growth in social, not only in growing our business, but in extending that reach and that opportunity to our local dealers, and that’s been a fantastic innovation that we’ve gotten into this year where, now, we’re helping dealers tap into this growing platform. Cost per customer acquisition in search, I think, is approaching north of $7 per generic keywords. In our environment, we can get dealers down to vin level users on specific cars on our lots for under $1. So we know we’re superior in investment. We think there’s some tracking challenges that dealers have got to get past. And once the sophisticated dealers realize this, it’s a more efficient marketplace than the usual search engine marketing game, I think, we stand to gain.

Operator

Your next question comes from Doug Arthur from Huber Research.

Douglas Arthur

It’s getting late, so I’ll just — two quick questions. Becky, you mentioned $1 million incremental from the conversion of the wholesalers. You also mentioned transition costs. Did the transition cost equate to the incremental revenue in this quarter?

Becky Sheehan

I’m pausing, Doug, because I’m — transition costs, help me with…

Douglas Arthur

Well, in the sense that you — I think Alex mentioned some — as you went into some of these wholesale regions to convert them, there were some issues with dealer retention and getting the sales staff integrated. I’m just wondering if the transition cost in converting these wholesalers equated to the incremental revenue uplift this quarter.

Becky Sheehan

Doug, if we move into these markets and do the affiliate conversion, in 2018, both because of the transitional nature of moving our sales team there as well as the payments that we’re making to the affiliate partners in connection with the early conversion, we’re not expecting the revenue uplift this year to materialize into EBITDA uplift, although we do expect that EBITDA uplift coming in future periods, for sure. So I’ll start there. The other clarification I’d make is that our sales team during first quarter — actually, we achieved some good cost efficiencies holistically across the team when we think about taking some of our cars — our strong car salespeople redeploying them over to Dealer Inspire to help accelerate the work that’s being done there. We look at how we’ve combined certain territories as we’ve moved into these affiliate markets, combined with our direct team. So we are making progress on the kinds of structural efficiencies that we’ve been talking about. But specific to the affiliates themselves, this year, I’m not expecting the EBITDA uplifts for the reasons I described.

Douglas Arthur

Okay. And just one quick follow-up, and you may or may not have this number right now. I mean, you onboarded the tronc sales group, a very small sales group from the acquisitions. What was — sort of — year-over-year, what is the sales staff headcount today versus a year ago?

Becky Sheehan

We onboarded just under 60 people from tronc. I’m looking at Alex just to make sure I had that correct. About 60 people…

Alex Vetter

It was a little bit higher, but we’re obviously down from that, as we’re gaining some efficiencies in the structure. But on total, Becky may have to get back to you on that one.

Becky Sheehan

I’ll need to look, Doug. I know that we added some people, of course, with tronc. I also know that we’ve been combining markets and, again, moving some people over to DI, so let me take a look at that.

Operator

I’m showing no further questions at this time. I’ll turn the call back over to the presenters.

Alex Vetter

Thank you very much, everyone, for participating on today’s call, and we look forward to speaking with you again. Have a great quarter.

Operator

This concludes today’s conference call. You may now disconnect.

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