Nov 7, 2018
Executives
Jandy Tomy - Vice President, Investor Relations Alex Vetter - President and Chief Executive Officer Becky Sheehan - Chief Financial Officer
Analysts
Tom White - D.A. Davidson Gary Prestopino - Barrington Research Dan Kurnos - The Benchmark Company Ryan Sigdahl - Craig-Hallum Capital Group Sameet Sinha - B.
Riley FBR Doug Arthur - Huber Research
Operator
Good morning and welcome to the Cars.com Third Quarter 2018 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 investor.cars.com. A replay of the webcast will be available at this website until Wednesday, November 21, 2018.
A copy of the accompanying slides can be found on cars.com IR website. Following today’s presentation, there will be a question-and-answer session with Alex and Becky.
I would now like to turn the call over to Jandy Tomy, Vice President of Investor Relations.
Jandy Tomy
Good morning, everyone and welcome to our third quarter 2018 earnings 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 would 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 tables included with our third 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 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.
Alex Vetter
Thank you, Jandy. Good morning, everyone and welcome to our conference call for the third quarter of 2018.
The third quarter had a number of positive indications that we are executing a sound and differentiated business strategy, tampered by the impact of changes in ad spend strategy for select OEMs, along with continued softness in dealer count. On the positive side, consolidated third quarter revenue in ARPD increased 6% and 8% year-over-year respectively.
Traffic increased 12%, unique visitors grew 10% and mobile traffic grew 28%. We are obviously aware that dealer count dropped 2% since June, despite our progress with audience and value-added solutions.
However, various achievements including important ones I just mentioned support our confidence in our online platform and the intentional strategic shift from a listings business into a digital solutions provider. Our robust and relevant solutions portfolio is an important pillar of our strategy and the third quarter demonstrates that our social, website and review products are providing meaningful value across the range of dealer customer segments.
This is proving to be a key competitive differentiator for us as we improve dealer sales and increasingly make progress by attracting and engaging a larger consumer audience as a result of our integrated marketing and product focus. Our momentum with consumer audience has continued.
Traffic grew 12% in the third quarter driven by growth in SEO and supported by incremental product and marketing investments and the unrivaled strength of our brand. Organic traffic made up 80% of our total traffic in the third quarter.
Monthly unique visitors increased 10% year-over-year and mobile traffic now makes up 68% of our total traffic. In October, these trends continued.
We have now experienced 10 months of strong traffic and unique visitor growth, including 7 months of accelerating growth in SEO. Google updated its algorithm in August, prioritizing websites with rich and valuable content, which further supported our SEO growth trajectory.
Certain competitors and competitor practices have been hurt with these recent algorithm updates. We believe that thin content, practice is not compliant with Google search engine guidelines and those competitors with an over-reliance on these SEO activities will continue to suffer from the change.
Part of the continued success that we have had with traffic growth is due to the marketing investments we are making. One of the key drivers of our traffic growth in Q3 is our investment in the integrated marketing campaign launch, which promotes our Matchmaker experience.
This unique AI powered experience provides a guided navigation for the 70% of car shoppers who don’t know the maker model they want when they begin their search. The advertising campaign and product experience have paid dividends with Matchmaker users submitting leads at 2x the rate of non-users creating profiles at 9x and repeat visitation 61% higher than non-users.
As a result of this campaign, brand awareness is up 8% this quarter and branded search was up 122%. The strength of our brand and our unparalleled 80% of organic traffic enables us to invest strategically and efficiently for our customers.
This combination of traffic growth, audience engagement and innovative product improvements are vital to increase value delivery to our dealers and support their success in selling cars. Our differentiated strategy leverages the strength of our branded platform, our national auto savvy sales network and our continuous launches of integrated solutions that provide more value to our partners than our competitors do.
As dealers face increasingly challenging environments, they are looking for and spending on comprehensive network solutions that together generate both insight and efficient feature drive sales. We believe our strategic shift is supported by market evidence.
In a recently published industry report where all notes that dealer spend 3x as much on digital media solutions as they do on advertising. However, the ecosystem of options to choose from is fragmented, disconnected and all too often ineffective.
Let’s talk about the Cars integrated suite of solutions and how they support ARPD. Our social products continue to grow.
In the third quarter we launched our Social Sales Drive product, a powerful new social tool which connects the dealership’s inventory with active shoppers and Facebook marketplace. The new solution uses proprietary AI chatbot technology and a managed chat solution to power conversations with consumers and capitalize on off-hour shopping via Facebook Messenger.
Last quarter, we shared with you the decision we made to include the Social Sales Drive product with our franchise dealer packages to improve retention rates by further differentiating and enhancing the value we are delivering to these customers. Among franchise dealers active on social sales drive, retention rates were 70% better than the franchise dealers not yet on the product, confirming that this enhances value and improves retention.
Since August we have enabled 5,200 dealers on social sales drive. Our other new social product Cars Social which you might recall was only rolled out six months ago, now represents a $10 million business.
Our other fastest growing solution is our dealer websites. Our DI products continue their trajectory of rapid growth with more opportunities on the horizon.
Dealer Inspire grew revenues 42% in the third quarter on a year-over-year basis by growing product sales in every product category. I am excited to announce that we have achieved our first preferred product endorsement with General Motors with Dealer Inspire and marketing services.
This allows us to sell our superior products to dealers who might have previously been required to use the services of another legacy provider. We also had success with gaining DealerRater OEM endorsements.
In October for the first time ever, our DealerRater product became eligible for co-op with Mitsubishi, Hyundai, Subaru and Volvo. This eligibility provides opportunity for dealer penetration and sell-through since these OEMs will subsidize or in some cases entirely pay for these products.
We also recently partnered with Mazda Canada in addition to other Canadian OEM partners for DI products. This robust and growing set of solutions will drive our future revenue growth, fueled by growth in ARPD.
I would now like to turn to the sales transformation underway. Although it has been a solid quarter and year for us in terms of growth and innovation as well as consumer traffic, these efforts have yet to improve dealer count.
We remain confident that our core strategy which includes increasing traffic, conversion and in value delivery and growing our solutions portfolio will shift momentum in our favor. At the same time, we are making substantial progress with our go to market project that is adapting our sales approach to our differentiated business strategy.
During our second quarter earnings call in August, we announced the start of the go to market or sales transformation with the goal of increasing sales effectiveness in light of our shift from a listings model and to address the conversion of 3,500 former affiliate dealers into our direct business. We also announced last quarter that we appointed a new Chief Revenue Officer, who together with top business transformation talent and specialist consulting resources have been analyzing and is now implementing the refresh go-to-market approach.
As a reminder, the project scope includes organizational structure, territory rationalization with the conversion of affiliate territories and sales incentives. In addition, product, packaging and pricing strategies are being evaluated across market segments to further optimize pricing and value across all of our solutions.
We look forward to updating you on our progress as we complete the core elements of this project. We intend to provide long-term revenue and adjusted EBITDA outlook which will incorporate changes in connection with our year-end earnings in February 2019.
Demonstrating the value of our unique solutions remains an important part of our success. As I mentioned earlier, dealers adopting our Social Sales Drive product have demonstrably higher retention rates than those that do not.
For example, retention rates for dealers with social sales product are 3.5x more likely to remain on the platform since we debut the offering in the quarter. While we are not where we want to be with dealer churn, I am reassured by the data showing that our traffic and conversion improvements are increasing value delivery.
Specifically, we are growing leads, vehicle detail page views and creating meaningful connections. We are also improving our tools and communication of these important metrics to our dealer customers.
Our innovative solutions portfolio is a point of differentiation that’s being leveraged across our platform and our sales network. Not only will our solutions grow ARPD, they will further enhance the visibility of the value we provide to our customers everyday.
I would now like to discuss our national advertising business. Overall, new car sales are being propped up by fleet sales, a sector in which we do not participate, but retail sales are in fact declining, because new car retail sales are down compared to a year ago, certain OEMs are pulling back advertising investments across consumer media as a result of these retail declines.
As a reminder, our national ad business is larger than that of our competitors with more than $100 million in annual revenue. We believe that we are weathering the downturn in sales better than many of our competitors.
National revenue declined 12% in the third quarter. Over 80% of the decline is from two clients who are making material shifts in their business.
On a year-to-date basis, national revenue declined 4%, but excluding these two clients, national revenue would have been up 4%. While our balanced new and used vehicle mix provides a level of installation, our national business revenue will have a correlation with the OEM retail sales environment.
Despite these challenges, OEMs continue to prioritize digital over traditional advertising and we are taking a number of steps to capitalize on this growing opportunity. We are innovating within national advertising business beyond display advertising towards direct response and growing programmatic solutions to meet shifting demands.
We are also creating native and more custom solutions for our advertisers. And finally, we are starting to cross-sell inventory through our dealer inspired performance marketing team.
Before I turn the call over to Becky, I’d like to provide a quick update on the project we announced last quarter to capitalize on the opportunities we had to realize technology efficiencies and cost savings. We have completed the technology review with the assistance of a third-party expert evaluating our current systems, structure and process.
We have done comparisons with peers, companies with similar business models and marketplaces in order to identify best practices. The implementations of our findings will result in efficiencies that save substantial cost.
Of course, this is a continuing aspect of our approach to optimize for growth and we look forward to updating you with the impact on our long-term guidance in February. At this time, I would now like to turn the call over to Becky to walk you through our financial results for the third quarter.
Becky Sheehan
Thank you, Alex. Revenue for the third quarter of 2018 was $169.3 million, reflecting $9.4 million or 6% growth compared to $159.9 million in the prior year period.
Retail revenue was up $32.8 million driven by the conversions of the Tronc McClatchy and Washington Post markets and the addition of the dealer inspired business. The affiliate conversions resulted in the addition of $25.6 million to direct revenue and we are also responsible for the $22.6 million decline in wholesale revenue for the quarter.
These amounts reflect only the uplift from wholesale to retail rates. Dealer Inspire has continued double-digit growth in the third quarter growing 42% year-over-year on a pro forma basis to $15.8 million of revenue.
This growth is driven by increased product sales across all of the Dealer Inspire products. Dealer Inspire now has 2,200 website customers.
We expect to continue to grow this metric as well as increase the penetration of the conversations chat tool and the online shopper product, which are currently at approximately 25% and less than 10% penetration respectively. Excluding the affiliate market conversions and the Dealer Inspire business, our organic direct business declined $4.4 million or 5%, driven by softness in dealer count.
Compared to June 30, 2018, total dealer count of 20,407 declined 2%. Direct dealers of 17,011 increased 419 resulting from 744 dealers that converted from the affiliate markets during the quarter offset in part by higher cancellation rates in legacy affiliate territories and lower overall sales.
We completed the McClatchy affiliate market conversions on October 1. This leaves just three affiliate relationships remaining or 3,300 affiliate dealer customers to convert.
As Alex outlined improving sales force efficiency, sales and dealer retention are among our top priorities and we’re taking steps to grow value and improve retention. Direct ARPD grew 8% year-over-year, driven by our increased access to large and attractive markets, which carry higher rates, as well as our growing set of marketable products.
Excluding the affiliate market conversions, direct ARPD grew 1%. Please note that revenue from Dealer Inspire is not yet included in the ARPD.
As Alex discussed our National Advertising business, which was down 12% year-over-year endures the brunt of the macro headwinds affecting the larger auto industry and is being impacted by system spending by some of our OEM customers. Wholesale revenue of $17.7 million was down $23.4 million compared to the prior year period.
$22.6 million of the decline was related to the early conversions, which includes $5.4 million reduction in the amortization of the unfavorable contracts liability. For the markets that are converted, the related amortization is now reported as an offset to the affiliate revenue share expense.
As of October 1, 2018, we now serve 84% of our dealer customers through our direct sales force. Total operating expenses for the third quarter of 2018 were $141 million, an increase of $20.5 million compared to the third quarter of 2017.
This increase is attributable to the addition of $16.9 million of costs related to the Dealer Inspire business, a $3.5 million increase in non-recurring costs, and a $2 million increase in stock-based compensation. Affiliate revenue share expense also increased with the market conversions, as well as the planned marketing investments made.
Importantly, these cost increases were offset in part by efficiencies realized in both product and technology and in sales. Net income for the third quarter of 2018 was $15.8 million or $0.23 per diluted share.
Adjusted net income for the quarter was $38.4 million or $0.55 per diluted share. Adjusted EBITDA for the third quarter of 2018 was $62.2 million or 37% of revenue, down $0.9 million year-over-year.
Net cash provided by operating activities for the nine-month period was $121.1 million compared with $147.2 million in the prior year. Free cash flow was $111.1 million compared to $119.6 million in the same period last year.
Impacting the 2018 free cash flow is incremental non-recurring expenses, lower adjusted EBITDA and incremental interest paid due to a change in our capital structure. This was offset in part by elevated capital expenditures in 2017 due to the relocation of our corporate headquarters.
As of September 30, 2018, cash and cash equivalents was $17.8 million and debt outstanding was $706.9 million. Our net leverage ratio was 2.9 times calculated in accordance with our credit agreement.
As Alex mentioned, we utilized our share repurchase program in the third quarter to buy an incremental 1 million shares. Through the end of the third quarter we have purchased a total of 3 million shares at an average price of $25.69 per share.
We have continued purchasing shares in the fourth quarter and through October, we have now purchased 3.5 million shares on a year-to-date basis. For the full year of 2018, we previously communicated a revenue growth range of 6% to 7%.
We currently anticipate being at the lower end of that range with adjusted EBITDA margin remaining unchanged at approximately 34%. We expect capital expenditures to be approximately $14 million, stock-based compensation expense of $10 million, interest expense of $28 million and an effective tax rate of 25%.
With that, I would like to turn the call back to Alex for some closing remarks before your questions.
Alex Vetter
Thank you, Becky. As we look ahead, we are focused on five key areas: continuing traffic growth, increasing conversion and value delivery, growing our solutions business, improving our sales force effectiveness, while continuing to drive operational efficiencies.
In 2018, we reversed a 2-year traffic decline. And in October, we hit record growth of 17% growth in unique visitors.
Our growing strength of our audience gives me confidence that dealer count and OEM revenue will follow. Our brand strength, high-quality growing audience and valuable portfolio of solutions is the right path to growth and shareholder value.
At this time, I would like to open up the call for your questions. Operator?
Operator
Thank you very much. [Operator Instructions] Your first question comes from the line of Tom White from D.A.
Davidson. Tom, your line is open.
Tom White
Great. Thanks for taking my questions.
So audience growth continues to be pretty solid. How should we think about how that audience growth and traffic growth translates into downstream connections growth for dealers and how much opportunity do you guys have still to maybe make product enhancements to optimize for connections growth for dealers?
And then I was just hoping you could update us on kind of how you rank your priorities around capital deployment between either kind of early conversion of the remaining affiliates, more M&A, R&D around product or the buyback or anything else? Thanks.
Alex Vetter
Thank you, Tom. Good morning.
First of all, the traffic growth has been steady and consistent and I know a consistent question that we have been asked is how do you correlate that to revenue, which is harder to do, but we can and do see a direct line to conversion and value delivery. So we are actually hitting record leads per dealer for the quarter.
We have got our highest overall traffic growth ever in October, which is up 17% in unique visitor count, which I think is a more pure and more reliable metric, because it’s not just repeat visitors, it’s actual unique and then we see that correlation in terms of value delivery to our advertisers. So increased phone calls to dealers, increased lead generation dealers and most importantly, we are seeing a ton of increases in traffic to dealers websites.
Unfortunately, as we have talked, some dealers don’t always map that value directly into their systems and see it, but we can see the increase in conversion and value delivery very vividly. I think on the product side, we do see continued opportunities.
Our app enhancements in the quarter have been really good in growing our conversion rate. Specifically, our mobile conversion rate has grown about 20% in the period.
So we are doing a much better job in UX getting consumers to the cars that they want and then converting those to measurable or tangible forms of leads to dealers. And so we think those things have certainly bolstered our sales force confidence and we know we will soon translate into dealer confidence as well.
On the capital deployment side, we have been reserving our capital for affiliate conversions so that we can – and then also investing for growth. And obviously our share repurchase program or paying down our debt, those would be the four primary areas.
Tom White
Thank you.
Operator
Your next question comes from the line of Gary Prestopino from Barrington Research. Gary, your line is open.
Gary Prestopino
Hey, good morning everyone.
Becky Sheehan
Good morning.
Gary Prestopino
Several questions. When you are talking about the shift in national advertising by certain OEMs, are they – is it a shift, are they just pulling back, I mean are they moving away from digital advertising or just in general of reducing their advertising expenditures?
Alex Vetter
Well. Good morning Gary.
Thanks for the question. First off all, the two OEMs really were responsible for the bigger part of the loss in the quarter.
Our business macro shift that they are making, pulling all advertising out of the market, specifically for specific makes and/or models that they historically had provided support for. So we see that macro shift across all media and not endemic or specific to our business.
Most OEMs are increasing the rate of investment in digital, so we know that with growing traffic, our opportunity continues to rise. But I think that certainly OEMs – there are OEMs that are shifting towards programmatic or trying to buy traffic in social or other larger horizontal platforms and buy around third-party marketplaces.
We typically see those OEMs come back to us in big ways. We have had large OEMs pullback advertising in prior years only to follow them a few periods later come back much stronger and bigger than they were prior because it’s hard to beat our cost efficiency, our audience who are people actively shopping for the very products we are trying to sell.
And so by and large Gary the bigger pullback is a macro one and mostly OEMs have already started talking to us about the ‘19 plans.
Gary Prestopino
Okay. And then in terms of the social sales life which is getting some good uptake on dealers and then Cars Social, could you just refresh my memory are you bundling social sales drive in your package and then for Cars Social charging an increment from the Cars Social?
Alex Vetter
That’s right Gary. So as you know most of our cancellations tend to speak to either perceived value or price value to price ratio, so we made the decision at the end of Q2 to bundle the Facebook marketplace inclusion of all of our franchise dealerships into that system.
We have got 5,200 dealers that have enrolled for that and that’s where we are seeing profound up-ticks in our retention rate, because the dealers appreciate that we are doing more for them year-over-year. I would caution it takes both the dealer and Facebook to accept our invitation to this and so averaging about 2,000 dealers a month in terms of getting their enrollment.
There is a dependency of both on the dealer to approve the credentials and then there is an approval at Facebook for them to accept the inventory, otherwise we would have flip to switch and put them all in there. But it’s more of a manual process.
And again about 2,000 dealers a month that were getting into that platform. With independents, we are actually selling this is an up-sell.
We have good value delivery for independents. We didn’t feel like we needed to flood them with more traffic and leads at our current price points and so we are now starting to sell this is an upsell to independents and it’s started to see a nice up-tick in revenue with independent dealers on that solution.
Gary Prestopino
Okay. And then could you just talk a little bit more of the changes in go to market strategy that you have been working on?
Alex Vetter
Sure. I mean I think ultimately what we have been talking about is optimizing the sales channels for the customer segments.
I think first and foremost Gary, if dealers are spending lower levels, we think we can more cost effectively support them through a call center approach. And we have been testing and optimizing our inside sales teams, optimizing territories and customer segmentation.
And then for our biggest dealers who are buying across our portfolio of solutions, we want to be in those stores working hand in hand with them to optimize their business. And so I think the first thing is really optimizing our sales channel based on customer segmentation.
I think obviously the bigger change that we have had to undertake this year is converting and absorbing the affiliate channels that we have moved from wholesale to retail. We have converted almost 3,500 dealers, that means we have to right size the territories and eliminate some of the duplication and management layers between our channel and direct sales.
But we have gone from 14,000 dealers in our direct channel to over 17,000 and keeping our cancellation rate roughly the same. Affiliate losses were much higher when they were purely managing our affiliate network.
And so strategically very important for us to convert that customer relationship into our direct channel and we’ve done a lot of that work this year.
Gary Prestopino
Right. Thank you.
Operator
Your next question comes from the line of Dan Kurnos from The Benchmark Company. Dan, your line is open.
Dan Kurnos
Great. Thanks.
Good morning. Alex, can we just help frame up a little bit of the dealer customer decel sort of what’s driving that?
And just kind of in conjunction a little bit with the last question, if you think some of the reversal on that trend is going to be your ability to sell through the inorganic products via bundle or whatever it is to turn these guys back on? And then I’ll follow-up with the guidance question.
Alex Vetter
Sure, Dan. Good morning.
Thanks for being here. Looking – in Q1 we had an 822 dealer loss and in Q2 if you back out the DI dealer count that we added to our mix in Q2, our dealer count loss has dropped to 262.
in Q3, I know we see 300 dealers dropping from the platform, but we had a couple of inorganic things there, including a billing challenge with about 72 dealers that weren’t paying their affiliate invoices and then we’ve got about 18% of our dealers out of business. But if you were just to back out the 72 that were – weren’t paying their invoices, our dealer loss in Q3 was 241.
So I look at that on a trend basis. We are moving the cancellation number in the right way perhaps not strong enough and we want that to be a grower, not a net loss, but we see incremental improvements in the trend and we know those improvements are due to things like our Social Sales Drive initiative in new dealer reporting and some of the sales transformation work that we’re doing.
So I think overall the trend we wanted to improve, but we also know that some of the recent turndown in sales particularly NewCar is adding a lot of margin compression to the dealers, and so they’re looking to cut costs.
Dan Kurnos
So – so let me just follow-up on that. I mean, look for the Q4 guide then, I’m just trying to kind of flush out exactly sort of the puts and takes here.
We’re going to – obviously national is going to continue to be soft, OEMs just shifting from brand to incentive, I think that’s pretty clear anyway. So that’s not that challenging.
I don’t know if you want to give some incremental color on wholesale in Q3, I know that Becky said it was mostly due to the affiliate conversion. I don’t know that that’s not struggling in their markets and that might be weighing at the margin.
But if you’re going to come in at sort of the low-end of your guide for the year, it kind of implies understanding of a slightly tougher comp sort of further decel in the organic business. So I’m just trying to understand kind of the puts and takes, Alex, and when that sort of reverses based on some of the initiatives that you’re making?
Alex Vetter
That’s right. Well, look typically dealer count churn is usually highest in the fourth quarter, that’s been a pretty consistent trend year-over-year with probably one exception over the last 10 years, because dealers tend to cut back in Q4 to try to deliver sort of year-end targets.
Conversely Q1 tends to be the strongest quarter in terms of dealer enrollment or investment, but we do still see continued choppiness in the dealer count. And the national softness we know is again mostly isolated to a couple of accounts, but with the traffic growth that we’re getting in terms of total volume of audience, our opportunities increasing there.
And again, OEMs are talking to us about stepping up their investments in ‘19. Becky what would you add to that?
Becky Sheehan
I think that’s a good summary, Alex.
Alex Vetter
Okay.
Dan Kurnos
Alright, Alex. And let me just ask one more if I could just on the traffic side.
Visitors, we’re still kind of flattish sequentially, but you have sort of an opportunity now with the new platform to go out there. How are you thinking about ROI in the marketplace brand versus paid performance and when do you think that you can – are you trying to use that as a leading tool now to drive reengagement kind of pre-year remarks or is it more of a balanced approach, where you’re still working on reengagement regardless of whether or not the traffic accelerates materially near-term?
Alex Vetter
Well, look first of all, one clarification. Our Q1 traffic was up 7% in Q1, 8% in Q2, 12% in Q3, and October was up even higher, around UVs, those numbers are – go from 9% in the first quarter all the way to 17% growth in October.
So our traffic growth has been our primary strategy. We had a turnaround, a multi-year decline in traffic and we’re doing that and have done that.
I think translating that as Tom White asked about how does that translate into dealer value. We are now seeing record leads per dealer and increased connections to our dealer body and that that we think is a very positive sign that shows that we are generating more value year-over-year and that we think will translate into both dealer growth and certainly the raw traffic counts will translate into OEM spending just not in the current period.
Dan Kurnos
And more Alex from your perspective of going after market opportunity for traffic growth, are you going to press on that a little bit and in which channels are you pressing?
Alex Vetter
Sure. If you look at our sales and marketing expense, it hasn’t grown that dramatically, because you have to remember we even added all of the tronc sales force to that number, which is about 69 folks.
So on a relative basis, particularly vis-a-vis competitors, we’ve had modest growth in our sales and marketing, and that has turned into an outsized growth in traffic. We contribute a lot of that to our SEO progress, right.
We finally have really made marked improvements in our organic and SEO traffic contribution. Our marketing strategy has always been a mix, a combination of both brand campaigns followed by heavy digital has been our formula.
And I think you will see more of that with hopefully continued growth in SEO.
Dan Kurnos
Got it. Thanks Alex.
Thanks Becky.
Operator
Your next question comes from the line of Steve Dyer from Craig-Hallum Capital Group. Your line is open.
Ryan Sigdahl
Hi guys. Ryan Sigdahl for Steve Dyer, it’s hard to beat a dead horse here, but with the improving traffic and user trends what is the primary pushback from dealers that are leaving the platform, it just – it seems a little odd that you have record leads per dealer, you are generating more value, but now they are deciding to drop their cars…?
Alex Vetter
Thanks Ryan. Look it’s the competitive environment out there.
And look we would like to have no cancels, but I would also just add that not all cancels are equal. We have had large dealer groups who are paying below rate card, demanding rate concessions from us.
In some cases, we are walking away from those and losing dealers in the short-term. Our own data shows that about 20% of our dealers re-sign with us within a six month window.
So they feel the pinch of not being on our platform. We have got to be deliberate here about protecting our pricing and not just reducing our rate because certain competitors are either dropping their prices, we think our value is very clear.
And we have to build value for the mid to long-term. And just dropping price to save dealer count, I don’t think is the right way to create value.
We certainly know that that we will continue to invest in traffic growth, attribution systems, value delivery systems and I think our sales transformation all will help to make our value more clear to dealers.
Ryan Sigdahl
And then can you break out the sequential decline in dealer count between recently converted affiliates versus the previously legacy direct dealers?
Becky Sheehan
Sure. So in Q3 and Alex mentioned this a few minutes ago we fund in some of affiliated converted markets about 72 cancellations that related to dealers who we are not paying.
And although they converted to us from the affiliate and we worked with them to try to I would say remedy those relationships. At some point if they are not going to pay their bills then we need to turn them off the system.
So in Q3 that’s a relevant decline in those affiliate converted markets. However, having said that, what I would also tell you is that we are seeing growth overall in the converted markets.
We reported that in the second quarter and in Q3 particularly if I take out the 72 non-payers. We are still seeing 5% growth from the date revenue grows, when you look at what revenue converted to us and where it is at the end of the quarter, so still very pleased with that progress.
Alex Vetter
Sure. I would just add – also add to that, I mean certainly as we look forward continued growth in ARPD is a huge part of the strategy.
And while we don’t want to have a net 200 dealer decline in any quarter, we reassured that our solution strategy is continuing to bear fruit. There are many dealers that love the platform that know we generate meaningful sales and are investing more with us year-over-year which is reflected in the ARPD growth and we hope to sustain that on a go forward basis.
Ryan Sigdahl
Great. Last one for me, with the sales transformation process, is this primarily focused on efficiency or not as much on the cost side, but more on the go-to-market strategy?
Thanks.
Alex Vetter
I think it’s really both. I mean.
certainly we want to optimize the sales channel in both cost and – but obviously with the growing solutions business, where we want to penetrate to our best clients more products and services and grow our ARPD, it’s really more about optimizing it for growth.
Operator
Your next question comes –
Ryan Sigdahl
Thanks a lot. I’ll pass it.
Operator
Your next question comes from the line of Sameet Sinha from B. Riley FBR.
Sameet, your line is open.
Sameet Sinha
Yes. Thank you very much.
So Alex, I guess the question is just thinking about dealer growth, the way I look at it is the three, I guess, represent the arsenal that you have to drive that, first one is product, second is proving attribution and of – the increased traffic, and the third is the go-to-market strategy. Can you help us think about which of these are the primary weapons that you would use or which of these would be the key drivers of dealer growth maybe starting sometime next year?
And if you can potentially help us think about kind of a timeframe around that, that will be helpful as well? My second question is just looking at kind of the gross margin cadence and seems like it’s been coming down.
Is that primarily related to the national – weakness in the national business or is it something else and then I have another follow-up?
Alex Vetter
Sure. Well I’ll answer the first and Becky can answer the question on the gross margin side.
Look I think you nailed Sameet the primary leverage we have to go-to-market which is our product, our attribution and our go-to-market transformation. I think we’re delivering on the product side, that was our first priority was to reverse the turnaround or the decline in traffic, that’s been a combination of product improvements, site experiences, SCO turnaround and marketing investments.
And so we feel very confident that we’ve got momentum there, but we obviously have to sustain it. It’s a very competitive category and there isn’t a data that goes by that we’re not talking about future product innovation.
I think attribution and sales transformation are – take a little bit longer. I think attribution is obviously the hardest one because the vast majority of consumers prefer to shop online and buy offline.
We’ve got great initiatives there in terms of our on-the-lot tracking, our new online shopper, which takes leads and drops them closer into monthly payments and we’re doing work there to move into digital retail, that will be an exciting achievement and advancement in Q1 with our friends from Dealer Inspire. But the sales transformation is a big and important move.
We think that we can optimize our value delivery, make it more clear for our dealers and how it ties to pricing and get more efficiency out of our sales channel. We know some of our biggest clients who measure us effectively continue to increase their spending year-over-year, which is driving our ARPD growth.
We need to replicate that formula down to the single-point store and that’s going to require us to make big improvements in our value capture and delivery systems, which is why we brought in Doug Miller to help us transform that team.
Becky Sheehan
And then on the gross margin question, Sameet. I would say it’s two things.
Certainly, product mix that we’re selling will impact gross margin, but it’s really more about the addition of the Dealer Inspire business into the portfolio. More of their costs given the – the type of business that it is more of their costs are oriented through that cost of revenue line item and therefore it carries a higher cost of goods.
Sameet Sinha
Alright. One follow-up, and Alex, you spoke about Dealer Inspire and General Motors.
Can you help us think about how that sort of – once you get that account, once you get that approval, what is the progression from your end about going out to the dealers in selling, and in your experience how long does it take, can you help us think about that process?
Alex Vetter
Sure. Well first of all, it was exciting to get included in GM’s preferred provider list for Performance Marketing Solutions through DI.
One of the benefits of integration as well as that even though we’ve had a couple of OEMs pullback in their advertising, we’ve now opened up the available inventory to DI’s Performance Marketing Group to resell that inventory at the local dealer level as well. So I think DI – DI is excited now to tap in to that open opportunity that came from the OEM pullback.
Just one example of good integration, I think obviously on the performance marketing side now that those investments are co-operable by GM, it means less money out of the dealer pocket and improves the value prop of why dealers should work with us. And the program just kicked off last week.
So it’s too soon to tell, but we are watching the program closely and bringing it out to the dealerships as we speak.
Sameet Sinha
Thank you very much.
Operator
Your final question comes from the line of Doug Arthur from Huber Research. Doug, your line is open.
Doug Arthur
Yes. Thank you.
Alex, just a couple market related questions, you mentioned the pressure on retail sales at the dealer level, are you – is that a function of higher financing costs, is it sort cyclical exhaustion I mean what do you sort of ascribe that to?
Alex Vetter
Doug, truly don’t have a crystal ball, but I know that the increased financing rates is certainly a trend I hear from our dealers, right. There are no more dealers at zero percent financing today.
You are hearing rates still have 4.5%, 5% and the price to buy a new car is higher in some cases than a late model used – I am sorry, is growing in terms of the purchase price and so consumers are feeling the need to push down towards late model used. I think the other one though, obviously, I think the election has pulled back in consumer confidence.
I am looking forward and I am really reassured by the snap in traffic growth for us in October and now that we have got this election behind us, typically we have seen in prior years like this that consumer confidence rebounds and you see more people head to the showrooms in the fourth quarter. And I know many OEMs and dealers are betting on that as well.
Doug Arthur
And then just as a follow-up, I thought you made reference to dealer bankruptcies, are you seeing an up-tick in that or is that – is sort of steady state?
Alex Vetter
Our independent dealer churn, we feel about 18% of our dealer cancellations are from dealerships closing their doors are going out of business or in some cases folding into other stores. They were acquired and sort of closed one outlet and migrated the inventory to another store.
So it’s picked up a little bit, but it’s held steady at about 18% of our cancellations are those types of losses.
Operator
Okay, great. Thank you.
We have no further questions at this time. I will turn the call back over to Alex Vetter for closing remarks.
Alex Vetter
I would just like to say thank you everybody for participating in this morning’s call. We look forward to speaking with you again soon.
Thank you.
Operator
Ladies and gentlemen, this does conclude today’s conference. You may now disconnect.