Good morning, welcome to the Cars.com third quarter 2019 earnings conference call. Hosting the call this morning is 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 November 20th, 2019. A copy of the accompanying slides can be found on the Cars.com IR website. Following the presentation, there will be a question and answer session with Alex and Becky. I'd now like to turn the call over to Jandy Tomy, Vice President of Investor Relations. Please go ahead.
Good morning everyone, welcome to our third quarter 2019 earnings conference call. Before I turn the call over to Alex, I'd like to draw your attention to our forward-looking statement and the description and definition of our non-GAAP financial measures, which can be found in our presentation. We will be discussing certain non-GAAP financial measures today, including adjusted EBITDA, adjusted EBITDA margin, adjusted net income and free cash flow. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measure can be found in the financial tables included with our earnings press release and in the appendix of the presentation. For more information, please refer to the risk factors included in our SEC filings, including those in our annual quarterly and current reports. Cars.com assumes no obligation to update any forward-looking statements or information as of their respective dates.
At this time, I'd now like to turn the call over to Alex.
Thank you, Jandy. Good morning, everyone, and welcome to our conference call for the third quarter of 2019. On this morning's call, we'll be discussing our third quarter business performance and then hand the call over to Becky, who will discuss our financial results. Our third quarter results were in line with expectations that we laid out on our last call. There are a few highlights that I'd like to discuss today. First, we completed our final affiliate market conversions, which gives us complete control over our entire customer network. With our affiliate sales model now behind us, our sales team is able to support dealers in these markets directly and more effectively increase our sales and service in these territories.
Second, we took over as the number one player in SEO, which reinforces the strength of our brand and demonstrates our technical sophistication and validates our product strategy to deliver high-quality content. Third, this quarter we announced a partnership with General Motors, which opens the door for us to sell our website solutions to over 4,000 new dealers across the country. This creates more opportunities to sell a broader set of products and solutions. Lastly, we achieve these milestones while generating significant operational efficiencies, most notably our sales and tech transformations. As we discussed on our last earnings call, we are further along with dealer retention and cancellation rates, which have stabilized. Our investments in product and audience are improving value delivery for our customers, and we believe these investments will yield positive results moving forward.
Importantly, with the affiliate conversions now behind us, our entire sales team is in control and focused on growth across all markets. I'm pleased to report that we delivered a strong October with nearly 100 net new dealer subscriptions. In fact, it was our second highest gross sales month in over two years. Our dealer customer decline in Q3 was due to the declines in both direct and affiliate markets. Cancellation rates in affiliate markets were higher than direct, emphasizing the importance of early conversions to stop the heightened attrition experienced during periods when those markets were not under our control. The declines in the third quarter were partially offset by the growth in solutions only customers.
The improvement in dealer count is more of a marathon than a sprint, and the initiatives around traffic and lead growth, product innovation, and sales effectiveness, like our turnaround with SEO, takes time, but ultimately makes our subscriptions much stickier. We are using the same playbook that was successful in reversing our traffic declines to the record growth we are experiencing today through investments in quality audience, technology, and a cohesive go-to-market strategy. The progress we continue to make on our attribution initiatives will also support our dealer retention strategy. We now have several quarters of Roxanne™ data, which shows that consumers who are cross-shopping between Cars.com and a dealer's own website are far more engaged and likely to buy a car from that dealer. These analytics and tools and solutions are unlike any offered by our competitors and put Cars.com in a unique position.
Gaining complete control over affiliate markets has been a key tenet of our strategy to better address the needs of dealer customers and unlock value of our solutions strategy through dedicated, experienced sellers. I'm proud to say that in October marked the end of the affiliate network for Cars.com, and we have successfully converted the last affiliate dealers to our direct control. This is not only expected to drive $50 million in incremental free cash flow uplift beginning in 2020, but it also gives us complete control over our go-to-market capabilities in all markets for the first time in our history. I spoke with one of our recently converted franchise dealers, and he said to me, and I quote, "When we were pitched by the newspaper, Cars.com and DealerRater were being sold to us as part of a bundle of print products.
Honestly, we didn't want or understand the value proposition. The affiliate rep couldn't explain to us how they could help our business. After a few calls with our dedicated rep, we are now going to be customers of Dealer Inspire, Cars.com and DealerRater, and I feel much better about my investment." End quote. This feedback is very typical of what we hear when we convert a market to direct. Having direct control of all of our customer relationships going forward is a big step in our sales transformation and positions us for growth. Another success we had in executing our strategy is around audience growth, which continues to accelerate, reaching our highest levels of unique visitors this past quarter. In a marketplace such as ours, audience is truly a key reflection of consumer preference, and the data clearly illustrates that we're a leader in consumer acquisition.
Our growth continued in Q3 with unique visitors and traffic up 22% and 27% year-over-year, respectively. Combined with the superior Cars.com brand, organic and acquired audience strength have resulted in notable market share gains at the expense of competitors throughout the year. Furthermore, our investments in product and technology continue to pay off, including a 30% year-over-year increase in SEO traffic. Steady and persistent focus on SEO has yielded market-leading results, which has produced the highest number of SEO visits and leads in 20 years. Achieving market leadership takes time, but I'm pleased that our diligent SEO strategy has now earned us the highest SEO performance in our category.
Translating these notable audience achievements in the market-leading dealer count is the ultimate objective, and to do this, we have to drive high-quality leads to our customers, which will improve their ROI from our platform, and our organic sources of traffic are very valuable to our customers because they are getting quality traffic that they can only get from Cars.com. We are also making strategic shifts in our marketing investments that are making us far more efficient. For example, our traffic generated through paid channels nearly doubled in the third quarter. However, our media spend only grew 4%, and we continue to generate the vast majority of our traffic from organic sources. Let's talk about our national advertising business, which continues to face headwinds in the current environment.
However, as we talk to OEMs, there is no shortage of demand to reach in-market undecided car shoppers, the very audience in which we are taking share. Combined with traffic share gains, we continue to innovate in solutions and formats that meet the evolving OEM needs. To help drive this strategy forward, we welcome a new team member in September, and I'm incredibly excited to welcome Julie Scott to Cars.com. Julie is an experienced digital marketing leader who will drive growth in our national advertising channel, focusing on business-driving media solutions for OEMs. One of the most exciting developments this quarter is our new opportunity to work directly with GM dealers nationwide. We also are excited about our new partnerships with Hyundai and Mitsubishi. Our OEM relationships continue to grow across our portfolio, which reinforces our digital solution strategy and our differentiation as an online marketplace and solutions provider.
Our portfolio now includes a total of 28 OEM partnerships. For GM, we are one of only four certified providers and can now sell our leading-edge digital website services to more than 4,100 GM dealers who now have a choice of providers for the first time in 15 years. The GM program is currently in the dealer enrollment phase, with the first websites expected to launch in Q1 2020. We expect subscription-based website development revenue to be an important growth driver for us for years to come. Ultimately, we believe this is much more than just websites. These new relationships that we're building with OEMs like GM create a halo effect, cascading into longer-term conversations, both with our traditional and emerging data-driven advertising and marketing solutions.
To that end, as you may have seen, we announced this morning that Dean Evans, an accomplished auto industry innovator, has joined Cars as Executive Vice President. Dean is an important addition to our leadership team as he sees the bigger solution strategy that we're driving to help sellers be more effective with technology. We have substantial automotive industry know-how and digital technology that can be further leveraged for growth. Dean's expertise, leadership, and impressive track record for ramping auto sales is unprecedented. Our vision is to create a competitive advantage for our customers and further evolve the business from a traditional marketplace to a full-service marketing and technology solutions provider. Before I turn the call over to Becky, let me just reinforce that our team is laser-focused on execution.
With the strategic alternative review process now fully behind us, I'm confident in our ability to devote our full attention to driving the return to growth expected in 2020. I'd now like to turn the call over to Becky to go through our financial results for the third quarter of 2019.
Thank you, Alex. Revenue for the third quarter of 2019 was $152.1 million, compared to $169.3 million in the prior year period. The decline was primarily driven by fewer dealer customers and lower national advertising revenue, offset in part by incremental revenue from the newly converted affiliate markets and growth in our Dealer Inspire Solutions business. Direct revenue was up $3.4 million year-over-year, driven by $14.2 million in revenue uplift from the affiliate market conversions and 25% growth from our Dealer Inspire Solutions sales. Wholesale revenue of $5.4 million declined $12.3 million compared to the prior year, of which $9.6 million was the result of the conversion of the affiliate markets.
Excluding the affiliate market conversions, wholesale revenue was down $2.7 million, driven by a decline in affiliate dealer customers. As a reminder, with the final conversion of the [Beetle] markets that took place on October 1st, we no longer have a wholesale channel. In addition, the unfavorable contract liability is now fully amortized, and the $6.3 million quarterly benefit from this amortization has ended. Our national advertising business was down $7.9 million or 28% in the third quarter compared to the prior year period. As Alex mentioned, while traffic growth increases our advertising opportunity, we are also taking a number of steps to improve our current product offering and introduce new solutions. Now let me move into a discussion of our operating expenses in the quarter.
Although our goodwill impairment analysis is normally performed in the fourth quarter, we determined there was a triggering event in the third quarter, primarily caused by a sustained decrease in the company's stock price after the completion of the strategic alternatives review process. Therefore, we performed an interim quantitative impairment test during the third quarter. As a result of that test, we recorded a non-cash goodwill and intangible asset impairment charge of $461.5 million because the book value of our assets exceeded the estimated fair value. We do not expect this non-cash impairment charge to have any impact on our operations, liquidity, or cash flows, or affect compliance with our financial covenants under our credit agreement. The cash benefit from the deductible goodwill and intangible assets for tax purposes remains intact.
Excluding the impairment charge, total operating expenses for the third quarter of 2019 were $138.3 million compared to $141 million for the prior year period. This reduction was primarily due to lower headcount related costs. Net loss for the third quarter of 2019 was $426.2 million or $6.38 per diluted share. Adjusted net income for the third quarter of 2019 was $21.3 million or $0.32 per diluted share, compared to $38.4 million or $0.55 per diluted share in the third quarter of 2018. Adjusted EBITDA for the third quarter of 2019 was $45.9 million or 30% of revenue, compared to $62.2 million for the prior year period. As Alex mentioned, we continue to set new records in our audience growth, with unique visits growing 22% and traffic growing 27% year-over-year.
ARPD was up 1% sequentially from last quarter, driven by our successful conversion of the affiliate market. Last year, we did not include revenue from our website products in ARPD, and on that basis, ARPD declined 2%, primarily driven by dealer mix. Dealer customers were 18,635 at September 30th, 2019, down 256 or 1% compared to June 30th, 2019. This decline was primarily driven by a decline in direct marketplace dealer customers and dealers who canceled in the affiliate converted markets. Digital solutions only customers grew in the quarter. Net cash provided by operating activities for the nine-month period ending September 30th, 2019 was $80.6 million, compared to $121.1 million in the prior year. Free cash flow for the nine-month period ending September 30th, 2019 was $65.1 million, compared to $111.1 million in the same period last year.
Keep in mind that in the nine-month period, we incurred $23.6 million of costs associated with affiliate revenue share payments, which is $4.3 million higher than we incurred in the prior year period. Cash and cash equivalents was $19.8 million, and debt outstanding was $666.6 million as of September 30, 2019. During the nine-month period, we reduced our indebtedness by $29.7 million. Net leverage at September 30, 2019 was 3.4 times, calculated in accordance with our credit agreement. In October, we announced an amendment to our existing credit agreement that resets our total net leverage covenant for the remaining term of the agreement. This amendment increased our maximum total leverage ratio to 4.5 times, with incremental step downs in that ratio through maturity on May 31, 2022. This amendment provides increased financial flexibility and an ample capacity to respond to market changes.
We are reiterating the guidance we communicated last quarter of revenue declines between 6% and 9% year-over-year, with adjusted EBITDA margins between 27% and 29%. At this time, I'd like to turn the call back to Alex for some closing remarks.
Thank you, Becky. While our building blocks for the future remain unchanged, we are focused on four key priorities as we close out this year. First, we will continue to take share in traffic and improve our overall value delivery. Second, with the affiliate channel now complete, we are fully focused on serving all of our customers directly. Third, we're focused on securing as many of the 4,100 GM dealers as we can, taking advantage of our semi-exclusive opportunity.
Finally, we will continue to innovate new solutions that derive growth and customer success. With that, I'd like to open the call up to your questions. Operator?
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile a Q&A roster. Our first question comes from the line of Tom White from D.A. Davidson. Your line is open.
Thank you for taking my questions. Good morning, everyone. Just, Alex, on dealer count, it sounds like October has been a strong start to the quarter. I think you said nearly 100 net adds. Can we extrapolate that you guys are going to be able to grow dealers again, net dealers for the full quarter now that given the affiliate conversions are behind you, the traffic trends are very strong? Then just on the traffic growth, obviously very impressive. Any sense you can give us of what downstream lead volume growth is looking like or looked like in the quarter? Then just lastly, the Dean Evans hiring announcement. There's some discussion in there around digital video. I was just hoping you could elaborate there a bit about how that kind of fits into your broader solution strategy and product portfolio. Thanks.
Sure, Tom. Thanks. Well, look, we certainly are reassured on the dealer growth in October. Having the first full month where we've had no focus on affiliate conversions and have complete control of the dealer network, it's not lost on me that that's the first month we hit our full stride. What I also though say is that Q4 typically is a tough season in the auto industry as dealers try to make the short-term decisions to meet bottom line. We don't want to declare victory yet on dealer growth in Q4. Certainly to your second point, the traffic trends are moving in all the right ways. I think your point is how does that translate to dealer value? Our leads are up for the quarter. Obviously, growing traffic translates to advertiser satisfaction.
We're pleased with what we're seeing in our dealer pulse surveys as well in terms of their overall satisfaction. Your final question was about Dean, and I'll just remind that Dean's been a client. Dean has been on the other side of the desk buying media from everyone in the industry. As we approached Dean in about 2020 and using data as our superpower and helping them with their television advertising, I think his eyes lit up and saw a bigger opportunity to not only do this for OEMs, but for dealers. I think that that solution strategy is one of the key reasons that Dean is here. Tom, you will recall that when we bought Dealer Inspire, one of the hidden gems inside that business was a programmatic advertising platform called FUEL. That allows us to run advertising solutions at scale in a programmatic fashion.
The biggest advent I've seen in technology in the past year has been the advent of digital video. We think there's a massive opportunity to help dealers become more efficient and migrate traditional and linear TV budgets towards more effective and accountable digital channels. Dean's here to help us realize that vision.
Tom, it's Becky. Just to add one more comment to what Alex said to your first question. I'll remind you that although dealer growth is certainly an important metric that we have for ourselves, it's not necessary for us to grow dealer count in Q4 to achieve the guidance that we've provided.
Got it. Thank you very much.
Our next question comes from the line of Gary Prestopino from Barrington Research. Your line is open.
Good morning, everyone.
Hi, Gary.
Hey, Gary.
With the ability to go after these websites from the dealerships, how do those contracts shake out? Are they all up for grabs in the current year, or is it a lot like the DMS that they renew every five years or something like that?
Thank you, Gary. I think you're speaking specifically to GM and that new opportunity. I'll also just point that both Hyundai and Mitsubishi were additions in the quarter, and we've also got agreements now with Subaru and Lexus. They all have some uniqueness. Dealers tend to be free to move from one website provider to another without much contractual overhead. The GM opportunity is a little bit slower roll because there's multiple sign-up phases for dealerships. GM's doing a roadshow for dealers where they're educating them on the four partners that are available to them to choose from. We're actively out meeting with all the GM dealers and showing them what we can do for them in the new year. The dealer count gains we've seen there initially are pleasing.
We know we're in the number one position as the most requested vendor in the semi-exclusive bunch. Again, it's going to be slow rolling, and that revenue really won't hit until 2020 because we're just in a sign-up phase.
Okay. Then can you wrap some metrics around this for us with just selling pure technology solutions in the quarter? What kind of revenues was that generating on a recurring annual basis, and what was the growth in that? Do you have those metrics handy?
The solutions growth was over 20%, Gary. Becky will have to give you the closer numbers, but we continue to see increased pacing as we ramp that business. Becky, I don't know if you have a point estimate.
For the quarter, our Dealer Inspire Solutions business was almost $20 million of revenue. That's up 25% year-over-year. Importantly, within there is our website business, which is up 40% on a year-over-year basis. We continue to see very strong growth. The difference between the website growth and the total growth is simply that the performance marketing solutions that we also bring to our dealers to help them drive their local business, that has more ins and outs during any particular period of time. We're certainly continuing to see the strong growth that we had earlier this year as well.
Okay. Lastly, somebody asked this on a prior question. Did you give a number for how much leads were up this quarter? Are you making that public?
We didn't disclose it, but leads are up in the quarter, and they're following a strong both Q2 as well. Q2 and Q3 leads per dealer are up, as all our total leads.
Okay. Thank you.
Thanks, Gary.
Our next question comes from the line of Lee Krowl from B. Riley FBR. Your line is open.
Hey, guys. Thanks for taking my question. Good to see some of the trends are turning up. Last quarter, you guys provided some guidance for 2020. Noticed it wasn't in the prepared remarks. Just curious if there's any changes to the commentary from the last call as to you expect to return to revenue growth in 2020 and double-digit EBITDA growth?
I think obviously we're affirming our 2019, and then we're going to be on our regular cycle now, and give guidance for 2020 at our typical time.
Okay. Just on the affiliate conversions, certainly exciting to see October off to a good trend, but is there maybe a way of, you've had enough conversions to this point to maybe handicap some anticipated churn or maybe quantify the anticipated churn of the affiliates? Obviously, it seems like there's some natural attrition. Is there a way to think about how, as you get all these guys fully onboarded, how that churn trends out over the next couple of quarters?
Sure. I think we do have a lot more experience. I think we pointed to ARPD in the quarter being a solid one. What's important for investors to also realize is that the final affiliate conversions were from media markets that tend to be on the lower end of our rate card. Our pricing model is skewed by both market size and dealer size, and most of the final affiliate conversions were to dealers in rural and smaller markets with smaller lots. I think going forward, what investors should be excited is our growing solution strategy that will emphasize ARPD and increase dealer spending as well. We know we will continue to have some churn. It's been pretty durable in our business and competitors as well. We've really cut the cancellation rate.
That's probably been the biggest achievement this year, is we've brought cancellations down into a much more manageable volume, and we're really focused now on total gross sales. We haven't declared victory yet, although October certainly points to a new muscle that we're getting much better at. We still have some more work to do there, candidly.
Got it. Last question from me. Pretty exciting developments that you guys have highlighted with Roxanne™. Can you maybe just talk to the data privacy laws that are coming on and perhaps how Roxanne™ is future-proof from that? Also just as this continued shift to mobile, perhaps how that plays into the strategy around Roxanne™ as well?
Sure. From a data privacy standpoint, what's key about Roxanne is we're largely using non-PII level data to validate our performance. What we see very vividly in the data is that users that go to a dealer's website that originate on Cars.com are converting to dealer metrics at four times the rate of all of their other traffic sources combined. This is the data that dealers have needed to validate that migrating website traffic from Cars.com to their environment is perhaps their best money in. Your second question, though, beyond the privacy concerns, I may have missed. If you could just run it past me one more time.
Just the strategy with Roxanne in the context of the continued shift in your traffic to mobile.
Yeah, actually, I think it provides the same visibility in all environments, and there isn't any degradation in our visibility with mobile.
Got it. Thanks for taking my question, guys.
Thank you.
Our next question comes from the line of Daniel Powell from Goldman Sachs. Your line is open.
Great. Thank you. Appreciate the time. Two questions. One, just wanted to get your view on the cadence of ARPD as we go into the back part of this year and into next year. You called out mix as being a reason for some of the pressure on the year-over-year growth in the quarter. As you guys go out with your reorg sales force, are you expecting to continue to see negative impacts from mix? Are you further down the tail of dealers that you can add at this point in time? The second question, if I was reading the numbers correctly, it looked like spend went from about up 15% last quarter to about up 4% this quarter. You saw a nice acceleration in traffic based on some of your SEO strength.
Just curious if the leads number, did it accelerate from the up 9% last quarter like your traffic did, or did it decelerate from that up 9% last quarter like your spend did? Thanks.
Sure. Thank you. First of all, on ARPD mix, we're not projecting growth in that between now and year-end. We'll give a better outlook on that for 2020 as we lay in our different solutions and we de-dupe dealerships by product type. That will be data that we'll give you on our 2020 outlook, we aren't projecting ARPD growth in Q4. I think as to lead volume, we did see sequential quarter drop, which is, I think, more reflective of the new car traffic, where we saw a stronger drop in the new car volume than used, which I think reflects the seasonal cycle that we experience every year. Q4 tends to drop down comes back in a stronger quarter in the first quarter. Our marketing spend, you noted, right?
We were able to drop the marketing spend considerably, but the scaling of our SEO strategy has probably been the most exciting trend in our value delivery, which I think dealers know that traffic is the most valuable kind of traffic that they can acquire because they're not competing for it in search, and they are actually tapping into a new source of incremental sales as opposed to an arbitrage player who's bidding up search.
Great. Thanks.
Our next question comes from the line of Marvin Fong from BTIG. Your line is open.
Great. Thank you for taking my questions. First one, I guess, just revisiting something we talked about last quarter with dealers a little skittish because gross profits on the used car side were down and the upsells of some of your ancillary products was getting a little tough. Could you just update us on what the macro environment looks like with respect to dealers and how they're thinking about their ad spend? Thanks.
Sure. Marvin, thanks. I think dealer profitability continues to be the headline theme in the industry. As I travel the country and meet with dealers, that is their primary focus. Which I think, by the way, sets us up great to introduce new alternatives to traditional advertising. Our video opportunity, I think can really help dealers find a more profitable way to grow sales in 2020. That said, I think they also are recognizing that the year has turned out to be not as catastrophic as one would have thought probably two months ago. That there is still a healthy used car market that's growing, and new car sales, while dipping, are also still at very healthy levels. I think the mood has improved and dealers have started to focus more on what they can do differently heading into 2020.
Great. Thanks, Alex. Two quick follow-ups. Becky, perhaps you have this. What was the listings in the quarter? Other question just on national advertising. I think you had said before you've tried to get more aggressive on the upfronts. Could you just update us, remind me when the timing of those upfronts are and how you're thinking about capitalizing on that opportunity this coming year. Thanks.
Yeah, sure. On the listings front, we have 4.4 million listings on our marketplace. As it relates to national advertising, we are in the midst of the upfront discussions and proposals with the calendar year OEMs. That's happening literally as we speak. We'll have more insights as to how that's progressing as we get closer to the year-end. Then, of course, there are the fiscal OEMs, where that happens closer to year-end timeframe and into the first quarter.
Okay, great. Thank you. Thank you, Alex. Thank you, Becky.
Thank you.
Thank you.
Our next question comes from the line of Nick Jones from Citi. Your line is open.
Hi. Thanks for taking the questions. First one, can you give an update on your capital allocation strategy, given the increase in the net leverage ratio? Secondly, as traffic continues to grow nicely and leads are growing, have the conversations with dealers changed at all? Are they looking for more tools internally on cars.com's platform in addition to some of the new products? Is attribution becoming more important or less as your traffic starts to ramp back?
I'll start with the second question and turn it for Becky on our capital strategy. I think the conversation has definitely turned with franchise dealers. I think independent dealers continue to hold the line and look for just cost efficiency at the independent level. Franchise dealers absolutely are looking for technology solutions that can eliminate vendor costs and/or automate solutions for their dealerships to run more efficiently heading into next year. I would also say just more broadly on our sales team front, I definitely feel like we've moved more to front foot in terms of our value delivery, our data around attribution, and the evidence that we have that we're a higher quality source of sales than other providers. That has been a welcome shift in the conversation.
On capital allocation in the near term, our focus is, and we think it's more prudent to pay down some of the debt. You'll see we did a bit of that in the third quarter. The credit environment has tightened, and as we've talked with investors, we also have been encouraged to prioritize some deleveraging, which is what we're doing. We do still have an active share repurchase program. I think that's a prudent tool to have as a public company. In the near term, our focus is on taking down some of the debt.
Great. Thank you for taking my questions.
Our next question comes from the line of Steve Dyer from Craig-Hallum. Your line is open.
Thanks. Good morning. Most might have been answered. Just one more on churn, down 1% in the quarter, much, much better than it's been. Alex, you noted kind of swung that positive in October. Can you give us sort of the cadence of how that trended throughout the quarter? In other words, did you see linear improvements throughout the quarter and then positive in October, or no?
Yeah, I think we did see fairly consistent improvement, particularly going Q1 to Q2 to Q3. The trend on the cancellation rate has continued to stabilize and improve. On the gross sales front, mostly, I think we had one, I'm looking at the data right now, one month in the quarter that didn't sequentially improve. Overall, if you look at the trend, gross sales volume has been steadily improving and the cancellation rate has been much more dramatically improving.
Got it. Okay. In the release, you talked about affiliate conversions are expected to generate an incremental $50 million of free cash flow in 2020. Can you sort of deconstruct that, provide a little bit more detail on what makes that amount up? Thanks.
Yeah. That's two components. The first component is the wholesale to retail revenue uplift that we realized with the conversions complete. We get the actual retail revenue that's being billed to the dealers instead of collecting that $0.60 on the dollar, which is wholesale revenue. That's the first component. The second component is the end of the payments that we're making to the former affiliate partners to have achieved the early conversion. You'll recall that we've been incurring extra payments to those former affiliate partners as part of our agreement to convert the markets early. In the first half of next year, we still have some of those payments, particularly to the most recently converted affiliates. By the midpoint of next year, those payments will end. Obviously, there'll be more significant uplift once that happens.
Got it. Thank you.
Our next question comes from the line of Doug Arthur from Huber Research. Your line is open.
Yeah, thanks. Becky, I'm wondering if you can just sort of disaggregate direct revenues in the quarter. You said Dealer Inspire, I think, was up 25%. You said, I believe, that the incremental impact of the affiliate conversions was 14.2. That's over a year ago, I assume. Can you speak to what that incremental impact was sequentially from Q2, for starters?
Apologies, I'll have to look. I don't have Q2 in front of me. You were right. The $14.2 is the, I'll call it the uplift in retail revenue. A large portion of which, of course, comes out of the wholesale line. That's the first part that's an increment for Q3 on a year-over-year basis. The Dealer Inspire growth on a year-over-year basis is 25%. That equates to approximately $4 million. The offset, of course, to get to the $3.4 million that we grew on that direct line, which would be excluding national advertising, is the lower revenue we achieved from the notion that the subscription business has less dealers today than it did a year ago. Those are the key components. I don't have in front of me, apologies, what those year-over-year changes were for Q2.
Certainly, we can get that and provide that as well. National advertising in the quarter is down 28%, that's a $7.9 million decline on a year-over-year basis. I think those are the key elements of the revenue.
Excluding Dealer Inspire, obviously very impressive growth, and the affiliate conversions. The baseline figure I was using for direct, excluding all that last year in the third quarter, was $78 million. I don't know whether that's right or not, but that's the number I was using, sort of the underlying direct number. That I assume was down sort of high double digits then in the quarter. Is that fair, excluding the impact of the conversions?
Yes.
Okay. Terrific. Thank you very much.
We have no further questions in queue. I'll turn the call back to Alex Vetter for closing remarks.
I simply want to say thanks for joining today. We'll talk to you soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.