Good morning, and welcome to the Cars.com first quarter 2019 earnings conference call. Hosting this 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 May 24th. A copy of the accompanying slides can be found on the Cars.com IR website. Following today's presentation, there will be a question and answer session with Alex and Becky. I'd now like to turn the call over to Jandy Tomy, Vice President of Investor Relations.
Good morning, everyone, and welcome to our first quarter 2019 earnings conference call. 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 two and three of 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 table included with our first quarter 2019 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 first quarter of 2019. On this morning's call, I'll be discussing our first quarter business performance and then hand the call over to Becky, who will discuss our financial results. You will recall last year we expanded from a listings-only model to a digital solutions platform. Our differentiated proposition offers dealers a greater array of sales tools and a better user experience for car buyers. We believe that our strategy will propel us to sustainable market leadership over time. We also believe that we are best positioned among all of our competitors to successfully execute this strategy. In the first quarter, we increased our product and performance marketing investments and drove a record number of leads focused on quality to translate into more sales for our dealer customers.
We are armed with a leading brand and highest organic traffic in our category, and we've also developed proven capabilities of performance marketing and achieved remarkable SEO results. With the consistent delivery of more high-quality leads through increasing exposure to an end market car buying audience and integrated digital product solutions, we continue to expect dealer growth beginning in the third quarter. Let me explain how this will happen. During the fourth quarter 2018 conference call, we introduced a plan with three primary initiatives that will grow dealer subscriptions. First, a program of incremental marketing investment is driving quality traffic and leads that convert to vehicle sales for our customers. Our winning streak in growing traffic continued through the first quarter of 2019. Driving this growth is significant competitive share shift in SEO traffic, as we are now taking meaningful market share. I will talk more about this in a moment.
Second, a relentless focus on product innovation to deliver greater audience growth and engagement. Our product innovation not only improves user experience but also sales conversion and helps dealers maximize their profit. In the first quarter, we launched AutoCorrected. It is a tremendous time saver for dealers and allows dealers to maximize their exposure and profits by ensuring that vehicle listings are properly merchandised. AutoCorrected is the latest in a series of product launches that benefit from the seamless integration of Cars.com and Dealer Inspire. The positive momentum in our B2B solutions continued in the first quarter. Our website customers grew to nearly 2,700, and revenue increased 24%. Finally, the new sales structure, which we implemented in December, focuses on providing dealer customers with ready access to product specialists and data-driven account management systems designed to improve retention and product sales.
Our traffic strategy and our organic strength is differentiated and sustainable. We are taking share with traffic up 17% year-over-year in the first quarter. Audience and traffic are fundamental to the strength of our marketplace proposition, and the team continues to deliver on impressive user growth. The Cars.com brand name is stronger than ever, achieving 73% awareness in March, an all-time high. I am incredibly proud of the work our team has done to widen the gap between Cars.com and the competition, as this strength translates into organic growth and value delivery. With the average car shopper being in market only once every seven years, brand recognition and organic traffic strength is critical to generate meaningful, sustainable returns. Our Salesperson Connect brand creative launched in early March, which included integration with the NCAA March Madness Tournament.
We are currently a sponsor of the Stanley Cup Playoffs and will be featured next week in the PGA Championships. These investments will ensure sustained exposure throughout Q2 and into the critical summer months. Perhaps our proudest achievement comes as a result of years of hard work, building stronger systems and process around improving our organic traffic strategy. Our continuous innovation and steadfast commitment to a sustained focus on quality and fair play within Google Search algorithms began paying off last year and continues. We achieved 49% year-over-year growth in SEO traffic in the first quarter, driving record traffic and leads. Importantly, the shift in our SEO strategy from research to listings is producing record leads of the highest quality for our dealer partners. We have stayed true to our focus on usability, original content, and improving speed, all while strictly adhering to Google's guidelines.
This high-quality approach is being rewarded. When a dealer cancels, the reason most often cited are lead volume and lead quality, or perceived lower sales conversion. With our success in traffic growth and product innovation, we have driven record lead volume and improved quality. In the first quarter, our total leads grew 15%. Keep in mind, the most material shift in SEO market share took place just at the end of the first quarter and continues to accelerate into Q2. This free traffic is pacing us higher than our plan for value delivery, while also scoring well with dealers who want to tap into this momentum and shift in volume and value. This may even allow us to spend less in marketing as we've built an organically strong, sustainable traffic delivery system.
Lead quality is a function of relevant traffic and digital products that enable dealers to convert traffic into incremental sales. Product innovation is also at the heart of our strategy and differentiates our business. For example, in Q1, we made industry news with the launch of Auto Corrected, a first-ever automated way to improve the visibility and quality of dealers' listings with more complete information. Kris Cox from Cox Chevrolet said it best, and I quote, "The task of verifying trim levels, equipment, and features across third-party sites has been frustrating. Thank you, Cars.com, for providing Auto Corrected for our inventory. We no longer have to worry about vehicles being represented accurately, and we've seen a 20% increase in connections since using Auto Corrected." Our focus on product quality and helping our dealer partners is validated through third-party data.
Driven Data analyze aggregated data from over 130 dealer management systems. In the first quarter, Cars.com was number one in average gross profit per used car at nearly $1,800. While competitors focus on cheap cars or SEM to drive up search costs on aging inventory, Cars.com helps shoppers find the best cars and helps the dealers merchandise them fully to maximize profit. Leads are only part of the story. Now we are leveraging our technology solutions to further improve dealer performance and ROI. Roxanne is a new pixel-based approach to track consumer shopping behavior between Cars.com and dealer websites to illuminate cross-shopping. From this data, we see that consumers who are cross-shopping between Cars.com and a dealer's website are more engaged than consumers who come from other sources.
Cross-shoppers from Cars.com are looking at five times the number of vehicle detail pages and are 37% more likely to return for a second visit. Cars.com users are four times more likely to buy a vehicle from that dealer. As dealers are constantly seeking sources of high-quality traffic to their own website, Roxanne will provide more evidence that there is no better partner than Cars.com, driving organic traffic value and sales directly to our dealers. It is this type of analytics and solutions that are differentiated and drive a clear articulation of our value. During our call last quarter, we talked about our long-term strategic plan to deliver sustainable market leadership, revenue growth, and double-digit EBITDA growth. Near term, as we look to the remainder of the year, we're focused on these objectives we set for ourselves at the beginning of 2019 to grow revenue.
First, leverage our best-in-class brand and marketing expertise to provide more value to our customers in order to add more rooftops and reduce customer churn. Second, deliver innovative products and solutions that improve our clients' business. Third, leverage our industry-leading sales and technology capabilities to continue to innovate and sell to our clients. Finally, to gain control of the remainder of our affiliate relationships and cost-effectively pursue our digital solution strategy. We're doing this while maintaining the industry's leading margins and driving further operational efficiencies with favorable year-over-year expense levels in sales, product, technology, and G&A. As we look ahead to our future, we are taking the necessary steps and exploring all the options that we believe are best for our business, our customers, and our fellow shareholders.
As many of you are aware, we are in the midst of a process to review strategic alternatives for our business. This process is ongoing, and we remain engaged with multiple parties. Naturally, there's heightened interest and curiosity to learn more about our progress. However, we cannot comment beyond what we've shared in our press release. I'm very excited about our future as we leverage our best-in-class marketing expertise, develop best-in-class dealer solutions, drive industry-leading innovation, and generate further growth in revenue and profitability by gaining full control of the remaining affiliate conversions. At this time, I'd like to turn the call over to Becky.
Thank you, Alex. Revenue for the first quarter of 2019 was $154.2 million, compared to $160 million in the prior year period. The decline was primarily driven by a decline in dealer count, softness in our national advertising business, offset in part by strength in our Dealer Inspire business. Direct revenue was up $13.6 million, driven by the early conversions of the Tronc, McClatchy, and The Washington Post markets throughout 2018, resulting in $13.2 million of incremental direct revenue in the first quarter. These conversions also resulted in a $11.4 million decline in wholesale revenue during the quarter. Dealer Inspire contributed to the growth in direct revenue due to continuing rapid growth across all of our core product lines and its results being included in the quarter for the full period.
Excluding the affiliate market conversions and the Dealer Inspire business, our direct revenue declined $11.1 million or 14%, driven by softness in dealer count. Our national advertising business, principally sales to OEMs, was down 24% in the first quarter compared to the prior year period. This was driven by lower 2019 upfront commitments and fewer scatter market sales in the first quarter. While traffic growth increases our advertising opportunity, we are also taking a number of steps to improve our current product offerings and introduce new solutions. We expect to hire a new leader for this business in the coming months, which will further help us accelerate our shift into more data-driven performance marketing solutions. Shifting to these new products will take time. We continue to be cautious about this channel and continue to project a decline in our national business in 2019.
Excluding affiliate conversions, wholesale revenue of $14.9 million was down $1.4 million compared to the prior year period. This was primarily driven by a 9% decline in affiliate dealer customers. Total operating expenses for the first quarter of 2019 were $158.3 million, compared to $152.8 million for the prior year period. This increase is driven by the addition of $10.2 million of costs related to Dealer Inspire and $4.2 million of increased depreciation and amortization, partially offset by a $3.1 million decrease in non-recurring costs. We realized operating efficiencies across product, technology, sales, and marketing during the quarter. Net loss for the first quarter of 2019 was $9 million or $0.13 per diluted share, compared to net income of $0.9 million or $0.01 per diluted share in the first quarter of 2018.
Adjusted net income for the first quarter of 2019 was $20.7 million or $0.31 per diluted share, compared to $28.5 million or $0.39 per diluted share in the first quarter of 2018. Adjusted EBITDA for the first quarter of 2019 was $38.6 million or 25% of revenue, compared to $47 million or 29% of revenue for the prior year period. As Alex mentioned, our audience growth continued its strong trajectory in the first quarter, with unique visitors growing 16% and traffic growing 17% year-over-year. Direct ARPD, excluding revenue from dealer websites and the related digital solutions from Dealer Inspire, grew 3% year-over-year, driven by the favorable impact of the increase in large dealers in larger markets that we now control.
This is the first quarter we are including revenue from websites and related digital solutions in ARPD, consistent with our strategy to sell digital solutions to our customers. Including this revenue from Dealer Inspire products, our direct monthly ARPD in the first quarter was $2,225. Dealer customers were 19,300 at March 31st, 2019, down 3% compared to December 31st, 2018, due to higher cancellations of marketplace customers, offset in part by growth in Dealer Inspire-only customers. As we said in our February call, we anticipated a decrease in dealer count following the changes to our sales structure. In March, our cancellation rate was at a five-month low, and our largest franchise dealer customers had the most significant reduction in cancellation volume compared to the December through February timeframe.
Net cash provided by operating activities for the three-month period ending December or, excuse me, March 31st, 2019 was $38.4 million, with free cash flow of $35 million, representing growth of $11.7 million and $10.9 million respectively. This increase was primarily due to changes in working capital. Cash flow was impacted in both periods by payments associated with the early conversion of affiliate markets. With our free cash flow in the first quarter, we repurchased $0.9 million shares for a total of $20 million and repaid $10.6 million of our outstanding debt. Cash and cash equivalents was $28.3 million, and debt outstanding was $685.6 million at March 31st, 2019. During the three-month period, the company paid down $10.6 million of indebtedness.
Net leverage at March 31st, 2019 was three times calculated in accordance with our credit agreement. I'll now take a moment to provide a brief update on our project to modernize our technology platform that we discussed last quarter. As a reminder, we are moving to a cloud-first infrastructure, which will allow us to be more efficient, improve our speed of product delivery, and reduce our data center footprint. Our work is well underway, and we are on track to complete in 2020. Following the completion, we expect to realize $10 million in annualized cost efficiencies. Keep in mind, in 2019, we will incur the cost of running parallel systems as we migrate to the cloud. As for outlook, we continue to expect 2019 revenue between a 5% decline and 2% growth, with adjusted EBITDA margins between 30% and 31%, as we discussed on our last earnings call.
At this time, I'd like to turn the call back to Alex for some closing remarks.
Thank you, Becky. I'm incredibly proud of the progress we've made with our product innovation and our traffic strategy, especially our record SEO share gains, which together are driving higher conversion and better quality leads, which will directly help us improve dealer subscriptions over time. We are also intently focused on taking the necessary steps to maximize long-term profitability. With the sales and technology reorganizations now behind us, we are transforming into the market leading digital solutions provider. I know we have the team, the strategy, and the commitment to propel us into sustainable market leadership. Before I open up the call for questions, I want to take a brief moment to mention a program that we're also really proud of.
In honor of Memorial Day and in recognition of military families everywhere, Cars has launched a new partnership with TAPS, Tragedy Assistance Program for Survivors, an organization that does crucial work to support families grieving a military loss. Since 1994, TAPS has helped more than 85,000 families, casualty officers, and caregivers, providing cost-free comfort and hope through peer support and grief resources. We are humbled by the service and sacrifice of these families and the work of this important organization. Cars is committing up to $1 million in media support to help raise awareness of TAPS and the much-needed work it does for the survivors of our fallen servicemen and women. We're also working with our customers nationwide to generate more awareness and support for TAPS locally. To learn more about this, please visit cars.com/taps. With that, I'd like to now open up the line for questions. Operator?
At this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from the line of Tom White with D.A. Davidson. Your line is open.
Great. Thanks for taking my question. Good morning, guys. Two, if I may. Very solid outcome on the traffic trends and I guess my first question is just kind of how that relates to what's happening on the dealer count side. You saw some elevated churn in January and February that's since improved, but would just be curious to hear more color on kind of what drove that churn. Presumably dealers, I imagine, have started to notice that the traffic and connection volume has been growing again and has for the last few quarters. Just curious why you saw that churn. Then just on the national ads business, can you maybe provide just some more specifics about how you can make that more of a growth driver or at least less of a risk?
Just seems like it's kind of lumpy because you've got a handful of large OEMs who can shift spend around. Just some more specifics there and maybe where national ads ranks on your list of priorities at the moment. Thanks.
Sure. Thanks, Tom. Well, look, we did have elevated churn in the first quarter that was more a result of our sales transformation. We know that this is a performance industry, but it also is heavily relationship oriented. When we impacted a fairly significant size of our sales force, we had increased cancellations in the first quarter as a result of that shift in strategy. However, as you know, Tom, we've shifted our sales approach to gear more support for multi-store dealer groups and more data-driven account management. We're starting to see the green shoots of that like we saw in March and some of the positive improvements. We also introduced our Social Sales Drive and AutoCorrected offering, which for the dealers that we've opted into those services, our cancellation rates are below 1%.
A big priority for us in the second quarter and through the summer months is going to be getting more and more dealers on these value-added programs so they can see better conversion and improved performance in their listings and results. When we look at the dealer CRM data, it's very clear to us that we can show dealers growing trends in terms of the number of leads, phone calls, and sales conversions that we're generating this quarter over last, and dealers are very aware of that improving trend.
On the national side, I think obviously as we guided this business to be down for the full year, I will tell you the concentration of revenue with big clients is both a challenge, but it also is part of the reason we're optimistic on a full year basis to maintain our guide because many of the OEMs that had pulled back earlier in the year are increasing conversations with us, partially in turn because of the growing traffic strength that we're demonstrating. There still is potential that these OEMs can come back in the second half of the year, particularly now that the demise of the SAR. It's been ruled out. It's a very healthy year, and manufacturers are realizing they've got to get back and start helping drive conversion for their dealer customers. It certainly remains a priority.
We're actively recruiting a leader for the business, but I'm impressed with the team in terms of how they've brought new solutions to market, and there is a lot of optimism still in the business.
Great. Thanks for the call.
Your next question comes from the line of Gary Prestopino with Barrington Research. Your line is open.
Hi. Good morning, everyone. Could you just give me what the vehicle listings were in the quarter?
Sure, Gary. I know used vehicle listings were up 2% in the quarter. New car listings are down about 13%, that's a 7% drop in vehicle count.
Total was just over 4.5 million.
Okay. $4.5 million. Okay. Looking at slide 10, when you're talking about dealer retention, lead quality, and AutoCorrect with this data. Is this data for used car gross profit a function of what you've generated with dealers that have AutoCorrect, or is that all across the board?
Across the board, Gary. Part of our marketing investment strategy is to drive more high-quality leads directly to all dealers.
Right.
I think that improvement is being amplified by the dealers that have enrolled for Auto Corrected, because now their vehicles are appearing in more search results, more long-tail search results for consumers, and the cars are being better merchandised. First and foremost, I would say we're seeing this growth across the board because we're really shifting our media strategy into high-quality channels, driving direct high-quality leads into dealer CRM systems. Certainly, the organic growth in SEO traffic has driven the vast majority of that improvement, which is quite exciting.
Do you have the data for just what the Auto Corrected dealers did? Because it would seem to me that one of the frustrations of searching for a car is not getting the correct trim.
That's right. Many of our competitors scrape website listings or don't get complete feeds. We're very intentional about helping the dealers maximize their merchandising and marketing. We now have dealers asking us how they can get autocorrected onto their own websites, which obviously, if they upgrade to Dealer Inspire, it's automatic, and that will help us with dealer website sales throughout this year because it's another value-added service that comes from the Cars family.
It'd be good eventually to see that data, if you could provide it, because I think that's important. Then lastly, when you're talking about leads, is that click-throughs directly from your website to the dealer, or is that something you're pulling out of the CRM systems of the dealers or the DMS systems of the dealers?
I think you're asking about AutoCorrect, Roxanne?
No, just total. You said leads were up 15%. I'm just saying, what is that exactly? Is that a click-through from your website into the dealer's website, or is there a whole bunch of things that are factored in there?
Thanks, Gary. Thanks for the clarification. That is just email and phone leads, which represent the predominant measure of value that dealers look at in evaluating ROI. Those are emails and phone calls, both with PII.
Okay. Thank you.
Your next question comes from the line of Daniel Powell with Goldman Sachs. Your line is open.
Thanks. Appreciate you taking the question. Wanted to ask a little bit more on the traffic side of things. I guess one, did you see whether on mobile or desktop, the impact of the algorithm change was more pronounced this quarter? Off the back of that, during past algorithm changes that have obviously happened in Google, what has tended to be the sort of longer-term implication of that? Is there a snap back or is there a steady improvement off of that base? Just trying to get a sense of sort of how sustainable you guys view the change in the algorithm and your ability to leverage that.
second question, just on the gross profit per unit that you quoted in Q1, how much of that is a function of you being able to drive better conversion versus any potential changes around mix shift to larger dealers that you might be seeing? Thanks.
Sure. Well, first of all, for Q1, almost 70% of our total traffic is coming to us through mobile devices. Mobile continues to be our strongest area of both opportunity and growth. The SEO changes specifically have not been platform-specific. They have been across the board, both desktop and mobile environments, because the change on our estimation is more about high-quality content and consistent adherence to Google's guidelines and standards, which apply to both mobile and desktop experiences. That certainly has driven a good mix shift in lead traffic. Historically, our SEO gains have been more in our research content and our editorial content. Most of the shift we are seeing now is accelerating in our search results, which is the primary revenue channel to generate value delivery for our dealers.
That's creating a lot of efficiency in our value delivery systems of high-quality traffic, very low funnel end market car shoppers directly to our dealers. Your second question was really more about the sustainability of the changes, and I would say, we certainly know that Google will always tweak their algorithms. However, most of the industry insights will say this has been the largest change that they've done in years, and the change only went down on 3/12, and so far into Q2, we are seeing those changes accelerate into the second quarter.
Just any commentary around the gross profit per unit that you are driving relative to competitors. It sounds like you guys are seeing some benefits on the conversion side of things, but just wondering if there's any mix shift to larger dealers or anything like that could also be playing into that number.
We don't see any material mix shift there. I know much of our success has been going to the larger franchise dealers who tend to be our biggest clients and spend the most. Increasingly, the value is going to the dealers that are spending higher average revenue per dealer, because they tend to participate with us beyond our base subscription. They're doing things like Social Sales Drive, Cars Social, and the dealers that have upgraded those into our preferred packages are generating even higher returns.
Great. Thanks so much.
Your next question comes from the line of Sameet Sinha with B. Riley. Your line is open.
Yes, thank you very much. I apologize if these questions have been asked. I just joined a little late. Two questions. First is, Alex, can you give us a sense of what the churn trends are in the second quarter, very similar to the way you had kind of characterized it when you reported Q4? My second question is, it's a multi-part question, basically focusing on the new products. Definitely seems like that strategy is working and when we speak to dealers, we hear the same thing that, yeah, the multi-product strategy is different.
Can you help us think about which of these new products do you think has the maximum potential according to you, how you prioritized it, and also talk about in the context of the growth in social advertising, your social products and how you're leveraging and where do they stand in the roadmap and in your priorities? Thank you.
Sure. Well, the trends we're seeing in churn are similar to what we saw in Q1, although I'll say that we're seeing an improved cancellation rate. March was our lowest cancellation rate in a five-month horizon. The March data was important, and we see continued improvements in those trends in the second quarter. Importantly, keep in mind that our sales transformation really happened in mid-December, I think that had the biggest headwind in terms of our gross sales performance. Now that that's behind us, I think our sales team is more focused on growth and customer acquisition. Certainly, the traffic trends and the value increases and organic shift in share are all tailwinds that I think our teams are excited about.
On the new product side, Sameet, certainly I would have to recognize social as having the broadest organizational impact in that we haven't even really begun to penetrate that with OEMs, and our retargeting of cars.com shoppers and social environments has been a huge success for dealers. The real strength I would signal to is our Dealer Inspire business and the growth rate and trends we're seeing there with OEMs and dealers. We added three new endorsements in the first quarter for DI in Subaru, Lexus, and Toyota. We've also added even players like Harley-Davidson, who want to make sure their stores are optimized digitally. Now when you look at all the OEMs are pointing to us as being the premier provider in the industry, dealer adoption continues to go to move off the legacy website systems providers into our more innovative mobile-centric solutions.
All right. Which of these, if you were to list out, rank them in order, which of these do you think have the largest opportunity, excluding DI? I'm talking about more sort of things that you have built in-house.
It depends on the customer segment. I certainly, again, would say social probably has the broadest appeal between OEMs and dealers. Again, I think one of the big priorities we want to get into the market in this year would be Auto Corrected because it helps dealers merchandise and perform better. Online Shopper, which is our digital retail tool. We're seeing phenomenal conversion rate improvements for dealers that upgrade into a tool that helps consumers calculate monthly payments and provide trade-in information. The richness of the content that those leads are generating into the dealer systems makes our value very vivid and leaves no room for debate as to who drove the lead in the sale. Those would be a couple of the initiatives that I think will be transformative for us as we begin to roll those out in greater scale.
Great. Thank you.
Your next question comes from the line of Dan Carnes with The Benchmark Company. Your line is open.
Great. Thanks. Good morning. Alex, I'll just ask some of the previous questions a little bit more of a pointed way. Do you anticipate that 2Q will be a trough for dealer customers?
We actually have guided the dealer growth will turn in the third quarter.
Yeah. That's what I'm saying. You're still sticking with that. You return to sequential dealer growth in Q3?
Yeah. Dan, we said on the year-end call and on today's call both that dealer growth we anticipate beginning in Q3. That's right.
Okay. All right. Look, the other question started dancing around that. Alex, look, obviously the product side has been performing at a level above, I think, almost everyone's expectations. What I want to dig into a little bit, I think you alluded to it in some of your prepared remarks and some of your responses in Q&A here, is with kind of the new sales force, you have an opportunity to reset the messaging to the dealers, and it feels like you've got a significantly altered go-to-market strategy. Clearly, it's helping you that your traffic trends are turning, so that's just another arrow in the quiver, right? But it seems like there's been a pretty good uptick on DI, which is probably helping support the underlying dealer numbers along with the ancillary product launches. If you can just talk to kind of maybe that revised messaging.
I could be entirely off-base, just sort of your thoughts on that and the sort of the go-to-market now that you've kind of reset at the end of the year, you're starting to come out on the other side here.
Well, I think, Dan, thank you for that. Certainly, we have transformed the sales force to be more performance-oriented and provide dealers a more data-driven experience. I think the exhibits of that transformation do come through to the dealers when they hear about Auto Corrected, when we roll out our integrated Facebook Messenger product with Social Sales Drive, and certainly when we are able to show them back-end analytics on their own website and how that traffic is converting from Cars.com, which isn't just the leads, but we're talking about the actual web trends and traffic. Our sales teams are learning these new languages and bringing that data and insight to the dealer, which I can tell you is a different tone and conversation that they're getting from our competition, which tends to talk about rate on leads and on declining per dealer KPIs.
I think our differentiated story that we're bringing more to the dealers than just traffic and leads, and that we're bringing data-driven solutions that help them improve their gross profit, make them more efficient, and ultimately provide them a higher degree of service, I think is starting to be seen and felt in the market. I would say that is mostly being recognized where we shifted our sales force, which is to the larger dealer groups and regional groups. Previously, as you know, dealer groups who had 12 or 20 stores sometimes had to work with multiple parties to work on their Cars.com account. We now have centralized dedicated account teams that are hyper-focused on the success of those dealer groups, and that's what's also translating to our growth in average revenue per dealer.
If you look at our ARPD growth, growing at 3% on an isolated basis is impressive, now you're also seeing when you blend in the DI growth in our average revenue per dealer, it's actually up 9% year-over-year. Turning dealer count is certainly our top organizational priority, and the increased value delivery and product innovation and improved sales structure are designed to help turn that around. I would also signal a bigger growth opportunity that we see once we fix dealer count is penetrating our dealer product solutions across a large, robust distributed sales network.
Great. Thanks. I have a follow-up on what you just said on ARPD. Let me ask that first before I ask the marketing question. Alex, just on that last comment on the 3%, I guess that's comparable underlying legacy. Is that inclusive of affiliate uplift or not?
Yes.
Yes.
Okay. That's part of it, the other question is look, I'm not trying to be nitpicky here, the ARPD uplift, it sounds like if dealer churn is at your lowest at your largest customers, then you're probably also getting some uplift natively from the fact that your smaller dealers are the ones that are experiencing the highest churn too. Can you kind of parse that out of the equation?
Well, what I would say is conceptually, of course, that's right. Again, to Alex's point, our largest customers are also the ones who are keenly aware of the value proposition we're bringing from a marketplace perspective, and they're also the customers who are buying more of the digital solutions because they also see the value prop there.
Yeah. About 61% of our dealer base were franchised in Q4, it's about the same exact percentage in Q1. There hasn't been any real shift in our dealer base in terms of franchised or independent. I'd also just add on the affiliate comment on ARPD growth. We're a year past our lapping the affiliate conversions, most of that ARPD growth, while it is coming from former affiliate markets, it is new product sales to those dealers. We've stopped segmenting our view of affiliate versus direct because it was quite a while ago.
That's fair, Alex. I just wanted to understand the nuance going in there. Listen, it doesn't really matter what the nuance is on the affiliate side, as long as you're getting the benefit you expected to see, and that was part of the story, right?
The last question I have just on marketing, then I'll step aside, is, look, I guess maybe to ask another question a little bit differently, given the strength you're seeing in the channel right now, if you believe that you have just an innately stronger offering in the marketplace right now, given that 2019 in general is, I think, people viewing it as sort of a reset year, why not lean in now harder on the marketing side, even pay up for higher LTV customers over the next few quarters to kind of set the table for what I think you guys are looking at pretty happily to get to 2020 and affiliate conversions and everything else?
Well, if you look at our sales and marketing line, we actually did have a fairly significant step up in our performance marketing channel. Then when you add in the organic improvements that we've gotten, we've got really strong trends on the traffic and the value delivery side for dealers. Most of the sales and marketing improvement in operating expense came through our sales reorganization and transformation. That was significant cost takeout in the business. That probably mutes some of the increased performance marketing investment that we are generating in Q1 and plan to sustain throughout 2019.
Got it. Great. Thanks for all the color, guys. I appreciate it.
Thank you, Dan.
Your next question comes from the line of Steve Dyer with Craig-Hallum. Your line is open.
Thanks. Good morning, everyone. Most of mine have been answered at this point. I guess, as it relates to ARPD, I know, Alex, you're not keen to sort of break it out with or without affiliates, but just trying to get some sense as to the base business, despite all the good trends in the business. Was that flat down/up on the base business excluding DI and affiliates this quarter?
Again, I think, the best way I can answer that question is not just pointing to the growth for the quarter, but talking about the month of March, where we would be lapsing those, at least the large affiliate conversion that happened last year. We still saw growth in ARPD year-over-year in the month of March. There is strength there, again, going back to the solution strategy.
Before we had-
Got it. Okay. Help me understand maybe a little bit more of the sales transformation. It sounds like that created some churn, certainly amongst your biggest sort of franchise dealers. Those are exactly the kind of dealers that, if I'm not mistaken, the transformation is sort of seeking to address and grow. Can you just kind of walk me through why that causes churn? Is it just a matter of my salesperson left, and I liked him or her, or what was sort of the impetus for that?
Well, I think that's right. At a broad level, that's right. This is still a very relationship-oriented business. We have great people, even those that were impacted were great people, but we needed to make a capital allocation shift towards traffic generation and product investment. We think we can, and we have centralized a lot of our key support functions so that our sales team can spend more time meeting with the customer and less time compiling reports, generating data, and analyzing performance. Now all of our field reps have this robust inside performance management team that they're able to quickly send to the dealer that they're visiting all the data they need to facilitate the conversation and shift us from defending our value to talking about our new solutions.
The initial blowback when we took out the cost on sales was that Cars.com is cutting back. I don't think dealers understood that while we were cutting back on the people side, we were making very deliberate investments to traffic and product improvements. Now that word is getting out that we're not cutting, we're actually investing differently. I think dealers are starting to appreciate that our value is good and we're certainly a great partner for them, to still do business with.
Got it. Thank you for that. Sort of along the investment lines, your capital allocation free cash flow this quarter, I think was split approximately between share repurchase and debt repayment. Going forward, is that generally how we should think about what you're going to do with that?
Yeah, I think for the time being, that's right. That is the strategy that we put forward.
Got it. Thank you.
Your next question comes from a line of Nick Jones with Citi. Your line is open.
Hi. Thanks for taking the questions. I just wanted to touch again on the Google algo change. You weren't getting credit for the content on your site the way you should have been. From here, are there areas to kind of continue to drive that gap from the competitors and improve SEO beyond kind of now getting credit?
Well, I think we are starting to get credit in dealer CRM systems. I don't think public market investors have dug deep enough into how this shift in traffic is going to impact the dealer value systems that dealers are pretty maniacal about looking at. Dealers are sending me their KPIs for Q1. They're seeing decreasing value from competitors and increasing value from cars. It's hard to see that when total volumes are up, but on a per dealer basis I think dealers are starting to see the shift in value creation and who's driving more year-over-year versus less. I think that's taking pressure off any pricing issues we had a year ago. Then I think certainly now it's shifting our conversation with dealers in terms of, what else do you have? What else could I do with you?
Which opens the door to talking about Cars Social, our Dealer Inspire products and services, and that's a welcome change, moving from back foot to front foot in our customer conversations.
Great, [Ken]. I guess one follow-up and segue into kind of the other digital products you're offering is, as you start to compete in kind of a more fragmented market against maybe local or regional agencies, have you seen any kind of competitive reaction from them as cars.com leans more into that segment?
No, we haven't seen anything there. I will tell you that one of the opportunities that we're excited about is using Dealer Inspire's programmatic business and their ability to buy traffic. They've been running campaigns now in the open national ad revenue positions on cars.com on behalf of both local dealers and local agencies and tier 2 clients, and seeing material improvements in the campaign performances in our ecosystem versus where they're booking the other media that their clients are buying through Dealer Inspire. Now I think both agencies, tier 2 advertisers are realizing they can buy cars.com traffic through Launch Digital Marketing, our DI performance marketing group, and they're seeing that performance improvement. That could be one way that we mitigate some of the national headwinds we're seeing in 19, if we can get more volume through that business.
Got it. Thank you for taking the questions.
Thank you.
Your next question comes from the line of Marvin Fong with BTIG. Your line is open.
Hi. Thanks for taking my question. First question, just following up on what you're talking about with higher quality leads. Are you actually observing conversion rates going up from your leads? If you are, could you give us some sense of the magnitude of that? Then I have a follow-up.
Sure, I can. One of the changes we made last year as we did the sales transformation, we wanted to show the dealers that we were going to hold ourselves accountable, so we started partnerships where we're actually getting real-time data access to our dealer CRM systems. We certainly also are pleased with third-party companies like Driven Data, who are aggregating that data and providing that to us in a real time fashion. We're seeing what our dealers are seeing in current period. The trends that we're seeing in the CRM systems that we're directly accessing or through third-party audits like Driven Data, are both showing the similar trend, which is a very deliberate improvement in lead quality, an improvement in the dealer's net promoter score of their satisfaction, and an improvement in their likelihood to maintain relationship with us based on that data.
We track it those three ways, and again, consistent trends across the board.
Okay, great. My follow-up question, just on the listing, the new car listings down 13%. That seems like it's a greater decline than your direct dealers. My understanding is that vehicle inventories industry-wide are quite high. If you could just sort of give more color on that dynamic. Why do you think it is that the new car dealers appear to be listing fewer cars than last year on the site, even though their inventories are up? Thanks.
Yeah. Certainly the majority of our value delivery systems to dealer are on the used car side. So we don't have 100% of our dealers participating in uploading the new vehicle inventory. So I think you may be just getting a mix change there in terms of the percentage of dealers that are uploading all their new car inventory. Usually, that happens when you get new dealer enrollments. They'll start with the used car inventory and then over time will work to get their new car inventory listed and featured. But I don't have more data on that to provide any analytical support behind it. I do think that OEMs have not introduced all of their models, but this summer there's a number of launches that are happening with OEMs, and so I could see those numbers improving in new car inventory volume in the summer.
Okay, great. Thank you, and congratulations on all the progress you guys have been making.
Thank you very much.
Your next question comes from the line of Doug Arthur with Huber Research. Your line is open.
Becky, can you just take me through the math of how you got to direct down 14, I think you said 14.1% organically?
All I did there was I excluded the revenue from our Dealer Inspire business, I also excluded the $13.2 million of retail revenue that shows up in that direct line that came from the affiliate market conversions of a year ago. That's a gross number, of course, because there's a corresponding offset in the wholesale line.
Okay. I missed the 13.2. Finally, you gave the I could figure it out myself, but you gave the mobile traffic 71% of total versus 65. Was that about a 30% growth rate in mobile?
Yep, that's right. It was just, yep, about 30% growth rate on a year-over-year basis.
Okay, great. Thank you.
You're welcome.
There are no further questions in queue at this time. I would like to turn the call back over to Alex and Doug.
Thank you for joining our call today. Have a great weekend.
This concludes today's conference call. You may now disconnect.