Image source: The Motley Fool.
Cars.com Inc. (CARS -2.85%)
Q3 2018 Earnings Conference Call
Nov. 07, 2018, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
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'd now like to turn the call over to Jandy Tomy, Vice President of Investor Relations.
Jandy Tomy -- Vice President of Investor Relations
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'd like to draw your attention to our forward-looking statements and the description and definition of our non-GAAP financial measures found on Slide 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 -- Chief Executive Officer and President
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're 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 seven 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 (inaudible) 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've had with traffic growth is due to the marketing investments we're 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 make or model they want when they begin their search. The advertising campaign and product experience have paid dividends with Matchmaker users cementing (ph) leads at two times the rate of non-users, creating profiles at nine times 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 innovative solutions that provide more value to our partners than our competitors do. As dealers face increasingly challenging environments, they're looking for and spending on comprehensive network solutions that together generate both insight and efficiency to drive sales. We believe our strategic shift is supported by market evidence.
In our recently published industry report, Merrill notes that dealer spend three times 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 dealerships inventory with active shoppers in Facebook Marketplace. The new solution uses proprietary AI chatbot technology and it 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've 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'm excited to announce that we have achieved our first preferred product endorsement with General Motors for Dealer Inspire 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'd now like to turn to the sales transformation under way. 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 value delivery in 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 a 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 a 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 rate than those that do not. For example, retention rates for dealers with social sales product are 3.5 times more likely to remain on the platform, since we debut the offering in the quarter. While we're not where we want to be with dealer churn, I'm 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 every day.
I'd now like to discuss our national advertising business. Overall, new car sales are being propped up by fleet sales, the 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 toward 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've have completed the technology review with the assistance of a third-party expert evaluating our current systems, structure and process. We've 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'd now like to turn the call over to Becky to walk you through our financial results for the third quarter.
Becky Sheehan -- Chief Financial Officer
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're 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 in 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 the 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 and legacy affiliate territories and lower overall sales.
We completed the McClatchy affiliate market conversions on October 1st. This leads us 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 and toward the brunt of the macro headwinds affecting the larger auto industry and is being impacted by shift in 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'd like to turn the call back to Alex for some closing remarks before your questions.
Alex Vetter -- Chief Executive Officer and President
Thank you, Becky. As we look ahead, we're 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 two-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'd like to open up the call for your questions. Operator?
Questions and Answers:
Operator
Thank you very much. (Operator Instructions) Your first question comes from the line of Tom White from DA Davidson. Tom, your line is open.
Thomas White -- D.A. Davidson -- Analyst
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 -- Chief Executive Officer and President
Thank you, Tom. Good morning. First of all, the traffic growth has been steady and consistent and I know a consistent question that we've 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're actually hitting record leads per dealer for the quarter. We've 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're seeing a ton of increases in traffic to dealers websites. Unfortunately, as we've 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're 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'll soon translate into dealer confidence as well.
On the capital deployment side, we've been reserving our capital for affiliate conversions, so that we can -- and then also investing for growth. And obviously you know our share repurchase program or paying down our debt, those would be the four primary areas.
Thomas White -- D.A. Davidson -- Analyst
Thank you.
Operator
Your next question comes from the line of Gary Prestopino from Barrington Research. Gary, your line is open.
Gary Prestopino -- Barrington Research -- Analyst
Hey, good morning everyone.
Becky Sheehan -- Chief Financial Officer
Good morning.
Gary Prestopino -- Barrington Research -- Analyst
Several questions, when you're talking about the shift in national advertising by certain OEMs, are they -- is it a shift or they just pulling back? I mean are they moving away from digital advertising or just in general reducing their advertising expenditures?
Alex Vetter -- Chief Executive Officer and President
Well, good morning, Gary. Thanks for the question. First of all, the two OEMs that really were responsible for the bigger part of the loss in the quarter. Our business macro shifts that they're making, pulling all advertising out of the market, specifically for specific mix and -- or models that they're historically had provided support for us. 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 toward 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've had large OEMs pullback advertising in prior years, only to follow them a few periods later, comeback much stronger and bigger than they were prior because it's hard to beat our cost efficiency. Our audience or people actively shopping for the very products they are trying to sell. But by and large, Gary, the bigger pull back is a macro one and most of the OEMs have already started talking to us about their 2019 plans.
Gary Prestopino -- Barrington Research -- Analyst
Okay. And then in terms of the Social Sales Drive, 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 Car Social?
Alex Vetter -- Chief Executive Officer and President
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've got 5,200 dealers that have enrolled for that and that's where we are seeing profound upticks in our retention rate, because the dealers appreciate that we're doing more for them year-over-year.
I would caution that, it takes both the dealer and Facebook to accept our invitation to this. And so we're averaging about 2,000 dealers a month in terms of getting their enrollment. There is a dependency 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 flipped to switch and put them all in there, but it is more of a manual process. And again, about 2,000 dealers a month that we're getting into that platform.
With independents, we're 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're now starting to sell, this as an upsell to independents and it's started to see a nice uptick in revenue with independent dealers on that solution.
Gary Prestopino -- Barrington Research -- Analyst
Okay. And then could you just talk a little bit more of the changes in go-to-market strategy that you've been working on?
Alex Vetter -- Chief Executive Officer and President
Sure. I mean, I think ultimately what we've 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've 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've had to undertake this year is converting and absorbing the affiliate channels that we've moved from wholesale to retail. We've 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've 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 managed in our affiliate network. 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 -- Barrington Research -- Analyst
Great. Thank you.
Operator
Your next question comes from the line of Dan Kurnos from The Benchmark Company. Dan, your line is open.
Daniel Kurnos -- The Benchmark Company -- Analyst
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 its 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 product via bundle or whatever it is to turn these guys back on? And then I'll follow up with the guidance question.
Alex Vetter -- Chief Executive Officer and President
Sure, Dan. Good morning, thanks for being here. 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 is 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 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, and 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 in new car is adding a lot of margin compression to the dealers and so they're looking to cut costs.
Daniel Kurnos -- The Benchmark Company -- Analyst
So let me just follow up on that, I mean look, for the Q4 guide then, I'm just trying to kind of suss out exactly, sort of the puts and takes here. We're going to -- obviously national is going to continue to be soft, OEM is 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 back you said it was mostly due to the affiliate conversion, I don't know that (inaudible) 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 -- Chief Executive Officer and President
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 cutback 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 opportunity is increasing there. And again OEMs are talking to us about stepping up their investments in 2019. Becky, what would you add to that?
Becky Sheehan -- Chief Financial Officer
I think that's a good summary, Alex.
Daniel Kurnos -- The Benchmark Company -- Analyst
Alright, Alex. And let me just ask one more if I could, just on the traffic side. Visitors are 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 per your 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 -- Chief Executive Officer and President
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. On 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 to turnaround a multiyear 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're now seeing record leads per dealer and increased connections to our dealer body. And that we think is a very positive sign that shows that we're 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.
Daniel Kurnos -- The Benchmark Company -- Analyst
And -- more Alex, from your perspective of going after market opportunity for traffic growth, you're going to press on that a little bit and which channels are you pressing?
Alex Vetter -- Chief Executive Officer and President
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'll see more of that with hopefully continued growth in SEO.
Daniel Kurnos -- The Benchmark Company -- Analyst
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 -- Craig-Hallum Capital Group -- Analyst
Hi guys, Ryan Sigdahl on for Steve Dyer. Not to beat a dead horse here, but with the improving traffic and user trends, what is the primary push back from dealers that are leaving the platform? It just, it seems a little odd that you have record leads per dealer, you're generating more value, but now they're deciding to drop their car subscription?
Alex Vetter -- Chief Executive Officer and President
Thanks, Ryan. Look, it's a 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've had large dealer groups who are paying below rate card, demanding rate concessions from us. In some cases we're walking away from those and losing dealers in the short-term. Our own data shows that about 20% of our dealers resigned with us within a six-month window. So they feel the pinch of not being on our platform.
We've got to be delivered 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 it's the right way to create value. We certainly know that, we'll continue to invest in traffic growth, attribution systems, value delivery systems, and I think our sales transformation, all will help make our value more clear to dealers.
Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst
And then can you break out the sequential decline in dealer count between recently converted affiliates versus the previously legacy direct dealers?
Becky Sheehan -- Chief Financial Officer
Sure. So in Q3 and Alex mentioned this a few minutes ago, we saw in some of the affiliate converted markets, about 72 cancellations that related to dealers who were not paying. And although they converted to us from the affiliate and we worked with them to try to -- I'd say remedy those relationships. At some point if they're not going to pay their bills, then we need to turn them off the system. So in Q3 that drove the 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're still seeing 5% growth from the date revenue growth, 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 -- Chief Executive Officer and President
That's right. I would just -- also add to that. I mean, certainly as we look forward, continued growth in ARPD is a huge part of the strategy. And well, 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 now 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 -- Craig-Hallum Capital Group -- Analyst
Great. Last one from 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 -- Chief Executive Officer and President
I think it's really both, I mean, certainly we want to optimize the sales channel in both cost and in (technical difficulty) 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 from the line of Sameet Sinha from B. Riley FBR. Sameet, your line is open.
Sameet Sinha -- B. Riley FBR, Inc. -- Analyst
Yes, thank you very much. So, Alex, I guess, question is, when 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, one is product, second is proving attribution and 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? Obviously (inaudible) 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 would be helpful as well.
My second question is, I was 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 -- Chief Executive Officer and President
Sure. I'll answer the first and Becky can answer the question on the gross margin side. Look, I think you nailed, Sameet the primary levers we have to go-to-market, which is our product, our attribution and our go-to-market transformation. I think we are 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, SEO 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 day 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 -- Chief Financial Officer
And then on the gross margin question, Sameet, I would say 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 cost given the type of business that it is, more of their cost are oriented to that cost of revenue line item. And therefore carry -- higher cost of goods.
Sameet Sinha -- B. Riley FBR, Inc. -- Analyst
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 their approval, what is the progression from your end about going out of the dealers and selling? And in your experience, how long does it take? Can you help us think about that process?
Alex Vetter -- Chief Executive Officer and President
Sure. Well, first of all it was exciting to get included in GM's preferred provider list for performance marketing solutions through GI. One of the benefits of integration as well is that even though we 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 is excited now to tap in, to that open opportunity that came from the OEM pull back, 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're watching the program closely and bringing it out to the dealerships, as we speak.
Sameet Sinha -- B. Riley FBR, Inc. -- Analyst
Thank you very much.
Operator
Your final question comes from the line of Doug Arthur from Huber Research. Doug, your line is open.
Douglas Arthur -- Huber Research Partners -- Analyst
Thank you. Just a couple of 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 of cyclical exhaustion? I mean what do you sort of ascribe that to?
Alex Vetter -- Chief Executive Officer and President
You know, Doug, I certainly 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 deals at zero percent financing today. You're hearing rates around 4.5% -- 5%, and the price to buy a new car is higher in some cases than a late model used -- I'm sorry it's growing in terms of the purchase price. And so consumers are feeling the need to push down toward late-model used.
I think the other one though, obviously, I think the election has pulled back in consumer confidence. I'm looking forward and I'm really reassured by the snap in traffic growth for us in October. Now that we've got this election behind us, typically we've 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.
Douglas Arthur -- Huber Research Partners -- Analyst
And then just as a follow-up, I thought you made reference to dealer bankruptcies, are you seeing an uptick in that? Or is that sort of a steady state?
Alex Vetter -- Chief Executive Officer and President
Our independent dealer churn, we got about 18% of our dealer cancellations or from dealerships closing their doors are going out of business or in some cases, Doug, folding into other stores. They were required in sort of closed one outlet and migrated the inventory to another store. So it's ticked up a little bit, but it's held steady at about 18% of our cancellations are those types of losses.
Douglas Arthur -- Huber Research Partners -- Analyst
Okay, great. Thank you.
Operator
We have no further questions at this time, I will turn the call back over to Alex Vetter for closing remarks.
Alex Vetter -- Chief Executive Officer and President
I 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.
Duration: 49 minutes
Call participants:
Jandy Tomy -- Vice President of Investor Relations
Alex Vetter -- Chief Executive Officer and President
Becky Sheehan -- Chief Financial Officer
Thomas White -- D.A. Davidson -- Analyst
Gary Prestopino -- Barrington Research -- Analyst
Daniel Kurnos -- The Benchmark Company -- Analyst
Ryan Sigdahl -- Craig-Hallum Capital Group -- Analyst
Sameet Sinha -- B. Riley FBR, Inc. -- Analyst
Douglas Arthur -- Huber Research Partners -- Analyst
Transcript powered by AlphaStreet
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
