Cars.com Inc (CARS) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Cars.com Fourth Quarter and Full Year 2017 Earnings Conference Call. Hosting the call this morning are: Alex Vetter, Chief Executive Officer; and Becky Sheehan, Chief Financial Officer. This call is being recorded, and a live webcast can be found at investors.cars.com. Replay of the webcast will be available at this website until Tuesday, March 2018. A copy of the accompanying slides can be found on the Cars.com IR website. (Operator Instructions)

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

Good morning, everyone, and welcome to our fourth quarter and full year 2017 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 Slides 2 and 3 of this 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 fourth quarter 2017 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 statements and our annual quarterly and current report. Cars.com assumes no obligation to update any forward-looking statements or information as of their respective dates.

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

Thank you, Jandy. Good morning, everyone, and welcome to our conference call for the fourth quarter and full year 2017. 2017 has been a transformative year for us. And before we discuss our financial results, I would like to first take a step back and talk to you about the strategies we've made and the opportunities we see ahead.

As you know, we completed our spin-off and became an independent publicly traded company on June 1. Armed with greater financial flexibility and strategic focus, we have invested in unifying affiliate territories within our direct sales network, product and technology innovation, incremental marketing to generate traffic and lead, the recruitment of high caliber talent across the business and expanding our portfolio of products and services.

Let's first talk about the progress with the affiliates. Consistent with our strategic priorities, we have relentlessly pursued agreements to convert affiliate marketing. In the last 2 months, we announced the conversion of tronc and McClatchy market, representing nearly 60% of our wholesale revenue. This gives us access to sell directly into 30 additional markets this year, including the important markets of Los Angeles and Chicago.

Two important highlights to point out about the tronc agreement. First, we acquired an experienced sales team now fully devoted to the success of Cars.com. The acquisition of this sales team enabled the immediate conversion of the tronc market and a smooth transition to direct. Uniquely, the transition did not require the expense nor time to recruit, hire and train new employees. It also enables us to be a nice territory that were previously managed separately in our regional sales structure.

Second, the terms of this conversion agreement includes billions of incremental media impressions over the next 2 years across tronc media properties, both online and in print, in all eight of the tronc markets. These new territories deliver immediate revenue uplift and provide opportunities for us to further grow revenue through increased dealer count and product penetration as well as the opportunity to find efficiencies within our sales network.

Importantly, these conversions enable us to sell directly new solutions such as DealerRater and Online Shopper into these important markets.

I'm pleased with the early progress in the converted market, and we continue conversations with our remaining affiliate partners about additional early conversions.

Some of the most important operational initiatives executed during the year centered around accelerating innovation and product development and technology.

In 2017, we implemented a lean/agile development methodology, which, along with our new platform, have allowed us to launch a number of enhancements, which provided a more innovative and valuable product offering to dealers and a more comprehensive and relevant shopping experience for consumers.

You may recall that in the third quarter, we launched Salesperson Connect, a direct result of our product and tech team collaboration with DealerRater. Salesperson Connect makes the consumer experience personal, more intelligent and impactful. Evidence of its compelling value is supported by data, which is demonstrated that consumer to use Salesperson Connect before entering a dealership, has an 89% higher closing rate and their time to close improves by 15%.

Salesperson Connect is even more value to our customers. It helps dealers better retain their sales people and reinforces best practices by motivating them to continue earning positive reviews and attract more consumer attention to generate more sales.

And finally, Salesperson Connect is a unique and differentiated approach to attribution. By connecting people before they arrive at the dealership, we believe we will drive greater assignability to our service as the primary source of sale.

In 2017, we also unveiled various improvements to our main platform, including enhanced vehicle inventory pages and expanded pricing contextualization tools. We believe that we have the industry's most accurate and most powerful pricing tools, leveraging our 20 years of data. We're the only platform that considers specific trend and geographic input to best capture the unique attributes that inform the value of a car.

These recent enhancements have improved conversion throughout the consumer journey, from the homepage, to the search results, to the vehicle detail page and finally to a dealer connection. All of these important changes are leading to an improved consumer experience, and our current consumer satisfaction scores are the highest we've seen in over a year. And of course, we are reaping the benefits of faster product innovation this year by making very deliberate progress towards fortifying our SEO Authority.

Traffic in 2018 is demonstrably moving in the right direction. Total traffic has grown 6% year-to-date. In addition, our unique visitors have grown even faster. SEO is showing steady progress with high coordination of new products and feature launches, increased content optimization and further site improvements.

One of the many things that excites me about the recent acquisition of Dealer Inspire and LDM is that they are steep in SEO and SEM expertise, which will only strengthen this core competency.

I'd also like to mention the strength of our new-car business and remind you how important it is to us to provide balanced information to consumers, as they progress through decision-making because most consumers vacillate between buying a new or used vehicle up into the transaction itself.

And at Cars.com, our editorial expertise is the differentiator, and we are more focused on new cars than most of our competition. New car editorial content is not only a differentiator to consumers, but it also underpins our $100 million national advertising business with our OEM partners.

Our editorial staff reviews 100 new models each year. And in January, we held our annual best of awards, which caught the attention of many industry executives, including the CEO of Volkswagen, who took home 2 awards this year.

While we've made significant progress in our efforts to drive organic growth, we are also committed to the thoughtful and deliberate use of capital to achieve our strategic goals. The acquisition of Dealer Inspire and Launch Digital Marketing, or LDM, furthers our strategy of integrating new and relevant capabilities and talents to accelerate organic growth, strengthen the retail experience and deepen dealer connections and improve attribution.

We began meaningful conversations with the founders of Dealer Inspire and LDM about 6 months ago and, ultimately, closed the acquisition of these businesses just 2 weeks ago.

With Dealer Inspire's suite of solutions, we are expanding in the new channels, including an award-winning website platform, messaging platform with artificial intelligence, real-time online car buying and dynamic advertising inventory.

Dealer Inspire's technologies will allow us to strengthen our attribution capabilities and further integrate and demonstrate our value to dealers. We have already started the integration of the proprietary messaging system, Conversations; entered digital retailing solution Online Shopper into our platform. By integrating Conversations in Online Shopper, dealers can guide shoppers through the transaction, instantly collaborate on terms and even video chat for live personalized vehicle tours. We plan to bring to market Conversations and Online Shopper in the second half of this year.

The dealer-inspired development team continues to focus on their product pipeline while supporting our team on the integration.

Two highly regarded industry veterans of the Cars.com team have assumed new roles and are working closely with the Dealer Inspire team to ensure rapid product and sales integration. Greg McGivney has been with Cars.com for over a decade and now has assumed the role of Chief Operating Officer of Dealer Inspire. He will help prepare the business for greater scale and operational efficiency, as they continue their high growth trajectory.

And Darren Haygood is now the Chief Revenue Officer of Dealer Inspire. We believe Darren is ideally suited for this role as he has previous experience growing a dealer website and digital marketing services company from 2,000 dealers to over 7,000 dealers in just a 3-year period. Simply put, Darren has run this playbook before and is very excited about the prospect of developing the sales strategy and growing this business in its next chapter.

I'm confident that with this team, we have the focus to execute on the plans we are creating together. Important to the cultural fit of both companies, we share deeply embedded values of innovation and dealer advocacy in our collective DNA. Having added Greg and Darren to the DI team allows Becky and myself to remain laser focused on our core marketplace business.

With the Dealer Inspire and LDM product features, our own dealers will have access to even higher quality connection. I would like to note that Dealer Inspire and LDM represent much more than website platforms to Cars.com. They also provide dealers solutions that are user-friendly, sophisticated and unique technologies that use artificial intelligence, embedded messaging and provide an end-to-end digital retail solution.

Dealer Inspire and LDM's technologies are a catalyst for further extending our product offering and strengthening our dealer relationships and clarity of attribution while they improve the dealers' ability to sell and connect with consumers.

We paid $165 million in cash at closing for Dealer Inspire and LDM. As previously announced, there's a potential for additional contingent consideration as well as incentive compensation over the next 3 years, each of which will be triggered if the business achieves certain revenue milestones. Dealer Inspire and LDM would need to outperform as a stand-alone business for additional contingent consideration to be paid.

The contingent consideration is not triggered by achieving the $55 million of annualized revenue in 2018 and is not triggered by the incremental $25 million to $30 million in annual revenue that we expect to achieve by 2020 by selling certain of these products through our national sales network.

Importantly, ROI improves at every level of overperformance. ROIs will further improve with modest product penetration amongst our dealer customers. We assumed only 15% product penetration in our calculation of the projected incremental $25 million to $30 million of revenue we expect to achieve by 2020 by sales through our existing sales force.

The addition of these 2 market-leading technology companies will provide an opportunity for significant incremental revenue in 2018. The acquisition is expected to be accretive to adjusted net income per share in 2018 and to GAAP EPS in 2019, reflecting intangible amortization.

While the digital automotive advertising market is projected to grow, the acquisition of Dealer Inspire and LDM will allow us to tap into the even faster-growing segments of the market.

Let's now turn to our specific performance results for the full year and fourth quarter of 2017. We continue to focus on gaining a greater share of the consumer audience. Unique visitor count grew 1% in 2017, reflecting improvement compared to 2016, when unique visitors declined 7% year-over-year. Our total traffic declined 3% in 2017 year-over-year, which, as I noted earlier, does reflect improvement since the early months of '17. In the fourth quarter of 2017, unique visitor count was flat compared to a year ago and total traffic declined 2% compared to the prior year period.

We have been successful in our mobile strategy, and we're pleased to see that mobile traffic in the fourth quarter was 60% of our total traffic compared to 56% in the same period the year prior. Mobile app traffic was 25% of our total for the fourth quarter of '17 compared to only 24% in the same period of the year prior. We're committed to further developing our mobile strategy to keep up this momentum.

Direct dealer customers were up 1% compared to the third quarter dealer customers and affiliate dealer customers were down 2%, excluding the affiliate conversion.

As we previously noted, we continue to believe that there's an opportunity to grow our dealer count, improve retention and grow revenue per dealer as our own dedicated sales force steps into affiliate market. This is in addition to the revenue upside from being able to build the dealers at retail rate as compared to wholesale.

At this time, I would now like to turn the call over to Becky to go through some of the financial results for the full year and fourth quarter of 2017. I'll return to speak briefly about our road to growth and strategic priorities for 2018.

Thanks, Alex. As I discuss the profitability and cash flow of the business, I'd like to note that some year-over-year comparisons are impacted by changes in our capital structure, including the addition of interest expense and tax expense.

Revenue for the full year of 2017 was $626.3 million compared to $633.1 million in 2016. This 1% decline year-over-year was in line with our previous guidance, which we provided during our third quarter earnings call in November. This reflects a 4% decline in wholesale revenues, partially offset by an uptick in retail revenues.

Excluding the affiliate conversions in 2017, wholesale revenues declined 3% and retail revenue declined 1%. Total operating expenses in 2017 were $492 million compared to $456.5 million for the prior year. The majority of the $35.5 million increase is attributable to G&A expense, depreciation, revenue mix and marketing expenditures offset by a decrease in sales expense.

The $21 million increase in G&A expense included $12.9 million of costs primarily associated with the spin-off, corporate headquarters move, write-off of certain assets and restructuring costs. We also included $8 million of incremental public company costs and $2.6 million of stock-based compensation expense. Those incremental G&A costs were offset by other efficiencies.

Net income for 2017 was $224.4 million or $3.13 per diluted share. This includes a discrete tax benefit of $131 million, primarily associated with the adjustment of deferred tax liability compared to $176.4 million in 2016. Recall that in 2016, the company's legal structure allows for almost no tax provision.

Adjusted net income for the year was $165.7 million compared to $250.6 million in the prior year.

Adjusted EBITDA for 2017 was $238.9 million or 38.2% of revenue, which was also in line with the guidance we gave in November. This compares to $260 million or 41.1% of revenue in the prior year period. The decline in adjusted EBITDA is primarily attributable to: the reduction in affiliate revenue, changes in revenue mix within our retail business and the addition of public company expenses.

Turning now to the financial results for the fourth quarter. Revenue was $156.6 million compared to $161.7 million in the prior year period. Our national advertising business contributed $2.3 million to the decline due to timing of advertiser spend as well as advertisers shifting to programmatic. I would like to note that our national business has started off, in 2018, strong, and we are expecting mid-single-digit growth from this business in the first quarter of 2018.

Total operating expenses for the fourth quarter of 2017 were $117.7 million compared to $112.8 million for the prior year period. This increase was driven by the increase in G&A expense, cost of revenue and operations reflecting revenue mix and marketing spend offset in part by a decline in sales expense.

The increase in G&A included $2.7 million of incremental public company costs, $0.7 million of nonrecurring costs, $0.4 million of write-off of assets and $1.1 million of stock-based compensation expense.

Net income for the fourth quarter of 2017 was $151.8 million or $2.11 per diluted share compared to $48.8 million in the fourth quarter of 2016. The 2017 results include the discrete tax benefit of $131 million associated with the adjustment of deferred tax liabilities.

Adjusted net income for the fourth quarter of 2017 was $34.2 million compared to $68 million for the prior year period. Adjusted EBITDA for the fourth quarter of 2017 was $63.5 million or 40.6% of revenue compared to $70.5 million or 43.6% of revenue for the prior year period.

During the 12-month period ending December 31, 2017, net cash provided by operating activities was $185.9 million and free cash flow was $153.2 million.

With our free cash flow during 2017, we repaid $91.3 million on our debt, of which $80 million was voluntary payments on the revolving credit facility. All of this was in advance of the $165 million of borrowings in February for the acquisition of Dealer Inspire.

We had almost $33 million in capital expenditures in 2017, of which $23 million related to the new corporate office space. Further, we paid $11.8 million in interest and $11.5 million in income taxes related to our new corporate capital structure.

We continue to benefit from a strong balance sheet and robust free cash flow, as evidenced most recently through our acquisition of Dealer Inspire and LDM. We are able to utilize our existing revolving credit facility while maintaining modest leverage.

I'd now like to review our 2018 outlook, which is consistent with the preliminary outlook we announced in February. We expect to achieve approximately 10% to 11% revenue growth in 2018. We anticipate this will consist of approximately 3% to 4% revenue growth from our organic business, which includes the transitions of tronc and McClatchy affiliate markets as well as approximately $45 million from the acquisition of Dealer Inspire and LDM, reflecting a partial year of ownership. We expect Dealer Inspire and LDM to generate $55 million of revenue for the full year. So if we had closed on the acquisition on January 1, our 2018 revenue outlook would have been 12% to 13% growth on a year-over-year basis.

We expect our adjusted EBITDA margin to be approximately 34%, excluding external adviser expenses to be incurred in connection with preparing for the 2018 shareholder proxy and annual meeting.

Further, we expect adjusted EBITDA margin to be approximately 35% if we also exclude the acquisition of Dealer Inspire and LDM. Dealer Inspire and LDM are expected to deliver an adjusted EBITDA margin of approximately 15% in 2018.

We expect capital expenditures to be approximately $10 million in 2018, cash interest expense to be approximately $25 million, which includes interest on the February borrowings from our existing credit facility related to the acquisition of Dealer Inspire and LDM. We expect stock-based compensation expense to be approximately $10 million, which includes an estimate of the awards expected to be granted to the management team and key employees of Dealer Inspire and LDM.

Taking into consideration the recent changes in U.S. tax regulations, we expect our effective tax rate to be 25% and our cash tax rate to be 13% in 2018.

Finally, I'd like to note that while reaching agreements with our remaining affiliate partners is a top priority for us, our current outlook does not factor early conversions beyond what we have already announced.

With that, I'd like to turn the call back to Alex for closing comments before we open the line for your questions.

Thank you, Becky. Converting affiliate markets gives us a lift in revenue, both because we get the wholesale to retail uplift and because we gain an ability to increase dealer counts and increase average revenue per dealer. The uplift in profit begins in 2019 as we realize the revenue gain and achieve the sales force cost synergies and amplify it as we complete payment periods for the former affiliates.

We acquired Dealer Inspire and LDM, which drives growth by having new product to sell through our national sales network and the continued double-digit growth of their stand-alone business. And with traffic and attribution improvements, we provide more benefits to our dealer customers, dealer count and revenue will also grow.

We're proud of the achievements in the 9 months that we've been an independent public company, and we have much more to achieve in 2018. Our priorities are converting the remaining affiliate markets, integrating the Dealer Inspire and LDM products into our platform and optimizing the Cars.com sales team with better geographic reach and providing them with highly competitive solutions to help dealers make better connections with customers and to improve attribution. As we achieve these goals, we are confident they will drive growth and build lasting shareholder value.

Before we open up the lines for questions, I would like briefly to touch upon the current situation with Starboard. As you know, Starboard has nominated 4 Director candidates to stand for election for our Board of Directors at the 2018 Annual Meeting. We maintain an active and open dialogue with all our shareholders, including Starboard, and remain committed to acting in the best interest of all shareholders. The board will carefully review and consider Starboard's candidates as they would any other potential directors and will make a formal recommendation regarding Director nominees.

With that said, we are here today to discuss our fourth quarter and full year 2017 results. We ask that you keep your comments focused on our results.

Thank you, everyone, for joining our call this morning and your continued interest in Cars.com. We will now open the call for questions. Operator?

(Operator Instructions) Your first question comes from Gary Prestopino of Barrington.

A couple of things here. Could you -- in terms of the Dealer Inspire business and the integration, I mean, I think basically it's kind of a technology company in one sense. But how are you planning to integrate their sales force into the Cars.com sales force? And will they be responsible if they -- for selling the full product line, meaning the Inspire people? Or are they just going to continue to sell some of the Inspire's products?

Gary, thanks for the question. First and foremost, like you said, DI is a technology company, first and foremost, and that makes up the vast majority of the resources. In fact, their sales force was relatively small, only 11 people in the company devoted to sales, yet they grew to over 2,000 dealers largely through word of mouth. And I think that's one of the exciting opportunities about this business. From an integration standpoint, on the sales side, clearly, we announced that we're moving Darren Haygood there to lead that sales effort. Darren will be building up and expanding that sales team that will be dedicated to the Dealer Inspire business. What's important about this is that many of those openings are going to be filled by the existing Cars.com sales team, which will allow us to leverage the established intellectual capital that our team has, transition them to Dealer Inspire to help them ramp that business. And we don't necessarily need to refill those jobs in the car sales networks. So we'll be able to migrate some of our sales space that's already sufficiently penetrated a lot of the market to helping accelerate the growth of the new business that has an even faster-growing potential. So they will be separate sales channels. The area where we will integrate and leverage our 400-plus sales network is when we plug in some of their technologies into the Cars.com environment, and that's where we really find tremendous synergy in the deal. We've got their digital retail solution, which we want to make available to any dealership through the Cars.com experience. We also have their proprietary messaging platform, Conversations, which will allow us to plug into both Facebook as an embedded messenger platform as well as into the Cars.com experience. So there will be a divide and concur here in the sales channels that we'll be getting cost synergies and revenue synergies through those integration efforts.

Okay. And then with the online sales product, which I went through a few dealerships that have it, and it's a pretty neat product. As you bundle that into the Cars.com website, that would be open to all of your dealers? It wouldn't be open at any dealers, that's just specifically part of Inspire or legacy Inspire, right? So in other words, you could go -- I could go in as a car buyer, pick out my car and start the process, and it would then direct me to the website of the specific car dealer?

Well, Gary, we're working through those integration tests today. But preliminary, what we're planning is that if the dealer would like to enable digital retail and online booking transactions on Cars.com, they will need to purchase that upgrade opportunity to enable that functionality within the Cars.com environment. And importantly, they do not need to be a Dealer Inspire customer to participate in that digital retail opportunity. Certainly, if the dealer is a Dealer Inspire current customer, the enablement of that is much easier. But there is no limitation to the market size here. Every dealership could participate in online digital retail with Cars.com.

Okay. And then lastly, do you have, just in front of you, what the traffic visit numbers and percentage changes were for Q2, Q3? Do you have those in front of you handy or not?

Traffic changes from Q2, Q3?

Yes. No, just what the year-over-year changes were. I'm just trying to see how if this -- how it has improved.

Jandy, I'll look for you, correct me if I'm wrong, on this. Q2 decline in traffic overall was a 1% decline, and Q1 was a 7% decline, Q2 was a 1% decline, Q3 was also a 1% decline.

And, importantly, we're showing growth in the first quarter of 2018, Gary.

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

So I just wanted to touch on the national advertising piece. You mentioned some weakness there. Can you clarify where -- I mean, what -- I know you made some ad changes, format changes in the fourth quarter, so how that is benefiting. Obviously, what you're seeing for Q1 is fairly encouraging. Secondly, can you talk about just pricing trends? I saw the tailwinds that you mentioned is primarily from affiliate conversions as those deals come into the hands of your direct sales team. Can you talking more, just organically, how does pricing performed just in the dealer base that you directly controlled? And how should we expect that to go moving forward? And then I have a follow-up question.

Sure. So let's start with national advertising. It's important, and I think you captured it well in that. Our 2 sales channels or customer bases operate fundamentally very differently. On the dealer side, obviously, a SaaS-based subscription model that's highly recurring and is really more of a rolling business and slow on the up and slow on the down because it's really stable subscription model. The national business has a lot of variability into it from week-to-week to month-to-month and is subject to things like vehicle launches through the car manufacturers and the volume of new product that they're introducing into the market and budgetary cycles of the OEM, which can change, again, week-to-week, month-to-month. So you will always see more variance in our national business than you will in our local. In the fourth quarter, national was off slightly because we didn't get the same sell-through of the programs that we had in the third quarter. But we're seeing a strong pickup in the first quarter as those dollars come in nicely on the national business. On the local side, we are seeing pricing pressure, as we've talked about on prior calls, with respect to low cost alternatives. But I think as we've made progress on our attribution and value demonstration and level of service and support, particularly through our affiliate transitions, I think we're seeing stabilization in both not only in our dealer counts in our direct business, but also with respect to pricing. We've really been able to mitigate a lot of the pricing pressure, where I know similarly situated competitors in our space have struggled with that. And I think that's because we've been investing in product innovation, value delivery and service levels for our dealers, and so they can appreciate that we're bringing a lot to the table.

One final question. You mentioned that in a previous response regarding attribution. Can you kind of highlight what your strategy is to bring more attribution products online in 2018? And if you can include commentary about how -- what products are you getting from your new acquisitions?

Sure. I mean, I think on the attribution side, one comment, I will tell you that we're really pleased with McClatchy and tronc transitions because what we're finding there is that the dealer bodies haven't been fully aware of all the progress that we've made here, as you've noted that we've had more steady declines in our affiliate business than we have in our direct. And I think the absence of a dedicated service and support and communication of value is one of the chief culprits. So we've been training the tronc team that we recently acquired on all the attribution tools that we have and also adding our own staff in the McClatchy markets. I think dealers are finding that we're really able to illustrate the value that we're bringing to the table. I would say, there's been 2 primary strategies that we think are significant and differentiated from our competitive set. First, our on the lot mobile tracking, which demonstrates the arrival of human beings to the physical store. We know those close significantly higher than traditional lead gen businesses. And then the second would be the innovation we deployed around Salesperson Connect. This is allowing the user to connect with an individual at the dealership as opposed to a generic business development center, where they can get lost in the shuffle. And by beginning those human interactions online, the salespeople have a higher degree of confidence of the source of sale. I think in '18, what we're really excited about, and it was part of the thesis on the Dealer Inspire acquisition, is that their 2 proprietary tools we also think can strengthen attribution. The digital retailing solution will give total clarity as to the user journey all the way down to the point of sale and then their online messaging application also allows us to capture the conversations between the dealer and the shopper to illustrate to the dealer evidence that the sale originated on our platform. So those are going to be 2 new initiatives in '18 in addition to the 2 that we've already deployed.

So on the organic Cars.com site, will you slow down the innovation and just focus in on digital retailing and messaging?

Well, certainly, our product priorities will shift towards integrating those tools in the first and second quarter of this year, because we want to bring those to market in the second half of '18. But I would say, no. I mean, our product innovation has an ambitious schedule in the first quarter, including further improvements to Salesperson Connect, SEO optimizations, we've been building on our guided navigation and adding many more filters and search criteria, and then we're also launching some new native ad programs for the OEM clients. So we've got a healthy appetite on product innovation that will carry and persist throughout the year.

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

Ryan on for Steve. So a little early, a few weeks in here, and you guys mentioned some of the good things that are going on with Dealer Inspire and LDM and synergies, et cetera, but did you discover anything unexpected, whether it's positive or negative, kind of in these first few weeks while integrating them?

Well, I don't think there are any new discoveries. We've known that the 2 companies have very similar DNA. We both are obsessed with product innovation and have cultures of dealer advocacy. So we tend to look at the world through similar lenses. And I think that led to a lot of the chemistry work between myself and the founder there in terms of where we can take the businesses together. So I would say it's no new surprises. I would tell you that perhaps the thing I was most shocked at is that we've done a number of acquisitions in the industry over the years, we've never received more positive fanfare or customer excitement about this deal than any other one that we've done. If you just read online the level of trade excitement about 2 companies, who share similar values and the dealers know that we're there to support them, I think the feedback has been overwhelmingly positive. In fact, referrals from our existing dealer network into Dealer Inspire has, I think, also probably caught the Dealer Inspire team by surprise and that we're able to funnel them a lot of inbound pent-up frustrated dealers with their legacy solutions. And so the acceleration of inbound interest to their business perhaps could be the only thing that might have caught us by surprise, but it's certainly a positive.

Great. And then a couple modeling questions. Becky, maybe I missed it, but what are expectations for D&A in 2018?

I would expect D&A to be very similar in 2018 to what it is in 2017. CapEx will go back to a normal level of about $10 million. Our amortization should be fairly consistent and as will depreciation.

And does that include Dealer Inspire and LDM, any amortization from those acquisitions?

Yes. Today, there's very, very little depreciation on their books. From an amortization perspective, we're still working through all the purchase accounting impact, and we'll provide some guidance on that as we get through Q1. So it doesn't. That's on an organic basis, the way that I just described it.

Got you. And then secondly, can you walk through the puts and takes of affiliate conversions and how the unfavorable contract liability amortization will flow through the P&L?

Sure. Let me try to briefly describe it now. And certainly, we can -- I think you'll see some more color when we file our 10-K later today as well. That could be helpful to you. The unfavorable contract, the liability gets amortized into revenue in the wholesale line of revenue. That continues for all of the affiliates that haven't been converted. When affiliate has been converted as McClatchy did at the -- in the 2017 financials, what you'll see is as those markets convert, we then recognize retail revenue. There is no wholesale revenue, and there also is not that component of the revenue amortization that's in that wholesale line either. What we do is we've moved that credit, if you will, to the affiliate revenue share expense line on the income statement, and it offsets the expense that we recognize as we're making payments to McClatchy during those transition periods for the markets that we're taking over.

Helpful. One follow-up on -- and without trying to get too specific on revenue share amounts. Is it reasonable to assume that the affiliate revenue share line, that expense, in the income statement will be down year-over-year just because that unfavorable contract amortization will be offsetting that revenue share? Or how should we think about kind of flat, up, down?

Yes. Well, the credit goes to that same expense line item. What also happens is that the expense or the payments that we're going to make to McClatchy and tronc get recorded in that same line item. So in 2018, I would expect it actually to go up a bit. And then in future periods, that will eventually go to 0, but certainly, decline.

Your next question comes from Doug Arthur of Huber Research.

Alex or Becky, if you kind of deconstruct the 10% to 11% growth expectation for '18. Obviously, there's a lot of puts and takes in there and then 3% to 4% organic. If you took out the impact of the affiliate conversions, is the base business -- given all the product improvements, the momentum in mobile traffic, is the base business going to grow in '18?

Yes. So embedded in the guidance is growth in what you've described as the base business, which would exclude the tronc and McClatchy-announced affiliate conversion and also excludes the impact of the acquisition of Dealer Inspire and LDM.

So is it fair to say sort of grow 1% to 2%? Is that a decent ballpark?

That's right.

Okay. And then just sort of a detail question. I think your adding something like 70, I think the number was 77 salespeople from tronc if that was -- if I can remember that correctly. How big is your sales force right now? You're going to add a few from Dealer Inspire as well. So what was your sales force size? And what do you expect it to be by year-end '18?

Yes. Our direct dealer sales force is about 350 people. And obviously, we have our national business and our major accounts business. And so in total, when you accum' all of the various sales channels, it's just about 450 folks. And so we are looking at different go-to-market models. And as you heard me answer before, we're going to be transitioning some of that sales channel to build up the new business and Dealer Inspire, so we'll get some synergies there. And importantly, even though we acquired all the tronc salespeople, what it's allowing us now to do is really look at optimizations geographically, where we can centralize management and create better territory optimizations that today had dual management models overseeing fractured geographies. So I think what we'll see in '18 is that we're going to be able to create some efficiencies in our sales operation and even test some call center-based models for smaller-scale dealerships.

So just to clarify, you're 450 before tronc and before Dealer Inspire?

That's right.

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

I thought I would just ask a couple. So in the fourth quarter, you -- there was a significant redesign of the website, you followed that up with an ad campaign as well. Can you talk about that strategy going forward as we enter into '18? Obviously, traffic is going to be critical. It seems that you're gaining some early traction. What's going to be your advertising budget? What's going to be the messaging focus that you have for consumers, especially in light of that -- your new markets that are under your control now?

Sure. I'll let Becky talk about the budgetary changes year-over-year, but at a high level, first of all, Brooke, our new CMO, has really revolutionized our go-to-market with marketing. What used to take 6 months for us to conceive and execute or create a campaign, we've collapsed now to less than 4 weeks. And so you'll see much more of our marketing and product innovation coming together so that as we introduce new features, products and services, we're able to quickly cascade those out from a consumer messaging standpoint for differentiation. I think you saw this in the second half of this year with regard to our new pricing tools, which we know are the industry's finest. So we're really accelerating the pace of innovation on product, and we're also increasing innovation of our marketing communication strategies. We will be diversifying our marketing channels in this new environment. We mentioned our test in Facebook. We continue to think that it's an opportunity and then opening up new channels. But the product and marketing alignment will be a much stronger force in 2018. Becky, any commentary on the actual investment?

Yes. So our 2018 guidance includes what I would say is increased investments on marketing and, in particular, that consumer marketing that you're talking about and it's for the reasons that Alex just described. We anticipate great product innovation that we'll bring out to the consumer market, and that will be an important part of the strategy for 2018 just like it was in that fourth quarter period of 2017. And even in the 2017 period, when you look at the financials, of course, selling and marketing is one line item, but we did achieve sales, cost synergies -- or efficiencies, I should say, efficiencies in 2017. And we did begin to increase some marketing investment, which we think is important for the business and the growth of the business.

One follow-up. Becky, you kind of pointed out 2018 adjusted EBITDA margins excluding some proxy costs. Can you highlight how much costs are you expecting on that end? And why do you need to highlight it?

So at this point, we don't have an estimate on what those costs are. But certainly, if they grow to something significant, those aren't considered in our guidance. This is our first year as a public company, so this will be our first time going through a proxy process and an annual meeting process. And so we simply excluded those costs from our guidance.

There are no further questions at this time. I would now like to return the call to Mr. Alex Vetter.

Look, so I just want to thank you for participating in today's call. And we look forward to speaking with you, again, as we enter our first full year as a stand-alone public company. Thank you very much.

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