TrueCar, Inc.

Q1 2022 Earnings Conference Call

5/10/2022

spk04: Good day and welcome to the Truecar First Quarter 2022 Financial Results Conference Call. Please note that today's event is being recorded. I would now like to turn the conference over to Zainab Bokhari, Vice President, Investor Relations. Please go ahead.
spk01: Thank you, Operator. Hello and welcome to Truecar's First Quarter 2022 Earnings Conference Call. Joining me today are Mike Darrow, our President and Chief Executive Officer, and Jantun Regersman, our Chief Financial Officer and Chief Operating Officer. By now, I hope you've all had the opportunity to read our first quarter stockholder letter, which was released Monday, May 9th, after market closed, and is available on our Investor Relations website at ir.trucar.com. Before we get started, I want to remind you that we will be making forward-looking statements on this call. These forward-looking statements can be defined by the use of words such as belief, expect, plan, target, anticipate, become, seek, will, intend, confident, and similar expressions and are not and should not be relied on as a guarantee of future performance or results. Actual results could differ materially from those contemplated by our forward-looking statements. We caution you to review the risk factors section of our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our other reports and filings with the Securities and Exchange Commission. For a discussion of the factors that could cause our results to differ materially, The forward-looking statements we make on this call are based on information available to us as of today's date, and we disclaim any obligation to update any forward-looking statements, except as required by law. In addition, we will also discuss certain GAAP and non-GAAP financial measures. Reconciliation of all non-GAAP measures to the most directly comparable GAAP measures are set forth in the Investor Relations section of our website at ir.trucar.com. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. With that, I will turn the call over to Trucar's President and Chief Executive Officer, Mike Darrow, for some opening comments. Mike?
spk02: Thanks, Zeynep. Good morning, everyone, and thanks for joining us this morning. We issued our Q1 stockholder letter yesterday and highlighted some of the really impressive progress our company has made on the product front during the first quarter in a difficult macro environment. We launched a commercial version of Truecar Plus at the end of April, and now it's full speed ahead as we ramp up the inventory available in our marketplace. None of this would have been possible without the hard work of the entire Truecar crew, so I want to thank them for their dedication to bringing our plans to fruition. We're striving to bring something new and unique to the market and doing it at a time of rapid change and enormous macro headwinds. During the first quarter, dealer inventories, particularly for new cars, remained near historic lows while pricing remained elevated. A recovery in the global supply chain is likely several quarters away in our view, and recent geopolitical events in Eastern Europe have created new uncertainty for OEMs to navigate. These industry-wide headwinds continue to put pressure on our close rates, reported units, and other key metrics. We expect some volatility in our key metrics throughout 2022, but are managing our business efficiently in this environment. We're investing in our product roadmap with TrueCar Plus and core used car offerings. As we shared in our letter, we added the ability for dealers to offer VIN-based protection products and for consumers to add their trade payoff quote directly from their lender. giving consumers confidence in their deal numbers. Our certified dealers can now show consumers a transactable price in Trucar Plus, and we've added distance retailing. We've also launched a new sell your car experience that has exceeded our plan since its launch in March. With the commercial launch of Trucar Plus now behind us, our dealer teams are starting to ramp up the rollout of Trucar Plus out across Florida. We continue to target broad market coverage for new and used cars across Florida by the first half of 2022. In upcoming months, we plan to expand Trucar Plus into additional states. It's an exciting time for our company, and we plan to continue investing to ensure a successful rollout for Trucar Plus in the months ahead. Before we open up the call for live questions, we're going to address some questions around key topics. Zainab, what's the first question?
spk01: Thanks, Mike. I'll start with a question that is two parts. First, can you provide more details about the capabilities that have been added to Trucar Plus and why these are noteworthy? And secondly, you mentioned the commercial launch of Trucar Plus. Can you provide more details around what that means?
spk02: Thanks, Zainab. I'll take the first part of that question, then I'll turn it over to Chantoon to provide more details about what's happening on the ground in Florida. In Q1, we were working through the pilot launch of Trucar Plus. We were managing dealer participation and traffic flow into Trucar Plus very closely and learning about consumer behavior and dealer support and fulfillment. We captured a great deal of important learnings through mid-March and decided a final product push to achieve a more fully commercial product. Adding features like automated trade payoff and VIN-level dealer protection products along with continued focus on accurate pricing that included taxes, title, and other add-ons, resulted in a comprehensive product that we feel we can now roll out more aggressively in Florida. Additionally, we added distance retailing and delivery to Trucar Plus to provide greater market exposure and shipping support to dealers in our Trucar Plus program in Florida, integrating the learnings from our pilot in Texas. Now I'll hand it over to Jan Toon to provide more details about our market approach in Florida.
spk00: Thanks, Mike. So as Mike mentioned, now that we can really commercialize TrueCar Plus, we're focused on growing inventory across the state of Florida for new, used, and certified pre-owned vehicles. As we build up this inventory, we plan to start driving more and more traffic and get shoppers through the flow in TrueCar Plus. At the end of April, we had dealers representing 19 different brands already participating in our marketplace in Florida, and we're adding higher volumes and dealers onto the platform as we look to expand both the market and brand coverage across Florida in the next couple of weeks and months. We'll remain focused on Florida for at least the remainder of Q2, and starting in Q3, we'll look to transition into state-by-state rollout for new and a nationwide rollout for used cars. What's the next question, Zeynep?
spk01: Thank you both. Mike, the next question is for you. You've added many great features and capabilities into Trucar Plus. What do you still need for your product roadmap? And how are you thinking about build versus buy to advance this roadmap?
spk02: Thanks, Zaina. M&A has always been part of the consideration set as far as our capital allocation priorities. We continue to survey the landscape very closely for potential opportunities. For us, it's about smart tuck-in opportunities with innovative technology and talented know-how and capabilities that accelerate the product roadmap for Trucar Plus as we look to bring world-class digital e-commerce capabilities to our dealers and consumers and bring more and more of a car buying and selling experience online. Let's have the next question, Zainab.
spk01: Thanks, Mike. Jantun, the next question is for you. You're not expecting much improvement for new vehicle production and dealer inventories in 2022. While you're not providing guidance, how should we be thinking about your business and the expected investments for Trucar Plus in this backdrop?
spk00: Thanks, Zeynep. We're obviously not providing guidance in the uncertainty of this market, but I think a high-level framework may be helpful. Bear with me for a second because this might be a little bit more detailed, but it actually I think would be helpful for people as they think about the remainder of the year. First, let me start with the macro backdrop. The reason we discussed this in more detail in our stockholder letters is because we see the correlation between high vehicle prices, low inventory, and our close rates. With high vehicle prices probably as being the main driver of what we're seeing with respect to these close rates. Until these factors start to improve, we expect continued pressure on our close rates in our core business, which we think will lag improvements in industry trends. In addition to this, we don't think the market has fully factored in the effect of rising interest rates on consumer demand for cars. So that will be another macro factor that we need to consider as we go in future states. With that in mind, From a top line perspective, if nothing changes in the macro environment and close rates remain stable, annualized Q1 revenue and possibly baking in some seasonality is probably a reasonable framework for this year, given where prices and inventories are. The big caveat here is that in reality, things have been very unpredictable when you consider war breaking out in Ukraine, COVID shutdowns in Asia, inflation, the Fed raising rates, et cetera. So the truth is no one knows for certain, which is why we're not providing guidance. On expenses, we have a relatively simple cost structure that we can control very well. On top of that, we're planning to lean in and invest in Truecar Plus now that we've launched commercially. In Q1, total loan gap expenses were approximately $50 million. And do some back of the envelope math, about 20 of the 50 is employee and headcount related, many of which have been allocated to Truecar Plus in product, technology, and other support areas. The remaining expenses consist of fixed expenses and marketing costs. We've been reducing and refining our fixed expenses over time. What we've done as an example, what we've done on the real estate is a good example of this, and we'll continue to further reduce this as we go along. Obviously, as we go further, this becomes harder and harder, but it's something we've always been very focused on. This leaves marketing. A big portion of the marketing budget is partner-based, and this fluctuates with partner demand. The remainder is brand and performance marketing that we have dialed back in recent environments and with the lower close rates. As we lean into Truecar+, we will scale the second category quite a bit higher. So you can assume that our recent spend is somewhat of a baseline, but it will obviously invest further as we go through the balance of the year and start rolling this out more commercially. So hopefully this provides some clarity of how we're thinking about this. I do want to point out one part on the marketing spend. So despite having reduced the marketing spend quite a bit in recent times, we still attract more than 7 million uniques every month. This is a testament to our brand, although we know that unaided brand awareness has gone down. So we do know we also have to invest further, and we also know that we have to educate the markets on the ability and capabilities of Truecar+. So overall, though, I also think it's worth noting, given the macro and what we've seen around us, that we have an asset-light approach with our marketplace model, and our balance sheet is very, very strong, and we can support these step-up investments very well with the current balance sheet that we have, and we have run away for many, many years. So let's have the next question, Dana.
spk01: Thank you, Jantun. One more question for you, Mike, before we open up the line to the audience. How is Trucar thinking about the EV space? And does the shift to electric vehicles pose a risk to Trucar?
spk02: Thanks, Zainab. EV represents a great opportunity for Trucar, and we've already established a strong position in growing this vehicle category. We shared our Q1 stockholder letter that based on Trucar leads that can be attributed to sales at our dealers, consumers using Trucar have purchased more than 170,000 EVs to date through mid-April. including battery electric vehicles and plug-in hybrid vehicles. Consumer interest remains high given that the recent rise in gas prices and that looks like that's gonna continue. We think that consumers are still confused about which cars to buy and our ability to help them find the best car for their needs, regardless of the powertrain, is where our focus lies. We have strong relationships with OEMs and dealers and are here to help them market new and used cars to consumers, and this includes new and used EVs. Given the uniqueness of our profile, we have the ability to provide a great experience for consumers, dealers, and OEMs with our TrueCar Plus and two-sided marketplace. Zainab?
spk01: Thanks, Mike and Jan Toon. Now, operator, let's open up the call for questions from the audience.
spk04: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Tom White with DA Davidson. Please proceed.
spk06: Great. Good morning. Thanks for taking my questions. Maybe just two clarifying ones on Truecar Plus and then one on the Outlook commentary, Gentune. I guess on the timetable for the rollout of Plus, by year end, what's your best guess on sort of where you guys are? How many states can you have the new offering rolled out in? And is it possible that you could be nationwide for the used offering by the end of this year. And then there's a comment in the letter about inventory levels in the TrueCar Plus marketplace. Just curious, do participating dealers put all of their inventory in the marketplace or just sort of select inventory and maybe just touch on the extent to which participating dealers, what's the integration process like? How difficult is it for dealers to onboard?
spk00: This is Gintu and thanks for the questions. Let me start with the first piece. We obviously have a huge opportunity nationwide as well as in the different states. It's really about how deep do you go, how fast. By the end of this year, we aim to be nationwide. Obviously, that means that you can still then go deeper and deeper because obviously you'll have you'll spend the coverage of X amount of dealers per salesperson. And so there's a lot of runway for us to add dealers as we go over, frankly, the next many, many quarters. But yeah, so we'll want to make sure that for both consumers and dealers alike, there's a nationwide offering available before the end of the year. And we'll go new state by state. I think it's fair to say that should we be able to add... two, three, four states before the end of the year on the new side, absolutely, that's something that's definitely in the plans and that's definitely in the works. It's really about how deep do you go at that point in time. So we're still refining in Florida and just running further tests, running this through. And as we go and are ready with our prioritization in the different states, then we'll start rolling out in the second half of this year. So we're very bullish that by the end of this year, we'll have very good traction with this product overall. Your second question is on the dealers in Florida. Yes, they put their inventory on. This is something that obviously is interesting for them to have. It's an extended sales funnel effectively. It means that one, you go from a much more localized, TAM for the average dealer to effectively, in this case, a statewide TAM. Number one. Number two, it's obviously an additional funnel. Number three, it means that they don't need to do any marketing expenses. They don't need to actually have any infrastructure, et cetera, et cetera. So this is a very interesting value proposition. Onboarding has been refined and will continue to be refined as we go. And so this is something that we effectively sign up the dealer. We have a team go out, do the onboarding process with the dealers. We train them accordingly. Is there always room for improvement? The answer is yes, but so far this has gone very, very efficiently and we'll continue to make this easier and easier as we go along and over time even potentially seek to automate this in efficient ways.
spk06: Okay, that's great. Thanks. And then just a quick follow-up on the Outlook commentary. So just trying to kind of get a sense of how to think about the cadence of quarterly EBITDA here for the balance of the year. Gentune, I think you said maybe adjusting for seasonality and presuming no material deterioration in the macro, that kind of annualizing the first quarter revenue number wasn't a horrible place to kind of start our models today. Does that imply that the magnitude of the absolute EBITDA dollar loss gets a little bit worse relative to the first quarter levels, presumably as you continue to ramp investments around TrueCar Plus?
spk00: Yeah, I think those are very fair assumptions. That's exactly what is probably the right frame. It's like this is somewhat of a baseline and will obviously, as you can see, even in the detailed financials, we've only leaned into TC Plus to a limited extent and we see a lot more room for that. So, yes, we will continue to lean in and increase the way we lean in. And then on the core side, we'll pretty much remain our core spaces flat or marginally improve that, but that will obviously be offset by how much we lean in on the C++ side. Okay. Great.
spk03: Appreciate the call. Thank you.
spk04: Our next question comes from Marvin Fong with VTIG. Please proceed.
spk07: Great. Good morning. Thanks for taking my questions. One was already covered, but I just wanted to ask about the pilot on Truecar Plus. I'm appreciating that it's early days. I think some others in the space that have been experimenting with a digital retailing solution have seen their conversion rates go up and just wondering if anything you've seen in your pilot in terms of close rates attributable to Truecar Plus. Thanks, and I will follow.
spk00: Yeah, thanks, Marvin. I think it's hard to say at this stage still. So at the end of the day, if you think of where we have not yet been to a place long enough where we've laid all the pipes, to actually make it fully online from finding a car all the way to the buyer's order. And so that's something that we've now recently connected. So we have a lot of data on the different parts and where people have been interacting with the different elements of that flow. but we've only recently connected everything altogether. And so we don't have enough data to really make any statistical significant statements on that. What we do have seen is that the behaviors online are obviously slightly different than you're used to in the real world. And there are a lot of preconceived notions that people have around how people behave in the car buying process actually do not necessarily seem to apply online to the benefit of actually the experience. Consumers seek clarity. They don't want to haggle. They like the transparency. So there's a lot of really interesting elements that are coming forward. But in terms of close rates, et cetera, it's still too early to tell. But we hope that on our next call, we have more data around this to provide.
spk07: That's great. Thanks, Danteen. And I just wanted to drill down a little deeper, I guess, in your thinking about the macro environment. An optimist would say, despite all the headwinds that you highlighted, and I think we all appreciate that, because of the supply shortage, that we're already basically at recession levels, and that if we get any improvement in terms of inventory and car availability, maybe we can see an improvement there. I think you're alluding that interest rates have not been fully factored in, but just wanted to get your thoughts on sort of that line of thinking and just wanted to see if you could expand a little bit more on your thoughts on the macro. Thanks.
spk02: Yeah, I think what we're seeing, Marvin, is the pricing has gotten to a point where it's begun to slow down the turn rate. And that's going to be one of the things that we look at going forward is, you know, affordability for many consumers is becoming a real issue. And even though we may get a slight increase in inventory until prices start to adjust and until we can get the, you know, the sold orders out of the system you know, we don't see a big response to the, you know, the pricing situation that's going on out there. And it's really squeezed many of the discretionary buyers, we think, out of the marketplace. So, you know, there's a chance we'll see an uptick, but it's going to take a while to get enough inventory out there to begin to affect pricing and affordability. Finance rates are starting to extend. and things like that that we haven't seen for a while. So we're watching all of those factors and are hopeful that in the second half of this year we'll begin to see some positive signs in that area.
spk04: Perfect.
spk07: Thanks for the commentary, Mike.
spk04: Appreciate it. Our next question comes from Rajat Gupta with JP Morgan. Please proceed.
spk03: Great. Thanks for the question. I hopped on a little late, so I'm curious if you touched upon capital allocation at all. Just given the balance sheet flexibility, you mentioned talking acquisitions in the past to help accelerate the roadmap or the product roadmap. Could you give us a sense of what's your latest thinking around capital allocation, particularly in the context of the current macro? We would love to hear that and have a follow-up.
spk02: Thanks for the question, Rajat. I'll start the answer and then I'll let, excuse me, I'll let Jan Toon jump in as he sees fit here. But, you know, we love our cash position. You know, we're looking hard at a number of opportunities to really accelerate what we're doing on True Car Plus. You know, we think coming out of NADA just recently, there's some interesting tuck-in type opportunities that we're taking a look at. All all aligned to help us accelerate getting to market, accelerate some of the knowledge and know-how around a commerce-driven site. So we'll continue to look at those things. We'll continue to manage our expenses. We've been working on reducing our fixed expenses and trying to manage our way through that. So we think there's some opportunities there. We are out in the market actively looking, and it'll all be focused around accelerating Crew Car Plus with our own capabilities and then some of the things we've seen in the marketplace.
spk00: Yeah, and so I think what Mike was saying is absolutely right. Correct. Tuck-in investments is something that we're looking at very actively. Also, it seems that prices have come down of some of these type of acquisitions. So it has also become more reasonable. That was harder effectively a year ago, number one. Number two is we obviously are ready to really start leaning in on the TC Plus side on the marketing side as well. Now that the pipes have laid effectively, We can really push people through. We want to do this in a strategically effective way. We haven't necessarily done that to date because we knew we were pushing people through only through phases of the flow, not yet through the entire flow. So we're now ready to actually start doing that. And then the other thing is obviously macro in general, and obviously the concept of creditworthiness will become important overall. So having a little bit of a a war chest and a strong balance sheet is probably a good thing for a company like ours going into the next several quarters, especially in a world where credit worthiness is something that will become more prevailing as interest rates are going to rise. And so we want to also be somewhat prudent there as we navigate these waters.
spk03: Got it. Got it. Great. Maybe, you know, I'll just follow up on that. any color on the exact kind of capability you might be looking at. For example, car deals with the car offer deal, and cars.com did the AccuTrade one recently. Those kind of capabilities, is that something you're looking at, or is that something you're already building in-house with TrueCar Plus and distance retailing? Just curious as to what kind of capabilities are you targeting?
spk02: Well, I think we're just to speak specifically about, you know, some of the things you mentioned. You know, we have an Accutrade deal in place for a guaranteed cash value on our site. So we've had that offering available for quite a while, and it's built into TrueCar Plus as part of the flow. We also made an investment in Dealer Science a few years back in that desking tool. I want to clarify at this point, there's a big difference between some of our competitors launching various digital products and what we're trying to build, which is a fully comprehensive digital marketplace end-to-end. So, you know, there's pieces of it. The interesting piece we announced just recently was the automated trade payoff. So on a lot of sites, you can go out and get a value for your trade, but then the dealer or the consumer has to make a call to the bank, find out if there's still any money owed on that loan. has to get worked into the deal. We've automated that process. You won't hear many of our competitors talking about that. They leave that up to the dealer to do. So, you know, we're working at great lengths to bring a digital solution to the entire purchase process versus, you know, the introduction of random tools. And we think we're there. There's always ways to accelerate. The work we did around VIN-based protection products was very important to us. You know, many of the offerings in the market are very generic around the vehicle. We now have protection products, individual dealer protection products at the VIN level with VIN level pricing. So those are the type of things we're working on. And it will further perpetuate our ability to get to, you know, that full, you know, penny perfect end to end transaction at the end of the day versus, you know, a series of random transactions. kind of tools that are being introduced to help consumers shop, right? We're trying to create an environment where they can come to our platform, shop new, used, and certified pre-owned vehicles, and actually go fully end-to-end with fulfillment happening either at the dealership. And now we're going to be delivering vehicles to consumers with our shipping program. So we're excited about what we've built. There are folks out there who have built interesting things that we can we can use to accelerate even further and get better at what we do. So we'll continue to look at those things.
spk03: Got it. Great. Thanks for the cover.
spk04: Again, if you do have a question, please press star, then 1. The next question comes from Chris Pierce with Needham. Please proceed.
spk05: Hey, I'm just curious on the Florida dealers you guys are signing up with Truecar Plus. Are these new dealer relationships for you guys? Existing dealers you've had a previous relationship with? Just kind of curious what's going on out there as far as dealer feedback and potentially growing the dealer network.
spk00: Absolutely. And good question. And the answer is both. And so we've also, similar to our product, we're also trying different forms of actually approaching this. So you can think of, do you approach your current dealer networks that you have already have existing relationships with? Obviously, those are often good relationships that we have. But also what we do is we'll take a hub or take a city and then you go and actually this is a really interesting offering to approach dealers that are not necessarily on our network and start those dialogues. One thing you'll obviously see is, for example, a focus also on independent dealers that we've been having where 2Car Plus could be a really interesting proposal to them as well. And that's also in a world where obviously, as you see the mix shift happen from new to use overall. So with our somewhat greater focus on use in the current macro environment. But the short answer to your question is absolutely both. And we seem to get good traction with both. So yeah, we feel that overarching with the core offering, the sell your car distance retailing, and then over time, the TC plus as you go nationwide. And we feel we have a very good offering for the dealers. and ready to become their big partner in enabling multitude of sales channels, both locally, as well as regionally, as well as nationally.
spk05: And you kind of touched on it there. On sell your car, who buys the car? Is the dealer much more likely to buy the car if that consumer is also willing, looking to buy a car on Two Car Plus? Or if a consumer just wants to sell a car, just wants to kind of price check what's out there, who would be the buyer of that car?
spk02: Yeah, the buyers are, you know, our network of dealers are looking for acquisition opportunities all the time. So they get they're getting pretty excited about consumers who either are reducing a family fleet or want to, you know, maybe sell a car now and come back into the market later. So we've had dealers very quickly rally to be part of our sell your car program. and consumers are beginning to dispose of vehicles through that process, and dealers love to have them and are excited about the opportunity to bring those cars into their used car inventory.
spk05: Does the dealer have to be part of TrueCar Plus to be part of that car buying program from retail?
spk00: No, currently no. That's separate.
spk04: Okay, perfect. Thank you. This concludes the question and answer session. I would now like to turn the call back over to Trucar's president and CEO, Mike Darrow, for closing remarks.
spk02: Hey, I'd like to thank everybody for taking the time to participate in the call today. I also want to thank the entire team here at Trucar for all the hard work to help us take the commercial version of Trucar Plus to dealers across the state of Florida. It's an exciting time for our company, and we look forward to sharing our progress with you on our next call. So thanks, everyone, for participating.
spk04: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
Disclaimer

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