TrueCar, Inc.

Good day and welcome to the TrueCar 4th Quarter 2022 Financial Results Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Zainab Bukhari, Vice President, Investor Relations. Please go ahead.

Thank you, Nick. Hello and welcome to TrueCar's 4th Quarter 2022 Earnings Conference Call. Joining me today are Mike Darrow, our President and Chief Executive Officer, Dantoon Rikersen, our Chief Financial Officer, and Theresa Luong, our Chief Financial Officer. By now, I hope you've all had the opportunity to read our fourth quarter stockholder letter, which was released yesterday 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 identified by the use of words such as believe, expect, plan, target, anticipate, become, seek, will, intend, confident, and similar expressions, and are not and should not be relied on as guarantees 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, reconciliations 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?

Thanks, Zeynep. Good morning, everyone, and thanks for joining us. We highlighted some of the great progress we've made across our company in our fourth quarter stockholder letter. We also shared some of the exciting personnel enhancements we made to align around our key business priorities in 2023. We continue to refine our product experience and align our resources around delivering the automotive industry's first true modern-day marketplace for new certified pre-owned and used vehicles. As we look ahead, we have four key priorities for 2023. To rebuild our core business, expand the market footprint for Trucar Plus, lean into the used vehicle market, and focus our marketing on converting our healthy top of funnel traffic into sales for our dealers. These priorities are strategic for us and are informed by what we're seeing in the market today and what we heard from our dealer partners at NADA. We're confident that our efforts throughout 2022 have provided a solid foundation to execute towards these priorities in the coming year. To embrace the opportunities we identified for 2023, we reorganized our senior leadership team and added essential new hires to ensure the successful execution against these key priorities in 2023. Two of those leaders are here with me today, so I'll address them first. Jantoon, who previously held the role of both Chief Financial Officer and Chief Operating Officer, has become our COO in a dedicated role that initially will focus on rebuilding our core business and on the rollout and adoption of TrueCar Plus, in addition to our marketing plan to aggressively pursue conversion of our robust top-of-funnel traffic. We've also developed plans to add additional operating departments under Chantoon beginning in Q2. Chantoon has demonstrated that he's an effective leader and his influence over the operating functions will help ensure that our entire company remains focused on innovation that will be quickly scaled to deliver value to dealers and consumers. I'm excited to announce that we promoted Theresa Long to Chief Financial Officer from SVP of Financing recognizing her extensive knowledge of our company and her leadership in the many critical roles she had placed since joining Trucar in 2014, which include helping to take the company public, overseeing financial reporting, technical accounting, tax, forecasting, and business planning. Congratulations, Theresa. In December, we hired Jay Neiman to lead our field sales team as our head of sales. Jay has a proven track record in managing field sales and operations team and has quickly become a hands-on leader for the sales organization. Jay will report to Jantune and will lead our efforts to rebuild our core dealer network and expand our Truecar Plus footprint. We also recently hired Jay Ku as our first chief commerce officer, a creative role to which he will bring his extensive experience in full funnel marketing and conversions. In this capacity, Jay will be responsible for scaling the Trucar brand across multiple channels and helping us convert the millions of monthly unique visitors into sales for our dealers. Jay will report to Jantune. At this point, I'd like to turn it over to Jantune for an operating update.

Thanks, Mike. During Q4, we continue to see the supply of new vehicles rise across the industry. This is an encouraging start. But since this recovery is from a very low base, much more progress is needed in the quarters ahead. Vehicle affordability is still a concern for many consumers who are struggling to manage their monthly payments while interest rates continue to tick higher. This has continued to pressure our close rates, and we believe it will be several months before we return to a more balanced environment across our industry. Debt dealer accounts for our corporate leads-based business increased during Q4, driven by the by growth in franchise dealers. During Q4, dealers that left our platform when new vehicle inventories were in decline started to return. We saw some attrition amongst independent dealers in Q4, and in light of softening demand and other dynamics impacting the used side of the market, we expect some turn in independent dealers in the coming quarters. Despite these near-term issues, we remain firmly committed to the used side of the market. Wherever we travel across the country, dealers tell us that they need more and more used cars. It is clear to us that the limited availability of new vehicles over the past few years is creating some scarcity, particularly for one to three-year-old vehicles, and we intend to step up efforts to help our dealers source used vehicles. During the fourth quarter, we continue to enhance our Trucar Plus marketplace. We upgraded our TCplus credit offering and expanded our coverage of auto lenders from fewer than 50 to more than 1500 lenders nationwide by replacing a third party provider with our own credit engine. This is a huge feat by the team. As a result of this upgrade, TC Plus dealers can easily find and configure their preferred lenders, which makes onboarding new dealers much simpler and may potentially support higher approval rates for consumers with a broader group of preferred lenders available for each dealer. Additionally, we more than doubled the size of our accessories catalog in TC Plus, which lets dealers offer a broad set of accessories throughout our marketplace and also helps simplify the dealer onboarding process. In addition to the great dealer consumer factor upgrades, we modernized our entire cloud infrastructure, an upgrade that will allow us to reduce costs while increasing our development speed and flexibility to respond to change. We also launched our AI recommendation engine, which will be used to power some of the exciting new features planned in the near term product roadmap for both DC Plus and our core business. After establishing a solid foundation in Florida, we announced the expansion of TC Plus into five additional southeastern states throughout Q4 and have either signed up dealers or are in the onboarding process with them in each of these states. It is important to note that as we expand our footprint for TC Plus, we intend to focus on adding digitally forward dealers to our marketplace and help them broaden their market reach and impact to drive higher sales. The dealer network for TC Plus will therefore be much more curated than our leads business and will be mostly focused on inventory. We've also launched new subscription packages for 2023 that are aligned to the value that our products can deliver to our dealers. Over the course of 2023, we plan to move away from the legacy pay-per-sale model and focus on growing monthly recurring revenue. We're also committed, as ever, to helping our dealers grow their unit volumes, especially as the market starts to shift from a purely supply-driven market to one where demand generation and a robust digital presence will increasingly be important. I'll turn it back to our CEO, Mike.

Thanks, Jantun. There are many other areas where we're making strong progress that we'll continue to share with you over the coming year. I'll touch on a couple of significant examples that demonstrate the resurgence of the Trucar brand in the affinity and OEM space. We launched a new partnership agreement with NerdWallet, a leader in the personal finance space with approximately 20 million monthly unique users of their sites for education, insights, and information about life's financial decisions. We believe this program will help bolster brand awareness for Trucar, and Trucar Plus is set to be active on the partner site at launch. We also expect to significantly expand our OEM program with Mercedes-Benz on March 1st. This program expansion will provide targeted Mercedes-Benz offers to some of our most robust affinity platforms. We're excited to combine the power of a world-class automotive brand like Mercedes-Benz with the membership and purchasing power of our exclusive affinity network. Our balance sheet remains healthy, and we believe our cost structure is in a good place. We're encouraged by the signs that new vehicle inventories are starting to rebuild. We will not be providing detailed guidance on this call. However, based on our current plan, we expect to achieve double-digit year-over-year revenue growth and return to break even or positive by the fourth quarter of 2023. I'm very encouraged by our progress during the fourth quarter and in the weeks that have followed. I want to thank the entire Trucar crew for their hard work dedication, and commitment to our vision of bringing something new and unique to the market and doing it at a time of rapid change as we embrace what we expect to be increasingly digital future for automotive retail.

So with that, Mike.

Before we open the call for live questions, we're going to address some questions around key topics. Zainab, what's the first question?

Thanks, Mike. The first question is for you. We've highlighted several updates to Truecar Plus in the stockholder letter, including an updated credit experience and an expanded accessories catalog. Can you explain why these are important within the overall product flow for Truecar Plus and what is next?

Thanks, Zainab. We greatly improved the dealer and consumer experience at Trucar Plus during the fourth quarter in a number of ways. First, we expanded the number of lenders that dealers can access within our marketplace from just under 50 lenders to more than 1,500. This is an important upgrade for several reasons. First, dealers will be able to provide vehicle shoppers access to a broader set of their preferred lenders. Second, consumers applying for credit will now have more options and more of them may be able to get financing now that the selection of auto lenders is much wider, some in a matter of a few minutes. Third, as we expand Trucar Plus into additional markets and bring dealers onto our platform, onboarding these dealers becomes easier since we'll have integration with many, if not all, of their preferred lenders. Strategically, we shifted a key capability from a third party to our own in-house credit engine. This gives us a lot of flexibility to continue to customize the offerings and also opens up our marketplace to lender partners. We've done something similar with accessories and protection products, an important and lucrative revenue stream for dealers, more than doubling the catalog of approximately 28,000 multi-brand parts and accessories and protection products across all major OEMs from when we launched in October. This means that dealers can find and bring the accessories that they want to sell on Trucar Plus quickly, and consumers can customize their desired vehicles. With these updates, the flow within Trucar Plus now allows vehicle shoppers to find their car, get full credit approval from a dealer's preferred lending partners, and customize their desired vehicle by adding accessories and products offered by the dealer. In the first quarter of 2023, we plan to enable an order confirmation that will effectively represent the fully-baked deal on the dealership's terms, using financings from a dealership's preferred lenders and the accessories and protections plans they want to sell, after which the deal will be ready for review and fulfillment. Zainab, back to you.

Thank you, Mike. I'll direct the next question to Jan Toon.

jantoon how do the new subscription packages uh compare to our past ones and how are dealers reacting to this change yeah thanks as mark as mike mentioned we've made significant investments in product and technology over the past year to develop and launch exciting new offerings for both new and used vehicles as a result of this we started 2023 with an expanded set of products to take to our dealers We've demonstrated that our TC Plus marketplace attracts high intent, profitable shoppers. Trucar Plus leaders have seen two to three times improvements in close rates and a 65% reduction in days to close. In 2022, approximately 1,290 consumers applied for credit and received lender approval through the TC Plus platform. Additionally, during the fourth quarter, TC Plus shoppers with the dealer-approved reservation who added at least one protection plan or accessory to their vehicle added on average 4,700 worth of optional plans or accessories. These are measures that we believe dealers will be very excited about to hear. At the start of the year, we launched three new subscription-based packages that we believe are aligned to the value our solutions offer dealers. The new plans include three tiers that encompasses our leads-based business auto buying solution, a regional plan, and Truecar+. In addition to this, dealers have the ability to customize their chosen packages with add-on services and to select their desired levels of market exposure and reach. We believe the new structure offers the flexibility for dealers to choose the package that best serves their needs. We are as committed as ever to helping dealers grow their unit volumes, but we shift towards a subscription model across our overall business, where we will focus on growing our monthly recurring revenue across our dealers. During the course of this year, we'll be moving away from the legacy paper sale model. Many of our dealers are already on our subscription model, so we don't anticipate much disruption from the new packages. We have begun signing up dealers at the higher MRR. However, it is early days, and as dealers adjust to the new subscription pricing, we may see some migration and or turnover. What we've seen thus far has been within our expectations. Let's have the next question.

Thank you. The next question is for Theresa, our Chief Financial Officer, who I want to congratulate and welcome to the call. Theresa, can you explain what drivers will help Trucar achieve double-digit revenue growth and return to break-even or positive adjusted EBITDA by the fourth quarter of 2023? And secondly, what could the revenue cadence look like?

Thanks, Nina, for the warm welcome. It's great to be here. So when we think about drivers, I'll point back to what Mike highlighted earlier in his remarks. Our priorities for 2023, which are to rebuild a core business, expand our market footprint for TrueCar Plus, lean into the used vehicle market, and to increase traffic conversion. These priorities are the operational roadmap that we think will help drive growth for our business and opportunities for monetization in the coming year as new vehicle inventories start to rebuild. So for our core business, we plan to rebuild our core dealer network throughout this year as new vehicle inventories start to recover. There are still headwinds, as we noted, with independence and affordability concerns for our consumers, but this is a definite priority for us. In regards to Truecar Plus, we've also started monetizing at the beginning of the year and introduced new subscription packages for our other solutions as well. We'll look to broaden our footprint for Truecar Plus with digital for our dealers who are looking for innovation and committed to the digital channel. As we expand the number of markets that we are in, we expect to expand the monetization opportunities available to us and grow revenue contributions from two-car plus. Now, in regards to the used vehicle market, we've talked about how dealers consistently tell us that they want to buy more used cars. Despite the near-term issue in the used car market, the longer-term repercussions from supply challenges for new cars will lead to scarcity in used cars. particularly in a desirable one to three-year-old vehicle category. For this reason, we are leaning into used cars with a focus on helping dealers source these vehicles. We plan to shift to a new offering for trade-in and vehicle sourcing that we expect to broaden our monetization opportunities once it is launched. On the fourth point of traffic, we have continued to see sustained strength in our monthly unique visitors and are focusing on improving conversion across the traffic that we are already driving to our site to both raise consumer awareness of TrueCar Plus and convert our existing healthy top of funnel into unit volume for our dealers. As Mike had noted earlier, we have realigned our senior team and added key hires to ensure that we execute on these priorities this year. And finally, with respect to revenue cadence, recoveries are rarely linear and there are enough cross-trends still present that could make things choppy in the near term. Assuming macro trends continue to recover steadily and we don't end up in an economic downturn, we expect the second half to be better than the first half since we expect new vehicle supply improvements to broaden and also expect to have a broader market footprint with two-car class. What's the next question Zane asked you?

Thank you, Teresa. Our final question before we open up the line is for both Mike and Jan Toon. First, Mike, you mentioned that bringing dealers back to the Trucar platform is a priority for 2023, but given our expectations for some churn with independent dealers, what do you expect for Trucar dealer counts? And secondly, for Jan Toon, if Trucar Plus

uh dealer group is more curated what should we be looking to to gauge our progress there thanks a-neb i'll go first on this one new vehicles inventories are rebuilding but the gains are still somewhat concentrated by oem and brand and well below typical inventory levels for the industry so we're not out of the woods yet Traditionally, new vehicles have been our area of strength for Trucar, so our teams are out in the field reaching out to both new franchise dealers and new dealers who turned us off when inventories were low and going to the market with a portfolio of great solutions for both new and used vehicles. Our franchise dealer count rebounded in Q4. On the used vehicle side, we expect unfavorable market conditions to create some pressure on dealers' gross margins per unit. As a result, we saw some attrition for independent dealers in Q4 and expect some additional churn in months ahead for independent dealers who only focus on used vehicles. We operate a full marketplace that includes small, privately owned independent dealers, large public dealerships, and vertically integrated digital operators that focus on the used vehicle market, like Carvana. Some smaller independent dealers may go out of business, while others will be acquired by larger dealers. Many will employ expense-saving measures to conserve cash until conditions stabilize. We're already starting to see some of this take place. However, we remain committed to the used vehicle market and see many opportunities ahead to help dealers source vehicles and grow their sales volume. Bringing the dealers back to our truecar.com, to our core truecar.com offering is one of our priorities in 2023. We are early in the recovery for new vehicle inventory. And given the economic backdrop, we think there may be some choppiness in the months ahead. We aren't providing targets or expectations for dealer accounts across our core TrueCar.com business. However, we have more balance to return to the market as 2023 progresses further and the recovery broadens. We expect our core business to benefit as that happens. Dan Toon, why don't you cover the TrueCar Plus part?

Absolutely, and I'll keep it short. We expect our Truecar Plus dealers to be more of a curated group. Remember, Truecar Plus is best suited for digitally forward dealers who are committed to the digital channel to increase their sales and expand their market reach. For the core business and our lead business model, dealer density and rooftop count are an important factor. While for Truecar Plus, it's much more about having the right inventory for national coverage. So our new subscription plans encompasses both our core TrueCore offering and TrueCore Plus. So signing up dealers to our elite package is one indicator for TrueCore Plus that is important. Growing sales volumes for dealers and driving MRR higher will be some of the indicators of our progress. Zeynep?

Thank you, Mike, Jantian, and Teresa. Now, operator, let's open up the call for questions from the audience.

Thank you. We'll now begin the question-and-answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. This time we'll pause a momentarily to assemble the roster. The first question will be from Aja Uta, JP Morgan. Please go ahead.

Great. Thanks for taking the question. I just wanted to follow up on some of the commentary around the dealer churn that you're seeing after launching the subscription packages. Are you able to put some numbers around that on what you're already seeing since these packages have been launched, including what the monetization has been for those packages? If you could just help us with that. What's governing your 2023 guidance in terms of dealer count and just monthly dealer revenue or however you want to look at it in terms of metrics going forward?

Thanks. Thanks, Rajan. So there's little guidance to give so far. Remember, we've started the new packages as of January 1, so we're now effectively, what, six or seven weeks in. What has been very positive is that there's an understanding by the dealer base of the broader value we provide. There obviously is some churn related to that, especially with some smaller dealers that are saying, hey, let's see whether we can do this ourselves. Or if you're an independent, smaller use player, now you're struggling a little bit more on your P&L side. There's also obviously a lot of movements happening in the marketplace. There's consolidation happening. A good example of a player that came off our platform was Tread, right, acquired by Cox. And so as a result, they will not participate in our program anymore. So there's a little bit of give and take. Overarching, though, we've been successful in getting the revenue up. Really, if you remember, we've not increased our prices in any shape or form for a long period of time. And so really moving from a paper sale model to a much more value based selling approach is key. This is not about just giving a single lead. This is about giving the opportunity to really be a subscriber to a large value set that we provide. One example of that is, for example, the delivery aspects right so we now provide dealers to actually have delivery even on non-true card deals that we can provide for them um the other one is obviously uh um right so the offerings will be set around the accessories the prioritization and pc plus around the accessories their captive lenders etc etc so there's a lot of value that we can subscribe to the dealers it's too early to really give big indications but overarching I think we're trending nicely and we're happy with where the numbers are so far.

Got it. And so, you know, as this churn occurs or is starting to occur, is the monthly revenue per dealer already starting to pick up with those packages or is that something you would expect to blend over time? I'm just curious, like, what's the new algorithm to look for in terms of growth?

absolutely it will be the latter it will be it will because this is a transition we'll do over the course of the year so this is not something that you'll see immediately take up over the course of the next quarter or two this is much more something that we'll do gradually over the course of the year um especially as we're focusing initially mostly on the paper sales side and then start moving into the subscription states and then obviously any new dealer coming onto the platform will be on the new package but we're slowly but surely transiting legacy dealers onto the new system, and so this will take some time, so don't expect any immediate upticks, but obviously over the course of the year, this will start having a greater impact.

So the unit guidance, so the revenue guidance is more driven by just traffic more than just the monetization piece? Is that fair? Yeah.

It's fair. It's obviously an expectation that inventory will start building up and conversion rates will start improving. It's obviously opportunities around other revenue sources as well, but it's also overarching monetization improving vis-a-vis the end of the year. But overarching, yes, it's units driven as well as other revenue sources. Got it.

And lastly, I might have missed this on the call, but you're reiterating the $125 million greater than $125 million cash guidance for the end of the year?

Yeah, and the answer is yes, but obviously I'll caveat that all day long with saying that if there are opportunities to do attractive buybacks, etc., so yes, $125 million absolutely in the ordinary course of business, but if there are if they're attractive M&A opportunities or buyback opportunities or those type of things, and definitely we'll execute upon those. But I think what's important for people to realize that we have a strong balance sheet, we'll continue to keep a strong balance sheet. So the 125 is a good marker to have, but it's not written in stone.

Got it. Great. Thanks for all the comments. We'll jump back in here. Thank you. Next question will be from Chris Pierce of Needham. Please go ahead.

hey good morning everybody i just wanted to get a sense you kind of talked about building out the teams and kind of some hires as you launch truecar plus i wanted to get a sense how we should think about you know the path of opex in 2023 you know as you reiterate you know exiting the year positive or you know break even adjusted thanks yeah i'll i'll i'll take i'll take that for now and then i'll have in the anticipation of and then three second take them going forward but the

so remember that we've we've said last time as well is opex is uh fairly stable for us we're very focused on making sure that we keep opex under control um remember there are three large buckets on the operating side it's human human capital right it's marketing expense and then it's effectively our overhead charge if you think of marketing expense it's two buckets partner And then it's effectively performance marketing. So the variable that we can play with very easily is obviously performance marketing. We've articulated clearly last time that we want to focus on conversion as a key theme for 23. We have a lot of uniques coming to our site. So conversion is key. Adding another unique is not necessarily as valuable. And so conversion is key, which is obviously one of the great things of having Jay Koo come on board. But so overarching, the OPEC side, I think you can assume to be relatively flat, slightly increasing in the sense that we're looking at opportunities around dealer sourcing used vehicles, and we're doing some really interesting initiatives there, which will have some initial startup costs associated with that. But I would argue, and yes, you could probably anticipate a slightly increased headcount costs But overarching OPEX is something that we want to keep reasonably flat for the course of the year. And so I just keep that in the back of your mind, which I think makes also the modeling a little bit easier.

Thank you very much. Thank you. Next question from Steve Dyer, Crackhalem Capital Group.

Please go ahead.

Good morning, Ryan. I'm for Steve. Just one for us. Curious, following AutoNation's investment in November, have there been any changes in the operational partnership there?

Hey, Ryan. Thanks for the question. We continue to, you know, pay close attention to AutoNation. They're one of our biggest partners. We have ongoing dialogues with them. And, you know, I think we'll continue to work to make sure that their investment emphasizes where we believe we sit in the leadership position on digital retailing, and we'll continue to work with them to advance those opportunities. You know, they have many of the same needs all dealers have in acquiring used vehicles. So, you know, we're working with them to stay coordinated on all of our initiatives for 2023, and, you know, that partnership will continue to grow.

Maybe just a follow-up. Are they one of the Trucar Plus customers?

They're not yet. And that is really about timing because you want to make sure you get the right people on. So if you think about automation over time, there are really several pillars upon which we can have really interesting collaborations, which we're working on with them. And so they're not yet on the platform. And that is by design, frankly, because we're looking at... forward-leaning dealers now that are much more in the trenches with the product development. As we mentioned before, we've now changed from the credit piece, we've changed on the accessory piece. So now is the time that we actually have a product that can be rolled out across dealers. So this is something that is now a much closer focus for much more of the near term.

Great. Thanks, guys. Good luck. Thank you. Thank you. This concludes our question and answer session.

I can turn the call back over to Trucar President and CEO, Mike Tharo, for closing remarks.

Thanks, operator. I'd like to thank everybody for taking the time to participate in our call today. I also want to thank the entire team at Trucar for all their hard work over the past year and as we work to execute our priorities for 2023. This is an exciting time for our company. We look forward to sharing more about our progress with all of you on the next call.

Thanks for joining. Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.