TrueCar, Inc.

Good day and welcome to the TrueCar first quarter 2023 financial results conference call. Please note this event is being recorded. I would now like to turn the conference over to Zainab Bakari, Vice President, Investor Relations. Please go ahead.

Thank you, Operator. Hello and welcome to TrueCar's first quarter 2023 earnings conference call. Joining me today are Mike Darrow, our President and Chief Executive Officer, Jantune Rigersman, our Chief Operating Officer, and Teresa Luong, our Chief Financial Officer. By now, I hope you've all had the opportunity to read our first 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'll turn the call over to Trucar's President and Chief Executive Officer, Mike Darrow, for some opening comments. Mike?

Thanks, Zainab. Good morning, everyone, and thanks for joining us. We highlighted some of the great progress made across our company in our stockholder letter for the first quarter of 2023. The entire Trucar organization is focused on executing our four key business priorities in 2023. They are, one, to rebuild our core business, two, expand the market footprint for Trucar Plus, three, lean into the user market, and four, focus on market or focus our marketing on converting our healthy top of funnel traffic into sales for our dealers. I'll start with traffic. In Q1, we had nearly 8.7 million monthly unique visitors across all our sites. This represented more than 19% year-over-year growth and exceeded our internal plan. While we were measured with our marketing acquisition spend, we were also focused with targeted SEO improvements and continuous improvements to our approach. We believe this has put us in a solid position with our upper funnel traffic performance. Our focus is now shifting to customized experience flows and on a conversion of these millions of unique visitors into sales for our dealers. We are developing personalized shopping journeys for three initial consumer cohorts that we've identified. Economic buyers, convenience buyers, and EV buyers. By building personalized journeys for these cohorts, we believe we'll be able to help consumers in these cohorts identify the right vehicle for their needs and expect this to help us drive higher conversion for our healthy upper funnel traffic. To complement our demand-side performance, we've started being more deliberate and proactive in our approach to the supply side of our platform. This will position TrueCard to deliver a better e-commerce matchmaking experience for the consumer cohorts that we plan to focus on. We grew our net franchise dealer count by 37 dealers in Q1 and focused on adding brands and inventory where we have active shopping interest. As new car inventory continues to recover slowly off a historically low base, we plan to continue to add dealers and inventory that match our consumer demand patterns. On the used car side, our dealer count declined in Q1. impacted by consolidation and current market challenges, particularly for smaller independent dealers. We'll continue to focus on adding larger independent dealers that will align well with our very active shopping cohort of economic buyers that has emerged in our used car channel. On the product front, we redesigned our Trucar Plus checkout flow to deliver a better e-commerce experience for consumers through a transparent, intuitive, and streamlined flow. We also launched a new order confirmation step that allows a consumer who has built a deal within Truecar Plus to confirm their desire to complete the transaction. Additionally, to support our Truecar Plus retail partners, we made specific enhancements in dealer portal that will make it easy for dealers to respond to Truecar Plus orders. We believe these enhancements will make the Truecar Plus experience more efficient, accurate, and transparent to both dealers and consumers. We'll continue to expand the geographic footprint for Trucar Plus beyond the six in the Southeast states where it was offered. Over the next few months, we're preparing to more than double Trucar Plus market coverage, starting with key metro areas across an additional 10 states. We have already started adding dealers in Virginia, Ohio, Maryland, and Texas. Finally, as we lean into the used car market, we launched Trucar Plus Wholesale Solutions, a wholly owned subsidiary that will provide market-based vehicle valuations that are established using a proprietary algorithm and by leveraging multiple market inputs, including values that reflect the current dealer demand. We implemented a broad rollout of TrueCar Plus wholesale solution valuations across the contiguous United States at the end of April. The sourcing of used vehicle consistently remains a top demand for our dealers, and we believe this program will be a relevant solution for them. There are many other areas where we are making strong progress. For example, in mid-April, we expanded our OEM program with Stellantis and extended our Mercedes-Benz program, both of which will provide targeted offers to select affinity programs. As New Vehicle Supply continues to rebuild, we continue to work with leading brands to offer benefits to the members of our exclusive affinity partners. Our balance sheet remains healthy, allowing us to invest in our priorities for 2023. We continue to anticipate breakeven or positive adjusted EBITDA in the fourth quarter, as well as double-digit revenue growth compared to the fourth quarter of 2022. As always, I want to take this opportunity to thank the entire Trucar crew for their hard work, dedication, and commitment to our vision of bringing something new and innovative to the market at a time of rapid change. We'll continue to embrace what we expect will be an increasingly digital future for automotive retail. Before we open the call up for live questions, we're going to address some questions around key topics. Zeynep, what's the first question?

Thank you, Mike. The first question is for Jantoon. Jantoon, what factors drove the behavior of independent dealers in Q1? And how are you factoring this into the go-forward plan for rebuilding the core business?

Absolutely. So the used market has been experiencing headwinds in recent months. Higher interest rates have hurt many independent dealers as their floor plan financing costs have risen. The price and supply dynamics are less favorable and affordability issues remain a challenge for consumers. The combination of these and other factors have put pressure on dealers' gross profit per unit, especially for smaller independent dealers. Our net independent dealer count was lower by 277 in Q1. However, there are a couple of points to make. The vast majority of these dealers were smaller independents. And for dealers where we understood the reason of their departure, over 40% are either acquired or went out of business. In one case, a single group actually had 95 rooftops on our platform that was acquired. Although obviously the rooftop count was lower, it had very minimal impact on the MRR. As we rebuild our core business in 23, it is our intention to add the right dealers with the right inventory to our network that matches the demand from our shoppers. This will be particularly important as we focus on converting our traffic and on developing personalized shopping journeys for the three initial consumer cohorts that Mike mentioned. Further, we see some of the major franchise and independent dealers centralizing their efforts for online transaction, which actually is clearly to our favor. This will represent the single connection point for true car by dealer, but with significantly more inventory behind that single connection point and the dealers with greater ability to deliver a better consumer experience. So we see overarching a bunch of changes happening, which are effectively turning into our favor, which is good.

Thank you, Jansun.

The next question is for Mike. Mike, can you explain why we're launching TCWS valuations and how this is different either from what was used previously or other existing sources of used vehicle valuations?

Thanks, Zainab. At the end of April, we launched Trucar Wholesale Solutions valuations to provide Trucar.com and our extended affinity partner sites with real-time vehicle valuations and a backstop on trade-ins through TrueCar+. PCWS valuations will also support consumer-to-dealer sales through our Sell Your Car program. These vehicle valuations are established using a proprietary algorithm leveraging multiple market inputs, including values that reflect current dealer demand, which is relevant for consumers who want a current assessment of what their used car or trade-in is worth and for dealers who continue to tell us that used vehicle acquisition is a major priority for them. We believe Trucar wholesale solutions will be more relevant to consumers and dealers than valuations based solely on backward-looking algorithms that did not incorporate current market value inputs. As we lean into the used market, we expect to open up additional opportunities for Trucar and our retail partners in this market And offering real-time valuations is just one of the efforts underway at Trucar. Let's have another question, Zainab.

Thank you, Mike. The next question is for Jantoon. Jantoon, can you tell us more about the three consumer cohorts we've identified and explain how we plan to use the new experience flows to drive higher conversions?

Absolutely. So we continue to make big strides in Truecar+. Improvements like unified BDP and streamlined checkout flow as highlighted in our letter. I also urge everybody to look at the visuals because I think you clearly see that it's a much more efficient flow. While we've spent time building the various features for an online transaction, we've also started to hone in on developing a more defined experience flow to help match consumers with vehicles in our dealer's inventory that suit their wants and needs in order to drive higher conversion across our strong top of funnel traffic. Matchmaking higher up in the funnel will therefore become increasingly more important for us. We have identified three initial consumer cohorts to focus on. Economic buyers, convenience buyers, and EV buyers. Each have different wants, desires, and budgets, motivations for shopping for a vehicle. Economic buyer has a lower credit score and will have the ability to search for inventory qualified for their buying power. The convenience buyer is a higher credit score, focused on comparability, is most likely new or certified pre-owned, probably interested in leasing. The EV buyers seek different information, not only on range or battery life, but also considerations around buying a used EV, for example, or even the comparison against an internal combustion engine. Both the convenience and EV buyers are also very attractive profiles for OEMs as they look to re-engage their incentive programs. and figure out how to penetrate deeper into these markets. This is especially prevailing and important in a rising interest rate world where OEMs would like to subsidize for their consumers. The cohort identification also allows us to target the top of funnel more efficiently and allows us for more targeted and curator-dealer engagement too. So overarching, it just creates a greater focus for the company.

Thank you, Gentoon.

Our final question before we open up the line is for Theresa. Theresa, market conditions remain mixed. What are the drivers of the double-digit year-over-year growth and breakeven or positive adjusted EBITDA by the fourth quarter of 2023 that we're expecting?

Thanks, Zainab. Regarding the drivers, this goes back to our focus on our four key priorities for 2023. which we believe will help us achieve the double-digit year-over-year top-line growth we expect in Q4. It's encouraging to see new vehicle inventories continue to rebuild while more progress is needed. We are adding franchise dealers to help them generate demand for their inventories. There are still definitely some headwinds that we are watching closely, including what is going on in the used market and with independent dealers that could make our progress a little uneven, especially in this first half. As we are rebuilding our core business, our main focus there is to recapture dealers and grow inventory. We are being intentional as we focus on franchise dealers and larger independent dealers to our platform who have the brands and inventories that our consumers are shopping for. We expect this focus on adding the right dealers to our network and on developing personalized shopping journeys that Janatune spoke about to enable us to match dealer supply with consumer demand and drive conversion higher, which will help us grow sales for our dealers leading to more efficiency in our acquisition spend. As inventories continue to rebuild and we make progress with recapturing these dealers and executing the priorities we have set for 2023, we expect the second half will be better than the first half of this year. Back to you, Zainab.

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

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. To withdraw your question, please press star, then 2. The first question comes from Rajat Gupta of JP Morgan. Please go ahead.

Great. Good morning, and thanks for taking the question. Just wanted to follow up on, you know, Teresa's comments at the end. You know, how should we get comfortable with the bridge from, you know, the $11 million EBITDA loss to a positive, break even to positive EBITDA in the fourth quarter? I know you mentioned, like, the revenue drivers, but, you know, just from a profitability perspective, like, how should we get comfortable with that bridge as, you know, it seems like a pretty big hill? But, you know, if you could give us some more color there would be helpful. And then maybe if you could comment anything around just the linearity within the first quarter, you know, like did the profitability improve through the course of the quarter and into April? Any color on that also would be really helpful.

And I have a follow-up. Thanks, Rajat. I think as it comes to expenses, we've been very disciplined in how we invest into the company and where to spend wisely into the different types of strategic objectives that we have. When we look at the first quarter especially, I think normally we have slightly higher expenses in the first half of the year. We're always looking for efficiencies throughout the year, so this is something that we'll continue to do. And we'll keep a tighter focus on that. And the other big bucket that we always look at is really on the marketing side. As we've mentioned that our focus this year, one of our four priorities is to focus on the higher conversion. We have a pretty healthy top funnel and without really adding a lot of spend there. So I think being able to keep that marketing spend down while keeping the top funnel healthy And then really focusing on converting those unique visitors into sales will really help us drive that home. But, you know, in regards to expenses, it's something that we're watching closely and we'll always, you know, look for efficiencies where we can.

Yeah, I think also, Bridgette, thanks for the question. Also articulate a little bit on the top end. So remember that we... um, effectively realigned our, our field team at the end of Q4 of last year. It basically means getting their stride. It was a separation of two roles that we implemented, uh, provided the teams with their books of accounts and targets throughout the early parts of Q1. And so to your question around the curve, it's very obvious that already in, um, March, April, and in particular in May, obviously, we've gone through the worst of that and the trajectory has gotten a lot more positive. And so I think we're comfortable in reiterating the top line end of what we're looking at. And so it's pretty much on plan for us in terms of the first quarter was pretty much on plan and the board plan we originally had. And so it's still a work in progress, but we've gone through the worst for us as a business.

That's helpful color. And then maybe just on the independent dealer comment, you gave us some color on the 40% number. Were digital dealers also a part of that? I don't know how much exposure you had to digital used car dealers, but were they a part of that sequential decline as well? And was there any churn because of some of the pricing actions that he might have taken with Sugar Plus? Just wondering if any more detail you could give us. And have you seen these trends continue into 2Q as well? Thanks.

Yeah, those are all so good questions. So first of all, I think last time we articulated, so number one, digital dealers. So if you think of players like Carvana, for example, they are only on our platform with one single rooftop. And so the rooftop numbers themselves are not super big. The other thing is also, it's always a little bit tricky because on the one hand, a concept of rooftop is important because it shows you effectively a number of clients you have. But one of the things we've started shifting towards, and we've been really focused on as much more revenue and revenue contribution by our customers. And so it really depends on the type of dealers that are turning off overarching. Smaller, smaller dealers here are always rising interest rate world, similar to the past. So if you look at historical numbers, 10 years ago, very similar profiles were happening. A lot of moms and pop stores that don't necessarily have very strong financing. Will start suffering as well as obviously a greater M&A activity around, especially mid-sized dealers that are looking to acquire some of the smaller ones. And so that will continue to happen. If you look at other reasons for people to come off, it's often for themselves, gross margin. nervousness, et cetera. So it really depends. Some still don't have a lot of inventory or have difficulties accessing inventory. As Mike mentioned, a lot of our dealers are seeking to get access to used inventory. So if you're a smaller dealer with a less footprint, it's going to be harder to get access to inventory. So there are multiple reasons effectively for us. I think overarching though, if you look at our team, they've been really good at walking into our dealerships, making sure there's an active engagement with our network. And I think that's already bearing a lot of the fruits, if you look at our numbers. And so overarching, I think we're in a really good spot. In terms of Carvana specifically, which I think was your digital dealer question, obviously, and I think this was mentioned last time as well, There was a moment where some of the larger digital retailers effectively turned off any external support. Those are things where we're obviously in active dialogue with all of our clients at all times and various clients will try new things or different things in this environment that is constantly changing. But we feel very confident about the customer base that we have across the board. and we're very much revenue focused as opposed to purely rooftop count focused.

As a reminder, if you have a question, please press star one. The next question comes from Tom White of DA Davidson. Please go ahead.

Great. Thanks for taking my questions. Good morning. I guess, first off, thanks for the kind of the color and some of the background. behind thinking about the new customer cohorts and kind of the personalized, I guess, e-commerce flows that you guys are kind of developing or focusing on. I guess when I think about how that might change your kind of customer acquisition or your audience acquisition, I'm just curious, I guess, how much of a change does it require you guys, this new kind of approach, how much of a change does it require you to make on the traffic acquisition or customer acquisition side of things? Does it mean new marketing channels or new tactics? And how kind of confident are you that you can acquire kind of audiences that specifically are tailored to these new kind of profiles, if you will, in an efficient way? And then just secondarily on OEM spend, and I guess this is kind of tied to your commentary on new inventories, but That revenue line is still pretty depressed. Just curious if there's any change to how you're thinking about the trajectory of that revenue line this year. Thanks.

Thanks, Tom. This is Mike. Great questions. Let me start with the first one you put out there. We're seeing so much more and understanding so much more about our shoppers with the evolution of the TrueCar Plus flow. that we're able to identify these cohorts in a much more specific way. The three that we mentioned became very evident early on. These are initial cohorts that we'll be able to pursue. And as we see folks progress through dealmaking, requiring trade-in values, doing soft pulls, applying for full credit online, we get so much data that, you know, it's really helping us understand our customer traffic at a much deeper level. That then can be spun around, as you mentioned, into leveraging that in buying the type of traffic that fits the supply of vehicles we had. So we're working both sides of that equation. We're out there looking for dealers who can provide the type of inventory that our shoppers seem to be predisposed to. And then on the acquisition side of marketing, we can get more aggressive in marketing specifically the vehicles we have on our site. and leaning into those cohorts as they work on the flow. So we're getting and seeing much more information about both sides of that, and we're utilizing it and being more effective. And, you know, we made some changes in the marketing side of our organization. I'll let you, Antoon, provide a little more color on that. But this is an area where we'll continue to get better and better. We'll learn more about our shopping patterns of our traffic and then be able to lean into, you know, more – efficient acquisition spend.

Yeah, I know. So I'll go, like, there are obviously a lot of nuances here, but number one, we already have in our audience quite some of these identified cohorts, number one. Number two, we're also shifting a little bit the length of how we think about the journey of the buyers. So where historically we were very focused on the seven days prior to purchase, we're actually now moving to a 98-day cycle prior to purchase where people can really start thinking about discovery and finding the right cars for them. So there are a lot of things we're moving. The good thing is that we have been very efficient. I think we've also continued showing marketing efficiency. So these are cohorts that we already have, but also we feel are good and easy for us to attract. And some of them are highly underserved. So it's an attractive opportunity for us. It's also cohorts that we've been identifying already engaging very actively with DC+. And so we feel that each of these journeys effectively can have a much more experienced flow. So in other words, really thinking about an economic buyer start to finish will engage very differently with our product than a convenience buyer. And as a result, really, let's actually create that as frictionless as possible. Because for one, for example, registration would be much more important. And for another, for example, pre-financing would be really important. And so as opposed to having a generic person arrive on the site and have to do self-discovery, we're going to make more predetermined funnels, which then enables us to actually have greater amount of conversion.

And then I think, Tom, the second part of your question was around the OEM business. We're seeing probably the same signals you have in the marketplace. You know, the big issue that everybody in the vertical is trying to address is affordability. The OEM's first steps in that seem to have been, you know, buying down APRs through their captive, subvene leases, and those sort of things to address affordability for consumers. But we are very active in our discussions with the OEMs, more active than we've been in the past, as they seem to be more receptive to to those discussions. And I think as Jan Toon mentioned, as we get more specific about these cohorts, the convenience shopper is going to be a very attractive cohort for our OEM partners as well as the EV shopper. So they'll have the opportunity to come in and actually insert themselves in key stages of that cohort buying process and try to influence those outcomes. So The discussions and the pace of discussions are picking up on the OEM side. We've had some success, as I mentioned, with expanding the Stellantis program and then extending the program we've been running with Mercedes-Benz onto additional affinity partner sites. So, you know, we expect that OEM business to continue to get more active throughout the year.

Great. Thank you. Again, if you have a question, please press star one. This concludes our question and answer session.

I would like to turn the call back over to Truecar's president and CEO, Mike Darrow, for closing remarks.

Yeah, I want to thank everybody for taking the time to participate in our. I also want to thank the entire team at Truecar for all the hard work. over the last few months as we work to execute on our clear priorities for 2023. It's an exciting time for our company, and we look forward to sharing more about our progress with all of you on our next call. Thanks for joining.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.