TrueCar, Inc.

Good day, and welcome to the Truecar Second Quarter 2023 Financial Results Conference Call. Please note this event is being recorded today. I would now like to turn the conference over to John Thune, Rikersman, President and Chief Executive Officer of Truecar. Please go ahead.

Thank you, Operator. Hello, everyone, and welcome to the Truecar Second Quarter 2023 Earnings Conference Call. Joining me today is Teresa Luong, our Chief Financial Officer. I hope you all had the opportunity to read our second quarter stockholder letter, which was released yesterday after market close and is available on our investor relations website at ir.trucar.com. Before we get started, I need to read our safe harbor. 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, intent, 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 factor section of our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our reports and filings with the Security and Exchange Commission for a discussion of the factors that could cause our results to differ materially. The forward-looking statements we make on the score 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 be to the most direct comparable GAAP measures are set forth in the investor relations section of our website at ir.truecar.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. That was fun. Now with that, I will provide a summary of the quarter. So now we get into the real stuff. It is an exciting time at Truecar. Okay. It's time. of change in the time of focus. We've turned the ship and our laser focus on growing the business. In Q2, we achieved quarter-over-quarter revenue growth, significantly improved our bottom line, and we're targeting Q3 year-over-year revenue growth, followed by double-digit revenue growth and adjusted EBITDA profitability in Q4. In mid-June, we streamlined organization and eliminated 102 positions or 24% of our headcount. Although these are always difficult decisions, it was an important step to be nimbler as a company and a more focused company. We have so many diamonds in the rough that are ready to shine. We're excited to polish those together over the many quarters to come and transform this business for long-term success. As an example, Did you know that more than 50% of the nationwide supply of electric vehicles, excluding Tesla, is available in Trucar? We have a unique opportunity to disrupt our markets and redefine our value propositions to both our consumers and dealers through our various cohorts. We're excited to bring you along on this journey with us, and we'll elaborate more on this in the coming quarters as we launch our cohorts. Now, operator, let's open the call for questions from our analysts.

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're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star, then 2. At this time, we will pause just momentarily to assemble our roster.

And our first question here will come from Rajat Gupta with JP Morgan.

Please go ahead.

Great. Good morning. Thanks for taking the question and the quick prepared remarks. I had a question on the OEM incentive revenue. Obviously, pretty solid in the second quarter. Big pickup sequentially and likely a big driver of the EBITDA as well. Could you help us understand how the activations work here and how should we be thinking about the sustainability of these levels going forward. You know, did these incentive programs continue into the third quarter? Do you anticipate to see further contribution? And just how to think about the cadence here, you know, the recurring versus non-recurring aspect of this. And I will follow up. Thanks.

Absolutely. Hi, Rajat. Thanks so much for the question. So, yeah, we're excited on the OEM revenue, obviously. We're excited for two reasons. One is it's great to see OEM incentives coming back. It has obviously been an important part of our business in the past, and this dried out over the last couple of years. And so it's exciting to see that this is coming back. Not only is the OEM incentive piece is really interesting, it's also the combination of doing this together with our affinity partners. So it also articulates the strength of the platform we have as Truecar, which is really combining the various stakeholders together and provide value to all of those involved. And so in this case, The combination of doing things with Sam's Club, American Express and Mercedes is something that is incredibly valuable for all parties involved. We hope to do more of these type of programs. We hope to grow this type of business over time. It will always go a little bit with Epson Flow still in the near term as obviously the macro is resetting. But we do believe and expect this to be a longer term growth business for us.

And the NBA USA program in the second quarter, does that go on for a few quarters? Would it be refilled by other manufacturers? I'm just curious. Yeah, it's a good question.

These are almost individual programs, so it's always hard to predict. The way it works is we establish a program They run well. We then determine to continue the program or slow down the program. We obviously do similar type of programs with other players as well. So it's a little bit of give and take. And so it's always it's hard to say, hey, this is the steady growth because these are all always programmatic basis. This is not necessarily like an ongoing revenue flow always. But this program obviously has been very effective. It's something we're continuing at the moment. And then will that be replaced with other programs over time? The answer is yes. That's obviously what the teams are working on very much. And so over time, can you expect that we will do more and more on the OEM revenue side and we have greater tractions with the variety of these type of programs? The answer is yes. Will that be a perfect straight line? The answer is probably no.

Understood. That's very helpful. And then just a question on the OPEX. You know, the cost actions were executed, you know, I would say in this later part of the second quarter. Your guidance for the third quarter OPEX is flattish sequentially. I would have thought it would go lower, you know, with the full effect of the actions. I'm curious, like, what the offsets are. You talked about the some additions needed in the sales organization, but I'm curious if you could add any more color on how you should think about the cadence of the OPEX through the remainder of the year. Thanks.

Yeah, Rajat, thanks for that question. I'll provide some clarification around that piece. So, in regards to the headcount, we did receive some benefit in Q2. So, in regards to Q3 and Q4, we do expect some benefit, but not to the full extent that we disclosed in regards to the $20 million. annualized savings, but we do expect some benefit. So when you think about our cost structure, you know, there's headcount, marketing, and other expenses. And as we said, marketing, we expect that to be fairly flat quarter over quarter, but we're continuously monitoring the efficiency and effectiveness of those marketing spends. So we're able to adjust in real time as needed, you know, based on the trends that we're seeing. And then with other pieces, you know, we do expect that to stay flat. So overall, in total, I would say that we expect some benefit in Q3 and Q4 from the savings from the workforce reduction.

Got it.

Got it. Thanks. Great. I'll get back in queue for follow-ups. Our next question will come from Naved Com with B. Riley Securities.

Please go ahead.

Great. Thank you. It's nice to see sequential growth in the units. And I'm just curious if the increase was driven mostly by a more favorable macro, so more of a general improvement, or how much of this is really driven by Truecar Plus versus the improvement in general?

Yeah, so that's a very good question. So actually, I think it's two things. but not Truecard Plus. So Truecard Plus to date is still immaterial compared to the bigger numbers. So that's not the big driver. However, we continuously improve the platform, close rates, focus on conversions on the site, et cetera. And so it's a combination of obviously macro resetting as well as continued improvements that the teams are doing in terms of the type of leads they provide, the conversion rates on the site itself. So there are two drivers for that. TrueCard Plus is having good traction. Obviously, now with the cohorts, we're going to go into a much more narrow field there. And so we're going to report out accordingly as well going forward. And that's really focused on the transaction side, obviously, going forward. But right now, the number of TrueCard Plus units in there is effectively immaterial.

Got it. And then you had previously talked about rolling it out nationwide. Is that still on track? How do you kind of view that by year end?

Yeah, it's a very good question. So the nuance we're doing is if you think about the lessons we've learned on Tracker Plus is to date it was very much... effectively a person finding their own way in the product flow. And that's obviously never a really good experience because every person has a very different buying expectation and a very different engagement with the product. And so what we realized is we had to personalize those flows much more and take out constraints that appear as you go along. I'll give examples. If you are lower credit profile, then obviously lending will become a big issue. And then lending will become a big issue, not only for the consumer, because they need to find the right lender that can lend against the right rates, but also for the dealer, because depending on the type of lenders, it might actually affect the margins of the dealers a lot. And so at the end of the day, we realized that we need to have a much more personalized journey, which is why we landed on the three cohorts to start with. Over time, obviously we'll do more cohorts, but if you look at the cohorts in more detail, you realize that each of them will have a very unique flow and therefore we're solving a lot of the friction points inside the product immediately by having that more personalized flow. The idea there is obviously the ability to be nationwide also much quicker. Remember that you can be nationwide with used without any issue. It's harder to be nationwide with new because there are restrictions either by OEMs or or others or certain states. And so as a result, with the cohorts and launching the cohorts, it actually will facilitate us to be nationwide faster and sooner. And we'll anticipate to do that, obviously, depending on the type of cohorts and the type of cars. But as an example, in the form of the economic cohort, we're seeking to be pretty much nationwide, depends on certain states given the financing requirements, but pretty much nationwide, almost from the outset. So, net-net is it depends a little bit on the type of product and it depends on the type of cohort, but the answer is yes, we'll seek to be nationwide by the end of the year.

Got it. And then, last question. On the monetization, that went down sequentially. Is that just a reflection of the mix between new versus used? How should I think about that?

Yeah, I think that's correct. I mean, I think if you look at our new use mix, our use mix, you know, dropped down to, I think, about 44%, where in the last few quarters, it was closer to 48% and 49%. So, definitely, that did have a factor in that mix there.

Yeah, understood. Okay. Thank you, guys.

Our next question will come from Tom White with DA Davidson. Please go ahead.

Great. Thanks for taking my question. Just one for me. I guess it's been a couple quarters now you guys are talking about kind of these three kind of buyer cohorts. And I guess I'm thinking about your commentary around sales and marketing probably being flat sequentially. Can you talk a little bit about whether this kind of change in the way you're viewing the audience or you're segmenting the audience is requiring you guys to acquire traffic or acquire would-be car buyers in different ways or you use different channels. Any just kind of differences or changes to kind of your marketing mix or marketing spend that go along with this?

Thanks. Yeah, very good question. The answer is absolutely yes. So I think one of the beauties of doing the cohort is that the value proposition for each cohort consumer is slightly different. The value proposition, even for the dealers, is slightly different, even though as a dealer, you could obviously serve multiple cohorts. But the answer is absolutely yes. It allows us to not only capture people within that value prop at certain places and have a more targeted approach, And so effectively, we're allowing people to find a journey either by the way we target on the marketing side or as they obviously arrive on the site, they're going to be different entry points in which they can take certain cohort paths. Remember also, don't misunderstand that the three cohorts are just the start of many more cohorts, but the three cohorts, given the focus that we have as a company, obviously those three create real opportunity for us. Remember the economic cohort is one that is a very large unserved market. To date, if you look at TC Plus engagement, a significant part of the people that are seeking TC Plus transactions are actually within this cohort already. And so it was one of the triggers, whether we actually have the current product flow set up the right way. Then if you think about the convenience cohort, that's much more of the historical bread and butter of 2Car, but also it allows us to really then focus and align a little bit better with the different affinity partners and even lenders. So as you start segmenting cohorts, it actually facilitates everything. So it does not only facilitate the targeting of the marketing, which absolutely is true and it's something we're now embarking on, but it's also targeting effectively with partners that we have on the affinity side as well as the different lenders that are more specialized in each of these ports. So the answer is yes. In terms of overarching dollars on the marketing side, that's not expected to increase per se, but it's much more the allocation of dollars and being smart about that, which we're now working on.

Great. Thank you. Again. If you have a question, you may press star then one to join the queue.

Our next question here will come from Chris Pierce with Needham. Please go ahead with your question.

Hey, good morning. I should have a question on the macro and then a follow-up. You know, kind of looking at new car SAR, it seems like fleet is kind of driving some of the recovery. Do you think we haven't really seen a consumer recovery yet? And that's sort of, there's further growth to come from the business where you guys kind of are more levered to. Is that kind of, would you agree with that? Is that the right way to think about it?

Yeah, Chris, I think the answer is absolutely yes. So I think you're in a world where prices still held fairly high over time. I agree that the fleet obviously was an important driver. But also remember that there's a lot of pent-up demand in the markets. And I think you can see that even from the used cars still holding fairly steady, even though obviously new car prices are coming down. There is a lot of demand and you can see that even across all of the different platforms is that the demand and the UVs are very high because people are looking for cars. And so the answer is yes. I think that the healthy mix has come back. I also think that now the days in inventory has started increasing. And so all in all, I think the macro is turning very much into our favor, which is a good thing for us, obviously. And we can be more and more helpful for our dealer partners, which is also always a good thing for us. It is still a little bit sporadic, so it still depends a little bit on the brands and the makes, et cetera. But we expect this to iron out over the course of the next several quarters.

Okay. And it looks like you guys added franchise dealers, or it looks like franchise dealers might have bought them in the third quarter of 2022. Can you just kind of walk me through what's kind of resonating with those dealers? Is it because prices are still high, they're relying on leads more? Is it because of the changes you guys have made? Is it because of Truecar Plus? I just kind of want to get a sense of what's driving the franchise deal account back to a positive level.

Yeah, it's a great question. It's a combination of all. So I think there's an element of dealers, obviously, now having more inventory than they had previously and have a greater need of help. Um, obviously as the markets are coming back, we also have something that's called lost sales, right? So you walk into a dealership and you can show that they have actually lost sales in certain ways in, in their own area. And you can show like, Hey, if you actually were to do ABC, it's actually much more beneficial to you. And so it's all very data driven because obviously now the markets are turning and we have all the data available. It's also because we're improving on the product flows and starting to offer interesting new opportunities. I'll give you an example. We're launching sponsors listing, for example, for new cars. We only used to have that for used cars. And so there are opportunities there also to play for dealers. And then the other thing is also just overarching the opportunity to, especially as you start segmenting in the cohorts, obviously that's resonating really well for the dealers because Many dealers have some form of specialization in some shape or form. And so segmenting and cohorts actually allows them to really do what they do best. And so for us, having that type of traction is important. The other thing also that I think is important to underline is that historically, our sales forces were often driven by rooftop count or those type of metrics that has all shifted to really focusing on effectively net revenue generation. And so it's normal that you see a natural shift happening of some dealers coming off that are very low MRR and often very small independent players. And that we're really focusing on often a little bit more valuable revenue generating larger independence or franchise dealers, which is obviously the historical bread and butter of the firm as well. So, yeah, so these are normal natural shifts that happen for us, but there's a value proposition that is good. I think one thing to highlight as well is we're also focusing now that we've started segmenting on the cohorts, we've also gotten much more in tune with the value proposition that we have for both consumers and dealers. And so this is an effort that we'll continue conducting over the next couple of months where we're really refining on what are the biggest strengths that we have and articulate that differentiation much better than we have in the past. I think overarching Even for the financial community, if you actually look, it's hard to assess what makes the different companies actually different. And so it's a concerted effort we're conducting right now where we are articulating this much better and also we'll come forward much cleaner and clearer with our articulation on what makes Trucar actually so much different from many of the other players in the market.

Thank you. Good luck.

Again, if you have a question or follow-up, you may join the queue by pressing star, then 1. Our next question here will come from Marvin Fong with BTIG. Please go ahead.

Good morning. Thanks for taking my questions. Just a question. One question on conversion rates. You know, units were up, although traffic was down quarter over quarter. Just wondering if you could maybe break that down a little bit more. Are you attributing that to improvements on the website, or are you noticing any changes in consumer behavior? And then I have a follow-up.

Yeah, Marvin, I think it's both. So we're continuously making improvements, and we're always getting smarter on the product side. And also, thanks to TC+, we're learning a lot on where people drop and what happens and what makes people tick effectively. That's number one, but it's also, don't forget that at the end of the day, a large part of conversion is also driven by car prices and car availability. So if you look in the, like a couple of quarters ago, when the conversions were relatively low, two of the big drivers were obviously lack of availability of the cars or when they were available, the pricing was disproportionate in the eyes of the consumer. And so now that that becomes more in the realm of possibility for the consumers themselves, I think that's a big driver. But in addition to that, we're obviously making the right continuous improvements on the site itself. And then we think that that's obviously only going to improve over time as we become more focused on these cohorts.

Got it. My follow-up is, you know, I understand everything you were saying a question ago about, you know, a lot of the lower value dealers are going to be churning off as you focus on net revenue. But just as you talk about the independent dealer count, like what's your visibility there? Should we continue to expect that to decline or do you think that might be stabilizing? Thanks.

Yeah, the ones that are turning are often going out of business or merging, so those are often smaller players. I think that just needs to kind of wash through the system. I anticipate this to happen for some time on the independent side, given that we have quite a lot of smaller players still like in the long tail effectively. So on the rooftop number count, there are still some left. And the question is a little bit depending on how the markets normalize or how they are able to adapt their business lines. It's hard to say whether they will be able to make that or not. But for the time being, like while the interest rates are relatively high and obviously used car prices are where they are, some of them will probably struggle and that will stay like that. So I would anticipate just to keep going for a little bit and then at some point that will level out.

Great. Thanks, John Toon. Appreciate it.

And this concludes the question and answer session. I'd like to turn the call back over to TrueCars President and CEO, John Toon Reigersman, for any closing remarks.

I would like to thank everybody for taking the time to participate in our call today. I also wanted to thank the entire Truecard team. So the team is working tremendously well, coming together. It's a smaller team. It's a nimble team. And the team continues to work super hard. So it's an exciting time for the company. And we look forward to sharing more about our continued progress with all of you on our next couple of calls.

Thank you.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.