TrueCar - Q2 2023

Transcript

Operator (participant)

Good day. 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 Jantoon Reigersman, President and Chief Executive Officer of TrueCar. Please go ahead.

Jantoon Reigersman (President and CEO)

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.truecar.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 Factors section of our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, and our 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 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. Now we get into the real stuff. It is an exciting time at TrueCar, okay? It's time of change and a time of focus. We've turned the ship, and are laser-focused 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 our 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 on TrueCar? We have a unique opportunity to disrupt our market 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. Operator, let's open the call for questions from our analysts.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause just momentarily to assemble our roster. Our first question here will come from Rajat Gupta with JPMorgan. Please go ahead.

Rajat Gupta (Equity Derivatives Structuring Analyst)

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, a big pickup sequentially, and likely a big driver of, you know, the EBITDA as well. Could you, could you help us understand, you know, how the activations work here? And how, how should we be thinking about the sustainability of these levels going forward? You know, did these incentive programs continue into the third quarter, and 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 have a follow up. Thanks.

Jantoon Reigersman (President and CEO)

Absolutely. Hi, Rajat. Thanks so much for the question. Yeah, we're excited on the OEM revenue. Obviously, we're excited for 2 reasons. One is it's great to see OEM incentives coming back. It has obviously been an important part of our business in, in, in the past, and this dried out over the last couple of years, and so it's, 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. 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.

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 ebbs and flows still in the near term, as obviously the, the macro is resetting, but we do believe and expect this to be a, a longer-term growth business for us.

Rajat Gupta (Equity Derivatives Structuring Analyst)

Got it. and, and, and the, and the, and the MBUSA, you know, program here in the second quarter, is that... Does that go on for a few quarters? Like, you know, would you, would this be refilled by other manufacturers? I'm just curious, like, what the, you know?

Jantoon Reigersman (President and CEO)

Yeah, it's a good question.

Rajat Gupta (Equity Derivatives Structuring Analyst)

Yeah. Yeah.

Jantoon Reigersman (President and CEO)

Yeah, these, these are, these are all, like, almost individual programs, so it's, it's always hard to predict. The way it works is they, we, we establish a program, they run well, we then determine to continue the program or, or, 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. So it's, 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.

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.

Rajat Gupta (Equity Derivatives Structuring Analyst)

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 the 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 some additions needed in the sales organization, but curious if you could add any more color on how we should think about the cadence of the OpEx through the remainder of the year. Thanks.

Teresa Luong (CFO)

Yeah, Rajat, thanks for that question. I'll provide some clarification in, around that piece. In regards, in regards to the headcount, you know, we did receive some benefit in Q2. 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. We do expect some benefit. 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. 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. With other pieces, you know, we do expect that to stay flat.

Overall, in total, I would say that we expect some benefit in Q3 and Q4 from the savings from the workforce reduction.

Rajat Gupta (Equity Derivatives Structuring Analyst)

Got it. Got it. Thanks. Great. I'll get back in queue for follow ups.

Operator (participant)

Our next question will come from Naved Khan with B. Riley Securities. Please go ahead.

Naved Khan (Managing Director of Technology Research)

Great. Thank you. It's nice to see, sequential growth in the units. I'm just curious if the, if, 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+ versus the, improvement in general?

Jantoon Reigersman (President and CEO)

Yeah. That's a very good question. It's actually, it's, it, I think it's 2 things, but not TrueCar+. TrueCar+ yet, to date, is still immaterial compared to the bigger numbers. That's not the big driver. However, we continuously improve the platform, close rates, focus on conversions on the site, et cetera. 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. There, there, there are two drivers for that. TrueCar+ is having good traction. Obviously, now with the cohorts, we're gonna go into a much more narrow field there, and so we're gonna report out accordingly as well going forward.

That's really focused on the transaction side, obviously, going forward. Right now, the number of TrueCar+ units in there is effectively immaterial.

Naved Khan (Managing Director of Technology Research)

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

Jantoon Reigersman (President and CEO)

Yeah.

Naved Khan (Managing Director of Technology Research)

Then the follow up.

Jantoon Reigersman (President and CEO)

Yeah, Naved, it's a very good question. The nuance we're doing is if you think about the lessons we've learned on TrueCar+ is to date it was very much effectively a person finding their own way in the product flow. 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. What we realized is we had to personalize those flows much more and take out constraints that, that appear as you go along. I'll give examples.

If you are a 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. 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. 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 others or certain states. 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.

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. 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, we'll seek to be nationwide by the end of the year.

Naved Khan (Managing Director of Technology Research)

Got it. 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?

Teresa Luong (CFO)

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

Naved Khan (Managing Director of Technology Research)

Yep. Understood. Okay. Thank you, guys.

Jantoon Reigersman (President and CEO)

Sure.

Operator (participant)

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

Tom White (Managing Director and Senior Equity Research Analyst)

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

Jantoon Reigersman (President and CEO)

Yeah, Tom, very good question. The answer is absolutely yes. 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. 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, it also. Effectively, we're, 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, there are gonna 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 in a very large, unserved market. To date, if you look at TrueCar+ engagements, a significant part of the people that are seeking TrueCar+ transactions are actually within this cohort already. So it was one of the triggers whether we actually have the current product flow set up the right way. If you think about the convenience cohort, that's much more of the historical bread and butter of TrueCar, but also it allows us to really then focus and align a little bit better with the different affinity partners and even lenders.

As you start segmenting in cohorts, it actually facilitates everything. 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 cohorts. So the answer is yes, the 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 is which we're now working on.

Tom White (Managing Director and Senior Equity Research Analyst)

Great. Thank you.

Operator (participant)

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.

Chris Pierce (Senior Analyst)

Hey, good morning. I just had 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?

Jantoon Reigersman (President and CEO)

Yeah, Chris, I, I think the answer is absolutely yes. I think you're, you're in a world where prices still held fairly high over time. Agreed that the fleet obviously was an important driver, but also remember that there's a lot of pent up demand in the markets. I think you, you can see that even from, right, like, the, the, 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 in the UVs are very high, because people are looking for cars. The answer is yes. I think that there's a, the, 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.

Chris Pierce (Senior Analyst)

Okay. It looks like you guys added franchise dealers, or it looks like franchise dealers might have bottomed-

Jantoon Reigersman (President and CEO)

Yeah

Chris Pierce (Senior Analyst)

in the third quarter of 2022. Can you just kind of walk me through what's kinda 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+? I just kind of want to get a sense of what's driving the franchise dealer count back to positive levels.

Jantoon Reigersman (President and CEO)

Yeah, it's a great question. It's a combination of all. I think there's an, there's an element of dealers obviously now having more inventory than they had previously and, and have, and have a greater need of help. 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." 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, on the product flows and, and starting to offer interesting new opportunities.

I'll give you an example: we're launching Sponsored Listings, for example, for new cars. We only used to have that for used cars, and so there are opportunities there also to, to, to play for dealers. Then the other thing is also just overarching the opportunity to, especially if 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 in cohorts actually allows them to really do what they do best. So for us, having that type of traction is important. The other thing also that I think is important to, to underline is that historically, our sales forces were often driven by rooftop count or those type of metric. That has all shifted to really focusing on effectively net revenue, generation.

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 independents or franchise dealers, which is obviously the historical core, the bread and butter of the firm as well. These are, these are normal, natural shifts to 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.

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, right, it's hard to assess what makes the different companies actually different. It's a, it's a concerted effort we're conducting right now, where we, we are articulating this much better and also we'll we'll come forward much cleaner and clearer with our articulation on what TrueCar-- what makes TrueCar actually so much different from many of the other players in the market.

Chris Pierce (Senior Analyst)

Great. Thank you. Good luck.

Operator (participant)

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

Marvin Fong (Director)

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, you know, improvements on the website, or are you noticing any changes in consumer behavior? Then I have a follow up.

Jantoon Reigersman (President and CEO)

Yeah, I think, Marvin, I think it's both. We're, we're continuously making improvements, and we're, we're, we're, we're always getting smarter on the product side, and also, thanks to TrueCar+, we're learning a lot on, like, where people drop and what happens and, and, and what, what, what makes people tick effectively. That's number one, 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. If you look in the, in the, 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.

Now that that becomes more in the realm of possibility for the consumers themselves, I think that's a, that's a big driver. In addition to that, we're obviously making the right continuous improvements on the site itself, we think that that's obviously only going to improve over time as we, as we become more focused on these cohorts.

Marvin Fong (Director)

Got it. My follow up is, you know, I, I understand everything you're saying, a question ago about, you know, a lot of the lower value dealers are, are gonna be churning off as you focus on, on net revenue. Just, just could 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.

Jantoon Reigersman (President and CEO)

Yeah, it, it, there are, like, the, the, the ones that are turning are often going out of business or merging or. 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, given on the independent side, given that there are those, we have quite a lot of smaller players still, like, in the long tail, effectively. 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.

For the time being, like, while the interest rates are relatively high and obviously used car prices are, are at where they are, like, some of them will probably struggle, and that will, will stay like that. I would anticipate this to, to keep going for a little bit, and then at some point that will level out.

Marvin Fong (Director)

Great. Thanks, Toon. Appreciate it. Mm-hmm.

Operator (participant)

This concludes the question and answer session. I'd like to turn the call back over to TrueCar's President and CEO, Jantoon Reigersman, for any closing remarks.

Jantoon Reigersman (President and CEO)

I would like to thank everybody for taking the time to participate on our call today. I also wanted to thank the entire TrueCar team. 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. 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.

Operator (participant)

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