TrueCar - Earnings Call - Q4 2024

Executive Summary

• Q4 revenue was $46.2M (+11.9% YoY, -0.7% QoQ), with Adjusted EBITDA of $0.4M and positive free cash flow of $4.1M; cash and equivalents ended at $111.8M with no debt.
• Total units rose to 93K (+22.0% YoY), with new units up 27.8% YoY and the new‑vehicle mix at 61.7%; average franchise dealer new sales rose 27.1% YoY, outpacing industry new retail sales growth of 9.6%.
• Monetization per unit declined YoY to $492 from $537 and gross margin fell to 80.7% (vs 89.7% LY, 83.4% LQ) due to a mix shift toward lower‑margin TCMS and wholesale.
• 2025 outlook: Q1 revenue growth “high single digits” with negative Adjusted EBITDA of ~$5M; re-acceleration in Q2; full‑year Adjusted EBITDA profitability and breakeven free cash flow; 2026 targets maintained ($300M annual run rate, 10% FCF margin).
• Catalysts: OEM incentive ramp (e.g., MBUSA enabled through AAA), new affinity partners, AI/ML lead propensity model launched with AWS, and TC+ expansion post DMS integrations.

What Went Well and What Went Wrong

• What Went Well

  • Strong unit growth: total units 93K (+22.0% YoY), new units +27.8% YoY; average franchise dealer new sales +27.1% YoY vs industry +9.6%.
  • Cash generation: cash flow from operations $5.9M and free cash flow $4.1M; year-end cash and equivalents of $111.8M with no debt.
  • OEM incentives sequential improvement with OEM revenue at $4.6M (+6.2% QoQ) and enablement of MBUSA incentives for validated AAA members, with plans to add OEMs.
  • “We delivered another quarter of double-digit revenue growth and positive Adjusted EBITDA… and achieved our goal of generating positive free cash flow in Q4” — J. Reigersman (CEO).

• What Went Wrong

  • Profitability: Net loss of ($5.8M) widened YoY (impacted by non‑recurring Q4’23 gain) and Adjusted EBITDA fell YoY to $0.4M.
  • Margin pressure: GAAP gross margin declined to 80.7% (vs 89.7% LY; 83.4% LQ) as TCMS and wholesale mix weighed; monetization per unit fell to $492 (vs $537 LY).
  • Demand metrics: traffic fell to 5.7M (vs 7.0M LY) and independent dealer count declined YoY to 3,054; Q1 2025 guide signals a near‑term step down to negative Adjusted EBITDA (~$5M) and “high single-digit” revenue growth tied to AmEx incentive program transition.

Transcript

Operator (participant)

Good day and welcome to the TrueCar Fourth Quarter 2024 Financial Results Conference Call. Please note this event is being recorded. 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 TrueCar's Fourth Quarter 2024 Earnings Conference Call. Joining me today is Oliver Foley, our Chief Financial Officer. I hope you've all had the opportunity to read our most recent 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 exciting Safe Harbor. I want to remind you that we will be making forward-looking statements on this call, including statements regarding our revenue growth, expected adjusted EBITDA, and free cash flow, as well as aspirational goals regarding 2026 revenue and free cash flow margins.

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 factor section of our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our other reports and filings with the Securities and Exchange Commission for a discussion of the factors that could cause our results to differ materially. The forward-looking statements we make on this call are based on information available to us as of today's date, and we disclaim any obligation to update any forward-looking statements except as required by law. In addition, we will also discuss certain GAAP and non-GAAP financial measures.

Reconciliation of all non-GAAP measures to the most directly comparable GAAP measures are set forth in the investor relations section of our website at ir.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. With that, let us begin. With 2024 behind us and a new year in full swing, it's important for us to pause and reflect on the exciting journey we're on. A journey we embarked on in the summer of 2023 when we started restructuring the company and committed to building a stronger and more resilient TrueCar. Taking stock of where we are relative to where we were and where we are expected to be allows us to evaluate what is working and not working and adjust course accordingly.

To that end, let us start with a year-over-year comparison of our awesome 2024 financial performance and operational KPIs. Revenue of $175.6 million grew by $16.9 million or 10.6% year-over-year, the strongest annual revenue growth since 2017. Adjusted EBITDA of $1.6 million grew by $15.3 million year-over-year. Cash flow from operations of $7.7 million represents a year-over-year improvement of $30.1 million. Free cash flow of - $0.2 million represents a year-over-year improvement of $34.1 million. Total unit sales of 356,000 increased by 37,300 or 11.7% year-over-year. New vehicle unit sales of 204,000 increased by 27,500 or 15.6% year-over-year. Franchise dealer count grew by 119 dealers ending the year at 8,351, a 1.4% year-over-year increase.

With the launch of TC Plus, we became the first and only digital marketplace to enable the purchase and sale of new, used, and certified pre-owned vehicles through an entirely online transaction, the rollout of TrueCar's 12-month dealer service program, and we repurchased a total of 6.1 million shares of TrueCar stock. Moreover, we finished the year with momentum and strength across many of the areas in the business, as highlighted by several of the Q4 performance metrics. Revenue of $46.2 million, an increase of 11.9% year-over-year with positive adjusted EBITDA of $0.4 million, and cash flow from operations of $5.9 million and free cash flow of $4.1 million, an increase of $12.2 million year-over-year. Our ending rooftop count was three rooftops higher than prior year, making the first year of rooftop growth since 2019.

Total units of 93,000 increased by 22% year-over-year, and new units of 58,000 increased by 27.8% year-over-year. In summary, we finished the year by delivering yet another quarter of double-digit revenue growth and positive adjusted EBITDA and achieved our goal of generating positive free cash flow in Q4. Moreover, the intense focus we placed during the year on efficiently growing new unit sales and capturing greater share of new car shoppers showed tremendous results in Q4 as we delivered 27.8% new unit growth in the quarter year-over-year, significantly higher than the industry's 9.6% growth. As such, in Q4 2024, the average franchise dealer on TrueCar saw new vehicle sales generated through our marketplace grow by 27.1% versus the same period last year, reaching the highest level since Q3 2021. We also continued making progress on TC Plus during Q4.

As we articulated last quarter, our Q4 focus for TC Plus was to: one, expand the TC Plus purchasing experience to consumers shopping on select affinity partner sites; 2, integrate AI-powered fraud prevention tools into the buying process to more effectively detect and mitigate the risk of consumer fraud; and 3, deepen our integration with select dealer management systems, also called DMS providers, in order to further automate and streamline the buying process for dealers. During Q4, we introduced TC Plus on several of our affinity partner sites and made further upper-funnel optimizations that have contributed to a nearly 50% increase in the average number of consumers initiating the TC Plus purchase experience each month and a similar increase in transaction volume.

With the work to enhance fraud detection recently completed, we expect to enable TC Plus on additional partner sites in Q1 while maintaining a focus and control approach to expand consumer access to TC Plus that allows us to test and iterate. Furthermore, we expect that expanding access to TC Plus will be done in tandem with expanding the TC Plus pilot to additional dealers, which we plan to prioritize upon the completion of the work we began in Q4 to deepen our DMS integrations. 2024 was a year of great progress for TrueCar, with nearly every measure of performance improving from the prior year and several long-term growth initiatives being brought to market. We are proud of what the team has accomplished in the year and are even more hungry to accelerate our progress in 2025.

We firmly believe that the quality of our assets and the unique competitive strengths should yield sustainable annual revenue growth of 20% plus in a normalized new vehicle retail environment. To unlock that growth opportunity, we must stay committed to the following building blocks we have previously outlined while simultaneously strengthening our execution against them: 1, continue activating new franchise dealers; 2, minimize dealer churn; 3, grow revenue per dealer; and 4, continue expanding our OEM business. The expansion and commercialization of TC Plus continues to be a top priority for TrueCar in 2025. Following the completion of the work currently underway to deepen our integration with DMS providers and automate nearly every step of the selling process for dealers, we anticipate rapidly expanding the pilot to additional dealers and territories.

In conjunction with adding dealers and inventory to the program, we intend to make the TC Plus experience more broadly available to consumers shopping on our branded and affinity partner sites. Lastly, as we discussed last quarter, we made significant investments during the second half of 2024 to enhance our data platform to enable the rapid development and deployment of our new generative AI and machine learning models that enrich the consumer shopping experience and provide dealers with value-enhancing features and insight. In partnership with AWS, TrueCar has established a real-time ML platform through which we can quickly build and deploy modular, continuous, and traceable AI ML models that leverage our rich first-party data sets. In Q1 of 2025, we launched the first of these models, which classifies consumer leads based on their propensity to purchase with a high degree of accuracy.

We foresee a number of ways this predictive model can be leveraged across a range of use cases, such as powering marketing campaign optimizations and providing dealers with enhanced consumer insights that further improve lead conversion rates. With these enhanced capabilities, we expect to be able to retain more shoppers on the site and effectively retarget them through tailored email engagement that will ultimately allow us to capture a greater share of car buyers and drive high-quality leads to our dealer network. As such, leveraging these recent investments in our data platform and prioritizing high-impact use cases like the ones described above is a top priority for our buyers in 2025, and we believe can unlock significant value that can further accelerate growth of our core business.

Turning now to our outlook for 2025, our expectations for the business this year are rooted in our belief that we are a much stronger organization today than at this point last year. Not only is the value we are delivering for our customers stronger than it has been in years, but we're even more focused and determined to execute against the building blocks that we believe will enable us to achieve our targets of 20%+ year-over-year revenue growth. However, unlocking this growth potential not only requires strong execution, but a willingness to make key investments that will accelerate the growth of our dealer network, unit sales, and OEM partnerships, and deepen the penetration of our expanded product offering.

The primary investment we're making in Q1 is the addition of headcount on our dealer sales and service teams, which we expect will enable us to grow our dealer network by accelerating the pace at which we add new dealers and strengthening our ability to effectively retain them through our best-in-class service, as well as the expansion of some of our marketing efforts. With strong management and processes in place, we're confident that this investment will yield a strong ROI in 2025 and maximize our ability to deliver accelerated year-over-year revenue growth in the second half of the year, while also delivering fully adjusted EBITDA profitability and break-even free cash flow.

However, given the ramp time associated with these headcount additions, as well as the near-term impact to OEM revenue associated with the transition incentives of North American Express and onto new affinity partners, we expect modest Q1 revenue growth in the high single digits and negative adjusted EBITDA of approximately $5 million. That said, our outlook for growing OEM incentive revenue, in addition to core dealer revenue in Q2 to Q4, remains strong due in part to the recent enablement of Mercedes incentives to validate AAA members nationwide, a program we're optimistic about with early performance tracking in line with what we observed when we launched our former partnership with American Express. We're also actively working to expand this program by bringing additional OEM partners on board.

Given the strength of these partnerships and the momentum we're building by investing in headcount, we expect a re-acceleration of revenue growth in Q2. We firmly believe that the opportunity before us warrants the near-term investments and will enable us to deliver the strongest growth outcome for the business in 2025. Moreover, we maintain our ambitious targets to return the business to an annual revenue run rate of $300 million and 10% free cash flow margin by the end of 2026. Maintaining this target is rooted in our belief that our growth rate exiting 2025 can have us on the trajectory required to achieve these marks. Now, operator, let's open the call up for questions from our analysts.

Operator (participant)

Thank you. We will 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. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. The first question comes from Rajat Gupta from JPMorgan. Please go ahead.

Rajat Gupta (Research Analyst)

Great. Thanks for taking the question. I had one question just on the first-quarter guidance and the step-up in expenses. Could you elaborate a bit more on what specific areas are you targeting? I know you mentioned it seems like it's more sales and marketing related, but is there also some technology-related spending that's picking up? What's giving you the confidence, or maybe what are you seeing in terms of just line of sight that it's going to immediately help accelerate revenue growth in the second half of the year? I have a quick follow-up. Thanks.

Jantoon Reigersman (President and CEO)

Yeah, absolutely.

Let me start, and Oliver you can add to that. I think there are a couple of things. Predominantly, it's boots on the ground. We see the need, the help the dealers need, and our ability to have boots on the ground, knock on the doors, really provide them with the help we can provide them to sell more cars is something that we're very good at and that the sales team has proven to be very efficient at. It is really a focus on making sure we can drive the sales on that side, and that just requires more headcount, number 1. Number 2, on the marketing side, we've become much more efficient on the marketing side. We continue to become more efficient. We're more focused, and we also feel that it warrants further investments.

Historically, we've probably taken a little bit too much oxygen out of the room and would like to start deploying more. We feel that the market is really having some element of a turning point where we can lean in more because we know that on the core dealer side, we have a really good market fit, and we just want to keep pushing that. There are some modest technology advancements that we're making, obviously, on the GenAI side and the collaborations we're doing there as well, but those are smaller compared to, obviously, the headcount charge and the marketing side. Oliver, I don't know whether there's anything you want to add there.

Oliver Foley (CFO)

Yeah. The only thing I'd add is, obviously, Q1 is seasonally a quarter with higher, specifically, payroll-related expenses.

When we think about the increases driven by near-term investments, it's almost entirely dealer sales and dealer service headcount. The reason we feel confident investing in those two areas is because we restructured the sales and service team at the end of 2023, brought in new management, we created new processes, and we really focused on how we can drive sales productivity. Over the course of the year, we really saw strong improvements in the dealer sales team's productivity across the board, really every measure. Q4 was a really strong quarter in that regard. We feel like we've got the team in place or the management in place. The processes are much stronger than they have been in the past.

Right now, it's just a matter of having the right regional coverage across all of our territories to make sure we're tapping into all the inactive dealers out there today. Secondly, on the dealer service side, it was in Q2 we launched the 12-month service plan. Our hypothesis there was that if we can be highly consultative with our dealers and every month sort of work with them on driving or maximizing their performance on the platform, our hypothesis was that we would see a significant decrease in churn. In the fourth quarter, we really started to see sort of the results of that. It validated that hypothesis in many ways.

We believe that expanding the size of that team so that all dealers can get that consultation every month, ultimately, that's what's going to drive churn down to our long-term target in 2025. That's why we feel confident investing in both those sides of the business.

Rajat Gupta (Research Analyst)

Got it. Got it. That's helpful, Color. Maybe just wanted to follow up on the DMS integration with TrueCar Plus. Could you give us some more details on that in terms of what are the steps that are involved in that integration? What phase are you in in terms of integration? Is the DMS plus TrueCar Plus platform live already? Where we are in that process, and when do you expect it to really start to contribute more meaningfully, not just in terms of additions, but just in terms of monetization as well? Thanks.

Oliver Foley (CFO)

Yeah.

The answer to that on the DMS side is relatively straightforward. There are obviously several DMS providers in the country. One of them is obviously very large. We are integrating with them initially, which is CDK. The idea is, historically, dealers have not been able to modify the paperwork as easily. Obviously, in this online transaction, we want to be able to have a flow where the dealers really only need to just approve and do not need to do any further work on the documentation because everything has already been pre-calculated and is already penny-perfect. In order for that to happen, you need to be obviously on the roadmap. It takes some time. There are iterations. There are always certain bugs that are inside. As we continue that work, it is a matter of having both organizations being aligned.

In the interim, we're also integrating with other DMS providers where these integrations are probably a little bit easier because these are built for a little bit more futuristic architecture as opposed to some of the longer-term DMS providers who've obviously been and have historically been built effectively on a different type of ledger system. All in all, it's really a matter of keep pushing this in terms of the roadmap of all the various third parties. We're already fully transacting now. It's just really the difference is sometimes if there's a consumer in the last minute wants to change something, etc., it requires the dealer to still go in manually at times to finalize some components of the paperwork. We want to make sure that that's fully automated. There's really no burden on the dealer.

That's obviously a really important requirement as we start scaling because the more and further we scale, the fewer we want it to be a manual task for the dealers. That was really the trade-off we were making, which is we know we have a lot of dealers that would love to be on the program. We obviously want them to be on the program, but we want to make it as little manual as possible for them. Given we're so near to finalizing these different pieces, we really want to do that sequentially. In terms of financial contribution of TC Plus, remember that a lot of this will be part of, obviously, the subscription services of the dealer. As soon as we start ramping and having bigger volumes, then over time, you can start seeing this.

I think this will become more meaningful, obviously, next year. This year is really about proving units, unit volume, proving experience, becoming a larger size of the overall revenue of the individual dealers that are on, and then expanding inventory and dealers on it. It is really the monetization should then follow next year in terms of real contribution.

Rajat Gupta (Research Analyst)

Got it. Got it. That's helpful. Thanks for the color and good luck.

Operator (participant)

The next question comes from Navid Khan from B. Riley Securities. Please go ahead.

Ryan Powell (Senior Equity Research Associate)

Hi. Great. Good morning. Thanks for taking my question. This is Ryan Powell on for Navid. First, I wanted to ask about, over the past 2 years, franchise dealers have been trending up, whereas independent dealers have seen greater churn.

I was wondering if we should expect this trend to continue into 2025, and then also how the 12-month dealer service program should impact each group. I just want some more color on the total opportunity for adding new affinity partners. Thank you.

Jantoon Reigersman (President and CEO)

Yeah. I'll start, and then Oliver can jump in. The answer is, yeah, obviously, we skew more new, and we skew more franchise compared to many of our competitors. That has been a focus of ours and will remain a focus of ours. Obviously, driving franchise activation is a really important business driver for us, right? It's the first building block that I articulated earlier. On the churn side, similarly, franchise is obviously an important driver, but so are independents. I think what's really important is to understand that not every independent is equal.

We have very large independent customers who are really valuable and important customers of ours, but we also have a very large long tail of much smaller independents. Smaller independents obviously struggle much more in a high-interest rate environment and in an environment where used car prices are still very, very high. It is hard for them to get inventory. It is hard for them to finance inventory. It is hard for them to get the right clients on their lots. Those are often smaller dealerships that do not even run back-end ERP systems, etc. The churn on the independent side, if you look at the broader numbers, is always a little bit misleading because you are sure, right, there is churn happening, but as long as it happens on the long tail, it is not as impactful and it is not as important.

What we really are focused on is obviously our big clients across the board. That same applies to our 12-month service cycle. What happens is we're obviously very focused on the franchises and the larger independents. We have created a separate program for small independents where it's a little bit of a lighter touchpoint. Obviously, there's an important consideration of ROI. It's one of the reasons why we're obviously investing also, frankly, in sales and service people because it's really important when you do service to do it in person, to spend the time, to really work with your clients. We've seen that that has tremendous impact, mitigating the churn, but also adding dealers on. We feel that the opportunity is ripe for us to do further investments there.

Over time, you should see the churn rates come down, even though on the independent side, probably as the current macro persists, they will probably stay somewhat elevated for the time being, but that's all in the long tail at the end of the day. What we really focus on is obviously the dealers and bringing the highest revenue per dealer. Remind me what your last question was on the affinity side.

Ryan Powell (Senior Equity Research Associate)

Yeah. Just how you're sizing the entire kind of opportunity there with adding new partners.

Jantoon Reigersman (President and CEO)

Yeah. I think the affinity side is huge, right? And we've proven a very efficient product-market fit on that side of the business. It's really the triangulation, or I should actually say, yeah, the triangulation between 4 parties, which is the affinity parties, the OEMs, the dealers, and us.

If you do that well, we obviously run very efficient programs, and we're clearly one of the few that run that in the marketplace, or at the very least, run it so effectively. We think that there are a lot of affinity partners that we can add further onto the platform. It is a really big priority of ours. We also want to do that while obviously providing real return and attractive platform for the affinity partners that we have. We think that this is a place where we can scale a lot. Obviously, if you look at our units even, it is also a really important source of our broader traffic. Those are often highly intense buyers in the flow.

Not only from a core perspective, are they really important, but also long-term from a TC Plus perspective, they're very attractive consumers for ours. The other thing that also becomes very interesting in the TC Plus world in the future is the opportunity that you can really start adding more value-added services, especially to affinities that are membership-based, where you can start thinking about ownership of the car and long-term opportunities around that too, retargeting opportunities, etc. The affinity OEM side is an important driver for us across the board, both in the core side and long-term also on the TC Plus side.

Ryan Powell (Senior Equity Research Associate)

Thanks, Jantoon. Super helpful.

Operator (participant)

The next question comes from Ryan Myers from Lake Street Capital Markets. Please go ahead.

Ryan Myers (Senior Research Analyst)

Hey, Ryan. Thanks for taking my question. Just wanted to get some more color on the EBITDA guide for Q1.

Does that include any sort of an impact from the wholesale business that obviously has kind of weighed on the gross margin in the past couple of quarters, or do you expect to see gross margins rebound in Q1, and most of that is just going to be coming on the headcount that you guys are adding?

Jantoon Reigersman (President and CEO)

Yeah. We do not expect wholesale to have any significant impact on Q1. That is not really a growth driver of ours. When you think about gross margin, what has dragged it down in the last couple of quarters was in part wholesale, but I would say just as much it is TrueCar Marketing Solutions. TrueCar Marketing Solutions, the marketing dollars that we deploy for those campaigns get captured in cost of revenue. When you think about operating contribution, it is actually fairly comparable to the core auto buying program.

As we think about the trend in gross margin, it's really going to be driven by the makeup of our total revenue. As OEM revenue starts to accelerate, that benefits gross margin. If TCMS or TrueCar Marketing Solutions were to grow substantially over the next couple of quarters, that could, in theory, bring down our gross margin, but you would expect operating contribution to be materially the same as it would be if it was the core dealer business that was driving that growth. Looking in Q1, really what's impacting that guide is just the seasonal nature of payroll-related costs being higher in Q1, and then the incremental sales and service headcount, which it takes time to ramp those hires up. Effective dealer salespeople have a pretty quick payback period.

That is why our expectation is that you start to see the re-acceleration of revenue growth in Q2. Okay.

Ryan Myers (Senior Research Analyst)

Got it. Then primarily, just the biggest thing that impacted the first quarter revenue is just the loss of American Express, and then obviously with the hires in the remaining quarters, and then you called out the Mercedes business on AAA growth should re-accelerate. Really, the biggest driver of the growth rate in the first quarter is just the loss of the American Express platform. That is correct.

Jantoon Reigersman (President and CEO)

Yeah. Like any other OEM program, when you introduce it to a new affinity partner, it takes time for that to ramp up, and it just requires marketing it to that membership audience, making them aware of it, and over time, it starts to build steam. That is what we saw with American Express.

It sort of had a pretty gradual build, but then accelerated fairly quickly after a few months. Q1, we're sort of bridging that gap with the loss of American Express.

Ryan Myers (Senior Research Analyst)

Okay. Got it. Thanks, guys.

Operator (participant)

The next question comes from Tom White from D.A. Davidson. Please go ahead.

Tom White (Md and Senior Equity Research Analyst)

Great. Good morning. Thanks for taking my questions. 2, if I could, I guess the first one is just sort of a high-level one on kind of your discussions with dealers. It seems like dealerships are all kind of dealing with this profit normalization kind of evolution after a few kind of years of outsized profitability for dealerships. It would seem that maybe some are looking to cut some tech and marketing budgets kind of in the face of that.

Then, on the other hand, maybe they arguably need platforms like yours more so than ever to kind of get to incremental consumer demand. Just kind of curious how your discussions with dealers are going kind of and how you kind of navigate those two sort of different forces. I have a follow-up. Thanks.

Jantoon Reigersman (President and CEO)

Yeah. Good question. The answer is you're spot on. I think there's an added nuance there that it really depends also on the size of dealership and the level of sophistication of the dealerships.

Right, plenty of dealers right now think, "Okay, let's cut back on any of the marketing services effectively and then put more to Google." Very quickly, they learn that as they do that and deploy more on Google, that Google only shows their top 2 or 3% of their inventory, and the other 97 or 98% does not get any views. Very quickly, then they end up with aging inventory, and they call back and say, "Oh, we have a problem." It is also the reason why we have redesigned the service program to this 12-month program that Oliver was referring to that we started in Q2.

That is really much more of a direct engagement where every dealer has its own subset of issues because it depends on whether you're by coastal, depends on whether you're in the middle of the country, depends on whether you're in a larger city or smaller city. Everybody has their own nuances. Also, do not forget that there is another really important driver that people underestimate that the service team does a really good job of, which is training the dealers. Yes, the dealer has to kind of readjust to the margin compression, as it were. Also, dealers often are struggling with the sales team that, frankly, had a really good life over the last couple of years and now have to go back to actual hard selling.

Many of their sales team do not know or do not remember actually how to properly sell the way they had to and used to. Helping the dealerships with training of their staff, providing them insights with the tools, and providing them insights with all the different tools that we have allows the dealers to be much more efficient. That even goes as simple as, right, we have dealers where they are not actually selling as much, and we go and look into the system, and we have a person inside the dealership, and they actually look at how they are pricing. If they were to price the car at $50 or $100 in a different direction, that actually immediately the amount of leads expands disproportionately.

Suddenly, they're selling many more cars just because they're much more active and thoughtful in the way they're actually setting their prices and then engaging with those leads. There's a lot of training associated with this, which is why we're doing more of the servicing in that program. That's really the tension that there is. It's really on us to make sure that we show the value we can provide to them. Becoming more sophisticated in the way we articulate that and show them the reports of how they can improve is a very important part of our servicing efforts.

Tom White (Md and Senior Equity Research Analyst)

Okay. That's interesting. Thank you. One last one on kind of the OEM incentive revenue line.

I'm just curious whether, as you think about the multi-year runway there, is there any reason, sort of structural reason, why you wouldn't be able to make kind of meaningful strides, kind of getting that revenue line back to kind of where it was pre-pandemic levels? Is there any risk that in the years since you had a more meaningful revenue base there, that there's been some kind of change in the way OEMs either approach the channel or they've shifted budgets elsewhere when it comes to kind of digital marketing in this way? I realize it's not exactly a digital marketing kind of type ad budget necessarily, but just curious, when you're thinking about that $300 million annualized, kind of longer-term target, how realistic is it that this is going to be a big, big driver of it?

Jantoon Reigersman (President and CEO)

Yeah. I think it is.

I think there's plenty of opportunity, and I think we should be able to grow beyond to what it used to be. I think we prove to the OEMs our effectiveness. I also agree with you that, obviously, because they historically have pulled back budgets from, frankly, every program, they kind of need to normalize to reallocate. I think we did a good job in the letter trying to explain how to think about the OEM incentives, right? Really, if you oversimplify it a little bit, there are effectively two tools that the OEMs have, which is financing or captive incentives, right? What is the offer they give you effectively from the lending side to make the car more attractive? The other one is the cash-on-the-hood type incentive.

If you actually look at the captive financing side, which is the easiest lever for them to pull, it is the one that has now pretty much normalized to how it was pre-pandemic. We are expecting that now the cash-on-the-hood component is the next one to come, and this will be especially prevailing in a world where, right, lots will start getting fuller and fuller, and dealers need to obviously move their cars because otherwise they have real floor plan financing issues. Net-net is, I think this will be a growing factor and will continue to grow. In a macro where dealers will have a hard time selling cars, especially with affordability, these are programs that are very, very effective and do not impact the residual value of the cars, which obviously for the OEMs is really important. I am very bullish in this area.

Oliver Foley (CFO)

The only thing I would add there is I think the relevance of our OEM incentive offering is going to be stronger than it's ever been for the reason Jantoon just mentioned, which is our ability to offer private targeted incentives protects the OEM's residual value. What we've seen over the past two years is that way more new car loans were originated by the captive firms and way more new car sales were leased. The captives effectively have these loan books that are very susceptible to declining residual values. I think they're going to be very cautious when it comes to offering broad cash-on-the-hood promotions or discounts because that could directly impact their loan-to-values.

Going forward, I think their ability to incentivize demand with discounts and cash rebates, but do it in a way that protects residual values, is going to be more important over the next couple of years than I think it's ever been. I think that should favor the product that we offer them.

Tom White (Md and Senior Equity Research Analyst)

Great. Very interesting. Thank you.

Operator (participant)

The next question comes from Marvin Fong from BTIG. Please go ahead.

Marvin Fong (Director)

Great. Thanks for taking my questions. I know we've talked a lot about OEM here. I guess just to be a little more clear here, obviously, you highlighted Mercedes, and there are other partners potentially could join that AAA program. Should we and I know you also mentioned re-acceleration in the second quarter but by sometime this year, should we expect that you will have fully recaptured the lost American Express business?

I just want to be clear on that. Maybe a second question. Just love to kind of hear about, from the dealer side, coming out of NADA and whatnot, just what's the pipeline in terms of dealers that you have for TC Plus? Are you pretty much have a pipeline of dealers ready to go once you do roll out into new regions? Maybe just kind of talk about that aspect of TC Plus. Thanks.

Jantoon Reigersman (President and CEO)

Yeah. I think the first answer is yes. I think really Q1 is the only one where you have a little bit of a shift. I think in Q2, we should already start seeing that acceleration. I think that's number one. On the TC Plus pieces, yes, we have dealers ready.

We actually have dealers ready in many different states that would love to that have put their hands up and would love to participate. We obviously want to do this relatively focused. We will first do more dealers in California, and then we will start expanding in other states. The two states that are highly likely to follow afterwards are going to be Florida and Texas purely because of the density of dealers that we have in both these states, as well as obviously the car buying audience that exists in both states. Net-net is focused on California first. Yes, we have a pipeline ready, but we want to make sure that these experiences are really good. It also requires, obviously, a little bit of a different mindset at the dealerships themselves. It requires some level of training, etc. We want to do this in a structured manner.

The answer is yes. We have plenty of dealers that are really excited. Obviously, we continue to work with really important partners of ours. It includes the dealer associations, the OEMs, etc. As we scale this, we also want to make sure we take all our stakeholders along because we feel we have a very unique position in the market with TC Plus and the product we deliver. Yeah, we are very excited that as we make continuous progress on the product, we can start accelerating this and start accelerating this faster and faster and soon make it much more impactful. I know we've been talking about it a lot, but I think this is a huge opportunity for us. We are now in the final legs of really improving those experiences.

Marvin Fong (Director)

Great. Thanks so much, Jantoon.

Operator (participant)

The next question comes from Chris Pierce from Needham. Please go ahead.

Chris Pierce (Senior Analyst)

Hey, good morning. I just wanted to go back to the first question and the consultative approach. I guess I just want to understand. You're sending a dealer a lead, and where is sort of the ball being dropped, or why do you need to kind of help them massage that lead into a sale? I kind of just want to understand what's happening and what you're doing to kind of drive that conversion higher.

Jantoon Reigersman (President and CEO)

I mean, I should have my I should have my service team on the call because I would love to spend a couple of hours talking through this. The short answer is a couple of things. One is it starts with the way you effectively position your own dealership on the marketplace, right? So the price curve is a great example, right?

Whether you have an excellent price or a good price or an average price of your car, making sure that you have active pricing on the platform, especially as prices change very quickly and swiftly in the marketplace, is one example of something that's very simple. There are some dealers that don't really log into the systems very often. As a result, in a pricing-changing world, their prices might become uncompetitive unknowingly to the dealer. As a result, they might have pretty dramatic drops in their lead generation because, frankly, they're pricing themselves out of the market. Not because they do that intentionally, but because they haven't logged into the system recently, as an example. The active engagement with the tools is really important. The other piece is then the way you nurture the lead.

You would be surprised to know that if you're the head of sales or the GM of a dealership, you obviously have a lot of salespeople, but you also have a lot of salespeople turnover. Training these people and making sure that these people are really good at how they nurture these leads and what they do with them, etc., is something that not always happens the right way at many of the dealers. Our trainers coming in to help their sales folks effectively get to know the best in class of how to nurture a lead, how to bring it, how to prioritize leads, what works and what doesn't work, is really important.

Added to that is, for example, those new tools that we were describing where we're even now with the AI tools determining the propensity of a lead to close or not to close. Now you can also start prioritizing that within the dealership and then who does what and how does that work. There is a lot that comes to actually selling a car. The more we help the dealers to stick here, we are. You would be surprised that it's relatively low-hanging fruit for us to help them because very often it's very simple things where if you do those things well, they have dramatic impacts on the close rates of these leads that we provide.

Chris Pierce (Senior Analyst)

Okay. Thanks for the detail there. Perfect.

On TCMS, was revenue down sequentially, or is it too early to kind of gauge what's really going on there? I just kind of want to get a better understanding of that product as you roll it out.

Jantoon Reigersman (President and CEO)

Yeah. Do you want to—Oliver—do you want me to take that, or do you want to take it? Go ahead.

Let me take a stab at it. Quarter over quarter, it was down slightly, and largely because we really focused Q4 on streamlining the offering, right? It is still sort of a suite of digital marketing products, but we really wanted to streamline the offering and simplify it in part because it is easier for dealers to understand, and it is easier for the sales team to sort of communicate the benefits of TCMS.

We really brought in some leadership on the TrueCar Marketing Solutions side and started to sort of build out the right team on that side. I think Q4 was really about how do we strengthen our go-to-market muscle with TCMS, and let's create a stronger foundation going into Q1. Yes, it was a sequential decline, but I think it was sort of strengthening the go-to-market muscle so that in 2025, it'll be a big growth driver of ours.

Chris Pierce (Senior Analyst)

Okay. Is there a way to sort of quantify some sort of upper bound? What are we talking about as far as growth driver, whether in terms of absolute revenue or revenue growth? What's the right way to think about the trajectory of this over the year, next couple of years, etc.?

Jantoon Reigersman (President and CEO)

On that end, I'd say it's a little early to tell.

We're incredibly optimistic about it just because the amount that franchise dealers spend on digital marketing off of the TrueCar platform is astronomical, right? There is a huge addressable market there for us that allows us to capture parts of their budget that are not going to third-party listing sites but are going to Google or Meta. Our belief is that it could be a very sizable component of our overall revenue, but it is a little early for us to predict what % that might be. Hopefully, we will have a much better sense for that over the next couple of quarters.

Chris Pierce (Senior Analyst)

Okay. Very fair. Appreciate the time. Thanks.

Operator (participant)

This concludes our question-and-answer session. I would like to turn the conference back over to Jantoon for closing remarks.

Jantoon Reigersman (President and CEO)

Great. I would like to thank everybody for taking the time to participate in our call today.

I also want to thank the team for all their continued efforts. We're more focused and more disciplined than we've ever been. With gratitude, thank you, and look forward to the next call.

Operator (participant)

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