HyreCar Inc.
Q2 2021 Earnings Call Transcript

Published: 10 Aug 2021

[Operator:]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the HyreCar Inc. 2021 Second Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. This conference is being recorded today, August 10, 2021, and the earnings press release accompanying this conference call was issued at the close of the market today. On our call is HyreCar's CEO, Joe Furnari; CFO, Serge De Bock; and HyreCar's Head of Investor Relations, John Evans. I would now like to turn the call over to John Evans.

[John Evans:]

Thank you, operator. And welcome, everyone, to our 2021 second quarter earnings conference call. Before we get started, I'd like to take this opportunity to remind you that during this call, we will be making forward-looking statements within the meaning of federal securities laws regarding Hyrecar Inc. Forward-looking statements include, but are not limited to, statements that express the company's intentions, beliefs, expectations, strategies, predictions or any other statements relating to future earnings, activities, events or conditions. These statements are based on current expectations, estimates, and projections about the company's business based in part on assumptions made by management. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call. In particular, those described in our risk factors included in our documents that the company files with the U.S. Securities and Exchange Commission. In addition, such statements could be affected by risks and uncertainties related to factors beyond the company's control. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them, except as required by applicable law. Our discussions today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of GAAP to non-GAAP results will be found in our earnings release and supplemental materials, which will be furnished with our Form 10-Q that will be filed with the SEC and will also be found on the Investor Relations portion of our website. Now I'd like to turn it over to Joe Furnari, the company's CEO.

[Joe Furnari:]

Thank you, John. And it's hard to believe this is HyreCar's 3 year anniversary as a public company. As I look back to that first call in August of 2018, it's amazing what we've accomplished since then. These accomplishments are a result of the entire HyreCar team, those that have been with us since before 2018, those that have come recently, and those that have moved on. Your contributions have made this company what it is today. I would especially like to welcome a new executive on the line with us today, Serge De Bock. Serge joined the company about four weeks ago and has already started to make a positive impact. After this call, my hope is that all of our shareholders will be as excited as I am for Serge's present and future contributions. With that, I am pleased to say that we had another consecutive record quarter. The combined tailwinds of loosening COVID restrictions, increasing vaccination rates, higher rideshare demand, and stable delivery demand pushed our business to the highest quarterly revenue in company history. Our net revenue increased 62% to $9.1 million for the quarter, up from $5.6 million in Q2 2020. And rental days increased 44% to over $330,000 for the quarter, up from approximately $230,000 in Q2 2020. For the quarter, we saw a record of over 6,800 new unique drivers pick up a car on our platform, a 49% year-over-year growth rate. Two thirds of our HyreCar drivers are still predominantly delivery oriented, and the opportunity is accelerating in the local delivery as a service environment, not just for food, but all TNC platforms are starting to move into adjacent lanes like alcohol, pharma, and package delivery. On their Q2 call, Uber said that Uber Eats has grown at a compounding annual growth rate of 100% over the past 4 years, with plenty of room to continue to run. And Uber's acquisitions of Postmates, Drizly, and Cornershop are simply validation of the delivery as a service future. Continued growth of these channels will require sourcing a vetted supply of drivers and a reliable stream of cars to match driver demand. This is what HyreCar does best. Delivery platform demand suggests HyreCar driver economics will remain attractive, creating a sustainable environment supporting larger and larger driver pools for years to come. In addition to gains from delivery, both Uber and Lyft said in their Q2 calls that the rideshare business is increasing month-over-month and that July was their best month since March of 2020. Lyft alone is on a run rate to spend over $1 billion in driver incentives this year. Uber also admitted to having major supply dislocations in key markets in the first half of this year. So they spent heavily to subsidize driver earnings. In their top 20 markets, drivers are averaging over $40 an hour. HyreCar is seeing this driver demand as well, having registered over 37,000 leads in the month of July, and we anticipate a surge in leads as federal stimulus incentives roll-off in our key markets. As reports of school re-openings and businesses normalize, recovering rideshare volumes will further strengthen the demand side of our platform and we've shown that we're nimble enough to manage any business environment thrown our way. Last quarter, we stated that increasing driver demand and fewer driver alternatives were creating incremental margin pick up in our daily rates. I'm happy to announce that our dynamic pricing model brought take rates up to $27 per day in Q2, up 12.5% from Q1. Because we've invested in building a robust data environment and flexible technology stack, we were able to implement these changes relatively quickly, and we anticipate take rates growing through the rest of the year as the dynamic pricing model learns and iterates for risk and reward. On the car supply front, we are enjoying increased vehicle supply onto the platform from our previously announced partnerships with specialty fleet suppliers. On January 28, we announced an expanded partnership with AmeriDrive Holdings. That announcement included new relationships with Cogent Bank for innovative financial services and an automotive aftermarket retail and service chain with over 900 locations nationwide. AmeriDrive is leveraging these locations for higher car AmeriDrive branded parking spaces and vehicle logistics. AmeriDrive is currently operating out of seven stores, in addition to a 200 car overflow lot to help with in fleet Recon. With AmeriDrive's help, we've gone from a little over 3,000 average daily rentals or ADRs in Q4 to sequentially trending toward an ADR average of 3,700 in the second quarter, with a run rate of 4,500 to 5,000 ADRs expected in Q4. We've trended slightly lower-than-expected with AmeriDrive supply, partly because HyreCar has never had a fleet operator scale at the speed that AmeriDrive has, but primarily because AmeriDrive experience in car financing constraints that are short-term in nature. We're in the process of ironing out the scaling and financial constraints. And in the near term, we've been able to offset the slower ramp in cars with a steeper ramp in take rates. The overall success of our AmeriDrive partnership has opened additional opportunities to significantly grow vehicle supply over the next 12 to 18 months. So I want to reiterate what we said last quarter. As a company, we want to supply up to 16,000 new cars, both gas and EV vehicles into the market by the end of 2022 and 50,000 by 2025. Our conversations with our partners make it clear that the market will continue to grow and HyreCar intends to be the leading vehicle supplier for the gig economy. In the near term, our partners are working through a tighter vehicle purchase market due to the shortage of new and used cars at scale. That only impacts the short term pace of adding vehicles and will not impact the growth of our supply going forward as these market anomalies abate. What started as a gig sharing platform has evolved into a vehicle ecosystem that helps vehicle owners not only find the drivers for their vehicles but also helps them finance, manage, select and retain drivers. Our relationship with AmeriDrive and Cogent was only the beginning of this program. We are working on another large facility that will enable us to deliver on our growth targets. As part of this expansion, we are using AmeriDrive's process and planning to create a best-in-class operating model that we can share and monitor for other fleet owners that want to expand into the gig economy. This operating model includes using our partners to manage the acquisition and maintenance of vehicles and sharing the vehicles and drivers, handoff and retrieval of vehicles, and the ultimate disposition of the vehicles at the end of the vehicle's life. Creating this partnership ecosystem helps ensure best practices for the fleet owner to help them be a success and ensures that HyreCar can add 1,000 and 2,000 vehicles per quarter that will get us to the number that are rideshare and delivery companies desperately need. With that, I'd now like to turn the call over to Serge De Bock, our Chief Financial Officer, to walk us through some key financial elements from the second quarter. Serge?

[Serge De Bock:]

Thanks, Joe. I'm really excited to join HyreCar for its next phase of growth and to be part of this adventure. On to our Q2 performance, overall, the second quarter of 2021 saw solid top line revenue growth year-over-year at 62% and quarter-over-quarter at 22%, but we also saw some transition and investment in our platform in order to scale our operations. First, on the top line. Rental days increased to over 330,000 for the second quarter of 2021, on pace to surpass 1.3 million rental days this year, up from 1 million rental days for the full year 2020. This represents a quarter-over-quarter growth of 44% from 229,000 rental days in the prior year second quarter and sequentially increased 11% from the first quarter of this year. With a number of rideshare and delivery drivers steadily increasing and Uber announcing that 90% of inactive drivers intend to be back on the road by September, we are continuing to aggressively pursue adding new cars to the platform, and this will be one of the key success factors for us in the long term. While our rental days increased by 44%, net revenue in Q2 grew 62% to $9.1 million from $5.9 million last year and 22% from the previous quarter. This year-over-year favorable revenue growth delta of 18% over the 44% increase in rental days stems from pricing enhancement, a favorable market trend in daily rental fees, and the implementation at scale of dynamic pricing. Specifically, we have driven an increase in daily average net revenue, which represents net revenue divided by rental days from $24 historically in Q1 to $27 in Q2, as Joe mentioned earlier. This coincides with our net revenue to gross billings ratio increasing from 45% in Q2 2020 to 46% in Q1 '21 and 47% in Q2 of '21, a steady increase in our take rate. July continued to see an increase in both rental days, daily average net revenue, volume, and price. On the topic of price, dynamic pricing currently includes risk segmentation based on geographical location and driver risk profiles. We are still at the onset of leveraging analytics to drive optimal pricing, and we have tons more potential to unlock as we scrutinize and discern trends in the data we are collecting. Now onto the cost side. Cost of revenue increased in Q2 to $8.3 million from $3.1 million year-over-year, with insurance was premium and claims, accounting for the vast majority of the cost. While the insurance premium increased relatively proportionally to the increase in rental days, claims expenses have exceeded that, mostly because we centralized our claim portfolio with a new single processing partner with the goal to improve customer experience. We settle lot claims, migrated platforms, and performed a deep dive into insurance reserves to date. We add $1.4 million in one-time expenses related to transition and to claims development incurred from prior periods. At the same time, we observed a sharp decrease in customer complaints related to the claims process. We are assessing the ROI of various portion of the process and aim to find the right balance between customer retention and direct costs. Accordingly, gross profit for the current quarter was $0.8 million, representing a gross margin of 8.9%. Adjusted for one-off expenses related to the claims portfolio transition, our gross margin was 24.3%. We optimized our new process and pricing and have already identified several tangible opportunities to improve claims profitability, either by process improvements, geographical and risk price adjustment, or adequate pricing for our premium coverage offerings. One of these opportunities relates to reassessing our deductibles on physical damage claim and providing incentives for drivers with low claims experience. We want to strike the right balance between customer experience and cost. We believe we can aim for low 30s gross profit margin in Q3, in line with fiscal year 2020, and an improved profit margin of mid-30s in Q4 through pursuing and affecting these initiatives without impacting our growth or driver and owner retention. We are also collaborating with our insurance partners to leverage data and improve our driver and car screening processes to both reduce claims outcomes and claims premium through risk control and to continue our path towards 40% plus gross margin in the later half of 2022 and beyond. Specifically, during our discussions with our insurance partners, we estimated that we could reduce insurance premium over time by up to 20% by identifying and filtering more effectively high risk drivers. Operating expenses totaled $10.1 million in Q2 of 2021, an increase of $3.7 million or 58% over the $6.4 million recognized in Q2 of last year. Compared to Q1 2021, however, we scaled our operating expenses up by only 2%. We have invested in scaling our platform, optimizing our technical infrastructure, driving top of the funnel through marketing efforts and staffing, sales and operations for continued and sustained growth. We have been clearing some of the technical and operational debt we have carried over to build a sound base for accelerated growth. Going to Q3, our focus will be on continuing supporting higher car future top line growth effectively, while containing non-growth related expenses, creating operational leverage and economies of scale. Our adjusted EBITDA for the quarter ended at a loss of $7.1 million, up from $1.7 million loss in Q2 last year. As we discussed, this increase resulted primarily from our claims performance and transition, as well as cash operating expenditure to support growth at scale. Our cash position continues to remain healthy with sufficient liquidity to fund our operations in 2021 and pursue growth opportunities. As Joe mentioned, we're also in the process of securing favorable financing to create financial leverage and optimize our cost of capital. It will also help our partners such as AmeriDrive, grow their fleets and accelerate economies of scale through expanded volume. Back to Joe for final remarks.

[Joe Furnari:]

Thanks, Serge. And to summarize, HyreCar is carrying our growth trajectory into the third quarter and enjoying the tailwinds of the pending full reopening of the economy. For HyreCar's business, it's not a matter of if we're going to be successful, it's a matter of when. We want to supply 16,000 new cars, both gas and EV into the market by the end of '22 and 50,000 by 2025. We have exciting partnerships in the pipeline that will provide catalyst financing to scale the fleet exponentially. And I expect the TNC partnership coming to fruition this year, which has been in the making for over 5.5 years. The bottom line is that the future is bright as we continue to execute our growth strategy throughout the remainder of the year. With that, operator, let us move to Q&A.

[Operator:]

Thank you. Our first question comes from the line of Mike Grondahl with Northland Securities. Your line is now open.

[Mike Grondahl:]

Hey, Joe and Serge. Hey Joe, could you talk again about the cars, rental cars on the platform at the end of June or at the end of 2Q? And kind of - I think you said a number by year end, kind of help us understand maybe from year end 2020 to first quarter, second quarter and where you think you're going to be at year end? Start with that, if you could.

[Joe Furnari:]

Sure. Yeah. I mean, Mike, where we are right now, I think we have about 6,000 available cars on the platform. That includes both rented and available. About two thirds are rented right now. I think by the end of the year, we'll be around 4,500 to 5,000 actively rented, what we call ADRs, slightly lower than what we had talked about last quarter. And again, I kind of touched on some of the issues we've had with scaling, some of the issues we've had with financing those vehicle fleets. But I think those are all short terms in nature. I mean, we're one quarter into a six quarter strategic plan that is going to get us to 6,000 additional cars there and 16,000 by the end of '22. I think those are realistic goals given the partnerships that we're putting in place.

[Mike Grondahl:]

Got it. And the partnerships you're putting in place, is that a couple of partners with big chunks of cars? Or is it a process so dealers can put 100 there, 200 in this city. I guess, just help us bridge a little bit from the 4,500 to the 16,000?

[Joe Furnari:]

Yes. So you have three aspects to that. First is the financing. We're talking to players that can bring over $1 billion in financing to this market in the next 5 years. So we're talking about - and we're talking about a model that is proven. That's been done before, right, in a highly, highly scalable structure. So financing partners that can really bring capital to scale is one aspect of it. On the other side, from a driver perspective, we're talking to TNCs that we've been talking to for the last 5.5 years that I think are now at the point where - and we're at the point, nowhere, we can really help them scale. I think we have meaningful supply coming on to really help them ramp. And then on the ecosystem side of it, from an owner perspective, we are in process of building out the playbook, right, really learning best practices from AmeriDrive, rolling those best practices out in a playbook that enables many fleets, what we call kind of mini fleets is 5 to 50 car fleet owners to really scale and really kind of run a profitable business within our ecosystem. So between those three kind of aspects of the business and partnerships, I'm really excited about what the second half looks like and kind of what we have going into '22.

[Serge De Bock:]

Yes. And actually - hi, Mike, it's Serge.

[Mike Grondahl:]

Hey.

[Serge De Bock:]

Other question on financing. Hey, I have a quick thing on financing. I think it's important, we have opportunities to secure quite a sizable chunk of financing, but we want to make sure we strike the right balance between collateral interest rate. And that's something it's going to carry over for us in the long term. So we take our time to do the right thing and being able to pick the right partner for us to grow and being able to get the right cars and the right financing.

[Mike Grondahl:]

Got it. And then just secondly, it sounds like there was some insurance transition claims of $1.4 million. And if you subtracted that, you got a gross margin of like 24%, but that still seemed down from where you were running, I guess, help reconcile that a little bit more.

[Serge De Bock:]

Absolutely. So the $1.4 million represents a truly one-off items that impacted us from prior periods or just purely transition items, like, for instance, we had about 200k that came from an API that broke between our - in our transition between claims insurance processing partners. So those are purely one-off items. So the bridging to last year gross margin that was at 33% for the whole year, comes from us changing our processes. We want to improve customer satisfaction, customer retention. So we made it a little bit easier for folks to kind of go through the claims process. Now we try to find the right balance between direct costs and being able to have customers being happy and have a good retention impact. And as we get through, this is just a first few months with our new insurance processing partners. We're already hammering out. We're doing a deep dive, hammering out the details on the claims process. We already identified a few areas that we can fix or just improve. We're doing a good trade out there. And we believe we can get back the margin above 30% directly in Q3 through those efforts. But it's going to take a little time for us to kind of get back as we transition between partners and we understand the claims better. And then another angle is read data. We collect a lot of data in our claims process, and we were trying to understand better what makes a good driver as we mature, and we're able to do that, we'll be able to pick drivers more effectively. And then in turn, that's going to turn into less claims and lower insurance premiums. So we're trying to get a favorable wheel going in terms of getting data adjust and then reduce our expenses. But as we get through the transition, the new processes took a little bit of toll on a direct profitability.

[Mike Grondahl:]

Got it. Okay. Thank you.

[Serge De Bock:]

No problem.

[Operator:]

Thank you. Our next question comes from the line of Tom White with D.A. Davidson. Your line is now open.

[Tom White:]

Great. Thanks for taking my question, guys. I've got a couple, if I may. Joe, I guess, first, on the AmeriDrive partnership and kind of the pace of rollout there. Can you give us a little bit more color on what's happening there? I think you mentioned some kind of short-term-ish financing constraints. I guess I want to understand the extent what's happening there? And then also, is there any just kind of impact from the tight supply of used cars that might be kind of less short term in nature? And then on EBITDA, between the gross margin outlook for the balance of the year and also what seemed to be kind of elevated G&A in the quarter. I was curious if you can kind of comment on your - how you're thinking about EBITDA, profitability relative to kind of that level of kind of rental days that you thought or at least you've previously mentioned you needed to get to in order to reach kind of EBITDA breakeven? Thanks.

[Joe Furnari:]

Yeah. Thanks, Tom. Yeah, so from a supply perspective, what we're seeing in the market in terms of supply conditions in the used car markets, those prices have come down. I mean they were up, what, over 40% annually. And they've started to come down in the last six weeks or so. They're down about 5% to 7%, depending on the type of vehicle. Expectation is that those prices continue to come down another 5%, 10%. But eventually, they normalize. And probably, we don't get to full normalization until Q3 of next year just because of what's going on with the supply chain and chip shortages. All that being said, I think the AmeriDrive issues are more from a financial perspective. We've been in heavy conversations with multiple, multiple financing entities. I think we have that figured out so that now they can start to really scale again. And so we're leaning in with our resources to be able to get them to where they can really start to scale and they have the resources to support that scale, which is kind of where we want to be. And then maybe I'll let Serge talk to the EBITDA piece of it.

[Serge De Bock:]

Yes, absolutely. That's a good question. We've seen some of the increase in OpEx this quarter being more short term in nature. And also, as we go through, one of the key pillars of what I'm doing coming in on week five and six is really doing a deep dive on operating expenditure and understand the on each of those. And I think we really identified some areas where we can improve and reduce that cost base going forward. To your questions around with level of cars, I think based on the current trends and what we can do in the short term, we can get to at about a run rate of $60 million to $70 million annual revenue will be at EBITDA neutrality, and that represents between 6,000 and 6,500 cars. But that's making sure that we have enough sound base in our OpEx to be able to grow and continue on that trend going forward. We're trying to strike the right trade-off between investments in OpEx and our ability to grow. And right now, we're scaling the platform, fixing all the things for us to be able to be on a pretty big growth trajectory. If we can even secure $100 million of financing in the next few months, we'll be able to add a large amount of cars to the platform that will get us there. So I think that's our take right now on the profitability.

[Tom White:]

Okay. Thanks. Maybe just one more follow-up, if I could, on dynamic pricing. What gives you guys confidence that, that can be sustainable? I mean, clearly, probably for the next couple of quarters, the driver incentives from the big TNCs you mentioned will be a tailwind. But I guess kind of you know, eventually, that level spend will probably normalize. And then I also just - I wonder as your business kind of shifts, the mix kind of shifts a little bit more towards delivery, you know, it feels like delivery, food delivery drivers earn a little bit less than rideshare drivers. I guess what gives you confidence that kind of given those two things that you guys can sustain these higher kind of daily revenue takes?

[Joe Furnari:]

Yeah. Good question. I would point to a couple of data points in the market. Yeah, we touched on Lyft on a run rate to spend about $1 billion in driver incentives, Uber not far behind. If you look at Uber vehicle solutions right now, the cars used to be offered at $215 per day or per week. Now they're offered at $260. You see that Uber drivers are making about $40 per hour. I don't see that coming down in the near term. If anything, it probably starts to - it goes up a little bit as kind of Delta variant starts to maybe push some of the more drivers that would be worried about that out of the market and you start to see more new drivers coming in from the roll-off of the federal stimulus. So there's some interesting dynamics there that I think are going to enable us to maintain dynamic pricing, continue to grow that through the end of the year. And then from a - to address your question about the delivery piece of it, yes, you see delivery drivers make slightly lower. That's always been the case. And so the money has always been in ridesharing. But in this uncertain environment where drivers don't necessarily have to deal with people to make an equivalent earnings compared to rideshare, we see that only increasing. Just an anecdotal, I was in the car the other day with a driver who was like, yes, I'm giving you the last ride, I'm turning it off, I'm going to Amazon Flex because I can - I've reserved a couple of deliveries this evening. And so I think what all of this does, the trend creates flexibility for drivers because it's not binary, right. All these drivers, the drivers are driving for rideshare, they're driving for delivery, they're driving for package and food, all of that stuff. And so they bounce around and they go where the economics are. All of it means increased demand means that higher basket sizes means higher earnings for those drivers. So I'm not too worried about being able to sustain higher prices, at least in the short term for the next six to 12 months. Maybe it normalizes back, but I think this is structurally has changed how consumers are getting their goods now through the gig economy, and that's not going - that demand isn't going anywhere, which again, supports the pricing and earnings for drivers.

[Tom White:]

Okay. Thanks for the color, Joe. Appreciate it.

[Joe Furnari:]

Yeah.

[Operator:]

Thank you. Our next question comes from the line of Mark Argento with Lake Street. Your line is now open.

[Mark Argento:]

Hey, Joe. Hey, Serge. My questions have been answered, but I just wanted to drill down on kind of the competitive environment right now. It seems like demand is all And I think a little more in terms of pricing, both on the service side, but also on the insurance side, the opportunity to ratchet that up a little bit more. As you kind of alluded to just now, it seems like basket sizes are getting bigger. The last few times I've taken an Uber, it seems like the costs are going up. Does that allow you guys to price up a little bit? Again, not only - I guess when it comes to thinking about the insurance side and especially given it seems like you're really the only one out there in the market doing what you're doing.

[Joe Furnari:]

Yeah. Well, what I'll touch on kind of the competitive side of it. And then I'll let Serge jump in on the insurance side of it in terms of kind of like competitiveness. From my perspective, we are - the last man standing now at this point with a lot of the competitors that have fallen off, there are some - there's still one or two that are relevant. But from our perspective, there's about 60,000 plus cars that need to be supplied to the market today, right. September, I think it's 9th. You have the roll-off of federal stimulus with a lot of these states. And I think there's a tremendous amount of demand that's going to start coming back into the market. So our goal right now is to move at warp speed to get as many cars on the platform as possible. So that's what I'm focused on. From a competitive standpoint, I see prices going up from those competitors that are playing in the market. Just as an example, the 260 a week, up from 215 a week, which if you look at that all-in cost with some of the bells and whistles, it's closed to the $400 a week, whereas HyreCar's coming in $350 to $400. So in most states and for most of our offerings, we're coming in as the low cost provider of fleet. We just need to add it quickly and fast and faster. So - but maybe I'll let Serge talk to the insurance piece of that from the competitive standpoint.

[Serge De Bock:]

Yes. We are looking at the offerings in the market between the different competitors that we have and understanding what the driver is able to pay and what the owner is willing to offer. And I think for us, we're really trying to match the two, and being able to price right is going to be important. And then price, right, within the constraints of insurance, like you alluded to, is very important. As we understand better our offering and what impacted us on our cost of claims, we'll be able to price it appropriately. And here, I think we are in the middle of a review, and I alluded that in the beginning of the call of reviewing the different pricing options, including deductibles, to offer something that's pressed right. I think we have more opportunity to generate revenue based on increased pricing overall, but principally also on being able to select the right drivers and being able to leverage all the data we have to select the right drivers, and again, being able to selecting the right drivers, get the cost of claims down and help us on the profitability side, while not impairing our growth. And I think that's what we're going to be focused on to be able to get the cost down and also being able to set price appropriately based on risk profile.

[Mark Argento:]

Great. Thanks for the color, guys. Appreciate it.

[Serge De Bock:]

No problem.

[Operator:]

Thank you. Our next question comes from the line of Jack Vander Aarde with Maxim Group. Your line is now open.

[Jack Vander Aarde:]

Great. Hey, Joe - and congrats and welcome aboard to Serge. I'll start with a question for Joe. Joe, just a housekeeping item. Did I hear you correctly that new driver leads in the month of July was 37,000?

[Joe Furnari:]

Yes. That's correct.

[Jack Vander Aarde:]

Okay. Thank you for that…

[Joe Furnari:]

Yeah. That's up pretty significantly as we spent into other marketing channels, right? If you look at where we are from where we started, I mean we've doubled, if not tripled our speeds at this point to really spend into the opportunity to prime the pumps in anticipation of more car supply coming on. So yes, it's a pretty good number right now.

[Jack Vander Aarde:]

Okay. Cool. That's helpful. And then just another follow-up for you, Joe. In terms of identifying and just allocating future car supply, just because I believe the first phase, for example, you had with AmeriDrive is kind of targeting the southeast market, if I remember correctly. Have you identified or do you have a road map here now in terms of where your next, I guess, most immediate needs are to allocate future car supply? Have you kind of painted that picture yet? Or is it still kind of filling the blanks as you go depending on when you get that supply locked up?

[Joe Furnari:]

Yeah. We're kind of in stealth mode a little bit on kind of where we're going to be ramping up. We have a lot of conversations going right now with TNC partners that are looking for supply, both ICE and EV cars. So that's - but we do have a road map, we do have a strategy. And I think I'll be able to probably talk about it a little bit more on the next call.

[Jack Vander Aarde:]

Okay. Got you. And then maybe from just your revenue model, just a nuts and bolts question here. You guys often cite that an average weekly car rental rate as kind of the basis of your revenue equation. I know that fluctuates and the owners set the pricing. But have you noticed any changes to that average rental rate that you're seeing in your user base?

[Serge De Bock:]

Yes, absolutely. So that average rental number has gone up, as you can see, actually, in our performance. We're getting a little bit upwards of $37, $38, which is a positive trend for us. And then the drivers fees have also increased in percentage of that. So as we implemented dynamic pricing, we are able to select the right drivers and charge the right rate. So we've seen that. And we also have an increase in daily insurance rate as well. So all in all, it got us - it got us pretty favorably, went from 53% gross to 57% growth. And then on a net basis from 24% to 27%, and we continue to see positive trends. There's more upside there for us to be able to take as we get through. And then our take rate is also an important indicator, steadily going from 45% to 47% on that equation. And I think that's also continuously improving increasing dynamic pricing, but also things in the marketplace that we've seen.

[Jack Vander Aarde:]

Fantastic. All right. That's it for me, guys. I appreciate the time. Thanks.

[Serge De Bock:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Jon Hickman with Ladenburg. Your line is now open.

[Jon Hickman:]

Hi. I guess this is a question for Serge. In past quarters, you guys were talking about targeting operating expenses at around, cash operating expenses at around $5 million to $5.5 million. The past couple of quarters, it looks like that's gone up to $7 million, $7.5 million. Can you tell us what you expect for the rest of the year?

[Serge De Bock:]

Yeah. I think this quarter was extremely high compared to previous quarters through investments, but we're trying to normalize that around probably 6.5%, 7% in the immediate term.

[Jon Hickman:]

6.5 to 7 cash?

[Serge De Bock:]

Cash.

[Jon Hickman:]

Okay. And then can I just clarify what you said about gross margins? You thought they kind of low 30s for the rest of the year and then by the second half of next year, you could get into the 40% range?

[Serge De Bock:]

Correct.

[Jon Hickman:]

Is that what you said?

[Serge De Bock:]

Yes, that's correct. I think right now, we'll be able to get back in Q3, closer in line with what we saw last year as the annual gross profit rate. And then in Q4, I think we expect that to improve. And I think part of it is us being able to have more on the take rate. And then part of us is being able to get the claims in a better spot with all the data we have and implementing the initiatives that we've identified.

[Jon Hickman:]

So can you talk about why the claims expenses have risen so dramatically in the last couple of quarters?

[Serge De Bock:]

Yes, absolutely. I think this quarter, we had $1.4 million in one-off expenses from the transition, but also we're changing our process and implementing faster payment process that work more customer friendly, led to faster payouts, and sometimes payout is a little higher than what we've seen in the past. We identified a few things we need to do to be able to curtail that. We're going to focus on deductible as one portion to be able to have a good handle on the amount and volume of claims coming in. And then we also have a few things, including, for instance, our subrogation practices. We got a little loser on subrogation practices in Q2. We were paying our customers and then trying to chase back the money. I think here, we put new more guard rails in those cases. We only subrogating certain instances, for instance, and that will help us drive some of the claims back. We also looked at different trends for different states. We identified a couple of states where we saw more alarming trends and also a different profile of drivers, and we immediately action to curtail that in Q3. And that's going to show up partially in Q3 and then in Q4. And I think that's - with more data, and I think that's going to be a trend you're going to see. We have more data, more dashboards, we're able to discern and analyze the data more quickly and react very quickly to trends. And I think that's going to help us be more efficient, effective and generate more profit in the future.

[Jon Hickman:]

So long term, do you still think you can get close to 50%?

[Serge De Bock:]

That's a question that's difficult to address right now. There is a lot of factors in the long term. I think we can get above 40% for sure, with very, very high volumes, and keep that margin high up. So that's still a pretty solid margin business. We're going to aim for 50%. I think Joe is always very willing to push the envelope and being able to drive, shoot for the sky, and that's worked really well in the past. I think it's a great mentality for the company. I think right now, it's probably a little too early to tell, but I'd say that it's safe to say that we'll be shooting for margin upwards of 40% in the latter half of next year.

[Jon Hickman:]

Okay. And just one last question. Joe, what's the TNC partnership? What TNS stand for?

[Joe Furnari:]

Yes, John, good to talk to you here. TNC stands for a transportation network company. That's Uber or Lyft.

[Jon Hickman:]

Okay.

[Joe Furnari:]

Yeah. The transportation networks that are delivering people for the most parts, and then you have delivery on the other side. With those partnerships, there's two major players. And we are - we've officially signed with one of those TNCs. I want to - I just want to tease that right now. We're going to put out a real press release and throw some fireworks around it because we've been working towards this partnership for the last 5.5 years. So I'm really excited. We're going to get that done. And hopefully, everybody - everyone is as excited as we are at that point when we announce it.

[Jon Hickman:]

Okay. I'm sorry. I have one more. What do you tell driver lead when you get drivers, you get a lead, and you don't have a car for them. What do you - what happens then?

[Joe Furnari:]

For the most part, they come back in the queue and they're on a drip campaign. From a marketing perspective, we continually retarget. And when cars do come in into that geography, they're getting links directly sent to them. So a pretty sophisticated marketing algo to follow-up with leads that don't get into those cars.

[Operator:]

Thank you. We do have a follow-up question from the line of Mike Grondahl with Northland Securities. Your line is now open.

[Mike Grondahl:]

Hey, Joe, just one last question here. You guys had like 3,700 cars at the end of June. And you're talking about 50,000 in 2025, which is really big. What are the couple biggest impediments to getting to 50,000? Is it financing? Is it partnerships with fleet managers? Is it a TNC partnership? I guess help me understand the biggest impediments to getting there and how you think you're kind of knocking them down?

[Joe Furnari:]

Yeah. Well, it's multifaceted. We talked about three of them, which was the financing to really scale it up or having the capital to scale it up. The ecosystem of vehicle owners, utilizing a consistent playbook to get those cars out. And then a partnership with the TNC to really ramp on the driver supply. I think there are a couple of instances in history - in recent history, in the last 3 years, 4 years, where companies have been able to scale that fast. And I see us now having been able to replicate in a sustainable business model versus some that have come and gone. So we've talked about there in the past that was able to put 20,000 - 18,000 cars on the road in a little under 24 months. Same with exchange leasing was able to put over 20,000 cars on the road in a little under 24 months. So with those - with a TNC partnership, leveraging their marketing dollars to really ramp up and get qualified drivers into the cars and pairing that with capital sources and vehicle owners who are able to supply those cars, it just creates this virtuous cycle that continues to build upon itself. And I see us being at that inflection point right now. And again, that's why we're leaning in with some of the OpEx numbers that you're seeing because we're now seeing all these pieces starting to fall in a place. It's taken us 5.5 years to get there, but we're there. So I'm excited about that.

[Mike Grondahl:]

Great. Thank you, Joe.

[Operator:]

Thank you. There are no further questions. I will now turn the call over to Joe Furnari for closing remarks.

[Joe Furnari:]

Thank you, operator. So thanks to everyone for being on the call and taking the time here. We expect to update you soon on some exciting partnerships as I've teased multiple times here. But these partnerships will allow us to continue to scale cars for the ridesharing and delivery markets exponentially. So we're really the only historical player in the market left to provide safe and reliable cars at this point. So I'm excited for the prospects. So we'll look to update our shareholders regularly on the progress we're making. And most importantly, the details and rollout of everything that we have going in the pipeline. So thanks again, everyone. And look forward to speaking next quarter. Thank you, operator.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.