TrueCar, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Good day and welcome to TrueCar's Fourth Quarter 2020 Financial Results Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Danny Vivier. Please go ahead.

[Danny Vivier:]

Thank you, operator. Hello and welcome to TrueCar's fourth quarter 2020 earnings conference call. Joining me today are Mike Darrow, our President and Chief Executive Officer; and Jantoon Reigersman, our Chief Financial Officer. As a reminder, 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, anticipate, becoming, toward, will, intend, confident, and similar expressions and are not and should not be relied upon as a guarantee of future performance or results.

[Mike Darrow:]

Thank you, Danny and good afternoon everyone. I'm pleased to report that the turnaround story here at TrueCar continues to gain momentum. It's amazing to think that just a short 12 months ago, we were hit by two existential threats at nearly the exact same time; the non-renewal of a major affinity partner in the onset of a global pandemic. Many doubted that we could recover. However, in the face of adversity this organization has a history of rising to the occasion. And yet again I believe today's results speak to that very resilience and to the things you can achieve when a team of exceptionally bright and talented professionals band together in pursuit of a common goal. I'll start my remarks today with a brief review of Q4, a critical quarter that marked the first period following the transition of USAA. I'll then remind everyone of where we're headed as an organization with specific emphasis on where we play in the ongoing digital transformation of the automotive vertical. And finally, I'll close with our key initiatives for 2021 including commentary on our recently announced and highly anticipated partnership with Navy Federal Credit Union. Let's start with Q4, we closed the year with quarterly revenues of $64 million and adjusted EBITDA of $6 million, both metrics coming in well ahead of expectations. More importantly, as I've said before, the fourth quarter underscored the standalone viability of our business model. We operate an asset-light business with high gross margins in and room for meaningful margin expansion.

[Jantoon Reigersman:]

Thank you Mike. Let me start by thanking the entire TrueCar team for so graciously welcoming me and for helping to accelerate the onboarding process into just a few short weeks. I've been so impressed by the depth of talent across all parts of the organization and I'm really excited to partner with you all to build a best-in-class automotive marketplace. I joined TrueCar, because I believe in the vision you've heard Mike articulate. This company has a unique opportunity to be a leading voice in an industry undergoing rapid transformation. The team did an excellent job in 2020, stabilizing the current core business. Most importantly the business is built on a number of competitive moats that I believe are underappreciated. These assets include; one, a strong consumer-focused brand with lots of growth opportunity; two, relationships with over 14,000 franchise and independent dealers as well as a diversified partnership network; three, a healthy balance sheet allowing for strategic investments to further accelerate the business; and four, a talent base eager and ready to lead the industry. From the outside looking in, I saw what I believe to be a significant dislocation between the current value ascribed to this company and its true intrinsic value as measured by its existing assets and its long-term growth potentials, assets that are especially valuable in a rapidly changing industry. Since joining the team, I've become even more convinced in that view and look forward to supporting the business realizing its full potential. I'll now review the financial and operating results for the fourth quarter of 2020. Revenue in the fourth quarter came in at $64 million, down 25% year-over-year. The year-over-year decline was expected. The largest driver being the loss of USAA unit volumes, following the end of the partnership in September of last year. This unit loss is best reflected in our franchise revenue line item, which ended the period at $47.7 million, down 28% year-over-year. Independent and new dealer product revenues were less directly impacted by the USAA transition, and therefore, remained roughly flat to Q3 levels coming in at $9.9 million and $3.3 million respectively. And lastly, OEM revenues ended the period at $2.7 million, down 29% year-over-year but well ahead of the original guidance we had signaled of $1 million to $2 million. These results reflect favorably on our ongoing effort to transition clients onto our TrueCar Military platform. We ended 2020 with 14,383 dealer customers, down just 1.5% from the end of Q3. We saw less churn in the fourth quarter than we had anticipated as dealers continue to lean into digital solutions to capitalize on strong consumer demand. However, new additions and reactivations remain challenged by depressed new car inventory and continued state-level restrictions on retail activity brought on by the pandemic. Total units for the fourth quarter ended just above 166,000, down 33% year-over-year. Truecar.com units, however, were down just 3%, a good outcome, particularly given the 22% drop in branded acquisition spend, which I'll touch on shortly. Monetization for the fourth quarter came in at $382, up 12% compared to the same period last year. We had signaled this increase, which is the result of a large base of subscription revenue that does not immediately readjust with lower unit volumes. While we do expect gradual downward pressure on the monetization over the course of 2021 as we anticipate growth will outpace rate recapture, the fourth quarter results demonstrate how subscription billing hedges against periods of volatility leading to more predictable revenue outcomes. Now turning to expenses and margins for the fourth quarter of 2020, where all of the following metrics are for continuing operations and reported on a non-GAAP basis unless otherwise stated. The business generated $58.9 million of gross profit in Q4, a gross margin of 92% and in line with prior quarters. Technology and development spend of $8.8 million, was in line with the third quarter and down significantly year-over-year as a result of the strategic restructuring effective June 1, 2020. General and administrative spend was $9.5 million in the fourth quarter, up slightly from Q3 but also down materially year-over-year. In 2021, we expect both of these line items to annualize to their current Q4 run rate with typical seasonality pushing a slightly larger portion of the expense into the first quarter of the year. Sales and marketing spend our largest expense category, ended up $34.5 million, down 35% year-over-year. As a percentage of revenue, sales and marketing improved nearly 900 basis points as compared to Q4 of 2019. Within sales and marketing, truecar.com acquisition spend was down 22% year-over-year, ending the quarter at $13.3 million. Despite the significant reduction in spend, truecar.com units were down just 3%, resulting in a cost per sale of $149, 20% below the prior year. We believe much of the efficiency, you're seeing here is a result of ongoing investments in our technology and machine learning algorithms that enable much more effective audience targeting throughout 2020. Our 2021 forecast does contemplate a return to a more competitive marketing environment throughout the year as retail activity continues to recover. Product and marketing spend was $10.1 million in the fourth quarter, down 42% year-over-year due to the removal of USAA revenue share and lower extended affinity unit volumes. As a reminder, going forward much of this line is variable in nature and tied to affinity partner unit performance. Sales headcount and other, the final category within sales and marketing ended the fourth quarter at $11.2 million in line with the prior period and underscoring the positive impact of the strategic restructuring. In summary, though Q4 revenue fell 25% year-over-year significant efficiencies across all categories of our sales and marketing spend drove a 30% reduction in non-GAAP expenses resulting in adjusted EBITDA of $6.1 million or 9.5% of revenue, well ahead of expectations. Much of this can be attributed to flow through from our revenue beat, which was driven by less than expected churn across our dealer network and better than expected OEM revenues. GAAP net loss for the fourth quarter of 2020 was $7.7 million or $0.07 per share compared to a loss of $9.7 million or $0.09 per share in Q4 of 2019. In the fourth quarter, we continued to execute against our share repurchase program, buying a total of 6.9 million shares at an average price of $4.44 for a total of $30.6 million. We continued repurchasing shares in early 2021 deploying a total of 50 million since the program's inception. At this time we do not intend to repurchase shares over and beyond the 50 million already deployed as we believe maintaining a healthy cash position affords the business more flexibility as we look to accelerate against our product road map and strategic opportunities with attractive return on capital deployed. I'd now like to provide commentary on our expectations for 2021. Despite an improved retail environment and indications that widespread vaccinations may precede a broader reopening of the economy later this year, there remains a heightened level of uncertainty. As such, we will not be providing formal full year guidance at this time. However, as we think about the year-over-year comparisons, the first three quarters of 2021 will be complicated by the USAA transition and the impact of the pandemic, specifically the significant drop in unit volumes beginning in March of 2020 and the broad-based subscription discounts provided throughout the second quarter. Given the complexity, we'll be providing a range for our expected revenue performance in the first quarter of this year and we would expect to grow revenue sequentially from there with a bit less sequential improvements from the third to fourth quarter as a result of typical seasonality. For the first quarter of 2021, we expect revenues to be in the range of $60 million to $62 million. As it relates to adjusted EBITDA, it is management's view that accelerating unit growth takes priority over near-term profitability for Q1. However, we expect a healthy adjusted EBITDA for the remainder of the year. We are keenly aware of the marginal unit economics for both truecar.com and extended affinity channels and will deploy ad spend more aggressively to take advantage of improvements to on-site conversion, monetization or customer acquisition cost. And briefly, as Mike mentioned, we recently disclosed through an 8-K the Navy Federal partnership, which we expect to formally announce and launch in March. We'll have a better sense of the near-term impact of this partnership post launch but we're excited about the long-term potential. And with that let's go to questions.

[Operator:]

We will now begin the question-and-answer session. The first question comes from Andrew Boone with JMP Securities. Please go ahead.

[Andrew Boone:]

Hi. Thanks for taking my question. As I think about traffic and its improvement in 4Q – and I understood that was across kind of all channels but I'm assuming the majority of that was TCDC. To that point, as we think about TCDC units, down 3% year-over-year and broadly kind of trailing traffic growth through 2020, how do we think about Deal Builder and digital retailing more broadly improving conversion and I – is there a possibility that units can begin to grow faster than traffic overall? And then on maybe federal that was a really big announcement. Understood, it starts in March and it's still really early there but can you talk about kind of the levers and your ability to grow that to USAA size? And just any details you can provide today on the size of that opportunity? Thank you.

[Mike Darrow:]

Yes. Thank you, Andrew. This is Mike. Thank you for the question. Regarding the TCDC unit growth or situation for Q4, down 3%. It was driven some by the macro elements of what's going on out there with new car inventory. Some of our retail partners, big retail partners reported their Q4 unit numbers not too dissimilar from what we saw in TCDC. So we're excited to see the traffic's up. We're working on moving Deal Builder deeper and deeper across the site. We're excited by the data we've seen from Deal Builder. And the early signs are we'll have a positive – certainly having a positive impact on conversion rate and also NPS, which are both really key signs for us in executing that product. It exists now post prospect on truecar.com. So I mentioned some of the steps we're going to take to push it out across our site into our marketplaces on new and used cars and then across our affinity partner network. So we're excited about the early data we're seeing for Deal Builder around conversion and we definitely think, it will be one of the tools we can use to grow conversion in 2021. Regarding Navy Federal we were really excited to make that announcement. You'll see us do more and more PR around that as we get closer to the launch as we want to be respectful to the transition of their current channel. But the size and member affinity to that brand are similar to what we saw at USAA. So we're excited about the ability to grow that channel. We think we can take all the learnings from our long-standing relationship with USAA and begin to implement tactics to grow that channel very quickly. How -- exactly how fast that will happen is a little bit hard to say, but it certainly has the capabilities of being of equal size. And remember we've also launched our military channel, which we can work in tandem with that to continue to reach into that audience. So we're excited. We'll -- we're looking forward to the launch in early March. And then I think you'll see us spend a lot of energy against that relationship doing everything we can to grow it.

[Andrew Boone:]

Great. Thank you.

[Operator:]

The next question comes from Steve Dyer with Craig-Hallum. Please go ahead.

[Steve Dyer:]

Thanks. Good afternoon, guys. A couple for me. First just looking at your dealer churn in Q4 over Q3, I guess, I would have expected that to stabilize if not actually add net dealers in Q4 as the inventory situation improved following the COVID shutdowns early in the year. Did you see something different? Or were you surprised? And would you expect that you'd be net dealer adds here Q1?

[Mike Darrow:]

Yes. Thanks Steve for the question. I think the churn situation on our dealer network is certainly under control. We were unsure what to expect in Q4 from dealer churn being our first quarter without USAA. And at 1.5% we were glad to see it stabilize. Part of our efforts there will be to begin to bring on new dealers onto our platform. We spent much of Q3 and Q4 getting our Deal Builder tool set out across our existing network and using our sales team to do that. So you'll see us shift our focus a bit. The churn numbers are at a very manageable level and we'll start to add new dealers specifically with the announcement of USAA -- or I mean with Navy Federal as a new partner we expect that new dealer add number to grow quickly. So we do plan to get back to dealer growth in 2021.

[Steve Dyer:]

Yes. Okay. And then over the last I think a couple of quarters we've seen a lot of the automotive OEMs announce some of their own sort of homegrown digital retailing solutions be it new or used. Do you have a viewpoint on that? I think there's been probably a half dozen of them or so. Is your view there sort of trying to cut out the middleman so to speak? Or can you work in tandem? Or what's sort of your thoughts about that?

[Mike Darrow:]

Well, many of the digital retailing capabilities you talked about on the OEM side are the same ones that are working at the dealer level to build out the dealer capability. So we're in conversations with all those software providers. We think our ability to integrate with them is going to be key to our success as we go forward. There's a growing percentage of folks who are saying they want to go end-to-end, but the large majority of shoppers want to just bring more of the transaction online in a digital way and then transition to completing the deal at the dealership. So we're working with all the providers. There's a lot of really good software out there. And the key to that integration is the data. And because we are working deeply with our partners on Deal Builder on getting their pricing data, their financing data and all the data we need we think integration into the dealer platforms and the OEM platforms in some extent if that evolves into something bigger will be something that's very easy for us. So we're staying close to the software providers out there. There's a lot of good tools being developed. And we think what dealers will quickly turn to once they've made their choices is how do they fill those new systems up with traffic. And we think we can be the key player as a third-party marketplace to feed those new systems with buyers who are partway through the journey and then can be connected into the dealership to finish it out in a very efficient way.

[Steve Dyer:]

Got it. Okay. And then lastly for me and I'll toss it back in the queue, as it relates to your balance sheet, it's obviously substantial. You bought back a little bit of stock. It sounds like you're putting the brakes on that. What are sort of the thoughts going forward with that balance sheet in terms of reigniting growth? I mean, is it technology? Where do you sort of look to put that money?

[Jantoon Reigersman:]

Hi Steve. It's Jantoon. I think it's all of the above. Really it's the optionality that we have. I think the balance sheet is a strong balance sheet. The company has a lot of opportunities going forward both internally and potentially and externally. And so our ability to deploy that capital efficiently is -- we have various opportunities. And obviously, as we're moving towards that greater completer end-to-end experience, there are obviously various opportunities to innovate and we can do this in various ways. So we'll utilize that cash to that extent.

[Steve Dyer:]

Okay. Thank you.

[Operator:]

The next question comes from Nick Jones with Citi. Please go ahead.

[Nick Jones:]

Great. Thanks. I guess, two for me. One, what percent of dealers -- or what kind of disclosure do you give on the dealers that are really engaging with kind of digitizing their business, performing a bigger piece of the transaction online maybe all of it online? And then the follow-up is really just on -- I think you gave a percentage of what kind of consumer engagement you're seeing with Deal Builder. Could you expand a little bit on the kind of engagement you're seeing with that product launch? Thanks.

[Mike Darrow:]

Yes. Thanks Nick and I'll start with that question. We've seen a major shift and a major acceleration from the dealer perspective on digital retailing and the processes they need to put in place. And that was one of the residual effects of the COVID pandemic. There was certainly acceleration that went on there. And I think as dealers begin to experiment with the digital retailing platforms, they saw that many of the fears they had prior to implementation were dealt with in a very efficient way regarding protection of gross and those type of things. So there's a very high -- very different percentage post COVID than pre-COVID. And I think the data shows probably 70% to 80% of dealers are leaning into digital retailing. I could tell you from a personal perspective, we just recently had our dealer advisory board together, and we asked them what percent of them were heavily invested and heavily leaning into digital retailing. A meeting ago when we asked that question, the number came in at about 60%. And the last meeting, which was just recent it was 100% of the dealers. So dealers are very quickly gravitating to these software systems that are out there. They're seeing efficiency in their dealerships and improvement in their customer satisfaction numbers. So I think you'll continue to see that grow. We've been continuing to work to get our Deal Builder capabilities out across our network. I think the last time we chatted we were at 50%. I believe the number now is approaching 80% or above of our dealers of -- who are using our -- franchise dealers who are using our Deal Builder capabilities. So that's important to us. We didn't charge dealers for it. We wanted to get it out there and mass adoption and get it out there so that we could launch Deal Builder on the site. So the dealers have embraced us and get it launched and they're encouraged by the results they're seeing that we've mentioned. So we think those numbers will stay very, very high from a penetration point of view.

[Nick Jones:]

Great. Thank you.

[Operator:]

The next question comes from Rajat Gupta with JPMorgan. Please go ahead.

[Rajat Gupta:]

Hey, good afternoon. Good evening. Thanks for taking my questions. I just had the first one on the first quarter EBITDA guidance. I mean, you had $6 million in EBITDA in the fourth quarter. And that kind of excludes the USAA more of a baseline number to work off of. You talked about some additional expenses here in the first quarter and seasonality. But as we think through the rest of the year in terms of what you're expecting from a revenue progression and an EBITDA progression perspective from a margin perspective like should we think about the $6 million in the fourth quarter as like a base run rate in an annualized way? Or are expenses going to outgrow to an extent that we might be somewhere below that? I just wanted some clarification of that. And I have a follow-up. Thanks.

[Jantoon Reigersman:]

Sure. Let me -- thanks for the question. So let me start with the four -- so Q1 to Q4 -- so Q4 to Q1 you effectively have a sequential decline consistent with like typical seasonality, so it's number one. And if you then think about your expenses being variable and fixed right then fixed really in Q1 you have -- you can anticipate a little bit of an increased annual reset and non-recurring benefits that you have in your first part. But really Q4 is probably a good run rate for your fixed costs throughout the year. And so -- and then really the variable element is the part that we're going to be a little bit more flexible on. There's obviously a lot of opportunity for us to invest in the business, even though adjusted EBITDA is really important to us. We're also coming out of a rapidly changing year and we want to maintain flexibility to accelerate the business and opportunities that we see prevailing around us. So I think the answer is that the business is a healthy business. We're pursuing healthy adjusted EBITDAs, but we're also feeling that there are plenty of opportunities to invest number one. And then I would argue for a fixed cost base Q4 is probably the right run rate to assume for the remainder of the year.

[Rajat Gupta:]

Got it. And just as a follow-up to that, can you remind us like what's the mix today fixed versus variable like based on the restructuring you have done so far?

[Jantoon Reigersman:]

Well I would argue that probably the largest part of the variable is sales and marketing.

[Rajat Gupta:]

Got it. Okay.

[Danny Vivier:]

Yeah. Rajat, this is Danny. And I can quickly clarify on that. The two line items that you could think of as primarily variable would be the truecar.com acquisition spend and the partner marketing both of which we disclosed and you can use those more on the variable side.

[Rajat Gupta:]

Got it. Got it. Okay. That's very helpful. And just on the capital deployment with the cash on hand just to follow up to one of the previous questions one of your competitors recently made an acquisition in the online wholesale space. Is that something or something along those lines would be of interest to TrueCar? Would you be looking to get into that kind of adjacency? Or it's going to be more in and around like the current business profile? That will be all. Thank you.

[Mike Darrow:]

Thanks for the question, Rajat. Rajat, this is Mike. Regarding the potential investment opportunities, we kind of got a jump on our competitors with two of the investments we made back in 2018 around DealerScience and our Accu-Trade investment which we've been working on for two years kind of enabled us to get to where we are today. And as we look out over the horizon, I think we'll keep a keen focus on enhancing our consumer capabilities and accelerating our opportunity to get to a complete end-to-end solution on truecar.com. And there's a number of areas you can look at in the work, we have yet to do around financing, insurance and those sort of things. So we'll look out across the industry and be selective, but we want to keep an eye towards acceleration. And if those opportunities are out there we'll be aggressive and make moves like we did with DealerScience and Accu-Trade back in 2018.

[Rajat Gupta:]

Got it. Okay. That’s super helpful. Thanks and good luck.

[Jantoon Reigersman:]

And I just want to add one thing. We just like -- remember also we're very disciplined as an organization so this will be -- focus on return on capital for us, is a very important element. So we're very patient operators at the end of the day for the business. So I just want to make sure that everybody is aware of that as well.

[Rajat Gupta:]

Fair enough. Thank you.

[Operator:]

Next question comes from Marvin Fong with BTIG. Please go ahead.

[Marvin Fong:]

Great. Thanks for taking my questions and welcome Jantoon. Congratulations on your new role. So a lot of my questions have already been covered. I guess a couple still remain though. So on OEM incentives, nice to see that come in ahead of your expectations. Just curious how we should think about that going forward, I think you had indicated that USAA had caused some of the OEMs to step back yet, now we have Navy Federal to look forward to. But we also have a chip shortage hurting new car production. Just thought -- if you could shed in a lot on your thoughts about that that would be great? And then follow-up question just on the search -- or not -- sorry your web traffic. Could you just talk about how that trended within the new car -- within the TrueCar channel? Sorry if I missed that. And then just talk about how organic search traffic has been performing of late that would be great? Thanks.

[Mike Darrow:]

Yes. Thank you, Marvin. And I'll start with the first question. And we -- I'm sorry hold on minute. I'm sorry Marvin I dropped there for a minute. Just connecting back -- remind me on your first question again I'm sorry.

[Marvin Fong:]

Yes. So just thoughts on how we should think about OEM incentive for the -- for 2021?

[Mike Darrow:]

Yes. The OEM business we did see good signals from it in Q4 and a lot of that was driven by the OEMs embracing our military channel the truecar.com piece of that that we launched in May and we brought a number of our OEM partners over there. If you look on our site right now we have 11 different brands with FCA and all of their brands Audi and BMW. And I think we mentioned on one of our last calls, USAA was a fairly heavy percentage up to about 60% of our OEM revenue in 2019. So I can tell you our OEM partners are extremely excited about our new deal with Navy Federal. They're looking forward to that platform because they understand the similarities. And I don't think that the chip issue will affect the OEM spend in the military category. They're pretty committed to providing discounts to that segment and have been real supportive of our efforts there. The chip shortage as it drags out could affect, I think mass market incentives probably more specifically than some of the things you see the OEMs doing with us where they get very targeted around military or conquest or some of those things. So we're hoping for the OEMs to -- suppliers to get caught up on the chips and inventory levels in general get back to their levels. But we haven't really seen an impact on our military. And the OEMs have been leaning into TrueCar Military since we launched. And like I say they're very excited to see our Navy Federal Credit Union channel launch. And I think you'll see many of them move over to that channel. So we're looking for some real good opportunities with the OEMs in 2021 for sure.

[Marvin Fong:]

That’s great. Thanks so much.

[Jantoon Reigersman:]

Yes. And Marvin, I can answer your second question on the traffic. So long story short, we anticipate significant growth traffic growth in 2021. Yes there was a slight dip in -- effectively in the October/November timeframe, but that was really impacted because of the prolonged election season. So January seems to have already bounced back. Also remember USAA is not necessarily a large traffic contributor. So really the traffic you see in the past obviously mostly comes from our original two channels in truecar.com and extended affinity. Both -- obviously, growth in both channels is our top priority. And although, traffic is important, remember that units, effectively, is what drives our business. So it's always a focus of us. And, obviously, we're making structural improvements on traffic acquisitions, as we already discussed in our other remarks as well. But, long story short, I think, we have ample opportunity in both channels.

[Marvin Fong:]

That’s great. Thanks, Jantoon. Appreciate that.

[Operator:]

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

[Jantoon Reigersman:]

Mike, before -- this is Jantoon. Before I give the word to Mike, I just wanted to highlight one thing that came up as a separate question at some point, which is a question around the considered continued -- the discontinued operations in Q4 and the words around that. Basically, the discontinued operations represent the operating results for ALG through the sale date of 11/30/2020, plus the gain we recognized on the sale of ALG. So I just wanted to make sure that that's clarified as a clarification to our release earlier today. So I'll give the word to Mike.

[Mike Darrow:]

Thanks for that, Jantoon. And thanks again everyone for joining the call today. We're really excited about the momentum that we're building and we're thrilled to have your support through this process and we look forward to speaking to all of you again soon. So thanks, again, and look forward to chatting.

[Operator:]

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