TrueCar, Inc.
Q2 2018 Earnings Call Transcript

Published: 10 Aug 2018

[Operator:]

Greetings, and welcome to the TrueCar Second Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alison Sternberg. Thank you, you may begin.

[Alison Sternberg:]

Thank you, operator. Hello, and welcome to TrueCar's Second Quarter 2018 Earnings Conference Call. Joining me today are Chip Perry, President and Chief Executive Officer; and John Pierantoni, Interim Chief Financial Officer. As a reminder, we will be making forward-looking statements on this call, including, but not limited to, statements regarding our guidance or outlook for the third quarter and full year 2018, including revenue growth in the fourth quarter of 2018, for 2019 and in the longer term; management's beliefs and expectations as to future strategies, planned product offerings and marketing campaigns; our ability to bring the USAA channel to double-digit unit growth in the second half of 2018; our ability to expand or penetration of our expanded affinity partner audiences and to continue double-digit unit growth in this space. Our ability to increase growth in our core dealer business, including our efforts to align pricing and grow our dealer base, our expand unit monetization, our ability to rapidly scale our OEM business and achieve OEM revenue growth targets, the timing and expansion of TrueCar Trade, its dealer network, customer base and revenue contribution, market coverage and product features, completion of our technology replatforming initiatives, its timing and impact on conversion rates and engagement and our ability to introduce new product innovation , our ability to improve and build out our consumer experience and the timing of rolling out these concepts and the outcome of outstanding litigations. These forward-looking statements are not and should not be relied upon as guarantees of future performance or results. Actual results could differ materially from those contemplated by our forward-looking statements. We caution you to review the Risk Factors section of our annual report on Form 10-K for 2017 and our quarterly report on Form 10-Q for the first and second quarters of 2018 filed with the SEC for a discussion of the factors that could cause our results to differ materially. The forward-looking statements 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 statement except as required by law. In addition, we will also discuss GAAP and certain non-GAAP financial measures. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measures are set forth in the Investor Relations section of our website at true.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. Now, I will turn the call over to Chip.

[Chip Perry:]

Thank you, Alison, and good afternoon, everyone. TrueCar continues to build momentum across all of the key components of our 2018 plan with record results in the second quarter that are in-line with our guidance. Our execution to-date sets up to continue to perform against each of our key strategies in the back half of the year, are marking solid double-digit top line second half growth. As such we are reaffirming our revenue and EBITDA guidance to the year. We continue to be laser focused on implementing the changes in our business that will enable us to return to a 20% growth rate next year. We expect this growth to flow from our upcoming powerful new consumer experience supported by larger marketing spend, the accelerating growth of our trade in OEM product and the ongoing expansion of our dealers network. We continue to see OEM and dealer new car marketing dollars shifting toward our platform which has allowed us to generate significant growth in OEM revenue and reach a record 4.9% retail market share of new unit, representing a 6% year-over-year gain despite continued softness in the start. We believe this makes TrueCar a number one leader for new car sales amongst third-party players. John will give you more detail on the financial and operating metrics later in the call, but I would like now to dig into the progress we saw in the second quarter and how we plan to continue to make traction across each of these strategies for the remainder of the year. And we begin with an update on USAA and our broader affinity partner channel. One of our primary areas of focus coming out of 2017 was the level of unit volume coming from larges affinity partner USAA. As you will recall units in our USAA channel started to show improvement at the end of the fourth quarter 2017, and into Q1 of 2018. I'm pleased to report that were seeing this trend continued into the second quarter, while units in the overall quarter were down 5% year-over-year and flat to Q1, in June year-over-year unit volume improved to down 2%. This recovery was driven by continued sight improvements that made USA car buying experience easier for members to access as well as by marketing support from this important partner. The USA channel continues to recover and we remain on-track to see double-digit unit growth in the last two quarters of the year. We look forward to continuing to partner with USAA and support of their mission to serve the military community and their family. Turning to our extended partner channel. Extended affinity partner channel, showed strong performance in the quarter with unit growth at 18% year-over-year during by the expansion of high growth partners and our membership finance and publisher segment. As we referenced in our prior call, our focus is on the digital activation of member basis. We believe there are significant potential to deeply penetrate these partner audiences through multiple tactics, including the continued expansion of our OEM product offering. Even though we face tough year-over-year comparison, in the next two quarters, we expect strong continued double-digit unit growth in our extended affinity partner channel. It's important to note that the reach of our affinity partner network is significantly greater than unique visitors, we publicly report. In fact our affinity partners serve over 300 million members in America and the TrueCar, new car buying experience is exclusively delivered in all of their online portal, giving us massive reach into this audience. Now, turning to more detail across our key initiatives for the year. Our first key initiative is dealer revenue growth and monetization. Over the course of our last two quarters we have highlighted growing our core dealer business to investments focused on three key go-to-market strategy, designed to balance network growth while maintaining strong rate integrity, specifically. First, aligning pricing with the value we have been delivering based on our unique closed loop attribution model. Second, further enhancing our dealer acquisition strategy to strategically fill coverage gaps across the network and third, rolling out a new strategy around independent dealers designed to grow our independent dealer base and increased used car inventory. As we have executed across these three strategies, we are pleased with our progress to-date. Dealer account and together reaccelerates reaching at all time high of 15,534 dealers as of the end of the second quarter. We have seen an improvement to franchise via monetization or 5% year-over-year. A more surgical approach to renewals in the most recent quarter has yielded a 5% increase in revenue for franchise dealer year-over-year and sequential reduction in dealer turn. Our ability to simultaneously grow dealer count, and revenue per dealer highlights the strength of our value proposition. This shift and our independent dealer strategy has led to an increase in growth edition, specifically with small to midsize independent dealers. This strategy is designed to diversify our inventory to better meet consumer shopping need. As you heard me say before, achieving market leadership requires a superior value proposition for both side of the marketplace, means consumer demand side and the dealer and OEM supply side. Our unique new car pricing transparency is the current centerpiece of our consumer value proposition, which we believe gives us a durable competitive advantage and a key point of leverage for building out our upcoming end-to-end consumer experience. On the dealer side of the marketplace, our strong dealer coverage enabled us to provide a better experience to our growing consumer base and create capacity to absorb traffic growth through efficient marketing efforts. Our second key initiative is OEM. As we have said on earlier calls, we believe our efficient success based attribution model is growing an appeal to OEM relative to the traditional impression based display ad model. Our capabilities to deliver OEM incentive offers behind registration walls in ways that help OEMs avoid and residual value dilution is truly unique in the industry. In Q2, OEM incentive revenue, were $7.9 million an increase of 1% over Q2 of last year. Excluding isolated non repeatable revenue in Q2 of 2017 of approximately 3.7 million, our OEM incentive revenue increased 91% year-over-year in Q2, driven by addition of new OEM program and the expansion of existing OEM program. We continue to expand our business with our existing long-term OEM clients through ongoing marketing optimization and deeper extended partner penetration and activation. Additionally, the large scale OEM program announced on last quarter call remains in place and is now joined by another new major OEM who tested our platform in Q4 2017. We are very pleased with the growth of our OEM business as we are on-track to build revenue by more than 85% year-over-year in the second half of 2018 and we remain confident that OEM revenue is on track to experience over 30% growth for the full-year. Our third key initiative is our national rollout of trade. We continue to see positive momentum with our exciting new TrueCar trade products. As we rollout this offering nationwide, we are introducing a new form of transparency and liquidity into one of the greatest sources of consumer dissatisfaction with the car buying process, which is the trading component of the deal. Our product provides market leading transparency and competitively differentiated valuation insight through a dynamic interface backed by the third-party credibility of the TrueCar brand. This product address a major unmet need in the industry and history has shown that truly sustainable growth on our industry flows from meeting unmet needs not from just tweaking established value prepositions and business model. To-date we have over 450 dealers activated or in on-boarding and we are well on our way our year-end target of approximately 1,000 dealers on the trade program. We have activated over 30 markets from coast-to-coast including New York, Los Angeles, Chicago, San Francisco among others. The current footprint of active markets represents regions, comprising more than half of the population of the United States meaning this product is off to the rate. We expect to continue to aggressively activate new additional markets over the next two quarters, as we move towards growing out a nationwide marketing campaign for our trade product early next year. Recall, that we expect to generate small single-digit million dollar revenue from this product this year. But this starting point is the foundation for our larger customer base and a much more significant revenue contribution in 2019. Trade is also a vital elements of our upcoming end-to-end shopping to show on consumer experience, because we provides upfront transactional component that is needed to calculate accurate monthly payment. Our fourth key initiative is Capsella. In Q2, we continued making significant progress on our re-platforming effort and we remain confident that we will finish this project by the end of the year. While the priority for the second half of the year remains focused on the completion of Capsella. We are also beginning to test components of our new consumer experience which we expect to launch in 2019. We anticipate that these product innovation to unlock higher conversion rate and stronger consumer engagement with dealers. It will also enables to further build out the major component of our end-to-end experience, including our new upper funnel research and discovered product and our market differentiated digital retailing tool in our post prospect experience. In closing, as you can see we continue to make good progress across the key initiatives we set forth for 2018, and we expect to exit 2018 with a strong double-digit top-line growth rates. With continued focus on the strategic expansion of our dealer network, the completion of Capsella before rollout of trade and continued growth in our OEM business. We believe we are well positioned to achieve healthy 20% growth rates in 2019. And we will have created a foundation for building what we expect will be the industry's only true end-to-end online shopping to show an experience. I’m now going to hand it over to John to walk you through the numbers and discussed our financial performance in more detail.

[John Pierantoni:]

Thank you Chip and good afternoon everyone. Revenue in the second quarter of 2018 totaled $87.9 million up 7% over last year. This is in-line with our revenue guidance $87 million to $89 million. Revenue from franchise dealer, totaled $66.5 million which is up 8% over Q2 of last year. During the quarter we gain traction with our dealer go-to-market strategies that Chip described earlier and sequentially franchise dealer count increased by 163 dealer to 12,368. In addition, monthly revenue for franchise dealer was $1,803 in the quarter, increasing 5% year-over-year and 4% sequentially. We also gained momentum in our independent dealer channel. Revenue from our independent was $8.8 million in the quarter of 10% over last year. Independent dealer count was up 11% year-over-year to 3,166 dealerships and it is increased by 5% or 160 dealer sequentially. Monthly revenue for independent dealer remains flat year-over-year at $951. This represented a 3% sequential decrease, which is very much in-line with our strategy of pursuing smaller dealers to further build out our independent dealer base and improve our consumer experience with increased new car inventory. OEM incentive revenue was $7.9 million Q2, slightly up from last year. If you exclude the non repeatable business that Chip referred to earlier Our OEM business grew by 91% year-over-year and finally forecasts consulting and other revenue was $4.7 million in the quarter. Also up slightly from last year, Units in the quarter totaled 250,269, up 3% year-over-year, which is above our unit guide of 243,000 to 248,000. Breaking it down, in our TrueCar branded channel, we generated 97,777 units down 2% year-over-year. In our extended partner business, we achieved 83,932 units, which was up 18% year-over-year. And in or use USAA channel we produced 68,560 units, which was down 5% year-over-year. As for the new use mix, we noted a mix of 68.75 new and 31.3% used in Q2 of 2018 and as compared to 68.3% new and 31.7% used this time last year. Monetization also experienced positive trends, hitting $333 per unit in Q2 of 2018, which is up 4% from $319 last year. This increase was driven by improvements in our service delivery and are focus on price optimization across the franchise dealer network. Now turning to expenses and margins, where we demonstrating operating efficiencies in most of our expense categories and profit measures. As a reminder, all of the following metrics are on a non-GAAP basis, unless otherwise stated. Gross profit in Q2, of 2018 was $80.5 million, which is up 7.5% from last year and gross margin was 91.7% in Q2 of 2018 up for 91.6% last year. Technology and product expenses totaled $13 million which increased by 4% year-over-year, but was lower by 50 basis point as a percentage of revenue. Were free to show operating leverage in this area even as we continue to invest in our technology re-platforming initiatives. Sales and marketing expenses were $48.5 million or 55.2% of revenue in Q2 of 18, as compared to $44.8 million or 54.7% of revenue last year. Breaking it down further, in our TrueCar-branded channel, we spent $15.1 on customer acquisition cost as compared to $15.6 million last year. Our branded channel cost of sales declined by 2% from $157 per unit in Q2 last year to $154 per unit this year. In our partner channel marketing expense totaled $15.6 million as compared to $12 million this time last year. Our affinity partner cost per sale increased 22% year-over-year from $84 to $102 per year unit. This increase was primarily driven by three things. One, increased revenue shares due to growth in our extended partner channel. Two, increase revenue share related to our OEM business, and three increased digital marketing expense with some of our high growth partners. We continue to invest in these high opportunity partners, which helps lay the foundation for expanded monetization with the introduction of the trade and OEM initiatives. Finally, sales and marketing leaders headcount and other costs was $17.8 million, up from $17.2 million last year. G&A expenses totaled $10.3 million or 11.8% of revenue in Q2 of 18. We continue to see operating efficiency in G&A, where we reduced our spend as a percentage of revenue by 70 basis points year-over-year. Adjusted EBITDA for the second quarter of 2018 was $8.7 million or 9.9% of revenue as compared to $7.4 million or 9% of revenue last year. This was at the high end of our adjusted EBITDA guidance range of $8 million to $9 million. The non-cash expense guidance excluded the mix quarter's adjusted EBITDA through a depreciation and amortization of $5.6 million, stock-based comp of $9 million and $0.9 million of certain litigation cost. GAAP net loss for the quarter was $6.6 million or a net loss of $0.07 per share, this compares to a GAAP net loss of $8.1 million, or a net loss of $0.09 per share this time last year. Our non-GAAP net income for the quarter was $3.2 million or $0.03 cents per share which compares to non-GAAP net income of $1.1 million or $0.01 per share last year. And on our balance sheet, we continue to maintain strong cash balances, which totaled $198 million at the end of quarter. And now turning to guidance, where we are reaffirming our full-year guidance for revenue and adjusted EBITDA as follows. Annual revenue is estimated at the range of $360 million to $365 million and adjusted EBITDA is estimated as a range of $36 million to $40 million. As per unit, you will see that we are tightening our annual unit range to a 130,000 to 140,000 units. As we continue to unlock additional revenue opportunities on OEM and trade [Indiscernible] recordable units to our dealer network improvements in our per-unit monetization will play a stronger role in driving our future revenue and EBITDA growth. And for the third quarter of 2018, we expect units to be in the range of 274,000 to 279,000 which represents 9% year-over-year growth at the midpoint of the range. Breaking it down by channel, we expect the USAA channel to achieve double-digit unit growth as this channel regains momentum with user experience improvements from the product changes they made last year. Our extended partner channel is expected to maintain double digit unit growth driven by our high growth partners in our membership, finance and publisher segment and our TrueCar branded channel is expected to be flat year-over-year as we continue to hold our acquisition spend steady. Revenue in the third quarter is expected to be in the range is $93 million to $95 million which represents 14% growth at the midpoint of the range. A couple of areas to highlight includes our OEM business where we are excited that our revenue is expected to almost double from prior year. Additionally, we are also very positive about the national rollout our trading business, where we estimate approximately $1 million of revenue in the third quarter. Finally Adjusted EBITDA is expected to be in the range of $10 million to $11 million or 11.2% EBITDA margin at the midpoint of the range. As we looked to the back half of the year, we acknowledged that our projected growth in the fourth quarter is higher than that of the third with nearly 20% year-over-year revenue growth in Q4. We believe we have the resources and strategies in place to achieve these results and inside the Company, I can't tell you how excited we are about our opportunity to build a strong foundation for 20% growth in 2019. And now, we will open it up to questions.

[Operator:]

Great, thank you. [Operator Instructions] Our first question is from Mark Mahaney from RBC capital markets. Please go ahead.

[Mark Mahaney:]

On why traffic growth accelerated in the quarter in the June quarter to 8% and then one negative question, it looks like you are trimming down your unit growth expectations for the full-year. It looks like you just trimmed down by 10,000 I think that’s right the high end of your guidance just explain that. And then Chip, could you just a little bit more - the powerful new consumer experience. I know I have heard you talk a little bit about what you are trying to solve for in the past or in the past, or do you try to solve for? Could you just explain a little bit more how a consumer coming to TrueCar. What differences they would notice and how is this going to be better for them starting next year? Thank you.

[Chip Perry:]

Sure. Thank you Mark. Let me start with the consumer experience and then John will comment on guidance. So I will call it for new consumer experience, is based upon our understanding of what causes consumers to not want to register with TrueCar and fully experience all the benefits of being a registered user in a marketplace. Today after people register, they have a chance to see up front transparent pricing offers from dealers to the presented in the context at the individual car arrival compared directly with what other people pay for the car. So they answered the question for the consumer, with the offer a good price offer from the dealer. In order to receive this information consumers have to register. Before that point, they are able to see market based pricing information that helps them understand overall market context of what other people paying for cars including the market average price of the care they have been purchasing. With this stage of our understanding of how consumers look at TrueCar and to the point that that we now know that the consumers, who pursued our true experience are quite delighted with the information you receive in TrueCar and experience may get at the dealership. We see that it's very high net promoter scores of consumers to pursue all the way to our experience and buy a cars from a certified TrueCar dealer. And experience is what truly differentiates TrueCar from other third-parties which are more purely informational sites. To-date consumer has resisted and many consumer have resisted registration, because they are concerned about what happens after they provide their name to our marketplace. There is a considerable consumer end about how they are pursued by car dealers post registration. So we are working on - it's a new user experience which we will launch post Capsella, with tacking with new user experience in the second half of the year in selected cities across America, but what we will essentially enable consumers to do is that more control over the when their name is transmitted to the dealership through the TrueCar. They will still after registration be able to see the significant attractive upfront new car pricing information, but they have more control over how their name gets submitted to the dealership. We believe that making this change will result in a significant drive in our registration rate. Today our blended average registration rate is about 6%, so 94% of consumers who encountered the TrueCar marketplace leave without registering. We believe there is a tremendous opportunity to growth that percentage, because we know that TrueCar already serves a very large share of the new car buyer market. Our accountability to the power survey, TrueCar catches - our experience a use by more than half of new car buyers in America, so we believe there is a great opportunity here to improve the flow through in our marketplace and to enable many more consumers to get a great experience when they buy a car after they registered in our system. So that new dealers experience will focus on that, it will also provide many other improvements around the kinds of engagement post registration information that provide consumers how useful and relevant the updates we give them are as well as linking them to more relevant inventory about their car more quickly. And then beyond that post Capsella, we will be significantly improving the research and discovery part of the consumer buying process through our at the funnel our research and shopping tools [indiscernible] in 2019. So when I talk about our power from a consumer experience it includes all those things. Thank you for asking Mark.

[John Pierantoni:]

And Mark in response to your question, so first one in regards to traffic growth of 8% for the second quarter. Growth is driven largely by the extended partner channel, we are updating the in the teens. We have a little bit of softness in the USAA as that channel recovers and the TrueCar channel is up single-digit. As it relates to the unit guide, we did taken a range by 10,000 units we have got the top end down, we maintain the bottom end of the range. No particular weakness in any of the channels, what we are seeing is a greater extent of our revenue is coming from the OEM and impart some of the trade business and those are the changes don’t necessarily come with units that go through the other buying platform. And that is the reason for that.

[Mark Mahaney:]

Okay. Thank you both.

[Operator:]

Our next question from [indiscernible] from Goldman Sachs. Please go ahead.

[Unidentified Analyst:]

Okay. Thank you very much. Two questions if I could. First, it sounds like you are very much on track to finish Capsella by the end of the year. So how should we be thinking about you investing in marketing at that point to drive top performance. I think you have already guided to margin expansion in 2019, but as conversion improves post Capsella, does it make sense to push a bit more and marketing to reaccelerate unit growth? And then just a second question, I think for units in the TrueCar channel, I think if I have this right, they were down slightly year-one-year, you are showing nice recovery in units for USAA and other partners, but maybe you can talk a bit about what is driving this slow down in units for TrueCar.com, is it traffic conversion or something else. Thank you.

[Chip Perry:]

Thank you. So, yes post Capsella we will have a more productive user funnel, that will enable us to lean more heavily in the marketing, we have signal to do that. better user experience and strong rate conversion and close rates, so that would able through productively to play in the marketing dollars. In addition, next year we will have higher OEM and trade revenues, which will help us expand our unit monetization leading to even stronger and more positive unit economics than we have currently, which will also facilitate a higher marketing budget. So beside from real good position and [indiscernible] are poised to move forward into 2019, with a much stronger product, deal by our larger marketing budget with positive economics which will be a strong element of the Company’s growth next year. As it relates to TrueCar unit this year, we continue to moderate and hold steady our marketing spend in that channel. It’s all according to plan, we are taking that incremental revenues this year and investing in our dealer and product team, so that we can build up the strength around our product and our dealer organization, so we can capitalize on in 2019. So this is pure a short-term tactical decision, we bring this category on that, stronger marketing investments and we are excited about doing that in the future and we believe we will be well positioned economically to throw more coals on the fire marketing wise next year.

[Unidentified Analyst:]

Okay, thank you Chip.

[Operator:]

Our next question is from Ron Josey from JMP Securities. Please go ahead.

[Ron Josey:]

Great, thanks for taking the question. I have two please. First on just incentives, just following up on your incentive results here and specifically with Nissan live, I believe on May1st and across TrueCar.com and all affiliates. Could you just talk about the benefits of being live across the True network and whether the new partner that you announced as coming on, will they have a similar experiencing live across the network? I think your new partner, any insight there would be helpful and wondering why guidance maybe didn't increase here if it is one of the big six and then I have a follow-up after that.

[Chip Perry:]

Sure, thank you Ron. So, Nissan is participating across our network and on some of our selected affinity partners, not all, but they are having good results and they are giving us positive feedback. So we are excited about continuing to work with them. The other OEM that joined us in the presuming of the third quarter just now recently joined us is Ford. In the Texas in the first quarter of last year and they are excited to rejoin and they are initiating their presence within our marketplace and USAA platform, so we are excited about bringing them on and are hopeful that like other OEMs overtime they would broaden their involvement with TrueCar. I would like to say that we are going to be reporting last granular detail of revenue by - into this OEMs going forward, but I would likely to know that there are the factors that are [three or four] (Ph) factors involved in the high growth category growth and then when OEMs come on which facilities also achieves to grow. Second the number of partners that they actually participate with. Third, the extent to which they are using the TrueCar platform and remember brand they are choosing to conquest across the TrueCar platform. These are the factors that determines the variability of this revenue stream and the Fourth one is the size of the intensive offers vary by month by OEM. So we are very excited that between the beginning of the year and the end of the year we have seen dramatic growth in this category when we exclude the one time unrepeatable revenues that we have with this one major OEM in the first half of 2017 which means a doubling of this business year-over-year. In fact we have seen significant growth in the one OEM that have the issue they caused us to show the decline in revenue between 2Q and 3Q of last year. So this growth excitement of our business comes to what I said in the remarks, which was that OEMs really in are excited, are interested in learning more about how does an exploit the capability deliver efficiently deliver incentive office behind registration through the TrueCar network, but on our branded channel as well as our affinity partner channels. You had another question.

[Ron Josey:]

I did. Just on USAA, I was just on not too long ago noticed a complete redesign of the car buying experience that launched, I think it was last week actually. Wondering if this is Capsella, the testing that have you seen from it and is there are any benefits are baked into the guidance and specifically what I saw was making model on the main car driver home page.

[Chip Perry:]

Yes, we think it's continuing to evolve their experience, they are placing more upper funnel shopping tools on USA sites, they want to strongly advice their members on the car they should buy and give them good solid information and guidance. So they [Indiscernible] about them. At the same time compared to third or fourth quarters of last year and number of improvements they made within their experience to make it much easier for the member who is ready to buy a car, to get straight to the TrueCar buying experience. Thus far we have seen a nice growth in the second half of the year and the improvement beginning in June which were down less than they were in Q1 and for the balance of Q2.

[Ron Josey:]

Got it, thank you.

[Operator:]

Our next question is from Steve Dyer, from Craig Hallum. Please go ahead.

[Steve Dyer:]

Thanks, good afternoon. Just circling back on a previous question. You talked about putting more coals in the fire as it relates to marketing next year, presumably to drive people to the new user experience. Are you going to be able to do that in a way I mean you have been getting really increasingly impressive operating leverage, are you going to be able to do that in a way that margin is can still expand next year on the revenue growth.

[Chip Perry:]

Yes, we believe it will be accretive. Our targeting line actually sufficiently be expanded to enable us. We will recall we will see some increased in the branded channel cost per unit acquired modest, but not enough to the gross margins.

[Steve Dyer:]

Got it, okay and then the 6% conversion rate now, obviously leaves a tons of room for improvement I mean based on very early days in testing and sort of what are you guys thinking in terms of where you can get that number realistically over the next year, two years, three years. Is there an aspirational number and a realistic number or kind of help us think about the kind of changes you think this might drive. Thanks.

[Chip Perry:]

That is a very hot topic within our Company Steve, -. We do have high aspirations and goals for that. We call them [OKRs] (Ph) and I think a bit of our ahead of product and technology, I mentioned he was but he is aspiring to publicly he would [indiscernible]. So it’s a big number. I think we should hold that fire to shows the investment community the potential improvement until we have the results of some testing that we are doing in the second half of this year, but we are very excited about the potential here because with 94% of car buyers - consumers use TrueCar leading even modest improvements in that have seem to leverage and the volume to that marketplace. So a lot to wait until more of that to you known before we can be more descriptive in this area, but thank you for asking.

[Steve Dyer:]

Fair enough. Thanks Chip.

[Operator:]

Our next question is from Kyle Evans from Steven. Please go ahead.

[Kyle Evan:]

Hi, thanks. I guess I would like to talk a little bit about the user experience as well. How do you - as the consumer side is obvious and intuitive to me. How could this affect your dealership network or their state associations that might see anything wrong with this push back on the changes. Do you have any concerns on that side of the equation?

[Chip Perry:]

We don't see any concerns, any regulatory bodies or state dealer associations honestly. We are in good shape with them across America. As it relates to how this would be seen by dealers, we believe the dealers the [indiscernible] strong positive improvement in the value of the service we provide them. So when we send them more visitors that buy cars that will be a positive things and we believe that will enable us to swing some of them marketing dollars more towards TrueCar away from other less efficient marketing providers. The details of how this is going to work are still being designed within our Company, but all of our conversations with dealer so far about conceptually what we have on our drawing board give us great optimism and positive feeling about the changes coming. And we think dealers were quite happy with those changes and they do changes because they all see an increases in volume providing the way that we help them for those significantly improve the efficiency of their overall marketing spend.

[Kyle Evan:]

Okay. I would like to try a variation on Steve's question what conversion lift that you need to get the 20% growth rates that you have laid to the street for next year?

[Chip Perry:]

You are trying to back into a number here I can see, it’s a big question.

[Kyle Evan:]

We all are, we do for living.

[Chip Perry:]

I hear you. Based upon the anticipated growth of our OEM and trade businesses. We do not need to see a huge growth in conversion rates there are an outsized growth in dealer revenue next year to 2% to 20%.

[Kyle Evan:]

Excellent. Thank you so much.

[Operator:]

Our next question comes is from Tom White of D.A. Davidson.

[Unidentified Analyst:]

Hey this is [indiscernible] for Tom White. Just a quick question about if you have seen any OEM having marketing dynamics into the back half of the year and what implications that could have for TrueCar? Thanks.

[Chip Perry:]

We were not seeing that kind of effect in the market right now. We serve the automotive industry differently than the display ad based third parties and the impression based search and social site and click based. So what we provide the industry is a very unique efficient way to target end market car shoppers who are on the sense about what kind of car they want to buy and these incentive offers are delivered behind the registration while they are incremental to the other public offers that are available and they are often significantly motivating consumers towards making approaches. And we have gotten really good feedback for manufacturers that not only do the consumers who receive these offers, buy the cars that they offer is delivered on. They also buy many cars that is are different than the exact vehicle they receive the incentive for. So they see this capability as a strong new marketing channel for them. We also do this in a very success based way. We act for compensation only when a vehicle get sold and that is different than all of the display and click based and lead based new car system that the OEMs are used to participating in. That segment of the market is fairly mature now and OEMs are on the lookout for new ways particularly more efficient ways to go the market. So in our particular case, we haven't seen any slowdown in the market and we are excited about to potential of those categories for TrueCar.

[Unidentified Analyst:]

Thank you.

[Operator:]

Our next question is from Doug Anmuth From JP Morgan. Please go ahead.

[Unidentified Analyst:]

Hi, thanks for taking my question. this is [Ashwin] (Ph) on behalf of Doug. I wanted to ask about franchise dealer account, I think on the last call you mentioned about adding 3,000 dealer in the next year or two. Just checking if that is still in the plan and when should we expect you to add more dealer end of this year or next year?

[Chip Perry:]

Thank you Ashwin. Yes, expanding the TrueCar dealer network is one of key levers to our top line revenue growth. And so we continue to put strong emphasis on doing that, our dealers shelf and service team has put in place some extra cover on this year that enabling us to increase our growth dealer addition, as well as reduce churn on the back end. We are planning better service and more encouraging service across more geographies and we have more sales people in more local markets that we covered previously and we have the following our renewal strategies in ways that encourage more dealers to stay, but also so at a rate monetization rate which is very [indiscernible] and appropriate for marketplace. So we are doing a nice job balancing network and monetization. That is pretty easy in this category to give up rates to drive dealer count. We are being quite different ones about maintaining the integrity of our rates while at the same time we are growing dealer account, which is a very positive thing. So I believe in the next three years, we will have a good opportunity to add like you just noted about 3,000 dealerships and this year we expect to be adding about a third of that number between now and end of the year.

[Unidentified Analyst:]

Great. Thank you.

[Operator:]

[Operator instructions]. And if there are no further questions, I would like to turn the floor back over to management for any closing comments.

[Chip Perry:]

Thank you everybody for joining us today, we appreciate your interest in TrueCar, we are excited about our future and look forward to hearing from you later today and as the list go forward. Take care everyone, bye now.

[Operator:]

This concludes today’s teleconference, you may disconnect your lines at this time. Thank you for your participation.