TrueCar, Inc.
Q1 2017 Earnings Call Transcript

Published: 12 May 2017

[Operator:]

Greetings, and welcome to the TrueCar First Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the conference over to Ms. Alison Sternberg, Vice President Investor Relations. Thank you, Ms. Sternberg. You may now begin.

[Alison Sternberg:]

Thank you, Operator. Hello, and welcome to TrueCar’s First Quarter 2017 Earnings Conference Call. Joining me today are Chip Perry, President and Chief Executive Officer; and Mike Guthrie, Chief Financial Officer. As a reminder, we will be making forward-looking statements on this call, including, but not limited to, statements regarding our outlook for the second quarter and full year 2017 and longer term; management’s beliefs and its expectations as to future strategies, events, and planned product offerings, including TrueCar trade, research and discovery and transaction validation experiences and the benefits of such offering, including increased traffic and improved monetization; our ability to expand our footprint, open new revenue opportunities and to achieve revenue margin or growth rate targets; our ability to grow traffic, units and revenue without much incremental marketing spend or in the context of a flat-to-down overall industry environment; our ability to expand our operating margins; our ability to enable dealers and OEMs to more efficiently reach consumers or to create the most comprehensive collection of reviews by car owners; the outcome of outstanding litigations; and the effects of operational initiatives, including investments intended to improve operating leverage or conversion and close rates. 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 sections of our annual report on Form 10-K for 2016 filed with the Securities and Exchange Commission and our quarterly report for the quarter ended March 31, 2017, to be 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 statements 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’ll turn the call over to Chip.

[Chip Perry:]

Thank you, Alison. And good afternoon, everyone. It’s great to be speaking with you after another strong quarter of revenue growth and margin expansion. Mike will give you more details later in the call, but here are some highlights from the first quarter. Units were up 24% year-over-year to 218,000. Revenue was up 22% year-over-year to $76 million. Dealer accounts grew 25% year-over-year to 14,450 franchised and independent dealers. And adjusted EBITDA was $6.1 million or 8% of revenue versus $1.1 million or 1.7% of revenue in the first quarter of last year. At the same time last year, year-over-year unit growth had slowed to 4%, revenue growth was only 6% and adjusted EBITDA had declined 75%. Our results in the first quarter of 2017 demonstrate continued progress against the plans we laid out when I first joined the company. I’d also like to highlight that all this progress is being made while we are undertaking a major platform rebuild that is progressing well and will allow us to innovate more quickly. While we still have plenty of work to do, I’m pleased to say that we’re starting 2017 with significant momentum. Subsequent to the quarter end, we were able to complete a successful follow-on offering of our common stock, which we priced on April 26. The financing was another step in transitioning our shareholder base from the venture firms that finance TrueCar as a private company to an institutional investor base that we successfully broadened with this financing. During the road show for our financing, I spoke about the strength of our core business, bringing transparency to the part of the consumer car buying journey that we call pricing and inventory. This is where consumers are looking to obtain pricing information on a make and model of car and to find a conveniently located dealer that not only has the right car in inventory but also is willing to give a transparent upfront price on that car in the context of the market-based pricing we provide. While we have made some solid improvements to our core business over the past 5 quarters, we have several ongoing initiatives in place to continue growing traffic, raising conversion rates and improving close rates that I believe will enable us to double revenue over the next 3 to 4 years, along with healthy margin expansion. Because our core businesses is healthy again, we are ready to pursue a bigger and broader strategy. Throughout the remainder of 2017 and over the next two to three years, TrueCar will expand our footprint in the auto industry in a focused way and open up new revenue opportunities well beyond what we will realize from optimizing our existing business. This broader approach is summed up in our mission, which is that TrueCar exists to be the most transparent brand in automotive and to serve as a catalyst that dramatically improves the way people discover, buy and sell cars. To fulfill our mission, we’ll be helping consumers improve their experienced throughout their car buying journey, while enabling dealers and manufacturers to reach consumers in much more efficient ways during that journey. At TrueCar, we think about the consumer car buying journey in three simple stages

[Mike Guthrie:]

Thanks, Chip. And good afternoon, everyone. After just competing our successful public offering, we’re pleased with the financial results in the first quarter of fiscal 2017 and the momentum we are building as we head into the seasonally strongest part of our year. After returning to double-digit growth rates on units and revenue in Q4 of last year, we have accelerated growth in Q1 and are now generating 20%-plus growth on the top line. Revenue in Q1 of 2017 totaled $75.8 million, up 22% over Q1 of 2016 and above our revenue guidance of $71 million to $73 million. The growth in revenue was primarily driven by unit growth, but there was strength across all sources of revenue in Q1, including our subscription business with independent dealers and our targeted incentive business with OEMs. Turning to units. In Q1, units were 217,656, up 24% year-over-year and above the high end of our 205,000 to 210,000 unit guidance. By channel, TrueCar branded accounted for 91,729 units, up 27% year-over-year. USAA members accounted for 65,665 units, an annual growth rate of 18%. And our other partner channel accounted for 60,262 units, up 29% year-over-year, fueled by strong growth with JP Morgan Chase, Sam’s Club, our employee benefits business as well as the long tail of over 200 partners that includes credit unions, insurers, publishers and other member-based organizations. Finally, looking at units by new and used. New car units were 146,019, up 20% from last year and a sequential acceleration in growth rate from 14% in Q4. Since Q1 of last year, our new car retail market share has grown 26% from 3.5% to 4.4%, while the industry has been essentially flat. This performance is a good indication that TrueCar can grow nicely even in the context of a flat-to-down overall industry environment. Used car units were 71,637, up 34% year-over-year, a slight acceleration over used car growth rates last quarter. Used car units accounted for 33% of total units. Now that our used car experience is fully migrated to our new tech platform, we are optimistic about our ability to innovate our used car product and drive higher conversion rates in the second and third quarters of this year. Adjusted EBITDA for the first quarter of 2017 was $6.1 million or 8% of revenue versus adjusted EBITDA of $1.1 million or 1.7% of revenue in Q1 of 2016 and ahead of our guidance of $4 million to $5 million. Our dealer sales team had another great quarter, growing franchise dealer count by 26% year-over-year to 11,734 at the end of Q1 2017. Our independent dealer count was 2,716 at the end of Q1, up 17% year-over-year. The overall dealer network, franchise and independent, grew to 14,450 total dealers, with a record backyard coverage of 52%. Now let’s turn to our key funnel metrics. Monthly unique visitors were 7.3 million in Q1 of 2017, up 10% compared to Q1 of 2016. Overall, conversion rate, which combines new car conversion and used car conversion, grew 14% over Q1 of last year. Remember, new car conversion has been improving significantly and consistently since Q3 of last year, when we started to make significant changes to the product and to refine benefit messaging to users. Now that our used car experience is on our new tech platform, we are just starting to optimize it and are optimistic about our ability to drive up conversion over the next couple of quarters. As a result of the growth in traffic and conversion, registered prospects grew by 25% year-over-year to a record 1.2 million. Even with such a significant growth in prospects, the growth in our dealer channel and the improvement in backyard coverage allowed us to hold close rates basically flat year-over-year. And so the growth and prospects combined with a nearly flat close rate enabled us to grow unit by 24% year-over-year. Monetization in the first quarter was $324 per unit, down about 1% from this time last year. Turning to the expenses and margins. All of the following metrics are on a non-GAAP basis unless stated otherwise. Gross profit for the quarter was $69.6 million, and gross margin was 91.8%, up from 90.3% in Q1 last year. Technology and product expenses were $12.3 million or 16.3% of revenue in Q1 of 2017 versus $12.1 million or 19.5% of revenue last year. Even with the investment we are making in our replatforming, we have seen operating leverage in tech and product costs as a result of revenue growth. Sales and marketing expenses were $40.4 million or 53.4% of revenue in Q1 of 2017, as compared to $31.3 million or 50.7% of revenue in Q1 last year. Breaking down Q1 sales and marketing costs in more detail. We spent $14.1 million on television, radio and digital to drive TrueCar channel customer acquisition versus $12.8 million this time last year. Due to the significant year-over-year conversion improvements as well as the growth of the size and quality of our certified dealer network, this 10% increase in acquisition spend produced a 27% increase in units sold through the TrueCar channel. Thus, our TrueCar channel customer acquisition cost declined year-over-year by 13% from $176 per unit last year to $153 per unit this year. If you subtract the TrueCar channel customer acquisition cost per car from the monetization per car, you see that the unit economics improved from $152 of contribution per car in Q1 of last year to $170 per car in Q1 of this year. Within sales and marketing, we incurred $10.7 million of partner revenue share and other expenses in Q1 of ‘17, up from $8.9 million in Q1 last year. Since our partner revenue share agreements are generally variable in nature, a 20% increase in marketing costs yielded a 23% increase in units sold through the partner channels, and the partner customer acquisition cost declined slightly from $87 per unit last year to $85 per unit this year. Substracting the customer acquisition costs from the monetization per car yield unit economics, which were nearly flat, declining slightly from $241 per unit last year to $239 per unit this year. Finally, within sales and marketing, we recognized $15.7 million in headcount and other costs in Q1 of 2017, up from only $9.7 million this time last year. This $6 million increase is almost entirely related to the scaling of our dealer sales and service organization following our dealer pledge. And so the growth in dealer headcount accounts for 2/3 of the growth in our sales and marketing cost over the past year. It is this investment which has allowed us to add nearly 3,000 dealers to our program since this time last year and to have nearly 10,000 in-person training meetings in Q1 of 2017 alone. By late this year, the rate of this investment in fixed cost to support our dealers should slow; and over the next few years, we should see operating leverage coming from this part of the cost structure. General and administrative expenses totaled $10.8 million for the quarter or 14.2% of revenue compared to $11.4 million or 18.4% of revenue in Q1 of 2016. Our investment in G&A headcount is generally adequate to scale the business well beyond current levels of revenue, and so we believe G&A costs as a percent of revenue will continue to decline and should reach our 9% to 11% long-term target sometime in fiscal 2018. Adjusted EBITDA was $6.1 million or 8% of revenue in Q1 of 2017 compared to adjusted EBITDA of $1.1 million or 1.7% of revenue in Q1 last year. The noncash items excluded from adjusted EBITDA for Q1 2017 were depreciation and amortization of $6.1 million and stock-based compensation of $5.9 million or 7.8% of revenue. It’s important to note that in the first quarter 2 years ago stock-based compensation as a percent of revenue was more than double at 16.1%. Going forward, we do anticipate issuing equity both for annual compensation and to reward exceptional performance. However, we will strive to maintain a ceiling of stock-based comp as a percent of revenue of approximately 10%. Adjusted EBITDA for Q1 of 2017 also excluded $400,000 of litigation cost and a credit of $100,000 related to reduced real estate exit costs from the consolidation of our Santa Monica operations in the fourth quarter of 2015. of We have subleased all of our excess properties in Santa Monica and don’t anticipate additional real estate charges or credits going forward. GAAP net loss for the quarter was $6.8 million for a net loss of $0.08 per share as compared to a GAAP net loss of $11.7 million or a net loss of $0.14 per share in Q1 of last year. Our non-GAAP net loss for the quarter was $0.7 million for a non-GAAP net loss of $0.01 per share, and that compares to Q1 of last year, when our non-GAAP net loss was $5.5 million for a non-GAAP net loss of $0.07 per share. As of March 31, 2017, our cash balances totaled $115 million, an increase of almost $7 million from last quarter. We have no outstanding borrowings on our $30 million line of credit, and subsequent to the close of the quarter, we took in approximately $17.5 million of cash related to the $1.15 million primary shares that the company sold in the recent follow-on offering. Now I will share our outlook for the second quarter and our revised view of fiscal 2017 as a whole. For the second quarter, we expect units to be in the range of 235,000 to 240,000 or 23% year-over-year growth at the midpoint. Revenue is expected to be between $79 million and $81 million or 20% year-over-year growth at the midpoint, and adjusted EBITDA is expected to be between $6 million and $7 million or about 8.1% margin at the midpoint. For the year as a whole, we are revising our forecast to 950,000 to 960,000 units, revenue of $322 million to $327 million and adjusted EBITDA of $23 million to $26 million. And now, we will open it up for questions.

[Operator:]

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Douglas Anmuth of JPMorgan. Please go ahead.

[Lina Rudashevski:]

This is Lina Rudashevski on for Doug. Just wondering on the OEM showcase. Can you elaborate a bit on how you’ll monetize the user engagement and the direct OEM incentives? Will that be again a fixed cost per incentive or how are you thinking about doing that? And then for the TrueCar trade-in, just how did you decide on monetization strategies there? Why a subscription fee? And how do you involve dealer input into the product there?

[Chip Perry:]

Sure. So thank you, Lina, for the question about OEM incentives and trading monetization. Today, we monetize with OEMs via a fee related to redemption of targeted incentives that are provided to our marketplace at $300 per sale. We anticipate, although we haven’t made final plans yet, for how the incentives offers will be provided through our new OEM showcase, that monetization will follow a similar path, although many details are still to be worked out, as that product is still in development. Regarding trade-in, we felt that because this tool will be able to be useful for dealers in many different settings, it will enable dealers to view a liquid offer for any car at any time. As well as consumers, dealers will have many applications for this tool, either in their stores, in their websites as well as in their lean marketing activities in the wholesale auctions. So we felt that a subscription fee associated with this product is commensurate with the value they receive, and we’re setting this up to have several different levels of subscription based upon the value they’ll be receiving. The details of this will be announced as the pilot emerges over the next couple of months. Sale-only there’s a – sale-only will be monetized with a transaction fee. So to be clear, when a consumer uses this tool, the TrueCar cash offer tool, they will be able to receive an instant offer that is redeemable at the dealership. If they trade their car in and buy a car at a dealership, we will not monetize the trade-in. If they use the tool on a stand-alone basis, sell their car to a TrueCar dealer, then we will ask the dealer to pay transaction fee to be determined, still not finalized.

[Lina Rudashevski:]

Okay, thanks.

[Operator:]

Thank you. The next question is from Ron Josey of JMP Securities. Please go ahead.

[Ron Josey:]

Great. Thanks for taking the question, Chip, I think you mentioned doubling the business in the 3 to 4 years if the core is healthy again. So looking out, call it 4 years from now, I just wanted to get your view in how the business looks in terms of how meaningful trade and top of funnel and OEM are, which pretty much adjacencies rather to the core new/used car business today?

[Chip Perry:]

Sure. Thank you, Ron. So I am confident that we can double the size of this business in the next 3 to 4 years. That implies an improvement – ongoing improvement in our conversion rates as well as growth in overall traffic. The growth in revenue we’ll receive from our new products, the OEM incentives and trade-in, I think should be viewed in the context of that doubling at this stage of the game. Until we have more visibility of the exact performance of those products over the next year or so, I’m not really – I’m not calling out separately their growth potential beyond this fundamental estimate of our future performance.

[Mike Guthrie:]

So Ron, it’s Mike. There’s no revenue in any of our guidance numbers for incremental incentives and for revenue from the trade-in side. In fact, for the next couple of quarters on trade, it’ll strictly be investment, and there’ll be investment in our upper funnel experience mostly on our product team. So certainly, the revenue included in the guidance that we just gave for the year is all exclusive of incremental revenue from those things.

[Ron Josey:]

Got it. So primarily related to the core, if I heard correctly.

[Mike Guthrie:]

Entirely related to the core, that’s right.

[Ron Josey:]

Great, thank you.

[Mike Guthrie:]

Thanks, Ron.

[Operator:]

Thank you. The next question is from Kyle Evans of Stephens. Please go ahead.

[Kyle Evans:]

Hi, thanks for taking my question. Chip, what are some of the levers that you can pull to improve close rates? You talked about flat in the quarter. Seems like there is a lot of upside opportunity there.

[Chip Perry:]

Yes, thank you, Kyle. We’re actually very happy to see a steady close rate in the context of significant improvements in conversion rate because that means that the dealers are absorbing a larger number of prospects and able – and maintain their ability to close at a good rate. So going forward, we have a number of levers that we will be working on to improve close rate. They include ongoing training of our dealer clients by our Client Success Managers, whose job is to focus on bringing best practices in every dealership after diagnosing the improvement opportunities at the individual store level and doing mystery shopping, helping the dealers close more of the leads that we send. That’s a good strong lever that is just beginning to show promise because the 100-plus people we hired in the past year are now engaged but still in the early days of training our dealer body. Other levers relate to improvements that I cited in earlier calls such as our improving ability to enable consumers to view more VIN-specific offers at the time of introduction to the dealership. Today, we’re limited to only 3 vehicles per dealer at the time of introduction. And we’re going to be opening that up later this year to enable dealers to present more vehicles, which consumers are clamoring for, based on all of our research. And then another lever – we have several more, but another one worth mentioning is we have ongoing improvements planned in what we call our dealer selection algorithm, which is the mechanism by which we choose the 3 dealers that a consumer gets introduced to in a local market. Today, there is a number of criteria in that algorithm. We have – we’re in the process of rebuilding it. It’ll be testable in the third and fourth quarter, so I expect to begin iterating on improvements to that algorithm, which will enable us to improve close rate. Our ability to provide an intelligent match between consumers and dealers is unique in our industry, and it’s fueled by data science, and it contrasts with traditional online classifieds, first-generation legacy companies, who have more of a random introduction of a consumer to a dealer. Our – one of the key factors in our dealer selection algorithm today is the close rates that the dealers achieve in our marketplace. Higher close rate dealers receive an advantage in the DSA today. That intelligence enables a more effective match than the random interaction that happens through our competitors. That’s one of the reasons why I believe that TrueCar will stand out further and further from other players in the industry by being able to introduce consumers to well above average purchasing experiences.

[Kyle Evans:]

Great. Just 2 more quick ones. How much OEM incentive revenue was in the quarter? And then, it was such a great quarter, I hate to ask the Debbie Downer question, could you give us a time line on the CNCDA lawsuit?

[Mike Guthrie:]

Kyle, it’s Mike. There was about $5.3 million of OEM incentive revenue in the quarter, and the redemption per car, as Chip mentioned, was at $285 per car, so right at about $300.

[Chip Perry:]

And regarding the CNCDA lawsuit, it’s proceeding. It’s likely to go to trial late this year, early next year at this stage of the game. And we are confident that we’ll prevail when it goes to court.

[Kyle Evans:]

Thank you.

[Operator:]

Thank you. The next question is from Sameet Sinha of B. Riley. Please go ahead.

[Sameet Sinha:]

Yes, thank you very much. Couple of questions here. So the number of units sold per dealer seem to have – was flat year-over-year, which stems the decline that we’ve seen over the last year. You increased the number of dealers pretty dramatically. Should we expect this to be the bottom and now from hereon we should expect the number of units sold per dealer to start to grow? And if yes, where do think that number can get to? Is there a high watermark that you can point us to? Follow-up question – actually second question is, you delivered 8% margin in Q1. You’re guiding to 8% in the second quarter, and for the full year, you’re at 8%. Seems like the indication was that we’re going to see a lot of operating leverage in the second half. Can you point us to some of the reasons why you’re still maintaining the 8% guidance for the full year?

[Mike Guthrie:]

Sameet, it’s Mike. So I think we’re – in terms of the EBITDA margin, probably 2 things. One is just general level of conservatism. We started the year at sort of the high end of where we had guided for the entire year, which is great. We obviously added a decent amount of EBITDA to the overall forecast for the year. And the second thing is, we’re investing. So we are really putting money behind our upper-funnel experience and our – downstream of us, which is the trade-in business. So we have got – we have some – especially on trade-in, we had some upfront investments with no offsetting revenue in the early days. And just to be conservative, we kept it at that level. Generally, we tend to scale margins up in Q2 and Q3, as you know, which are seasonally stronger periods. And let’s just see how we get through the quarter and where the investments are versus top line revenue.

[Chip Perry:]

And regarding your first question on units per dealer and where it can go, we believe that with the rate at which we’re adding dealers, which is very strong right now, above our prior estimates, that we’re going to continue to see flattishness in units per dealer for a while. And where it can go? I’m not sure yet. Today, we represent – our marketplace accounts for about 4.4% of new car sales in the industry. And we’re a little bit north of – we’re north of a little bit – a little bit north of 10% typically of the share of the – of our franchise dealer customers. So I think there’s quite a bit of headroom here, particularly given the efficiency that our marketplace provides our dealer customers with a cost per sale well under their marketing average cost. So I have a hard time calling where that can go at this point, Sameet.

[Sameet Sinha:]

One final question, actually. Mike, can you talk about the advertising and marketing cost you plan to incur in the second quarter, which is seasonally strong? As a follow-up to that, your advertising spend was down about 12% sequentially, but your TrueCar units was just down 1%. Understanding that a lot of other factors are in play, things that you mentioned in terms of close rates, conversion rates delivered through training and improved product, what else can you point to for this – the benefit that you are seeing there?

[Mike Guthrie:]

On the effectiveness of the spend?

[Sameet Sinha:]

Yes.

[Mike Guthrie:]

Yes, I mean, it’s product really, Sameet. It’s been the conversion rate improvements. If we just segment conversion year-over-year in the TrueCar channel by itself, you’re seeing conversion improvements of – in the upper – high 30% range. And so it just – it really creates a nice bump for your marketing spend. And so, as you said, sequentially in the second quarter, we will lean in more heavily because seasonally it’s a better period. We don’t want to miss the top line growth. I wouldn’t be surprised if cost per sale went up a little bit in the second quarter, but we’ll do that to drive the units as long as we feel like we’re comfortably making our EBITDA numbers. And right now, we – you just – again, it’s just a lot of conversion improvement on the product side and steady on the close rate side. So I think that’s – for next few quarters, I think that’s – these kind of numbers is about where we’ll be, plus or minus a little bit of a $153 is what we did this quarter. However, obviously, I think the step function down for us now is when the upper-funnel experience really starts. And that’s when we – I think we’ll drive a lot more organic traffic. And we’ve been talking about really a new target once we get that up and running of $100 of sales. So right now – for right now, we’re at $153; when we went public, we said $150 would be our long-term goal. We’re sort of there, and now the business is changing, and we think that with a great upper-funnel experience we can drive that down to about $100. But I think for the next couple of quarters assume to see it there, Sameet. And right now, it’s really, really being driven by conversion improvement. Not that we’re not doing a great job on media spend and the analytics around the acquisition team. We’re doing a great job. We have some new creative in the market that’s probably helping us a little bit, some new messaging to consumers. The early results of the new creative have been quite positive. But for the most part, it’s really the product improvements creating such a better yield at the conversion layer.

[Sameet Sinha:]

Great, thank you.

[Operator:]

Thank you. The next question is from Steve Dyer of Craig-Hallum. Please go ahead.

[Greg Palm:]

It’s actually Greg Palm on for Steve. Going back to an earlier question as it relates to your goal of doubling the business from here. Just curious what sorts of investment you have to make internally, whether that’s people or processes, et cetera, to enable that type of scale-up? And as we think about the potential leverage, the margin increases associated with that, how does that look cadence-wise? Is it more back-half weighted, meaning years 3 and 4? Or do you think you can start seeing some significant leverage here maybe in the coming year?

[Mike Guthrie:]

So Greg, I think leverage – I talked a little bit in the prepared remarks about how each part of the cost structure will start – where it stands now, where we’re growing and where we expect to see leverage. If I go down that list, I think we’re quite happy with where we are in tech and product because we are making investments, and we are doing – running through a replatforming, but revenue is growing quickly. And so we’ve seen a little bit of operating leverage there. At the end of the day, I think we’ll continue to make investments there for the balance of the year. And so it should bump along about at this rate in terms of percentage of sales. And then on the G&A side, that’s kind of the easier one, right? It’s almost all headcount. We generally staff up the organization in finance, accounting, legal and human resources. So for the most part, we have the team in place to scale a much larger business, and I think that one will much more naturally move towards our long-term models and provide a 100 basis points or 200 basis points of operating leverage over the next, let’s call it, 12 months. It’s really in sales and marketing. And it’s the same – to answer your question about doubling the business. After the tech platform – replatforming is done, the real major investments really come in 3 areas, but primarily it’s the dealer organization still. So we’re still putting people into the field. We’re still putting a service organization into place. We’re really thrilled with 10,000 individual training and service meetings in the quarter, but there is more to do there. And we’re still – so I think the rate of investment there will start to slow down as we get later into the year, but we’re actually doing this call from our Austin office, which is where our sales and dealer organization is. We spent the last 2 days with our dealer council and with the whole senior leadership team on the dealer side. And great momentum here, but still investment required to be at scale and to be where we want to be. The dealers are responding incredibly well to the attention and to the training. We just need to keep making those investments. It turns out really when you look at it – and again, you reference back to my prepared comments, where the operating leverage is really going to be most significant is the headcount investment that we’ve been making. And you’ll start to see that, I think in 2018. So we’ll continue to invest for the rest of the year. The rate of change will slow down. It’s not in the marketing spend. People tend to think of us as – the leverage has to come in marketing. We have been making really good progress on our marketing spend, both our partner marketing as well as our brand marketing. It’s really been the investment in sales, in the field and support that has been the major investment. And I think that, like I said, the rate of growth in that area will slow later this year. I think you’ll start to see margins – opening margin leverage in ‘18 in the sales and marketing line and then across the rest of the business. And then just to finish the thought, really in ‘18 we don’t have any revenue in the plan right now for the rest of 2017 for trade-in. We don’t have any meaningful revenue coming from growth and incentives due to the upper-funnel experience. We do all of that in 2018. And so, as that revenue starts to come in and we build a plan for that, that’s going to have a very significant impact in terms of bumping up the margins.

[Greg Palm:]

It’s great color. Maybe just one more on the affinities. Several sort of new partnerships last year, so I was curious how those are trending and how those are ramping up? And secondly, just wondering how big of a focus area this is going forward with all the newer initiatives going on and whether there is any additional kind of affinity relationships yet to be announced that can move the needle?

[Chip Perry:]

Thanks, Greg. We would certainly be remiss if we didn’t call out the partner organization of TrueCar over the last few quarters. They had a great first quarter. The unit number is coming out of our partner channel, both USAA, which had really healthy growth of 16% in the first quarter. We did 16% in the fourth quarter on a year-over-year basis at USAA in a year where the growth rate was only 8%. So that’s been a great grower for us. But Sam’s Club, JP Morgan Chase and Car & Driver in the first quarter really generated enormous amount of incremental units for us. And all 3 of those relationships are really still quite early in the scale-up phase. So great quarter there. But then our long tail – one of the powers of this model is that you’ve got 200 and growing affinity partners that we call our long tail of partner – just because the individual units in any 1 partner aren’t necessarily huge; but when you add them together, the growth in that part of our channel grew at 29% in the first quarter, and that’s about 200 partners aggregated. And then within our – what we call our top 10, we do most of our employee benefits through third-party benefit administrator,s, and that channel has just been really fantastic for us over the last few quarters. Had a great quarter in Q1, and we saw really healthy growth across the employee benefit segment. So partner has been great. And yes, there is definitely a pipeline of large partners. We’d like to be able bring in 1 significant new partner every year and then a lot of really good execution on knocking out some of the smaller credit unions and insurance companies and member-based organizations. And so yes, we’ve got a group out there that’s working hard to bring in some big new relationships as well.

[Operator:]

Thank you. The next question is from Mark Kelley of Citi. Please go ahead.

[Mark Kelley:]

Hey guys, thanks for taking my questions. I just want to talk a little bit more about the upper-funnel, research and discovery initiatives you talked about. I guess, how do you kind of get that ecosystem started, so to speak? Specifically, reviews from car owners and things like that? And also how should we think about content sourcing? And then second, now that the used car component has been converted to the new platform, can you just remind us what is left on the replatforming work that’s being done? Is it just general tech debt that’s being cleaned up? Or is it more specific than that?

[Chip Perry:]

Sure. On content for the upper funnel, we’ve already secured it. It’s already in our cost base. We have a relationship with a research firm that receives hundreds of thousands of ratings and reviews of cars from consumers every year. We have exclusive access to this data. It goes back for years. And we’re now building an experience that will enable consumers to conveniently see what other people, real owners, verified owners believe and feel about their car, positive themes, negative themes, also natural language search into this data so that consumers can find quickly what they want, rather than the typical reverse chronological data dump that owner reviews represent today in the automotive space. So we’re very confident that we’re going to be able to right out of the box launch a groundbreaking new product, and we’ll obviously evolve it from there once it’s launched toward the end of this year. So the content is well in hand. And we’re also going to enable consumers to quickly move back and forth between pricing content, which is a very important part of a decision on which car to buy, back and forth between that information and research and review information. So the linkage of granular local market pricing information with really helpful consumer reviews, we think will dramatically improve how people build consideration sets and decide on the exact car they want to buy. And all this will be done in a completely display ad-free environment, which will really stand out compared to others in this category, whose offerings are typically cluttered with 1, 2, 3, sometimes 4 display ads per page. And like I said in the remarks, there’s literally billions of display ads exposed to consumers in this category every year. So by removing that clutter, we believe consumers will be delighted, and we also believe that Google will find this content to be very fast and attractive from an SEO perspective. So we’re very excited about the opportunity that we have identified here. And then when you mentioned, yes, we did launch our used car platform last year. What’s happening today with our platform rebuild – we call the project Capsella here at TrueCar. It’s a modular rebuild where different components of our systems are being rewritten and then launched sequentially over time. We have a number of pieces that we’re going to launch this year, and there’ll be more next year. So it’s not really a matter of just cleaning up tech debt, as you put it. It’s a fundamental rewrite that enables us to innovate from an brand-new, flexible, modern code base. So we’re very excited about how that project is proceeding. Tommy McClung, our CTO, and our entire tech team are working hard and doing great work. And we’re making great progress on that project.

[Mark Kelley:]

That’s helpful. Thanks, Chip.

[Operator:]

Thank you. The next question is from Blake Harper of Loop Capital. Please go ahead.

[Blake Harper:]

Hi, thanks. I wanted to ask about the subscription product you had and – you hadn’t brought that up. I just want to see what the adoption was outside of Georgia and if that’s been helpful with any visibility for the outlook that you’ve given.

[Mike Guthrie:]

Yes, so we definitely – we rolled out optional subscription in pay-for-sale states across country over the last few quarters. I cannot quote you a specific uptake number. I apologize. I can track it down. It’s been pretty healthy. And yes, it actually has – when I think about subscription, of course, we still get the sales data, so it has a pay-per-sale underpinning. But I will say I do believe it’s given us a little bit more visibility in forecasting because you can – obviously, it’s subscription. So it’s a little bit different. You can sell ahead. You have a skew month forward, and you do have a better sense of what’s coming. It puts pressure on forecasting and on the rate renewal, so we can make sure we hit our numbers. But all in all, I think it’s been a positive move. There were certain dealers that I just think we would not have gotten if we had not made the offer of a subscription, and then there are other dealers that really prefer to stay on a pure pay per sale. And so creating the options has been a healthy thing. So anyway, I can get you a specific number, exact number in terms of what the uptake has been, but it’s been rolled out across the country for the last couple of quarters.

[Chip Perry:]

Yes, and subscription revenues represent now about a little over 60% of our total. And because it’s got the pay-per-sale underpinning, it still has the success fee, closed loop quality of solid attribution, so the dealers are confident about the value they’re receiving from TrueCar, even though they’re now paying on a subscription fee if they choose to.

[Mike Guthrie:]

Yes. To Chip’s point of our purely unit-driven business, our pay-per-sale plus subscription was 58% of the total in the first quarter, and pure pay per sale was 42%.

[Blake Harper:]

Okay. That’s really helpful. And I just wanted 1 clarification. Mike, you talked in the – in your prepared remarks and then on the follow-up about the other channel been very strong. Was that though driven by the increase in traffic from those sites, JPMorgan, Sam’s Club, and Car & Driver, that you called out? Or was it really more just it’s the better converting traffic that drove the unit growth there?

[Mike Guthrie:]

Yes, it’s a little bit of all of them. The nice thing about partner is that you can – as you grow a partner base, you get more traffic. As you get more deeper penetrated with an individual partner, you get more traffic. When you bring that traffic into an improving experience, your conversion rates are going up; and you’re obviously going to pull more prospects into the system, some – more of the members into the dealership and close rate because our dealer network have been so strong, has held steady there. So it’s really a combination. It’s both growing the overall traffic in the partner channel but applying that traffic to a higher converting experience and then into a dealer network where the close rates are holding steady, even under significant growth and prospects, which is really a win for us.

[Blake Harper:]

All right. Thanks, Guthrie.

[Mike Guthrie:]

Thank you.

[Operator:]

Thank you. The next question is from John Blackledge of Cowen & Company. Please go ahead.

[John Blackledge:]

Great, thank you. Two questions. First, the unit guide implies unit adds of about 60,000 in the back half of 2017 versus I think 88,000 in one half 2017. Just wondering if that’s copping AutoNation or just normal seasonality or something else? And then second question around TrueCar Trade. When is it being launched? When the pilot is being conducted? And I don’t know, have you done any testing prior to this pilot launch?

[Chip Perry:]

Sure. TrueCar Trade will launch as a pilot in the next month or two, up in the Northeastern part of the United States. And so the purpose of the pilot is to be the market test to iron out all of the specific go-to-market strategy elements that we will be refining later this year for the nationwide launch.

[John Blackledge:]

How many dealers, Chip, are you working with in this – in the pilot?

[Chip Perry:]

Well, we haven’t – we just announced the partnership very recently. So we haven’t – we’re just now beginning the sign-up process. So we don’t really – I can’t really talk about specific numbers at this point.

[Mike Guthrie:]

And then, John, your question about units. Let me make sure I understand the question. Can you ask it again?

[John Blackledge:]

Yes. So the guide for the year implies 60,000 net adds in the back half of the year versus 88,000 net adds in the first half of the year. So just – so it implies that I think like mid-teens growth in the back half of the year. Just wondering if that’s like copping AutoNation or if that’s normal seasonality as we get towards the end of the year or if it’s something else?

[Mike Guthrie:]

Just want to make sure I get this. You’re talking about actual units sold?

[Chip Perry:]

Units sold, yes.

[Mike Guthrie:]

Because we – the guide for the year is 950,000 to 960,000 units. So I think if you take out the 218,000 units that we did in the first quarter over the last 3 quarters, it’d be about 737,000 units, which is about 82,000 a month.

[John Blackledge:]

Yes, I’m just saying incremental in 1Q on a year-over-year basis is 43,000 incremental and 2Q kind of at the midpoint 45, and so that’s like 150. You’re guiding to an incremental – I’m sorry, that’s an incremental like 88. You’re guiding to an incremental around 150. So that would imply that the incremental units in the back half of the year are less than the first half of the year?

[Mike Guthrie:]

Yes, it’s – I believe we’re looking at it right now is that from where we were before this quarter you’ve got about 7,000 incremental units that we did above the top end of our guidance in Q1. And you got at about 20,000 units to the remaining 3 quarters. So I think the rate of growth in the back half of the year over the back half of last year is certainly a little bit slower in our guide than in the first half. But that’s just because we’re in the first half, and we are obviously just – we’re going to take 1 quarter at a time and push forward. Now, again, in the third and fourth quarters as we start to compete against the conversion rate improvement that we started to put through the system in the third quarter, so it should be a little bit tougher to comp in Q3 than in Q. But we also will have more dealers, different product experience, a lot of innovation on the new – on the used car side. So yes, so, I mean, I think that’s the answer.

[John Blackledge:]

Okay, thanks.

[Operator:]

Thank you. The next question is from Heath Terry of Goldman Sachs. Please go ahead.

[Heath Terry:]

Great, thanks. Just on the – couple of questions. On the trade-in product, do you have a sense historically what percentages – what percent of your purchases involved a trade-in? Understand you weren’t involved in that process, but just sort of curious if you have any idea of that stat or metric for consumers that have used TrueCar with a dealer and ultimately traded in their vehicle with that dealer? And then any sense of how the change in the process for consumers which at least anecdotally seems to involve a lot more dealer-initiated contact is impacting customer satisfaction with the TrueCar process?

[Chip Perry:]

Okay. To your first question, TrueCar’s flow of prospects in the dealerships carries about the same typical percentage of trade-ins as the general market, which is about 50% of the time consumers when they buy a new car trade-in a vehicle or – at a franchise dealership. So it’s a big opportunity here to help consumers realize more transparency about the car they’re bringing into trade or to sell. And regarding how the change in our process online, which has resulted in more prospects being delivered to dealerships, growth in our conversion rate is affecting consumer satisfaction, we see continued high, good ratings from consumers about their overall experience on TrueCar.

[Heath Terry:]

And that hasn’t changed as the consumer experience or the consumer flow with more information given up front, little more in the way of sort of friction in the process in favor of the dealers as the process has changed, that consumer satisfaction hasn’t changed?

[Chip Perry:]

Correct. That’s correct. So consumers today through TrueCar get the best visibility and transparency of upfront pricing on a car they want to buy in the context of what other people paid. In the use case of trying to understand how good an individual dealer’s price is on a specific car is difficult to accomplish in America today. And so, we do it the best in our industry, and consumers really like the experience. They like the upfront transparency they’re receiving. And so today, more and more people are registering, and they are having a chance to interact with local dealers, get introduced to a good local dealer and get upfront pricing transparency on vehicles, real cars, real pricing on actual cars for sale at local dealers. And that’s a big, huge, bell-ringing benefit for consumers. And even though we’ve seen growth in the number of prospects, we continue to see really high customer satisfaction ratings from people who rate us after the fact. We survey consumers who have bought a car and learn from them their experience, and we’re very pleased with the ratings we’re receiving from them.

[Heath Terry:]

Great. Thank you very much.

[Chip Perry:]

Thanks, Heath.

[Operator:]

Thank you. We have no further questions at this time. I would like to turn the conference back over to management for closing remarks.

[Chip Perry:]

We appreciate you spending time with us today. We’re excited about recent performance but also believe we have much work ahead of us to do. No laurels being rested upon here at TrueCar. So thank you for your time. Look forward to catching up with you later or anytime you’re interested. Take care.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.