TrueCar, Inc.
Q2 2017 Earnings Call Transcript

Published: 9 Aug 2017

[Operator:]

Greetings, and welcome to the TrueCar Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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 Second 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 third quarter and full year 2017 and longer term; management’s beliefs and expectations as to future strategies, events, and planned product offerings, including TrueCar trade, research and discovery and digital retailing, the benefits of such offerings, including increased engagement and conversion and the timing of their launch, including the rollout of verified vehicle owner reviews, our ability to grow our core auto buying offering and take share from our competitors, our ability to grow incentive revenue, our ability to achieve revenue, margin and growth rate goals, and the outcome of outstanding litigation. 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 and our subsequent quarterly report on Form 10-Q filed with the Securities and Exchange Commission and our quarterly report for the quarter ended June 30, 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 again, and we are excited to update you on our progress. The momentum that we’ve been building over the past few quarters at TrueCar is continuing quite nicely. We’re growing well. We delivering strong value to consumers, dealers, and OEMs. We’re methodically expanding our business and we producing good operating leverage all while making key investments for the long-term. TrueCar exists to be the most transparent brand in automotive and the serve as a catalyst that dramatically improves the way people discovered buy and sell cars. To fulfill our mission, we help consumers improve their experiences throughout the car buying journey, while enabling dealers and manufacturers to reach consumers in much more efficient way during that journey. Specifically, we’re focused on continuing to grow our core auto buying offering, which we refer to as inventory and pricing, while expanding our business upstream to research and discovery and downstream to help dealers deliver exceptional purchasing experiences. By doing this, we believe we are building the only accountable end-to-end digital automotive platform. The strategy we put in place in early 2016 is working extremely well. In the quarter, where industry’s SAR declined approximately 3% year-over-year. TrueCar delivered accelerating unit and revenue growth and margin expansion, and we grew our new car market share from – to 4.6%, which is up 26% from Q2 of last year. Mike will give you more details later in the call, but here are some highlights in the second quarter. Units were up 26% year-over-year to 242,000. Revenue was up 23% year-over-year to $82 million. Adjusted EBITDA was $7.4 million, an increase of over three times over this time last year. Our adjusted EBITDA margin grew to 9% of revenue up nearly 2.5 times over Q2 of last year. Finally, our dealer network grew 19% year-over-year to a record 15,064 total franchise and independent dealers. Over the past six quarters, since we launched our Dealer Pledge in Q1 of 2016, we’ve added approximately 3,000 net new franchise dealers to the TrueCar platform. The most prolific period of dealer growth in the history of the company. Given the recent contraction in the auto industry’s SAR, the growth we delivered this quarter highlight the efficiency we bring to dealers and OEM, as well as our ability to take share of my competitors. We believe we have a better value proposition and we expect to continue taking share of both dealer marketing dollars and OEM marketing dollars from other online marketing providers and from the traditional media world. Turning to our expansion plan. In Q2, we continue to invest in driving the scope of our business and made significant headway. First, we launched the pilot of our new trading platform, known as TrueCar trade in partnership with Galves market data and Robert Hollenshead Auto Sales. TrueCar trade provides consumers with a bona fide online offer on their current vehicle prior to visiting the dealership. The early feedback to the trade products and dealers has been very positive due to enhanced pricing transparency that the product dynamic pricing algorithm enable. In addition, dealers are able to transact with confidence knowing that there is a financial backstop in the form of the largest wholesale dealership operation in the industry. Second, our product and tech teams have made good progress on the development side of our new research and discovery experience. Through our partner and branded channels, TrueCar already touches over half of new car buyers, mainly in the earlier stages of their car buying process. While we convert approximately 6% to prospects today, we believe this new content and functionality will increase engagement and conversion, while also growing the top of our funnel very efficiently. Our experience will be the only research product completely free of ads, so we believe it will be a much better consumer experience. We anticipate launching the first stage of this experience, focusing on verified vehicle owner reviews on TrueCar platform in Q3 and on one of our key partners in Q4. Finally, we will continue to work on building our digital retailing solutions. TrueCar digital retailing will enable dealers to offer consumer the ability to get a car deal got online down to the actual monthly payment or loan payment. It will bridge online with the offline experience at the dealership with price transparency from our trusted third-party brands. To deliver on that promise, the solution must include

[Mike Guthrie:]

Thanks, Chip, and good afternoon, everyone. Despite the bigger picture trends in automotive, we set records in nearly every major financial and operating metric in the second quarter. Units totaled 242,130 up 26% year-over-year and above the high-end of our 235,000 to 240,000 unit guidance. New car units were 165,304 or 22% higher than this time last year. New car unit growth was driven by continued strong improvement in new car conversion rates, which grew 30% year-over-year, driving high new car prospect growth. As our dealer network grew and improved, we were able to maintain new car close rates on those higher prospect levels and thus significantly improve the overall yield through our new car funnel. Used car units were 76,826 or 35% higher than in Q2 of 2016. This was the 18th consecutive quarter of year-over-year unit growth in excess of 30% for our used car business. Used car unit growth was driven by a number of factors. First, used car search visitors grew 18% year-over-year, supported by growth in partner traffic, improved SEO on our branded experience and television advertising, highlighting our used car offering. Second, as we have been hinting, the transition to our Capsella technology platform has enabled us to begin innovating on our used car experience. Although, we are in the very early innings of this effort, year-over-year used car conversion rate increased 13% in Q2, even on significantly higher traffic, thereby driving high growth in used our prospects. And finally, due to the growth of our dealer channel, used car close rates held steady despite prospect levels that were 33% higher year-over-year. Revenue in Q2 of 2017 totaled $81.8 million, up 23% over Q2 of 2016 and above our revenue guidance of $79 million to $81 million. Revenue growth was driven by our strength in units and growth in subscription revenue with both franchise and independent dealers. We also generated record OEM incentive revenue of $7.8 million, up 75% year-over-year, more on this later. Adjusted EBITDA for the second quarter of 2017 was $7.4 million or 9% of revenue, up from $2.4 million or 3.7% of revenue in Q2 of 2016 and ahead of our $6 million to $7 million guidance. Franchise dealer count grew by 20% year-over-year to 12,204 at the end of Q2 2017, as we added 470 net new franchise dealers during the quarter. Our independent dealer count was 2,860 at the end of Q2, up 13% year-over-year. The overall dealer network franchise and independent grew to 15,064 total dealers with a record backyard coverage of 54%. Monetization in the second quarter was $319 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 in Q2 of 2017 was $74.9 million, up 24% from $60.3 million in Q2 of 2016. Gross margin was 91.6% in Q2 of 2017, up from 90.8% in Q2 last year. Technology and product expenses were $12.5 million or 15.3% of revenue in Q2 of 2017 versus $12 million or 18% of revenue last year. Sales and marketing expenses were $44.8 million or 54.7% of revenue in Q2 of 2017, as compared to $35.9 million or 54% of revenue in Q2 of last year. Breaking down Q2 2017 sales and marketing costs in more detail. We spent $15.6 million on television, radio and digital to drive TrueCar customer acquisition versus $14.2 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, our 10% increase in acquisition spend produced the 25% increase in units sold through the TrueCar channel. Thus, our TrueCar channel customer acquisition cost declined year-over-year by 13% from $180 per unit last year to $157 per unit this year. Partner revenue share and other expenses were $12 million, up from $10.7 million in Q2 last year due to revenue share on partner units that grew 26% year-over-year. Finally, within sales and marketing, headcount and other costs were $17.2 million, up from $11 million this time last year. These increases were primarily related to hiring on our dealer team. General and administrative expenses in Q2 were $10.3 million or 12.5% of revenue compared to $10 million or 15.1% of revenue in Q2 of 2016. Our G&A cost continued to exhibit operating leverage and we expect G&A cost as a percent of revenue to reach our 9% to 11% long-term target, sometime in fiscal 2018. Adjusted EBITDA was $7.4 million or 9% of revenue in Q2 of 2017 compared to adjusted EBITDA of $2.4 million or 3.7% of revenue in Q2 last year. The noncash expense items excluded from adjusted EBITDA for Q2 2017 were depreciation and amortization of $5.7 million and stock-based compensation of $6.8 million. We also added back $2.3 million of certain litigation costs. GAAP net loss for the quarter was $8.1 million or net loss of $0.09 per share as compared to GAAP net loss of $14.7 million or net loss of $0.17 per share in Q2 of last year. The weighted average common shares outstanding were 93,745,000 in Q2 of 2017, up from 83,931,000 shares in Q2 last year. The growth in share count was primarily driven by the exercise of stock options. Our non-GAAP net income for the quarter was $1.1 million or a non-GAAP net income of $0.01 per share and that compares to Q2 of last year, when our non-GAAP net loss was $4.1 million or non-GAAP net loss of $0.05 per share. As of June 30, 2017, our cash balances totaled $182 million, an increase of $67.2 million from last quarter. Of that increase, $64.4 million was from financing activities, $17.4 million of net proceeds from the follow-on offering we completed in April, and $47 million as a result of option exercises. The balance of $2.8 million was from operating cash flow. We have no outstanding borrowings on our $30 million line of credit. And now, I will share outlook for the third quarter. As we entered Q3, we begin to lap some of the early conversion improvement that we implemented back in 2016 on our branded new car experience. Notwithstanding that, the unit trends in our business are very strong for both new car and used car. New car conversion and close rates continue to improve across the board and we have momentum in our other partner channel group – from group such as Chase, Sam’s Club and our employee benefit channel. On used car, SEO efforts are producing results and we have healthy top of funnel activity combined with conversion improvements as a result of implementing product changes that we mentioned earlier. Both new and used cars should have high close rates in Q3 because the dealer network both franchise and independent is at all-time highs in terms of size and convenience. And finally, we are already seeing signs of high unit growth rates as our July results come in. As a result, we expect Q3 units to be in the range of 265,000 to 270,000 or 20% to 22% year-over-year growth. Turning to revenue. As we mentioned earlier, during Q2, we had a very strong performance in our OEM incentive business. In particular, one of our programs for an affinity partner exhibited significant year-over-year growth and accounted for roughly half of the total OEM revenue. In early July, the OEM pass that program in order to test number of verification. We restarted the program on a more limited basis on August 1, but we expect the ramp up throughout Q3 to be more measured. As a result, in Q3, we expect OEM revenue to be $3 million to $3.5 million lower than in Q2. Potentially offsetting this decline, we have launched a program with Volvo. We have a robust pipeline of OEM opportunities and we are looking into other partner channels in which to promote incentives for our OEM partners. Thus, we are optimistic that we can make up the lost Q3 revenue by Q4 and we feel confident that we will broaden and grow our OEM business over the next few quarters and throughout 2018. Taking that into consideration, we expect revenue for Q3 to come in at approximately $85 million to $87 million, up about 50% year-over-year at the midpoint. And finally, although we continue to invest in key areas that we believe will drive long-term value. We are seeing operating leverage throughout our business. As a result, we expect to record third quarter adjusted EBITDA of between $7 million and $8 million. For all of fiscal year 2017, our guidance is as follows

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Mark Mahaney of RBC Capital Markets. Please go ahead.

[Unidentified Analyst:]

Hi, this is [indiscernible] on for Mark. Just congrats on the solid quarter. Given that you had another robust quarter of dealer count growth. Can you give more color around the dealership growth count opportunity? By that, I mean, what is the total numbers of dealers in USAA. What penetration, do think you can get to? And the next, can you elaborate on how the TrueCar trade pilot has gone so far? Is there any updated thinking on the subscription pricing model, you thinking about implementing for that? Thank you.

[Chip Perry:]

Sure. Chip Perry, here. We’re very pleased with our ability to grow dealers in the last few quarters, and more than 3,000 that we’ve added in the last year or so is a really strong indication that dealers are expecting strong belief and value proposition we bring them. And the fact that we’ve turned around through our Dealer Pledge many of the shortcomings, and the way we were servicing in before I joined the company. So we’re making great headway with the dealers. As we said in the past, we believe that we have a lot of headroom above us on the order of 3,000 or 4,000 additional dealers would be very positive additions to our network. Today, we’re adding, and as you can see, at the rate of about 150 a month. We suggested in the past that we believe our sales productivity net on the order of 100 per month is a really good performance at this stage of our evolution. Last couple of quarters, we’ve been exceeding that. I believe that the 100 dealers a month is still a number to be shooting for and that’s what our sales and service team is driving towards now. So I think you’re going to see us continue to add dealers nicely for the next couple of quarters. And then eventually, as we fill out the network, we’ll be able to explain in a little more depth, where we think the optimum dealer count lies. At this stage of the game, because we’re still a several thousand away from that point, I don’t really think it’s that useful to speculate on where we are going to end up. On your second question around the trade-in pilot, we’re very pleased with how it’s getting launched so far. We’re up and running now and three states, probably two states basically, the New York City and Philadelphia markets. We started in June, warming the dealers up to it letting them know we’ve coming. We turned on consumer traffic in mid-July in these markets. We have a good cadre of local dealers in these markets already signed up to the program. We’re doing the right now promotion of the program on our Homepage. We have plans to deepen the promotion, significantly in the next couple of months. We’re pleased with the conversion rates we’ve seen. And so far, the program is off to a good start. This product has a lot of legs in automotive, because the pricing that it produces for consumers is very competitive, compared to the competitive benchmarks offered by companies like CarMax and Kelley Blue Book. And it has a clearly superior value prop for the consumers and dealers, given the way it provide a strongly interactive and transparent view of what drives the price of the consumers trade-in. So we’re very excited about this. And off to a good start, like I said, we’re going to be continuing on the pilot basis for the next, at least, quarter. We’ll be planning the rollout of the consumer side of this product in the first half of next year. It’s likely to rollout on a region-by-region basis next year in the first half. There’s also wholesale focus set of products associated with TrueCar Trade. Those are products with subscription fee that dealers adopt, because they provide them really good tools for their website as well as a good understanding backdrop of any car that they’re interested in acquiring on wholesale basis. Our current thinking is that we will launch the wholesale side of this nationwide in early next year. We are right now training up more product specialists to address the growth in these products. We have a couple of them on the ground in the Northeast today and they’re doing a great job. So we’re very excited about this part of the business.

[Unidentified Analyst:]

Great. Thank you, Chip.

[Operator:]

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

[Ron Josey:]

All right, thanks for taking the question. So I wanted to ask little more about the incentives business and particularly on the rollout plans. Mike, I think you said, 2Q had $8 million incentive revenue, which is a great relative step up. But I’m wondering, as you roll this out to more OEMs and also more affinity partners, if a member verification, which I think is what you said, is that something you likely to do so might be lumpy as you roll it out? And then specifically, if you could help us understand maybe what metrics you’re looking for needed in order to expand the OEM incentives to go beyond affinity partners how you do the TrueCar channel? And then a quick second question just on guidance, just to make sure, I understand. So I think guidance for unit is around 267,000 at the midpoint, the revenue guidance we’d assume ARPU comes down 5%. Is that around there? Is that all because of the incentives that you talked about? Or is there something else going on in pricing? Thank you.

[Chip Perry:]

Okay. Ron, make sure we get all the pieces here. On the OEM side, I think it’s definitely a lumpy business. As we’ve talked about before. You add an OEM. You can have a lot of volume quickly. And as you roll that out across programs, you can see revenue moving up very quickly as well. Verification is a big issue, when you’re dealing with partners. You want to make sure that the people are qualified for the incentives are actually receiving them. And so we need to make sure that we are always connected end-to-end with the partner and with the manufacturer. So I think in general, what we find with the OEM business is, all the OEMs are happy with the programs right now. And when we get to, I would say five or six manufacturers, you’re going to start to see less lumpiness in the revenue and more predictability. But right now, at low levels, we just have that kind of – those kinds of ups and downs. Really great numbers in the second quarter. Testing in the third quarter and then a lot of activity right now. So some of that might come back this quarter, but more likely in the fourth quarter. But like I said, I think when we the four, five, six numbers of OEMs that we’re working with, I think you’ll start to get rid of some of that lumpiness and to be able to more predictable and manageable. Second question, I think was about, we’re going to get OEMs working on TrueCar. The answer is, we already are. FCA has got a small incentive program on the TrueCar platform. We had some technical limitations that we had to get through. And we did that this past quarter. And so that is an area, where I expect to see a lot of interest from manufacturer. So we do that now. We’re prepared to do it. And we’re ready to roll it out, as we sign on more manufacturers. And then the last question was about pricing in the guidance and you are – yes, you’re right, in terms of the percentage down. And that is due a little bit to this issue on OEMs and then a little bit on continued rollout of subscription pricing, right. We’ve gone to about two-thirds of our units coming from dealers that are on subscription. And when we have this kind of bump up in units. And you can see this historically with the company going back to 2014, 2015. Second and third quarter, you typically see lots of units and slightly lower monetization, because you’re trying to catch up with the units in your subscription. So it’s not unusual, pretty common in terms of what we seeing and that’s the balance of the movement in monetization or ARPU.

[Ron Josey:]

Great. Thank you very much.

[Operator:]

Thank you. The next question is from Brian Nowak of Morgan Stanley. Please go ahead.

[Jon Lanterman:]

Hi, guys. This is Jon Lanterman on for Brian. Just question on the unique visitor growth, strong quarter overall but this metric seem to like it droved a little bit. How you’re thinking about the metric, and when you prioritize spending growth. When you look at UVs prospects units sold. Is this probably your last priority of the three? And you’re more targeting NFE and then kind of short-term, long-term, other targets you want to get to for UV growth next few quarters and then in the next three or five years? Thanks.

[Chip Perry:]

Hey John. Yes, we’re definitely much more focused on units right now. And we’re really happy with the unit numbers. We have been, I think for the last four quarters now, going back to Q3 of last year talking about the difference between, where we were in 2015 and trying to grow the business versus where we are now. We wanted to improve the yield through the funnel. We felt like, we were already touching a substantial amount of new car buyers and, while of course, we would love to bring in more traffic, we’re much, much more focused on conversion improvement and where the prospect growth numbers are growing. So in the last few quarters, we’ve had really great improvement on new car conversion. And then as we talked about over time, we moved our used car experience over the new technology platform. We are just starting to work on the used car product that we’ve already seeing really healthy growth in conversion rate. At the same time, we’ve got that much conversion increase. We’re sending a lot of people, a lot of end market buyers to dealerships. We want to make sure that the dealers can digest all that. So as we have been adding prospects, we’ve been adding dealers and we’ve been able to maintain the close rates. So the quality of the funnel has not degraded over the last four or five quarters. Overall, we definitely are now looking more at top line – UV growth. And specifically what we look out is, what’s happening on the new cars search visitors side and the used car search visitor side. So on the used car side, strong SEO growth and from advertising – from television advertising around used has grown at the top of the used funnel. And I think in last couple of quarters, we’ll start looking at more carefully at the new car side and put some more money behind marketing and start to grow top of the funnel. Overall though, where it’s gets really interesting for us is, when we get our research side of our product, our upper funnel shopping experience up and running. And you will see the first pieces of that in the third quarter. But that’s ultimately, where we’re really going to drive a lot of top of funnel growth.

[Jon Lanterman:]

That’s helpful, thanks.

[Operator:]

Thank you. The next question is from Douglas Anmuth from JPMorgan. Please go ahead.

[Lina Rudashevski:]

Hi this is Lina Rudashevski on for Doug. You previously said that the NFE for new cars is better than for used cars. So I was wondering, if you could maybe disclose what the NFE is for both segments? Thanks.

[Chip Perry:]

Sure. In the second quarter and on metric being – units divided by search visitors, because when you coming to our experience, you can go to the new flow or the used flow. So forget about UVs for a second and look at who engages on the new side and on the used side. The NFE on the new car side in Q2 was 1.71% and that’s against the number this time last year of about 1.3%. And then on the used car side, the NFE – on used car search visitors was about 0.81% and that’s up year-over-year from 0.71% on the used car side.

[Lina Rudashevski:]

That’s helpful, 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. Thanks for taking our questions. Curious, what you’re seeing on the broad market given the recent slowdown in auto sales at least from the new side. I mean what sorts of behavioral changes are the OEMs making? What about dealers. I mean, are they turning into partners like TrueCar more to drive transactions. What are you seeing out there, Chip?

[Chip Perry:]

Well, we can read the news like you can and we see an industry SAR rate down a few percent in July. And over the course of the year, as far as the pattern of a modest decline year-over-year. When you look back 2016 was like a peak year after a strong period of growth of six or seven years coming out of the Great Recession in 2009. So the industry is now offering at a very high-level, slightly lower than it was last year. It’s operating at a level with plenty of volume for the manufacturers and dealers to do well in their businesses. Obviously, all of them have expansion plans and to add up their growth goals compared to the market. There’s obviously going to be discrete, in terms of the reality of cars being sold versus each dealer and each manufactures expectations. All that being said, even though the market is soft, softening – not soft, it’s softening, there’s still a lot of marketing money being spent chasing car buyers. And in fact that, it’s offer a little bit means that in order to achieve those growth goals, the manufacturers and dealers are moving to be pretty aggressive right now and they are. So we’re seeing healthy spending across the board. And in fact, incentives are holding at very high level. And dealer marketing spending is strong. We’re seeing at this stage of the game though, a real focus on finding more efficient marketing channel. As I said in the past over the last several years, digital has recently be more than 50% of dealer manufacturer ad spending, but the average marketing cost per car sold for both dealers and manufacturers has actually increased over the last decade. So digital hasn’t brought more efficiency to the industry. And there is – therefore a significant focus by both parties, dealers and manufacturers in finding ways to becoming more efficient. TrueCar, because our cost of growth in OEM and for the dealer is well below their marketing average cost, we are very favorably positioned as an efficient marketing channel for our clients. So, that’s where our market share growth is coming from, that’s where our well, well above average, compared to the industry, unit and revenue growth was coming from. So we said that, we believe we can grow in a tight car market, and a tight car market actually benefits TrueCar. So we’re excited about – although we take that story to our clients. It’s resonating with them. And we expect it to continue to do so for the foreseeable future, the rest of 2017 into 2018 and beyond. Because we have this efficiency advantage, which we’re going to nearly significantly build upon and provides tailwind into our marketplace.

[Mike Guthrie:]

Of all the metrics like, I think we could be much happier about the unit numbers than we are right now. We just really produced – really fantastic unit growth. We’re seeing, as the third quarter starts, continued strong growth in units that’s embedded in the guidance that we gave you on units and it’s embedded in guidance that we gave on units for the as a whole in addition to Q3. So that tells us that we also see dealer ads, that the marketing channel is efficient, that dealers perceive that and that we’re getting more than our fair share. The growth in new car retail market share flowing through TrueCar dealers has grown about 26% year-over-year. So, yes, it’s clear and it’s just in a market where the SAR is softening a little bit for us to see this kind of relative performance, we’re really pleased with are on the unit side. So, it’s – I think that says a lot about where the dealers are and how they perceive our product and our service. On the OEM side, I think that’s why we remain optimistic is that, it clearly the industry is incentivizing right now to move the inventory. And for the manufacturers that are taking a look at TrueCar, that numbers increasing, right, more and more manufacturers are engaging with us in discussions. And I think we ultimately feel like we’re going to see more than our fair share of growth in OEMs dollars as well over the next few quarters.

[Greg Palm:]

That’s a great color. And then I didn’t hear the unit counts by channel, maybe I missed that. But, Mike can you give us those and maybe any commentary on the Infiniti channel results and the color would be helpful too? Thanks.

[Mike Guthrie:]

Yes, no problem. So for the second quarter, total units were 242,130. I brought them down by new and used on the call. But to break them down by channel, TrueCar was 99,268 year-over-year growth of 25%. USAA was 71,826 year-over-year growth of 12% and our other partner channel was 71,036 and the year-over-year growth rate was 37%. I’m sorry. The USAA growth was 17%. I picked up the wrong number.

[Greg Palm:]

Any color on the other Infiniti channel? Was that just sort of the ramp up of some of the newer ones?

[Mike Guthrie:]

Yes, I mean it’s a continuation of the trend over the last few quarters, strong across the board, particularly strong at Sam’s Club and at Chase. But also very strong in our employee benefit side of our business, which is several partners embedded in that number. So really, we have, I would say, we really have zero complains around other partners right now. The numbers are going incredibly well.

[Greg Palm:]

Yes, sounds good. I’ll hop back in queue. Thanks.

[Mike Guthrie:]

Thanks.

[Operator:]

Thank you. [Operator Instructions] Our next question is from Kyle Evans of Stephens. Please go ahead.

[Kyle Evans:]

Hi, thanks. Mike, you gave some quantitates on the net funnel efficiency. I was hoping, Chip you could give maybe a more qualitative update there the progress that’s been made, maybe where the company has come up short. And where you think the lowest hanging fruit is going forward? And then I’ve got one follow-up.

[Chip Perry:]

Thank you, Kyle. We’re not coming up short anyplace right now, when it comes to improving NFE. After the period of stagnation in 2014 and 2015, beginning in 2016, we could have lost operational focus on this, an obsession I call it. And it’s really paying off. So we’re seeing really nice growth in conversion rates both for new and used and we’re holding close rates in both segments, actually growing new-car close rate a little bit. And as a result, NFE is moving up nicely. I’d say the conversion rate improvement have been the result of the great work that our product and tech teams have done to institute improvements in how our sites work and communicate the benefits of becoming a fully registered visitor in TrueCar to our consumer audience. We begin that benefit messaging journey. It was based upon research finding that we made last year. We continue to believe that we have a lot of headroom there in conversion growth. And, in particular, one of the great benefits that consumers receive through TrueCar is the ability to essentially top the price of a car at the then level instantaneously after they registerer. What I mean by that is, you show them an upfront attractive, transparent pricing offer from the dealer in the context compared to what other people actually pay for that car. And we did that instantaneously. That’s a really toughed used case to actually accomplish outside of TrueCar. Trying to figure out what a good price of a car is isn’t easy. You have to look at dealer websites, manufacturer site, you see a lot of different price reference point, MSRP, the acting prices and invoices, what’s a good price. A good price is the market average. And to be able to have that comparison instantaneously presented, along with an upfront transparent offer is a big thing for the consumer. We have this very large benefit. It’s starting to get communicated today. We’ve got a bunch of ideas in the hopper there really testing in the next couple of quarters to further enhance our conversion rates, that’s on the new car side. On the used car side, our tech team did a great job, on time, on budget, rebuilding the used car platform of TrueCar that’s now up and running. And we’re starting to already see some improvements in conversion rate by virtue of improvements in our sort order and in the way we’re presenting – starting to present vehicle detail pages better to consumers as well as some improved filtering techniques, so consumers can find more easily the car they’re looking for. So we’re very pleased about how that’s moving on both side of the business, new and used. And then with respect to close rate, we are just beginning to make improvements there. We have a lot of headroom there as a result of our client success team out on the field, helping dealers, learn how to best practices, improve their close rates as well as in the second half of this year, as I’ve said in the past, we have improvements in the works that will enable consumers to see more inventory with upfront pricing after they register, instead of only three cars per dealer today, we’re going to open that up, enable dealers to give more cars to in-market car shoppers, we think that’s going to increase engagement and conversion rate. Again, we don’t know how much, we’ll let you know, as those improvements rollout, becomes of step functions we find in that part of experience as it evolves. But those are the basis working on. In addition to, as I mentioned earlier, improvements and what we a call dealer selection algorithm, which will enable us to refine the match that we’re making and the quality and introduction between the consumer and the dealer. So there is a lot of individual dials inside this machine called the TrueCar platform that we have separate teams working on, instrumenting, testing improvements and then rolling them out as test proves that they create upside step function. So that’s what you’re going to see from us for the next year or two. And as I hit our rearview mirror, we’ll let you know what they are and we’ll be incorporating them in our guidance going forward.

[Kyle Evans:]

Great, thanks. On the upper funnel business you mentioned, TrueCar launched 3Q partner, 4Q. When do you envision that business being at scale and would you care to tell us how key the partner is in the fourth quarter? Thanks.

[Chip Perry:]

This program is very exciting because it’s going to open up a whole new dimension of transparency for consumers about what other real car buyers think about their cars they’re currently driving on the roads. And it’s going to be presented in a style, very efficiently, lightning fast with no display ads, unprecedented in our industry. Because our competition, which is leading down with this chopped up display ads based experience. So this product will launch in the third quarter. We’re going to roll it out brand by brand, as we’ve matched the content; curated and can launch it. It will hit TrueCar like I said, the latter part of this quarter, one of our key partners yet to be named in the fourth quarter. You will see this blossom over the course of 2018. It won’t really be in a full-blown form until the end of the year. We’re on a journey here that starts with consumer reviews, but then builds out other forms of content, including expert reviews as well as showcases for OEMs that enables them to get all of their great content to consumers in a way in which they’re not paying to advertise, which we think is very appealing to them as well as consumers, who will be able to in a common work and feel user interface, study and comparison shop across all the big automotive brands available in the United States. So by the end of 2018, this product will be fully rolled out. We’re going to start to see its affects and benefits in SEO incremental traffic in the right away there is no build, because it’s not going to be all brands all at one. You’re going to see by the middle part of next year, a big step forward by the end of the year, hugely for consumers and manufacturers, when it comes to research and discovery of cars.

[Kyle Evans:]

Thank you.

[Operator:]

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

[Nick Jones:]

Hi, this is Nick Jones on for Mark Kelley. Just one question on kind of a new and used car mix, what’s the right way to think about the current state of the used car pricing? And how that might impact your mix kind of the rest of this year and maybe in the next year?

[Chip Perry:]

Well, the used car market is affected by the new car market typically with off-lease vehicles and incentives offered by manufacturers. Used car market is strong in terms of volume. Pricing is affected by supply and demand, as new cars come off of release as incentive change that affect used car pricing. So the fact that used car prices flowed around a little bit doesn’t really affect TrueCar. The volume in the used car side of the industry is very strong. So that’s going well from our perspective. There is a bit of softening on the new car side as I described, which we think is actually a positive for TrueCar in the near and medium-term. So I think that’s a state of affairs as we see it in the used car industry and we don’t see any headwinds are particularly problematic issues in that segment.

[Nick Jones:]

Okay, thank you.

[Operator:]

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

[Sameet Sinha:]

Yes, thank you. Couple of questions. Going back to the OEM incentives program, can you provide us kind of a revenue number that you have for OEM incentives product in your guidance? And secondly, can you talk about marketing spend going into the third quarter, any sort of new creative that you could have, any sort of new target markets, anything basically new in that segment? Thank you.

[Victor Anthony Perry:]

Sameet, so the first question is what OEM revenue is in our guidance. It’s about $4.5 million to $5 million in the third quarter. So it’s about – as I said about $3 million to $ 3.5 million below the $7.8 million that was in the second quarter. And then we think that will pick up by a few million bucks in Q4. Mike said, there is natural lumpiness in this part of our business. That being said, we have the best pipeline we’ve ever had with OEM. It’s the improvement in the dealer perception to TrueCar that we’ve seen, OEMs are warming up significantly to the idea of embracing TrueCar’s very efficient form of marketing incentives. We don’t ask them for advertising fees like other third parties. We enable them to present their incentives in a very target and efficient way. And we get compensated after car get sold on a basis that they find a very attractive. So we have a new leader in that segment, as you know, Mike Darrell, who is out there talking to all the OEMs and we’re seeing really nice response and that’s why we’re bullish about an uptick in this category in the fourth quarter. Obviously, we’re seeing a bit of softening in the third quarter as a result of the prior to that one program. But overtime, I think you’re going to see this generally up to the right, even though there will be some volatility on the quarterly basis. I’d tell you a lot of the CFT are bit cautious as we forecast this part of our business.

[Mike Guthrie:]

Sameet, what was your second question?

[Sameet Sinha:]

Second question was primarily about marketing spend in the second quarter – I’m sorry, in the third quarter. How you’re planning to spend in any sort of changes to the plan more TV or less online, if you can give us a little more detail, that would be helpful. Thank you.

[Mike Guthrie:]

Yes, we’re spending a little more in the third quarter and that’s normal based on seasonality, Sameet. I think, if anything, spend isn’t changing dramatically and it’s probably a little more weighted to digital versus television overall.

[Sameet Sinha:]

Thank you.

[Operator:]

Thank you. There are no further questions in the queue at this time. I would like to turn the conference back over to management for closing comments.

[Chip Perry:]

Thank you, everybody for dialing in. We’re very excited about the progress we’re making. We’ve successfully reaccelerated the growth for our top line after going through a bit of a low period in first part of last year. We’re definitely on our way. We have in our site, the ability to grow our revenues double-digit for the next several years in 15% to 20% range. We can see this size of this company doubling in the next three to four years and beyond that. We clearly believe that we’re building $1 billion revenue business that will be the category killer in online automotive over the next three to five years. I think the industry is taking noticed, but the changes an improvements in TrueCar, we are gratified by our progress, but it’s not taking successfully granted at all ever. And very much focused on the operational obsessions in key areas of the business needed to continue for this kind of progress. So thank you for signing in and look forward to speaking with any of you have further questions. 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.