TrueCar, Inc.
Q3 2017 Earnings Call Transcript

Published: 7 Nov 2017

[Operator:]

Greetings, and welcome to the TrueCar Third 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 your host Alison Sternberg. Thank you, you may now begin.

[Alison Sternberg:]

Thank you, Operator. Hello, and welcome to TrueCar’s third 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 fourth quarter and full year 2017 and longer term; management’s beliefs and expectations as to future strategies, event, and planned product offerings, including the expansion of TrueCar trade, and its impact on traffic, and the impact on close rate of the rollout of dealer inventory; our ability to grow our partner channel as well as incentive revenue in redemptions, the impact on our future results of optimization to the USAA car buying experience, and USAA digital marketing campaign. Our ability to broaden our experience to encompass every staff of the car buying journey, our ability to increase revenue from dealers on the subscription pricing model. The impact of owner generated reviews on traffic growth, the impact of an improved set of benefit messages on conversion rate, 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 second quarter ended September 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. Notwithstanding the fact, we rely on units in revenue. It was a productive quarter at TrueCar. Let’s start with some key accomplishments for the third quarter. First, our partner business, exclusive of USAA had another fantastic quarter growing units by 45% year-over-year. The growth was broad based with significant gain not only from Sam’s Club and Chase, but also from other key partners such as U.S. News and our employee benefits provider. We believe that nearly every car buyer in America is a member of at least one of our committee partner. This channel which we have cultivated since our founding has a unique way to engage with car buyer, that no one in the digital category can match. In the aggregate, these partners are now our second largest channel accounting for nearly one-third of units in the third quarter, and we believe we will carry significant broad day momentum with this channel into 2018. Second in Q3. Our OEM partners, FCA, Mercedes-Benz and Volvo continue to capitalize on the targeted efficiency of the TrueCar marketplace. After the close of the quarter, we announced a new program with Ford Motor Company in partnership with Sam’s Club. In addition, we have deals pending with one or two OEM that we believe will have a positive impact on our Q4 result. These programs are differentiated, strategic relationship with a leading manufacturers enable by our leadership in the new car space, our unique affinity partnerships, and our singular ability to track consumers through to a transaction. No one else in the online auto category has done this. The OEM incentives business not only expands our served available market significantly, but also represents yet another key faculty to delivering a great end-to-end consumer experience. Third, we launched owner generated reviews on the TrueCar channel. This is the small first step toward providing, a differentiated ad-free upper funnel shopping experience to consumers and should become an important driver of traffic growth. Currently situated on our vehicle price report detail pages and covering very OEM, the user reviews enable consumers to see what real owners think about their vehicle. We launched with over 100,000 detailed vehicle ratings and more than 10,000 return reviews, all of them for verified owners. Right of the gates, this makes TrueCar the largest source in automotive for verified owner reviews. We’re already measuring approximately a 6% reduction in bounce rates and seeing that users, who engage with our review content, spend over twice the amount of time per session. Fourth. We saw continued progress with our TrueCar trade pilot in the Northeastern United States. TrueCar Trade delivers to consumers a sight unseen then specifically liquid offer based on numerous factors, including option, vehicle history and condition. This is the first time in our industry that dealers and consumers are equipped with the same level of information transparency to value a used vehicle accurately. Dealer and consumer feedback has been positive. We are pleased by the early results. Thus we plan to expand our offering to Florida in Q4, and launch the product nationally next year. Like owner-generated reviews, we view TrueCar trade as a critical ingredient to our goal of doubling our traffic over the next two years, while providing consumers a fully transparent, unique end-to-end online auto buying experience. Fifth. We grew our new car market share by 19% year-over-year to 4.6% in Q3, which is an all-time high for TrueCar, even as the auto industry SAAR declined by 2.3%. Finally, we took some important steps toward improving our process of determining subscription pricing with dealer. This is a key area of focus. And we have thoughtful and detailed plans in place to grow our revenues with dealers, especially those with whom, we have been under monetizing. In addition to these third quarter milestones, we have several exciting product improvements scheduled to launch in Q4. Noteworthy among them is the rollout of full dealer inventory to consumers, who register as TrueCar prospects. Currently, we typically expose three cars per dealers for a selected vehicle. But we will soon enable consumers to be upfront pricing for all the relevant vehicles that the dealership they get introduced to. This change will be positive for both consumers and dealers and should provide an uptick over time in our close rate. Another important product change that is now in test mode is an improved set of benefit messages, who we expect will provide the next step function in the growth of our conversion rate. I’m generally pleased with our execution in the third quarter. But we did have our challenges. Recently, USAA launched a significant website redesign. USAA’s mission is to facilitate the financial security of its members, associates and their families by providing a full range of highly competitive financial products and services. In doing so, USAA seeks to be the provider of choice for the military community. Because the car represents a large financial commitment, USAA wants to ensure that their members receive the best possible advice before entering into purchase or lease of a new or used car. In order to that, the new USAA car buying experience has introduced several new steps in the process. And new content related to total cost of ownership, before the member is linked to the car buying service powered by TrueCar. It is important to note that USAA and we are working on site optimizations and that USAA is supporting their car buying experience with a significant marketing campaign that started in early Q4. For Q3, however, we saw a decline in traffic, prospects and units on USAA. We support USAA’s mission and believe that together we can make the need improvement to produce great results for the car buying service, while ensuring that members are better served. In addition, we’ve begun the annual planning process with USAA and both of us expect to grow the program significantly in 2018. Before I turn it over to Mike, I want to write some context for where we want to take TrueCar over the next two to three years. Over the past decade or so, dealers and OEMs have moved the majority of their marketing dollars from traditional media to digital media with no results in improvement in marketing cost per car sold. That digital spend today is largely split between Google, Facebook and third-party automotive marketplaces. Search and social, primary drives clicks back to dealer and OEM websites, but don’t help consumers conveniently compare shop across dealerships. Among the third parties, used car listings sites provide limited functionality, namely finding a used car, scanning vehicle supply and asking prices and finding ratings of prices of dealers. The cars revenues are not tied directly to vehicle sales. These sites, including Google and Facebook charge marketer for tremendous number of low-yield, ad impressions, leads and clicks, thereby driving up the marketing cost per sale. These business models and value propositions haven’t changed much over time. They don’t serve the new car market well and the rigid advertising models make it difficult for them to innovate and improve the overall consumer car buying experience. Only TrueCar provides a distinctive experience for new car buyers and tracks consumers through to a sale, moving dealers and OEMs based on actual sales attribution. Our model requires us to focus our energies on dramatically improving the consumer car buying experience and desired dealer and OEM outcomes. We believe that ultimately, the company that is going to attract the most marketing dollars in the auto industry must provide an amazing comprehensive online car buying experience for consumers, whether they are buying a new or used car or also helping to solve the significant marketing challenges that dealers and auto manufacturers space. And this is a big opportunity, given that dealers and OEMs spend about $36 billion each year marketing to consumers and an additional nearly $60 billion on incentives. At TrueCar, we have a clear vision of where we want to take the consumer experience in order to win in this category. Consumers, where they’re looking for new or used cars can start their process on their mobile phone or desktop, by searching through and reading reviews from users, who’ve actually purchased driven and owned the cars in question. All this research will be provided with no distracted banner advertising that has junked up the experience across the sites of many of our competitors. Just free, highly relevant and easy to digest content. As consumers engage with particular makes and models, they can visit OEM showcases, where the manufacturers present highly relevant content about their cars, again, but no annoying display ads. While consumers are engaging with their brands, manufactures will be able to deliver targeted incentives on cars to improve the odds of purchase. As consumers move more deeply into the buying funnel, they can see detailed analytics about the price and value of the car. They will receive market pricing context and transparent upfront prices from dealers conveniently located to them that are willing to provide great buying experiences. They won’t have to be entered through confusing tiers of vehicle listing or wonder whether a new vehicle asking price is attractive or not. When getting close to buying a car, consumers will be in full control of how they communicate with dealers. When it’s time to visit a dealership, they will be introduced to dealers, who provide outstanding purchasing experiences via a curated dealer network. Before they buy, consumers will receive market correct transactable offer to their trade-ins. The volume of the trade-in and any incentives will be applied to purchase price of the car they want to buy. The consumer will then see financing offers. Before the consumer even shows up the dealership, he or she will have a good understanding of the financing process, and they will know the drive away price, inclusive of fees and taxes and precise monthly payment down to the penny. And the best part of this experience is that it creates a massive marketing efficiency for dealers and OEMs, because all of the spend will be based not on impressions, clicks or leads, but on successful transactions. As I said here before, I joined TrueCar because I saw huge opportunity to become the clear market leader by delivering on this vision. Despite some of the challenges we encountered in this quarter, we’re pleased with our traction toward expanding our offering to deliver best-in-class, modern automotive marketplace. We will head into 2018 focusing on making the necessary investments to make our long-term vision a reality. Now I’ll turn the call over to Mike.

[Mike Guthrie:]

Good afternoon, everyone. Revenue in Q3 of 2017 totaled $82.4 million, up 10% over Q3 of 2016, but below our revenue guidance of $85 million to $87 million. Revenue from franchise dealers totaled $65.1 million in Q3 of 2017, up 11% over Q3 of last year. Franchise dealer count grew 14% year-over-year to 12,286 and revenue per franchise dealer was $5,319 in the quarter, down 5% year-over-year, but up 4% sequentially. Revenue from independent dealers, almost all of whom are on subscription billing plans was $8.3 million in the quarter, up 31% over Q3 of last year. Independent dealer count was up 16% year-over-year to 2,938 dealerships, while revenue per independent dealer was up 14% year-over-year to $2,852. OEM incentive revenue was $4.1 million in Q3 on over 16,000 incentive redemptions, down from $5.5 million this time last year are nearly 20,000 redemptions and down from $7.8 million in Q2 of this year on approximately 28,000 redemptions. However, with the addition of the Ford program, and the additional programs that we anticipate closing soon, we expect the redemptions in Q4 will be between 24,000 and 28,000 and produce revenue of between $6 million to $7 million. Finally, forecast consulting and other revenue was $4.9 million in Q3 of 2017, essentially flat year-over-year. Units in the quarter totaled 253,527, up 15% year-over-year. The TrueCar branded channel generated 108,376 units, up 12%. Partners driven by strong growth at Chase and Sam’s Club contributed 80,310 units, up 45% and USAA, given the challenges of their new experience produced 64,841 units, down 5% from last year. Monetization in Q3 of 2017 was $306 per unit as compared to $319 per unit in both Q3 of 2016 and Q2 of 2017. The sequential decline was nearly entirely a result of the decline in OEM incentives from Q2. New car units were 172,979 or 15% higher than this time last year, and new car retail market share grew 19% to 4.6%. While used car units were 80,548, up 16% versus Q3 of 2016. The year-over-year contraction in the units at USAA contributed to the deceleration in used car growth versus last quarter, as our USAA channel has the highest ratio of used car sales. Turning to expenses and margins. All of the following metrics are on a non-GAAP basis, unless stated otherwise. Gross profit in Q3 of 2017 were $75.7 million, up 10% from Q3 of 2016 and gross margin was 91.8% in Q3 of 2017 versus 91.9% in Q3 last year. Technology and product expenses were $12.8 million or 15.5% of revenue in Q3 of 2017 versus $12 million or 15.9% of revenue last year. Sales and marketing expenses were $45 million or 54.6% of revenue in Q3 of 2017, as compared to $40.9 million or 54.4% of revenue in Q3 of last year. Within our sales and marketing expenses, we spent $16.4 million on television, radio and digital to drive TrueCar channel customer acquisitions versus $17.5 million this time last year. Cost per share declined by 16% from $180 per unit last year to $151 per unit this year. Partner revenue share and other expenses were $13.1 million versus $10 million in Q3 of last year. And finally, headcount and other costs were $15.5 million, up from $13.4 million this time last year. These increases were primarily related to hiring on our dealer team. General and administrative expenses in Q3 were $9.9 million or 12% of revenue compared to $10.4 million or 13.9% of revenue in Q3 of 2016. Adjusted EBITDA for the third quarter of 2017 was $8 million or 9.7% of revenue, up from $5.8 million or 7.7% of revenue in Q3 of 2016 and at the top end of our range of $7 million to $8 million guidance. The noncash expense items excluded from adjusted EBITDA for Q3 2017 were depreciation and amortization of $5.8 million and stock-based compensation of $9.9 million. We also added back $1.5 million of certain litigation costs. GAAP net loss for the quarter was $9.5 million or net loss of $0.10 per share as compared to GAAP net loss of $7.4 million or net loss of $0.09 per share in Q3 of last year. The weighted average common shares outstanding were 98,665,000 in Q3 of 2017, up from 84,822,000 shares in Q3 last year. The growth in share count was primarily driven by the exercise of stock option. Our non-GAAP net income for the quarter was $1.9 million for non-GAAP net income of $0.02 per share and that compares to Q3 of last year, when our non-GAAP net loss was $1 million or non-GAAP net loss of $0.01 per share. As of September 30, 2017, our cash balances totaled $196 million, an increase of $14.7 million from last quarter and that increase is primarily related to the exercise of stock option. Turning to guidance. We believe units in the fourth quarter will be in the range of 240,000 to 245,000, up 11% year-over-year. And we expect revenue in Q4 to be in the range of $81 million to $83 million, also up approximately 11% year-over-year. Finally, we are guiding adjusted EBITDA to be $6 million to $7 million or 8% of revenue and up 13% year-over-year. As a result, for all of fiscal year 2017, we are updating our guidance as follows

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Ron Josey with JMP Securities. Please state your question.

[Ron Josey:]

Great. Thanks for taking the questions. So I wanted to ask a little bit more, Mike and Chip on the unit side. I think you described what happened to USAA with a decline of 5%. And you talked about the change in the user experience. Chip, can you just talk a little bit more about, I think USAA is launching a new car buying marketing program in the quarter. Have you seen a rebound the here as a result, early on? And then what I didn’t hear is maybe why the de-sell in TrueCar units? It looks like it grew only about 11%, 12%. Is that because of hurricane impacts or may be because traffic only grew 1%. And if it’s traffic? Any sense on how you can improve that?

[Mike Guthrie:]

Hey, Ron, it’s Mike. I’ll take the second question first. As it relates to TrueCar units, when partners are down, whether it’s USAA or somebody else, it tends to drive outsize margin. And so we will pull back on marketing spend, when we see the units starting to slow down. So we would have – you can see we have a sequential decline in marketing spend that normally wouldn’t see with the healthy funnel. So we were really slowing the spend down to make sure we made up the margin. I’ll let Chip address the USAA experience.

[Chip Perry:]

And to your first question, Ron, about USAA. It’s too early yet to say whether the market – what kind of effect the fourth quarter marketing campaign will have. But like I said, we’re working closely with them to optimize the experience, make it stronger. And we’re hopeful that in the second half of this quarter, we’ll see some improvements.

[Ron Josey:]

And any insights on hurricanes, if any?

[Mike Guthrie:]

Yes. Really small impact. I mean, we’ve talked about it before. We’ve run the numbers both in Texas and Florida. And it was, really, not a meaningful amount of units in the quarter.

[Ron Josey:]

And one last one, I’m sorry. Just Chip to your point on USAA, haven’t seen impact. But how closely you’re all working together, so that when changes like this happen you are in the loop earlier on in the process? Thanks.

[Chip Perry:]

Like I said in my remarks, USAA has made these changes as a result of their desire to provide more financial advice to their members, when they’re making a big purchase like buying a car. So the changes – user experience involves some steps, questions and also content related to vehicle affordability and cost of ownership. So when we saw this coming, it wasn’t likely we’re blind to them and after saw them launch, we together realized that they’re having a downward effect on our numbers. And so together, we’ve been working since then to mitigate the decline and find improvements to get us back into the normal sort of growth trend with USAA that we have had for many, many years, double-digit growth consistently. And I believe that we will be able to get back into that zone next year, as we work on addressing these issues.

[Ron Josey:]

Great. Thank you, guys.

[Operator:]

Our next question is from Steve Dyer with Craig-Hallum. Please state your question.

[Steve Dyer:]

Thanks. Good afternoon. Question around your franchise revenue per dealer. It was down year-over-year, and just sort of been in the range, I guess, here for the last – really for the last couple of years and down from same period in 2015. I guess, is that something that you’re focused on specifically or do you not necessarily see that as a lever to grow the business? Just any color as to you how you think about that.

[Mike Guthrie:]

Yes. No, it is a lever to grow the business. It’s just generally has to do with the rate of growth of revenue and rate of the growth of the dealer volume. So we had a bit of a slowdown in dealer growth and revenue this quarter. So normally, with the more normal – with the all the channels functioning, I would have expected revenue per dealer this quarter would’ve been higher than actually ended up being. But over the long run, we’re not going to be adding dealers as fast. And so, I generally expect that number to be ticking up.

[Steve Dyer:]

That’s helpful. I guess, along those lines, you touched on it. What is, sort of, the thought process around adding dealers from this point forward? I mean is there a number in back of your head had – do you think there is still holds whether it be – by making OEM or by geographic, where do you sort of settle all over the next year or two?

[Chip Perry:]

Yes, we’ve indicated in the past that we continue to see opportunities to expand and enhance the TrueCar dealer network geographically in certain brands. And our dealer sales and service team is focused on both keeping our existing dealers happy with the service and feeling well supported throughout their experience with TrueCar as well as identifying and bringing in dealers, who would be very productive additions to the network. So we see, like I said, about a couple of thousand more dealers out there that we like to have, but we don’t. And our team is – have a systematic effort to attract them into the fold.

[Mike Guthrie:]

We’ve been adding a very high rate over the last few quarters, late 2016, early 2017. We’ve been talking about in the neighborhood of 100 a month; I think a good number going forward is more like 75. Again, there is not much focus on just getting the dealer count. So more like 75, it’s sort of the right number. So for quarter like, coming into the fourth quarter, where we’ve guided essentially the flat revenue, you will be adding dealers. So your revenue per dealer, I would expect it to go down fourth quarter, just normal seasonality.

[Steve Dyer:]

All right, great. I guess, turning to monetization quickly that ticked down again. Where are we in, sort of, in the move a subscription model? And at what point do you think monetization should stabilize or tick back higher?

[Mike Guthrie:]

Well, the primary driver of monetization this quarter was really on the OEM side. So we’re obviously coming off of a very big number in Q2, came down in Q3 about where we thought a little bit light and it’s going to pick back up in the fourth quarter. So you’ll see some wind in the monetization number in the fourth quarter, due to the OEM incentive business. In terms of overall subscription, it’s about two-thirds of all the units are flowing through a subscription at this point. So we are – I think moving towards the model where there is a vast majority of our dealers are in some form of the subscription payment, all of our independent dealers, virtually all of our independent dealers and a pretty good chunk of our franchise dealers.

[Chip Perry:]

And we’re fine with this transition and trend towards subscription because it’s all underpinned by our proprietary, unique closed-loop attribution model, which the dealer understands that the monthly fee we ask him to pay is related to the volume of cars that we help him sell. So this is, okay as far as I’m concerned. What we’ve been working on as we have indicated.

[Operator:]

Our next question is from Mark Mahaney with RBC Capital Markets. Please state your question. Mark, can you repeat your question?

[Dylan Haber:]

Yes. No problem. It’s Dylan Haber on Mark. Just, again, a question about the trade-in business. How is monetization would be going there so far and whether you think it’d be a material contributor? And then on the OEM incentive business, where do you see that going, I think you talked about it being around $20 million a year run rate business picking up in 2018? Do you think that can grow little bit more? Just sort of your color will be appreciated? Thank you.

[Chip Perry:]

Sure. Is this Joe? Did I get your name correctly?

[Dylan Haber:]

It’s Dylan.

[Chip Perry:]

Dylan, I’m sorry. So the trade-in business, like I said is proceeding quite nicely. We’ve been very pleased with the pilot that’s being running up in the Northeast. And it’s expanding in the Florida here in the next last couple of months and then going nationwide next year. We have, I don’t want to announce number of dealers, we’re happy with number of dealer, it’s growing rapidly. So with this small amount of revenue today coming from this product. I believe, it will be a nice revenue producer in 2018, but still a bit early to call the size. We’ll do that for you on our next call, when we talk about guidance for 2018. And with respect OEM. Yes, it is around roughly $20 million per year revenue stream today. We see it growing quite rapidly. We see, like I said wonderful new announcement with Ford. We’ve got a couple of other clients in the wings, close to signing. We’ll be positive for the network. And a big signal to the industry that the OEMs are taking serious look at the unique targeted incentives platform the TrueCar provides them. So yes, I see next year OEM being quite a measurable revenue growth lever. And probably as far as 2018 is concerned, significantly more growth there than in the trade.

[Mike Guthrie:]

And just to be clear in 2017, the number of our OEM incentives are based on our current guidance is between $23 million and $23.5 million.

[Chip Perry:]

I’m – sorry, roundabout.

[Dylan Haber:]

Great. Thank you.

[Operator:]

Our next question is from Chris Merwin with Goldman Sachs. Please state your question.

[Chris Merwin:]

Hi, great, thank you. I just had one on the competitive environment. I’m just wondering, if you saw any impact from increased competition in the quarter. I think some of your peers have talked about stepping up marketing efforts more recently. And I’m just wondering if that impacted traffic at all? And going forward, when you think about your organic upper funnel initiatives, do you think those are enough to reaccelerate traffic growth or have you thought more about stepping up the market, expand a bit more? Thank you.

[Chip Perry:]

Well, we see the competitive environment like everyone else does, heating up in online automotive right now, a lot of activity. As it relates to TrueCar, our traffic is moderate, because that’s been – our traffic growth has been moderate, because that’s been our strategy for the last 1.5 years or so to focus on yield through our funnel. And grow that way we’ve been able to achieve 15% to 20% growth in the first half of this year and slower growth in the third quarter, largely, almost completely as a result of shortfall from USAA that started. But we expect to return to nice 15% to 20% growth next year, and beyond. Not calling yet, our specific number for 2018. Our traffic growth is concerned, in future, we do believe that it’s important in our category to bring as much audience into a platform like TrueCar as we possibly can. You heard me say that we expect to double our audience in the next two years. We plan on doing that with significant improvements in organic. You’ve seen us launch our display advertising free, owner-review product attached to a price report pages, it’s just beginning to get indexed. We expected to show some very nice upticks in SEO in the next year or so. And we also expect to make greater investments in outbound marketing to grow the TrueCar channel in 2018. We have a dimension those yet we roll later and then we also see some tremendous potential from our partnered platform – partnered network. We have a unique set of arrangements across the industry with many different types of companies in the financial, member, category and others, publishers, they exclusively – one way exclusively came to us, that’s not for them. They direct – they are called by our audience into TrueCar marketplace. Those partners like Sam’s Club and USAA and Chase are showing tremendous growth now, along with others. We see tremendous potential there. Basically every car buyer in America remember one of these networks. And we’re the only company in online automotive. It has technical team to these – into these audiences the way we do. So we’re looking too aggressively to see that next year in addition to as I said, to see more organic as well as paid traffic to TrueCar channel.

[Chris Merwin:]

Okay, thank you.

[Operator:]

Our next question is from Kyle Evans with Stephens. Please state your question.

[Kyle Evans:]

Hi, thanks. If you’ve already mentioned this, I apologize for the redundancy. But when exactly within the quarter did the USAA shortfall hit the numbers and what kind of rebound does your fourth quarter guide assume in that channel?

[Mike Guthrie:]

Hey Kyle, it’s Mike. We had a pretty good July with USAA. We had a – we really start to see it in August and September, the drop is fairly significant. We – right now we’re starting to work on some things that we think will have an impact in around the holidays. Obviously what we don’t want to miss in the fourth quarter is the first Thanks Giving. But for now, what’s in the guide is really a full quarter of what we saw basically two-thirds of which we saw last in Q3. We’ve got nearly a full quarter of decline facing the model and we’re hopeful that we can get out, and have a much better holiday season in terms of traffic prospects and units.

[Kyle Evans:]

Is there anything that you can do on year-end without the concern or help of – you can say to fix that problem or we kind of home to them on this run?

[Mike Guthrie:]

We’re good partners. We don’t tell anything without their concern. What we can do is work together and try to achieve the goals they’re trying to achieve, while making the experience as projected for members as possible. So that’s the way we’re doing it. We work with them on a daily basis. And we’re well connected and having great conversations about how to achieve their goals, while also growing the program at least our growth at both sides, I think that we can achieve.

[Kyle Evans:]

Okay. What are some of the next phases of upper funnel initiatives that we should be looking forward in the next six months?

[Chip Perry:]

Yes, where we’re moving there is the drowning out and strengthening of the existing reviews. There’s few obvious improvements there. And in addition, we have some very interesting, new ways to summarize and navigate this content on our drawing boards that we’re working on, so the unique in our category. I’m very excited about the way in which we are going to help consumers to make productive use of reviews by verified owners rather than winning in reverse chronological data dump. We have a curation team that is working on its content, and I think we’re really moved above forward and stands out dramatically in our category. As you know, owner reviews have not been well done in the automotive space. And we’re making a major move to rectify that situation. I think you’re going to see over the next six months we did improvements there.

[Kyle Evans:]

Okay. Last one, very strong other partner growth. How sustainable do you see that 45% number being? Thank you.

[Mike Guthrie:]

There is lot of momentum, Kyle, in the partner channel right now with both like Sam’s and Chase. So I think we are certainly in the early innings of really healthy year-over-year growth rates. The team is very focused on it. The growth is broad-based, it’s not just Sam’s and Chase, we also have really substantial growth and employee benefits. And so across the board, right now, it looks you really healthy. So we went into 2018 with a lot of momentum in the partner channels. And the partner channel benefits from two things. It benefits from significant activations within their own environments, as well as the native improvements that happen on TrueCar. So it’s like a multiplier effect. When partner activates, it adds to the natural growth in the TrueCar core experience. And conversion growth rate from TrueCar are amplify and partners will get actively promoting to their members and constituents the ease and benefits of using TrueCar as their car buying service.

[Kyle Evans:]

Great, thank you.

[Operator:]

Our next question is from Sameet Sinha with B.Riley FBR. Please state your question.

[Sameet Sinha:]

Yes, thank you very much. Two questions. First on USAA. So you indicated that the USAA site now, ask a few more questions, added a few more processes to the step. So I’m trying to understand, what exactly happened, meeting these customers, while they were going through the process, going through the whole TCO analysis. Did you realize that they couldn’t afford or they – and they jumped out of the process or, while they were going through the process, maybe it was too tedious and that is what impacted their experience and decided not to go through with it? And the second question is the opportunity in independent dealers. Clearly, we’re seeing some numbers amongst your competitors, the dealer networks are seven, eight times the size of your independent network. What is the opportunity that you have been growing that network and continuing to scale the used car business? Thank you.

[Chip Perry:]

So to your question on what happened, you can speculate – isolate the need, all of the above. So yes, a few steps we were excited in the process, some content related to vehicle affordability was put in front of members and that caused them to pause, perhaps not continue perhaps come back at a later date. And so what we’re doing now is working on optimization that enable a members to continue to receive the benefits of having this information without getting in the way of people who know what they want to buy, feel they can afford the car and want to complete the vehicle search and buying experience as quickly as they can.

[Mike Guthrie:]

If you just look at the numbers, it’s really clear, we are really having a traffic issue with USAA. As Chip was saying, whether very well financially qualified or not, all of the members went through an experience to made a much more difficult to car buying service. And so if you look at traffic was fast expresses unit, very, very large decline in traffic, much smaller in terms of the declines in prospects and only 5% down. And with respect to independent dealers, we believe there is a big opportunity out there to go beyond what we’ve already done. As you have seen, we’ve achieved significant growth in tenant in the last year and a half up to now approximately 2000 independent dealers and that continues to grow nicely. We had a team focused on bringing those dealers in and servicing them specifically, separate from our franchise dealer team. And what we’ve worked down so far and where we have mind out the most opportunity with the larger independent by this way. There’s a big opportunity with small and medium-sized independents. And also in this area or the segment of the industry, where many independent dealers are serving our credit challenged car buyers. And we have most underway in most segments. This is basically very segmented industry and we have to have offering for each segment and we got the stream focused on those things. I believe this independent dealer represent a really great set of vehicle choices, and provide great set of vehicle choices for our users and all the members across our affinity organization. So we’re going to continue to strengthen in used. Obviously a bunch of that here have strong experience in the used case and we’re applying it, and you can expect to see some major moves some up next year on the used car.

[Sameet Sinha:]

Thank you.

[Operator:]

Our next question is from Mark Kelley with Citigroup. Please state your question.

[Mark Kelley:]

Great, thanks for taking my question guys. We’ve heard from dealers that USAA channel has some of the best close rates. Are your dealer partners noticing the impact from the changes that USAA made? And could there be like a follow-through, negative consequence, if that persist longer than your mid-Q4 expectations for optimization? And the second on the monetization this quarter, I know the OEM side had a fairly big impact, but even, if I kind of put that back into numbers, it seems like it still little bit below where I would have expected monetization to be. Can you just talk about the used versus new mix? And is there still that spread of $100 per car going forward? Is that what we should expect? Thanks.

[Chip Perry:]

Okay, three questions. If USAA dealers have not really noticed yet the decline in USAA, not many way that we’re hearing feedback from the dealers. So you’re right. We do have a great close rates and do have leverage to see those rates. But I don’t see any real effect of that in our business in terms of growing to attract in the train dealers. And as we improve the situation in USAA and get it back to normal, I expect that closely on the head there within a recent period of time.

[Mike Guthrie:]

Yes, this is driven by that, small volume down five – there are many dealers who not just with the USAA, if you look at partner in general that conversionally can close rate for partners lead in general, are higher than our branded business. So I think right now, we significant offset to USAA is down five is that the partner, rest of the partner channel is up 45. So I don’t think that the dealers are looking around and saying what happened maybe there more than replacing that with business from our other partners.

[Mark Kelley:]

Second question was about monetization and OEM, maybe not making up as much as you would have thought. So Mike, do you want to comment on that?

[Mike Guthrie:]

No, it would, Mark, if you look at the volumes. You may want to – you may have to take this upon and get into spreadsheets. But the decline sequentially from OEMs, the contribution from OEM incentives to monetization number more than makes up for the sequential decline in monetization. So we have a follow-up on these numbers and make sure that we’re getting comfortable with that.

[Mark Kelley:]

Yes, maybe I guess something incorrect. I appreciate the color. Thanks guys.

[Mike Guthrie:]

Then on the used new mix. Yes, we continue to have a spread in the revenue received at $299, $399 is our go-to-market pricing. And particularly lower car pay per sale situation and pay per sell dates the dealers who pay if that way. And the underpinning to all others subscription relationship so the average roughly is $325 per car. So the new used mix is going to continue to shift towards used, which is in some quarters, a very positive effect and others less depending on seasonality.

[Mark Kelley:]

Got it. Thanks guys.

[Operator:]

Our next question is from John Blackledge with Cowen & Company. Please state your question.

[John Blackledge:]

Great. Yes, thanks, just two questions. So the unit guide in the fourth quarter at the midpoint suggest 12% growth. Just wondering, how you think about longer term unit growth and it sounds like you guys expect USAA impact to kind of be – kind of a fourth quarter, 3Q event, 4Q event, but perhaps bounce back next year. And then, on EBITDA, the incremental margins were running kind of low-to-mid 30s first three quarters of the year, at the midpoint of 4Q guide incremental margins are around 10%. Just wondering, Mike, if there’s any call off there? Thanks.

[Chip Perry:]

In Q4 we start to really – we’re making investments for, things that we try to accomplish in 2018. So I don’t think it’s about – the incremental margin from the OEM incentive business, which will be the fastest-growing sequential business, is quite high. It’s very, very high incremental contribution profit. So it more has to do with the fact that you are just making some incremental a hiring investments and even though you are growing outside of the business, sequentially the revenues basically flat. So any increase in expense will take your EBITDA down and that’s a pretty normal Q4 phenomenon. So I think it’s – you look at the customer this year.

[John Blackledge:]

On the unit?

[Chip Perry:]

On the unit 12% of that in EBITDA.

[Mike Guthrie:]

So John, on the units, we will – we really should be in the 15% to 20% range on units going forward. You have USAA negative 5%, sort of normal double-digit kind of growth rates for them, you are back into the range is that we’re talking about. So I think that largely gets us there and we expect to be growing at much more a normal rates in 2018. So I think that one is on really will really return to kind of growth rate numbers that we expect that 15% to 20% growth number.

[John Blackledge:]

Okay. Thank you.

[Operator:]

[Operator Instructions] Our next question is from Brian Nowak with Morgan Stanley. Please state your question.

[Jon Lanterman:]

Hi, guys, this is Jon Lanterman in for Brian. Just a quick question on advertising cost per unit for the TrueCar branded channel. I don’t know if you guys got to this quarter, maybe I missed it, can you just give an update on that. It was 137 last quarter and any kind of trends or longer term thoughts there? Thanks.

[Chip Perry:]

Yes. We covered it, it’s a 151 for the quarter.

[Jon Lanterman:]

And then are you guys still thinking 150 for the year and may be the near term, as I think about going forward our when you think about getting that number down versus kind of unique visitor growth, what’s kind of more important to you in next two years?

[Mike Guthrie:]

I think traffic growth is more important, but you still think that number can come down pretty significantly.

[Jon Lanterman:]

Got it. Thank you.

[Operator:]

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

[Chip Perry:]

Thank you, everybody for tuning in. We appreciate your attention, and we’re looking forward to having conversations with you going forward. And like I said, we’re very positive about the future here. We had a steep bump in the third quarter. We expect to reaccelerate the company again, next year for sure. And see some hopeful good improvements in the second half of the fourth quarter. Thanks for tuning in.

[Operator:]

Thank you. This concludes to today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.