TrueCar, Inc.
Q4 2017 Earnings Call Transcript

Published: 16 Feb 2018

[Operator:]

Greetings, and welcome to the TrueCar Fourth 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 fourth quarter 2017 earnings conference call. Joining me today are Chip Perry, President and Chief Executive Officer; and John Pierantoni, Interim Chief Financial Officer. As a reminder, we will be making forward-looking statements on this call, including, but not limited to, statements regarding our outlook for the first quarter and full year 2018 and longer term; management's beliefs and expectations as to future strategies, event, and planned product offerings, completion of our technology replatforming initiatives, it's impact on conversion and close rates, and our ability to innovate the expansion of TrueCar trade, it's dealer-networking customer base, our ability to grow our OEM offering incentive revenue and redemptions, the impact on our future results of plans to grow USAA channel revenue, our ability to build an end-to-end experience, increase revenue in our core dealer business and grow dealer accounts 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 Reports on Form 10-Q filed with the Securities and Exchange Commission and our Annual Report on Form 10-K for 2017 to be fied 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. TrueCar closed fiscal year 2017 by exceeding the revenue and margin guidance we gave on our last call. For the fourth quarter of fiscal 2017, revenue was $83.1 million above our guidance of $81 million to $83 million and adjusted EBITDA was $7.5 million, above our guidance of $67 million. For the year as a whole, revenue totaled $323.1 million, up 16% year-over-year and adjusted EBITDA was $28.9 million or 8.9% of revenue, up 92% year-over-year. We also closed out the year by growing our new car retail market share to a record 4.7%, up 12% year-over-year. Now let's review our progress since our last call. First, USAA; one of our primary areas of focus coming out of Q3 2017 was the level of business with our largest affinity partner, USAA. I'm pleased to report that as we expected, the USAA business started to show improvement at the end of the fourth quarter, the changes USAA made and made those numbers to move more easily into the car buying service, and as a result, units in USAA channel came in better than expected. More importantly, through our detailed planning sessions with USAA we have developed a mutually agreed upon business plan that we believe will return this channel to high single digits unit growth in fiscal 2018. We look forward to continuing to partner with USAA in support of their mission to serve members and their families. Second, pricing and monetization. Another key area we focused significant energy and attention on is the growth of our core franchise dealer business, as measured by both, monetization and revenue per dealer. I'm pleased to report that we made progress in this regard in Q4 2017 as well. During the third and fourth quarters, we continue to better align pricing to be more commensurate with the value we've been delivering for the segment of dealers who were underperforming versus target. Our disciplined efforts in Q4 2017 contributed to franchise revenue of $64.2 million or 12% growth year-over-year. That's said, we did experience some churn associated with these efforts but we've seen healthy reactivation rate in recent months following the cancellation and the anticipated dealer count growth to return in 2018 accompanied by good rate integrity. Third, OEM. Turning to our OEM business, in Q4 2017 TrueCar run OEM incentive program for more manufacturers than ever [ph] with Ford and Hyundai testing our platform and joining our established program with FCA, Mercedes and Volvo. Over the course of the fiscal year 2017, TrueCar drove nearly 87,000 OEM targeted incentive redemption generating over $23 million of revenue, up 22% over the prior year. Fourth; trade pilot. In Q4 2017, we continue to pilot our trade product in the Northeast and in Florida, and given the success we have set a target of having a nationwide network of dealers in place by the end of 2018 with initial ramp up process set to begin in late Q2 of 2018. Fifth, Capsella. We have made significant progress towards completing our Capsella technology replatforming project, the progress we've made to-date has enabled us to add new features to our consumer site including more priced new car inventory and [indiscernible], in addition to new features for our dealer tools including an updated sales analyzer product product and a soon to be released DIM based pricing management system. Finishing Capsella will provide the foundation to unlock powerful new growth levers that we believe will drive very significant increases in both conversion rate and close rate, and further stimulate our OEM and trading products, beginning in 2019. It will enable us to further build out the major components of our end-to-end experience, particularly our new upper funnel research and discovery product in addition to incorporating new leading edge digital retailing tools and our post-prospect experience. Now are finishing the Capsella group platforming in 2018, we will be testing and validating our end-to-end experience concepts and we anticipate rolling these out beginning in 2019. As you can see, we've made significant progress throughout 2017, however, there is still much to be done. In 2018, we'll be focusing on four key areas; first, completing Capsella; second, launching new OEM incentive program; third, rolling out our trading product nationally; and fourth, executing on strategies to grow our core dealer business. Let provide more detail around each of these focused areas as they are key components of our plan for 2018 and we believe they will set us up for 20% plus top line growth and healthy margin expansion in 2019. I just noted that finishing Capsella will help us feel growth in our OEM business. This year we are expecting to see over 30% growth with new and existing OEM clients who are leveraging our current credit targeted offer and live prospect offered products. As the capsella project is completed, it will enable us to scale these products even more rapidly, and will allow us to apply data science to machine learning and behavioral targeting to help our OEM customers spend their marketing and incentive dollars even more efficiently. This will provide significant values to our clients, leading to even more rapid revenue growth in 2019. Trade-in is another high potential growth product. Our pilot in the Northeast and in Florida last year confirmed that there are strong demand from both, consumers and dealers for our TrueCar trade-in tool because our product developed in conjunction with Gal-Accu trade [ph] provides market leading transparency, competitively differentiated valuation insight, and third-party credibility that's strongly aligned with our core pricing value proposition. We are now building up our launch team and targeting a network of approximately 1000 dealers by year-end enabling us to turn on national promotion of the product across all of our media channels and affinity partners by early next year. We expect to generate small single-digit million dollar revenues from this product this year and this will lay the foundation for a much larger customer base and significantly more revenue in 2019. While we're building out these new products, our dealer team will be focused on three keys go-to-market strategies to increase the growth in our core dealer business. First, we will continue our efforts towards aligning pricing with the value we've been delivering based upon our fully accountable business model. Second, we will further enhance our acquisition strategy to strategically stall coverage gaps across the network resulting in a better natural supply-demand at the micro level. And third, we will be rolling out a new strategy around independent dealers designed to grow our indepedant dealer base and increase used car inventory. These are the key components for our plan for the year and I'm very excited about the foundation we are continuing to build. We believe our work this year will set us up for a strong 2019 with top line growth back over 20% along with significant margin expansion. Now, John will walk you through our financial results and guidance in more detail.

[John Pierantoni:]

Thank you, Chip and good afternoon, everyone. Revenue in Q4 of '17 totaled $83.1 million, up 12% over Q4 in '16, and just above our revenue guidance of $81 million to $83 million. For all of fiscal '17, revenue was $323.1 million, up 16% over fiscal year 2016. Revenue from franchise dealers totaled $64.2 million in Q4 of '17, up 12% over Q4 of last year. Franchise dealer count grew 9% year-over-year to 12,142 and month revenue per franchise dealer was $1,751 in the quarter, which was flat year-over-year. For all of fiscal '17, revenue from franchise dealers totaled $248.5 million, up 15% over fiscal year 2016 and monthly revenue per franchsie dealer was $1,778 which was also flat year-over-year. Revenue from independent dealers, almost all of whom are on subscription billing plans was $8.5 million in the quarter, up 23% over Q4 of last year. Independent dealer count was up 15% year-over-year to 2,979, while monthly revenue per independent dealer grew 6% year-over-year to $954. For fiscal year 2017, revenue from independent dealers was $32.1 million, up 34% over 2016 while fiscal year 2017 month revenue per independent dealer was up 12% year-over-year to $960. OEM incentive revenue was $6 million in Q4 of '17, up 46% sequentially over Q4 of '17 given the addition of new programs with Ford and Hyundai during the quarter. For fiscal year '17, OEM incentive revenue was $23.3 million, up 22% from $19.1 million for fiscal year 2016. And finally, forecast, consulting and other revenue was $4.5 million in Q4 of '17, up 8% year-over-year. For fiscal year '17, forecast, consulting and other revenue was $19.3 million, up 7% year-over-year. Units in the quarter totaled 239,521, up 9% year-over-year and just a lower guide of 240,000 to 245,000. For all of fiscal '17, units were 952,834, up 18% year-over-year. In our branded channel, we generated 103,926 units in Q4 of '17, up 10% and 403,299 units for all of fiscal year '17, up 18% year-over-year. Other partners driven by strong growth at Chase, Sam's Club and U.S. News contributed 76,620 units in Q4 of '17, up 38% year-over-year and for all of fiscal year '17 our other partner units were 288,228, up 38% over fiscal year '16. USAA produced 58,975 units in Q4 of '17, down 14% from last year. For the year, USAA members bought 261,307 vehicles via the car buying service, up 3% over fiscal year '16. The news mix was 68.6% new and 31.4% used in fiscal year '17 as compared to 69.4% new and 30.6% used in fiscal year '16. Monetization in Q4 of 2017 was $328 per unit, up from $306 per unit in the third quarter and up from $320 per unit in Q4 of last year. The sequential increase was primarily due to the increased incentive revenue from the Ford and Hyundai programs previously mentioned. Monitization for the year was $319 per unit versus monetization of $322 per unit in 2016. Turning to expenses and margins all of the following metrics are on a non-GAAP basis, unless stated otherwise. Gross profit in Q4 of 2017 was $75.8 million, up 11% from Q4 of 2016 while gross margin was 91.2% in Q4 of '17 versus 91.9% in Q4 of last year. For all of fiscal year '17, gross profit was $296 million, up 17% from the prior year and gross margin was 91.6%, up from 91.3% in fiscal '16. Technology and product expenses totaled $13.4 million or 16.1% of revenue in Q4 of '17 versus $11.9 million or 16.1% of revenue last year. For fiscal year 2017, technology and product expenses were $51 million or 15.8% of revenue as compared to $47.9 million or 17.3% of revenue in '16. During 2018, we expect a slight uptick in technology and product expense as percentage of revenue as we continue to invest in our capsella technology platforming project. Sales and marketing expenses were $44.8 million or 53.9% of revenue in Q4 of '17, as compared to $39.9 million or 53.9% of revenue in Q4 of last year. Within our sales and marketing expenses, we spent $15.1 million on television, radio and digital to drive TrueCar channel customer acquisitions versus $16.2 million this time last year. Cost per sale for Q4 declined by 15% from $171 per unit last year to $145 per unit this year. For fiscal year '17, sales and marketing expenses totaled $175 million or 54.2% of revenue as compared to $148 million or 53.3% of revenue. During 2018, we're targeting a similar level of acquisition spend as '17, and we plan to shift the portion of our spend from TV and radio to digital marketing campaigns. Partner revenue share and other expenses were $12.9 million in Q4 of '17 versus $9.4 million in Q4 of last year with increased cost driven by the large increase in units from our other partner channel. For fiscal year '17, partner revenue share and other expenses totaled $48.7 million, up 25% from $39 million in the prior year. Finally, headcount and other costs were $16.8 million, up from $14.3 million this time last year. These increases were primarily driven by headcount related costs on our dealer team. For fiscal year '17, headcount and other costs totaled $65.2 million, up from $48.4 million in 2016. General and administrative expenses in Q4 were $10.2 million or 12.3% of revenue compared to $10.5 million or 14.2% of revenue in Q4 of 2016. For fy '17, G&A expense totaled $41.1 million or 12.7% of revenue, down from $42.4 million or 15.3% of revenue in fiscal year 2016. Adjusted EBITDA for the fourth quarter of 2017 was $7.5 million or 9% of revenue, up from $5.8 million or 7.8% of revenue in Q4 of 2016. The items excluded from adjusted EBITDA for Q4 2017 included depreciation and amortization of $5 million, stock-based compensation of $9.6 million and the add back $3.8 million of certain litigation costs which includes the cost of resolving our lawsuit with the CNCVA in December. GAAP net loss for the quarter was $8.5 million or net loss of $0.08 per share as compared to GAAP net loss of $8 million or net loss of $0.09 per share in Q4 of last year. Our fourth quarter 2017 GAAP net loss includes a $2.6 million non-recurring tax benefit related to the recently enacted tax reform. This benefit was due to the combined impacts of the reduction in corporate tax rate and the reduction of the valuation allowance on our deferred tax assets. Our net loss in fiscal year 2017 totaled $32.8 million or a net loss of $0.35 per share, as compared to a net loss of $41.7 million in 2016 or a net loss of $0.49 per share. Our non-GAAP net income for the quarter was $4.9 million or $0.05 per share as compared to a net loss of $0.5 million or a loss of $0.01 per share in Q4 '16. For the year, our non-GAAP net income was $7.2 million or $0.08 per basic share and $0.07 per diluted share as compared to a loss of $11.1 million or a loss of $0.13 per share in 2016. We continue to maintain a strong balance sheet with cash balances totaled $198 million at the end of the year. Now I will share our outlook for 2018 and the first quarter of the year. For fiscal year 2018, we estimate a range of 1.030 million to 1.050 million units which represents unit growth of 8% to 10% over fiscal year '17. We expect to generate revenue of $360 million to $365 million which represents year-over-year topline growth of 11% to 13% due to the breakdown of key components of revenue. We expect 2018 dealer revenue to be $309 million to $312 million or 10% to 11% growth over fiscal year '17. In 2018, we expect OEM incentive revenue to be between $30 million and $32 million or growth of 29% to 37% over fiscal year '17. With tougher comps in the first half of '18, we expect much of this growth to come in the back half of the year. And with the national rollout of trade-in, we expect to generate $3 million of revenue and we're targeting approximately a 1,000 dealer customers by the end of the year. Looking back over the past two fiscal year sales, we've nearly doubled adjusted EBITDA each year and grown margins from 3% to 9%; this reflects the significant operating leverage in our business model. As Chip noted earlier, this year we'll focus our efforts in four key areas; one, investing in our technology team to ensure that we peak capsella; two, launching new OEM incentive programs with current and new OEM clients; three, running out or trade-in product nationally; and fuor, executing on key strategies to grow our core dealer business. As we invest in these areas in 2018, we expect to grow our adjusted EBITDA margins by 100 to 200 basis points over fiscal year 2017. We estimate producing adjusted EBITDA of $36 million to $40 million or adjusted EBITDA margins of between 10% and 11%. In addition for the year, we estimate non-cash stock-based compensation expense to be in the range of $44 million to $48 million compared to stock-based compensation expense of $32.2 million in fiscal year 2017. For fiscal year 2018, we estimate depreciation and amortization expense will be approximately $21 million to $25 million compared to $22.5 million in fiscal year '17. For the first quarter of fiscal 2018, we expect units to be in the range of 230,000 to 235,000 representing year-over-year growth of approximately 6% to 8%. We expect revenue to be in the range of $80 million to $82 million or year-over-year growth of 6% to 8%. And we expect adjusted EBITDA to be in the range of $6 million to $7 million producing adjusted EBITDA margins of 7.5% to 8.5%. And now, we will open it up for questions.

[Operator:]

[Operator Instructions] Our first question is Doug [ph] from JP Morgan.

[Unidentified Analyst:]

This is Ashwin on behalf of Doug. I want to go back to the discussion on pricing for dealers; thank you for the color on the independent dealers, I guess most of them are on subscription plans now but any more color on what the mix or overall mix between subscription versus let's say paper sale? And how are you thinking about it in '18? And my next question is on incentive revenue; if I got the numbers right, you're thinking OEM revenue to be $30 million to $32 million; was that -- is that in-line with something in your plans few months ago, anything has changed in the last few months? Any more color on how have you got this number will be really helpful.

[Chip Perry:]

As we drive for dealer growth on our business, we continue to work hard to enable the dealers who are on what we call performance plan, just see strong value from our service and the revenue growth we realized from that category flows from our prospects growth -- following the unit growth at the individual store level. We have a mix of what we call performance-based versus pure subscription of about 50-50 in our business today. So what you're seeing is an ongoing effort on our part to realize the benefit of the increased number of prospects we're sending to dealers, we worked hard on it last year, we'll continue to do that this year and that's why we're expecting to show continued good revenue growth from our franchise dealer body. With respect to our OEM incentives; were showing really nice growth this year, it's a buildup coming from the great work of our leader in that segment, Mike Daryll [ph], as well as his team; and we're very bullish about that effort this year because we were able to land two important new clients in the fourth quarter, Ford and Hyundai who tested our TrueCar for the first time and we expect after they absorb the results of that work to have strong participation from one of those OEMs in addition to our current base of OEMs, SGA, Mercedes and Volvo. So this is a very strong potential growth channel for the company, we -- I don't think we've really changed our outlook in a fundamental way but we've seen we're building our momentum. Last year we signaled it, we had high hopes for it and we're starting to see that hard work pay off.

[Operator:]

Our next question is from Mark Mahaney from RBC Capital Markets.

[Mark Mahaney:]

First, I don't know if you mentioned used cars as -- the used car marketplace as an opportunity in 2018; if you could just go over that, is that a bigger or less of a priority for you? Second, I know you talked earlier on about the issue -- could you just go through that again, what the dealer count seemed to be pretty sluggish in the quarter and how to expose those problems are? And then, finally third on the OEM incentives business going forward, are there other major OEMs that you can't -- that you can realistically add this year or do you think that you've got the majority of the ones that you'll have? So just help us think how much bigger that business can be long-term. Thank you.

[Chip Perry:]

Used cars are a big part of our plan for 2018, we continue to show really good growth in that category, our used new car mix is roughly two-thirds/one-third now; our use is still growing faster the new, will continue to grow faster than new. We're making a priority in a couple of ways in 2018; one is, we're blowing out a new independent dealer strategy which will involve us targeting more smaller independent dealers, we do very well with the larger ones and we'll be incorporating some software solutions which we tested this past year into our mix of offerings with these dealers and they've been very well received, so we're quite optimistic there. We saw good growth in the fourth quarter that our indepedant dealer team on a gross basis by increasing the number of sales people in that category, we saw a nice pay-off for that; so we're going to keep pulling deal to the fire there. And when it comes to the new car business overall, we have improvements in our product that we believe will produce some nice incremental growth for us in used car; these improvements include changes and how we structure use cars for consumers in the search process. We're creating improvements in the way consumers can contact dealers when they're interested in buying a new used car. Historically we required everybody to fill-out a form, a lead form before they can contact a dealer, we're going to start opening it up; so folks can just pick up the phone and call the dealer and enter -- express their interest to the dealer in that way. As well as some other improvements in our used car curve, price curve, and other aspects of the experience which we think will continue to grow that part of our business. For used, it will continue to be an important trust of TrueCar. For respective dealer accounts, we did see a slowdown in the fourth quarter. Like I said on the call, that reflects rate adjustments that we made in the fourth quarter that caused some churn but in retrospect and looking back, I believe it's quite healthy churn because in the cohort of dealers who accepted the subscription rate increases that we've asked them to pay based upon the volume increases that they've seen in their business driven by our accountable closer model -- for the folks that received those increases, they accepted that on average about a 28% increase. So even though we experienced some churn, we're able to show our value to the dealer and we're starting to see a nice healthy reactivation rate among the dealers that left us. So overall, I feel like we're doing very well with monetizing the strong value we're providing our dealer body. On your third question Mark about major OEMs; as I mentioned we have had good success with Ford and Hyundai, they both liked the results, they are in a natural mode now of evaluating and absorbing those results; and this is the category in which when we work with our clients, it's a longer sales cycle with our dealers. We go through a stage when we discuss our business and their needs and reach strategic align on how we can work with them. Second, we do pilots like we did with Hyundai and Ford. Third, we then rollout programs after they absorb the results of those pilots; so we're quite encouraged by the positive feedback we received from the pilots last year, so this year we're expecting at least one of them to come back and hopefully, we'll have more joint the fold, we actually have a very strong pipeline of interest by OEMs and working with our two very efficient incentive products, once called private target offering and it is called live prospect offer. So we're excited about this area very much and I guess at 30% growth this year we expect and even faster growth in 2019.

[Operator:]

And our next question comes from Steve Dyer from Craig-Hallum.

[Steve Dyer:]

As it relates to units, a lot of the strength in the industry in Q4 came really from outside strength in Florida and Texas based on a hurricane replacement; how did your dealer exposure in those areas either help or hurt you?

[Chip Perry:]

I would say Steve that we did well in those areas. I don't we experienced anything abnormal in either of those areas as those geographies are covered from the major catastrophes of last year. Obviously, there was a replenishment of inventory in both the areas, and essentially a surge in growth, we match with what's happening in the industry, we didn't see anything abnormal in TrueCar as a result of those storms.

[Steve Dyer:]

And then, as it relates to monetization, really strong quarter and guidance is implied, really strong 2018; I'm wondering if you can bucket that, just generally speaking between some of the changes you're making in rates, as well and then versus the OEM incentives?

[Chip Perry:]

If you look at our monetization, you can look at it both on an overall basis, concluding OEM revenue or excluding OEM revenue. When you exclude OEM revenue, it was up about 1% in 2017, we expect to be about the same in this coming year and then we include the OEM revenues; obviously the monetization grows much faster and then double-digit [ph]. Monetization is a function of both how our marketplace performs in terms of producing prospects that turn into sales, as well as our ability through our field efforts to work with the dealers who are on subscription plan to compensate your car commensurately with the volume growth that we're generating for their stores. So I'm quite confident that we've got the right set of strategies, go-to-market strategies in place, and the right kind of focus on our dealer team in training and consulting with our dealers, helping them understand how efficient TrueCar is, helping them make the most of our service through improving their close rate; we're the only thirty-party in America that actually works with dealers to improve their close rate, to help them sell more cars, our clients success team doesn't try to upsell them trying to put some new ad product or like -- they are there to help the client win and that the whole process is really working great. And as a result, we continue to be quite bullish in our ability to -- in an environment where many dealers are looking to become more efficient and cutting back on some tenders that we're seeing is more efficient and we're able to hold our solid monetization rate.

[Steve Dyer:]

And lastly from me, I'm wondering if you're able to willing to give USAA cadence sort of by quarter and then any commentary as to how it's going so far this year?

[Chip Perry:]

Well, as you know, USAA experienced a dip with TrueCar last year when they made a change in the user experience in the third and fourth quarters; it came back nicely as I indicated towards the end of the fourth quarter and we're seeing some continued improvements, they are making ongoing changes both, in the new and used car, parts of their portal which is enabling us to project this kind of very positive trend back towards single digit. I think I should wait until actually this quarter to explain what happened in this quarter and what we -- how we see that cadence rolling out over the course of the year.

[Operator:]

Our next question is from Ron Josey from JMP Securities.

[Ron Josey:]

Chip, I believe you said our work this year will set us up for a strong 2019 and also you gave some guidance around 20% top line growth and margin expansion but can you help us understand the bridge to get there, meaning what products should we focus on the timing around that? I think we've been talking about top of funnel, for example, and so what can we expect around there? And maybe as we get closer to '19, should we start to see traffic growth ramp here, I think it was 3%; as incentives ramped to your point at the back of the year. So any insight on the bridge for 2019 will be helpful. And then just lastly on TrueCar trade with the rollout planned nationally; can you talk about the monetization model here? That would be helpful. Thank you.

[Chip Perry:]

Yes, we're very bullish about 2019 because we can see clearly the potential in three major areas to significantly increase our revenue growth. One is obviously in the trade program we just mentioned, we're doing a national rollout over the course of the year with an expected 1,000 dealers or so monetizing at a rate of between $500 and $1,500 per store. And transaction dates of $2.99 whenever there is a sell-on in transaction. We believe that that product will strongly increase in 2019 once it's fully rolled out over -- basically, launch year this year. That product has been very well received in the test markets, our consumers like it, dealers like it, dealers have told me it's a hot product, they can't wait to get their hands on it; so I'm very bullish about that. Second piece is OEM; like I said, our OEM team is building up a strong pipeline. Our goal is have more OEM working with TrueCar more deeply; so some OEMs work with us only with our affinity partners, some work with us with our affinity partners and then also leverage TrueCar itself. We're seeing increasing interest in OEMs and that's why I'm confident guiding to better than 30% growth in that category. And the third key to bridging to 2019 is the growth in our core business. Now as you know, TrueCar is essentially a units-based business where we drive volume into dealership and they are compensated for that volume. We are not dependent here on significant audience growth to drive strong unit and revenue growth. We have today a market share in our industry of 5% roughly of new car sales passing through the TrueCar marketplace. Externaa research from folks like JP Power indicates that more than 50% of new car buyers in America are using TrueCar. So the difference in 5% and 50% is huge, it represents the best opportunity to grow our top line is to enable more consumers to see the value of registering -- taking full advantage of all of the content and services in TrueCar and then introduce to your TrueCar dealer and purchasing their car in a way in which we can receive credit at the dealer level. We have clear line of sight today. As a result of the research that we've done to a significant improvement and well beyond anything we saw last year or the year before in our ability to enable consumers to see the value of registering in TrueCar in a way that they will want to fail to use our service. So growing the core business, the core buying service which is not dependent on new ad products or upsells of existing ad products which are generally the growth strategies of our competitors, we have no dependency on that, it's a purely volume based opportunity and because we represent an efficient form of marketing to the dealers, well underneath their average marketing cost, the TrueCar costs is. I'm confident that as we increase volume, we'll be able to help the dealers see the wisdom of investing a larger share of their marketing budget at TrueCar than they do today. So that's where our growth is going to come from in 2019, we're very excited about it.

[Ron Josey:]

And just quickly on your line of sight; do you think maybe that consumers can see the values that should happen at some point in '18?

[Chip Perry:]

We'll be doing some testing of these ideas over the course of this year but we'll expect to roll them out significantly until our platform being project is completed later this year. Much depends upon the completion of capsella. We pursue the capsella replatforming in a modular fashion, about 75% of all of the features and functions of TrueCar have now been rebuilt into the new environment, what remains are important pieces including pre-prospects. Pre-prospect is the area that consumers experienced before they register; now that needs to be rebuilt in order for us to put our hands on this opportunity. It's going well, the progress of that work is going well and I'm excited -- and whole team is excited here about when we finish that, the fantastic ability to encourage more consumers to actually have a full TrueCar experience compared to what they do today when 95% roughly of the folks who use TrueCar can figure a car, see the price but don't register to go all the way through to inventory and have a chance to introduce to a trusted certified TrueCar dealer.

[Operator:]

Our next question is from Kyle Evans from Stephens.

[Kyle Evans:]

how I think from Stephen we school and. I think. We think about Jewish groups sure after the town to coach of course for Q. Sir Kyle Like I said the fourth quarter was really the result of you know the threat of a bold action that we took in the marketplace and we came in I don't know strong the door through except that any creature playing a significantly my money and would have my fact emotion. I believe that that will continue the record I'm sorry I'm gloat now that you're protected in the second half of the year now we have to go through a couple of cycles of conditioning on. To win and subscription though and they soon increased volume flow through their goodness to competitors and fear Truecaller Without about going to providers and agreeing to take the the higher subscription fee to those volume numbers are commensurate with so we have one lower lead after another cycle of those changes in the first half of the year I think we're going to see some out growth in the second half we have from a number of key. Targeted the network modest goals that were are set up in a focused on and we're increasing without a bar are stepping in and elected you out a piece where we think there's opportunity so I expect to see a about I demoed the earth on our network I think individual compared to what we have now and then over time over time I believe will end up having about sixty percent of the board in America which represents about a fifteen percent increase over where our penetration of well we are now it should be another couple of couple thousand dollars so that's out there and our product improvement and as. The demand side of this marketplace continues energized and efficiency. Out of two cards to Lucian to do is become well known recognized I believe got mo do it won't work with us it's not definitely not a diminishing phenomenon it's an increase in phenomenon no moment you are taking an interest idea or pledge has it taken root. The reputation and perception of the company about jurors is much stronger we have positive M.P.'s now compared to no good on a year year and a half ago net promoter score. You know every indicator is going to be worked out if there's a star strong a positive. Trait any change in behavior in California. Agreement. As you know we had about fifty percent of all the French I knew were in California before the lawsuit and during a lawsuit which. From the perspective that the average typical friend knew from new car dealer that that you know their laughter with the not event. Historically what we've seen no amount of tactic. From dealers who found several They have nice pipeline of mobility they were interested but overall you know that. We're quite happy with your car in terms of what we're doing from with them before they're going to I think one of the strongest penetration of any state in the country. I'm back Q How many how many times a year do you get to reprice Yeah average. Dealership I ran the country with me practically every six months. And in California making not making any changes this year they're moving from what we call on a percentage guarantee model this year to a. Flat rate subscription model throughout the nineteen which routes back to have you know time with fact on on our business in California. Great thank you our next question from Chris Morrow and from Goldman Sachs we support. Thanks I just would have thought that that an utterance question from before about traffic can you just talk a bit about your top a final initiative as how does a progressing I think you still have the coal up double your traffic in the next couple years and traffic growth has lower singles this quarter just curious how you think about the steps you need to take to get there over time and then secondly I guess a related question Twenty nine hundred you talked about you know significant X. add margin expansion in addition to the twenty percent growth and as you think about the status of this category opportunity how do you think about the trade off of delivering that type of margin expansion not only eighteen or nineteen as well as opposed to investing in marketing to try to capture more top of funnel. Or Thank you Chris so I fled but I believe we can double our traffic over a couple year period I believe that's true strongly. And then that's dependent upon our completion of our cap Stella project which will happen later this year and I don't move off to rebuild new caps now and expand our operating in the upper funnel part of the shopping journey so far we've launched just a map first step to call out to fight owner reading reading the reviews of cars where we have grown bored plans to [Technical Difficulty].

[Chip Perry:]

Significantly improve how those research pages are presented to consumers, how they're connected to our price reports, how they're coded to facilitate strong search engine optimization and so a good chunk of our growth will come from that. And then also when we have the full experience that I just described earlier, ready to go, you can anticipate significantly more marketing by TrueCar to let consumers know what the benefits of these are and how the new changes will benefit them. So I'm quite optimistic that that kind of traffic growth is in the cards. Like I said earlier, we can grow our revenues nicely with existing the traffic we have to have more than 50% of actual new car buyers using TrueCar. So we don't have an audience issue here, no problem; we have a conversion rate opportunity, meaning only 5% roughly, now 6% of our consumers actually convert to being a prospect in our system, so that that's where the big opportunity lies. We'll go traffic, we'll go conversion, we'll go topline significantly, well north of 20% like I said in 2019. As it relates to margin expansion, when we put that kind of revenue growth on the top of this kind of company, there is clearly an opportunity to both, grow marketing to loom into expansion in a very important vibrant category called online car shopping and purchasing, while also improving margins. So we're dedicated to doing both; we want to -- we believe we'll become the clear leading online automotive destination for consumers over the next 3/4/5 years; we have to lockdown new car in the way we're doing it to do that, you have to make used car improvements which are in our gun sights, and we'll do those things and we have unique assets between the transparency model that we provide consumers which is unsurpassed in our industry with the large collection of oneway exclusive partnerships -- with energy partnerships pointing their members towards TrueCar. And thirdly, our unique close look attribution model with approvable efficient marketing ROI for our dealers; all three of those things enable us to move towards becoming a category killer as I said. But one step at a time, 2018 is a year which -- in which we finished capsella, got this foundation locked-in in a way that will allow us to catapult into 2019 very strongly.

[Operator:]

Our next question is from Sameet Sinha from B.Riley & Company.

[Sameet Sinha:]

Chip, can you talk about the used car product; obviously that's a highly competitive industry, number of players there. What would differentiate your product from theirs? Secondly, if you can talk about the marketing spend as John indicated that it's going to be flat year-over-year in '18, why are you investing more in digital; so can you talk about the rationale for that? And while unit growth is high single digits, how do you keep marketing spend flat; if you can give us some insight into any sort of new campaigns that you're getting into, that would be appreciated. Thank you.

[Chip Perry:]

Our used car product is a good strong product, we're really the first in the category to provide a used car price curve with a cost by listing, we're going to be doing more of that in 2018, we're going to improve how that curve works. Like I said, we've got user experience improvements that enable us to essentially convert more of the large number of used car consumers who come through TrueCar today. And important, like I said if you're moving the registration requirement for used car buyers to fill out a form before they can learn about a dealers inventory and the dealers location; that gets you superiority with the other major classified sites. With the ongoing growth of the TrueCar brands, with the ongoing flow of consumers coming from our affinity partners who have strong used car need; we see good prospects in used car. With respect to market spends, how do we grow the top line and units in the phase of flat marketing spend, that's your question. The answer is, the same thing we have been doing the last two years which is improving conversion in close rates; that's the biggest opportunity to '18 eighteen in front of this company. With 5% of market share and more than 30% of usage by actual new car buyers, we have the buyers. We need to improve our user experience and enable them to see the light on making full use of your service. Like I said, we have a clear round in site, how we're going to do that, in a way that will have create a big step function beyond anything we've seen before in 2019. And the third question was about [indiscernible] my own handwriting.

[Sameet Sinha:]

It's about digital campaigns; why you're shifting orders from T.V. to more online campaign?

[Chip Perry:]

Yes. So we vigorously test all channels and what we've learned is, we've got -- that in a time which we're focusing our investments and our products as opposed to grown our marketing budget, it's really important to become more efficient with your marketing and on the margins we discovered that we have digital channels that can produce better traffic flow more economically than some of the offline campaigns we've been running. So it's really just a matter of rigorous testing that's moving us in this direction. Like I say though, we expect to turn the corner on this starting in 2019 when our product experience will be much stronger that it is today and we'll have a much more significant topline growth which will enable a much larger invest in marketing to come. So this is a hot lead completed category that we know that more market will be here overtime and we're excited about leading into that as our business evolves.

[Operator:]

Our next question is from John Blackledge from Cowen & Company.

[John Blackledge:]

On completing the tax replatforming, will we get any color or see any evidence of it working prior to 2019? And then on a trade-in national rollout, how many dealers would you expect to be participating in the program starting next year?

[Chip Perry:]

With our tax rebuild for capsella, we would be able to share with you as the year evolves, the components that we have been able to successfully rebuild. There is 3 or 4 of them remaining, and we'll be testing pieces of this new experience that I've explained and so we have visibility of those tests, we'll share some of those results with you. So I think we'll have to count on us to report back every quarter to let you know how we're progressing there. What I can is that we have fully dedicated our products and technology teams to this effort, they organized completely around this project. In the past, we organized in a way and prioritized their work to enable more short-term revenue producing project into the mix; this year we're prioritizing most left in order to ensure we complete capsella, it's the prime directive and really most important goal in the company; we're really excited about getting it done, our team is excited about it and we can see the fruits of what that will produce for us when it is complete later this year. We'll expect to trade-in, we expect to have about 1,000 dealers towards the end of this year.

[Operator:]

Thank you again for your participation you may disconnect your lines at this.