TrueCar, Inc.
Q3 2014 Earnings Call Transcript

Published: 7 Nov 2014

[Operator:]

Greetings and welcome to the TrueCar Third Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alison Sternberg, VP Investor Relations. Thank you, Ms. Sternberg, you may now begin.

[Alison Sternberg:]

Thank you, operator. Hello and welcome to TrueCar’s third quarter earnings conference call. Joining me are Scott Painter, TrueCar’s Chief Executive Officer; John Krafcik, President; and Mike Guthrie, our Chief Financial Officer. During the course of today’s call our management team will make statements that may be considered forward-looking including statements regarding future results of our operations, revenues and adjusted EBITDA, growth and incentive monetization, improvement in core metrics and our products, as well as commentary regarding growth in the TrueCar certified- dealer network and overall automotive sales. We caution you to consider the risks associated with forward-looking statements that generally relate to future events or our future financial or operating performance. Such risks and uncertainties are detailed in the risk factors section of the company’s registration statement on Form S-1 and quarterly report on Form 10-Q for the quarter ended September 30, 2014 to be filed with the SEC, and could cause actual results to differ materially from those projected. Note that the date of this conference call is November 5, 2014 and the following discussion and responses to any questions reflect management’s views of today. Further, any or all forward-looking statements made today are based on information available to us as of the date hereof and we disclaim any obligation to update any forward-looking statements except as required by law. In addition, we will discuss GAAP and certain non-GAAP financial measures. Reconciliations of all non-GAAP measures to the most comparable GAAP measures are set forth in the Investor Relations section of our website at true.com. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Now, I will turn the call over to Scott.

[Scott Painter:]

Thanks, Alison, and good afternoon. It’s great to be speaking with all of you again. Q3, our second as a public company, was another strong quarter for TrueCar. I’m going to divide my comments into three parts. The first part will cover the strength of our current execution and performance. The second will highlight how we affect the new car buying experience for consumers, dealers and OEMs, and how much more impact we can have. And the final part of my remarks will cover our unique positioning in the market and why we are extremely well situated to deliver on our promise of transforming the new car buying experience. The management team that we have assembled at TrueCar is strong and we are executing extremely well across the company. That is quite visible in the numbers, as it was another record quarter across all of the key metrics for TrueCar. Users on our platform accounted for 172,000 units across the TrueCar certified-dealer network in the third quarter that was 47% higher than the 117,000 units recorded this time last year. Our share of the new car market grew to 3.7% in Q3, an annual growth rate of nearly 40%. We recorded revenue of $57 million, an increase of 51% over Q3 of last year. We also saw significant operating leverage this quarter, delivering record positive adjusted EBITDA of $3.9 million or year-over-year growth of 60%. Finally, there are now over 9,000 TrueCar certified dealers, of which over 8,100 are new car franchise dealers and nearly 1,000 are non-franchise dealers. We are working with 26% of the franchise dealers in the US. And TrueCar consumers account for nearly 15% of their new vehicle unit sales on average. As Mike will discuss later on the call, all of our five key growth and margin levers

[John Krafcik:]

Thanks, Scott. I will begin my remarks with some comments on the overall health of the industry. Then, share a few insights about our TrueCar business, and lastly, provide more details into how we are working with dealers and OEMs to improve their business and deliver for consumers. First, October was another good month for the industry delivering a 16.5 million new vehicle SAAR and providing confidence to our full-year forecast of 16.4 million units. We see an even better industry in 2015 with a potential for 17 million SAAR. Now, as we shared last quarter, the used-car side of the industry is experiencing a much-needed expansion in supply, bringing used-car availability back to the industry normal trend line. We expect 38.6 million used cars to be sold this year with new car dealers, independent used car dealers, and direct consumer-to-consumer private market sales sharing roughly equally in this marketplace. The supply of three-year-old to five-year-old and newer vehicles is increasing from recent industry lows, providing new car dealers with more opportunities to grow this important aspect of their business while maintaining per unit margins. Now, we’ve not yet seen the impact of increasing used-car availability on new-car transaction pricing. That’s good news. So far this year, industry-wide transaction prices are up $776 per vehicle, while incentive spending has grown just $221. That’s great for automakers with broad product ranges who are seeing improving margins and higher volumes this year. We attribute this growth, primarily, to continued consumer-driven mix shift away from compact and midsize sedans, toward vehicles that provide more consumer functionality, such as car-based crossovers like Honda CRV, truck-based utilities like Chevrolet Tahoe, and full-sized pickup trucks like the Ford F series. So why does this matter to TrueCar? Well, we work with most every major automaker and finance company through our ALG subsidiary, providing residual value forecasting and consulting services on new vehicle product planning and pricing. Doing our job well for them requires a keen understanding of consumer preferences and market segment dynamics. Our mastery of all aspects of automotive retail data fuels these insights, delivering great value to our OEM and finance partners and fueling new growth prospects for the core TrueCar business. Now, on the dealer side, we’ve continued to see strong growth in the number of dealers seeking to join the TrueCar network. Inbound contacts from perspective dealers continue at a strong pace, while our churn level remains extremely low. The most recent 1,000 net dealer additions occurred in the shortest time period in company history, and we now work with 80% of the top-50 dealer groups. Our network has recently surpassed 8,000 franchise new-car dealers and nearly 1,000 independent used car dealers. At our current pace, we should exceed 10,000 total TrueCar certified dealers in the first half of 2015. Our TrueCar is an increasingly relevant source of sales for dealers on the platform. In the third quarter, we represented nearly 15% of new vehicle sales for the average TrueCar certified dealer. Our ability to simultaneously grow our dealer network and share of dealer sales reflects our disciplined dealer-network strategy. We continue to communicate our expectations for high levels of customer service from our TrueCar certified dealers and they are delivering. Based on net promoter score data, TrueCar buyers can continue to rate their satisfaction with our service on par with Amazon and Apple iPhone. And JD Power recently identified TrueCar as the most useful third-party automotive site. As another example, we recently announced our No Surprises initiative. TrueCar certified dealers are now required to provide upfront information for all their fees and standard dealer added accessories when they present their pricing to consumers. This industry-first initiative reflects the mutual commitment of TrueCar and our certified dealers to transparency at every stage of the car buying process. Now while it is clear we are adding value at the interaction between dealer and consumer, it is also clear that we have opportunity to serve the industry in a broader fashion. Let me give you a sense of how, and how important TrueCar can be to this enterprise. OEM revenue flows to TrueCar via our ALG subsidiary. It also flows directly to TrueCar via our delivery of targeted OEMs incentive offers through our network and TrueCar powered affinity channels, such as USAA. I spent a week last month in Europe meeting with executives at nine different OEMs, sharing aspects of the TrueCar business model with them and listening to their points of view on future retailing trends, pricing, and brand strength, both in Europe and the US. The clear take away from these meetings was the enormous opportunity for TrueCar to help improve the efficiency of the $40 billion they spend on incentives to drive demand conversion. As a former OEM CEO, I can tell you that incentive spending is very important, but incredibly inefficient. At TrueCar, our historical focus has been with dealers on demand generation, helping them spend more efficiently than the current industry average of $616 per car. But over the past few years, we have implemented targeted incentive programs for large OEMs such as Mercedes-Benz, BMW and others. Our most engaged, targeted incentive partnerships have delivered terrific results. And for those brands, TrueCar now represents 7% to 8% of their total retail sales, two times higher than our 3.7% US retail market share. And those incremental sales come at very low costs vis-a-vis other incentive programs that OEMs employ. Now, let me explain why the TrueCar platform can be so incredibly valuable to OEMs. Today, the new car retail industry is working to a price-volume elasticity of about minus 1.6, that means for an automaker to increase sales at a certain model 5%, all other things being equal, this would require a price reduction of about 3%. Now, for a car with an industry average transaction price of a little over $30,000, that’s a price cut of about $1,000. Now, the challenge for automakers is that level of elasticity drives the cost per incremental sale of approximately $20,000, because the $1,000 is offered to every buyer, even those who are going to buy anyway. It sounds crazy, but that is the economics of what is going on right now in the industry. Because we are talking to consumers at the bottom of the funnel and because nearly one out of every three TrueCar prospects buy a car, we enable OEMs to target incremental sales much more efficiently. We found that price responsiveness of car shoppers on TrueCar and our affinity car buying sites to targeted OEM offers can be 2 to 5 times higher than general market offers. This year our platform will enable OEMs to deliver about $150 million of incentives on about a dozen brands. That’s a drop in the $40 billion incentive bucket. We are in the early stages of monetizing this capability. Doing OEM incentives right and dialing in all the potential benefits will take time. The good news is that in addition to the 12 brands for which we are already serving incentives, we have pilot programs with several more. Building out our incentive business is a key strategic product and business development focus for the company in 2015 that I will be heading up. It’s really exciting and I look forward to reporting more on this initiative next quarter and next year. With that, I will hand the call over to Mike.

[Michael Guthrie:]

Thanks John. As Scott has already highlighted, we were pleased with our financial performance in Q3. All of our key performance indicators and financial metrics improved significantly over this time last year, and we’re comfortably ahead of our prior guidance. On our call last quarter, we stated that we expected revenues to be in the range $51 million to $54 million. We also gave guidance that we expected to achieve increased efficiency on our marketing spend and leverage on G&A spend, thereby generating adjusted EBITDA in the range of $2 million to $3 million, or approximately 4% to 5.5% adjusted EBITDA margins. We were able to exceed that guidance. Total revenue for the quarter was $56.8 million or about 8% ahead of the midpoint of our guidance. Adjusted EBITDA was $3.9 million or 54% ahead of the midpoint of our guidance. And adjusted EBITDA margins were 6.8% or 43% ahead of the guidance. The adjusted EBITDA improvements were driven partially by efficiency in our sales and marketing spend. We reduced sales and marketing as a percentage of sales by 170 basis points over Q2 of this year, largely by reducing cost per sale in the TrueCar branded channel. On the last call we guided cost per sale down by about 13% from $260 per sale to $225 per sale. We actually lowered cost per sale by nearly 20% to $210 per sale. Said in another way, we increased acquisition spend in the TrueCar branded channel by less than 1% sequentially while increasing units by 25%. In addition to generating strong growth in adjusted EBITDA with nearly 7% margins, in the third quarter we also produced non-GAAP net income of $300,000. I’m going to take you through the key metrics, and then we will go through the P&L in detail. Our average monthly unique visitors totaled 4.6 million in the quarter and represented 45% over Q3 of last year. As the bottom of the funnel experience, we have continued to prioritize quality of unique visitors over quantity. In the third quarter, our monetization per unique visitor remained very high at $3.74, which compares favorably to the top of the funnel lead gen and impression-based monetization models that generate revenue per unique visitor typically between $0.30 to $0.40 per month. Total units this quarter were 171,775 and represented 47% growth over Q3 of last year. TrueCar.com units continued to grow by over 100% year-over-year. For the first time in the last four quarters total unit growth outstripped growth in traffic. That’s because unit growth was driven not only by increased traffic but also growth in overall conversion and closed rates or what we call net funnel efficiency. The strength in NFE was primarily the result of product optimization, growth in our dealer network, increased brand awareness, more intelligent media buying, the quality of our creative and the mix of marketing modalities among television, radio, and digital. For the third quarter, our share of new car unit sales grew to 3.7%, up from 2.6% a year-ago. Because we had stronger than expected unit growth, we had slightly lower monetization in our subscription states. That drove overall monetization to $303 or just below our guidance of $305 to $310. We expect monetization to be strong in Q4, and actually to be above the high end of that range. As Scott and John both referenced, we continue to add to our franchise dealer network, while increasing our level of penetration within those dealers. As of the end of the third quarter we had 8,149 TrueCar certified franchise dealers across the U.S., representing 26% of all new car franchises and year-over-year growth of 29%. We also had 982 non-franchise dealers, bringing the total TrueCar certified-dealer network to over 9,000. In Q3, transaction revenue per franchise dealer continued to grow, reaching nearly $6,600, up 22% year-over-year. Now, let’s turn to the income statement. Transaction revenue, which consists primarily of fees paid by TrueCar certified dealers, was $52 million in the quarter. This represents 55% growth over the third quarter of fiscal 2013, and was driven by 47% growth in units and 5% growth in monetization. Data and other revenue was $4.8 million, consisting primarily of residual value consulting services from our ALG subsidiaries. Total revenue was $56.8 million or annual growth of 51%. Turning to expenses and margins, all of the following financials are on a non-GAAP basis. Gross profit for the quarter was $52.2 million and gross margin was 92%. Technology and development costs were $8.8 million or 15.6% of revenue compared to $5.2 million or 13.7% of revenue in Q3 last year. During the quarter, we prioritized investments in platform improvements and our mobile experience as well as OEM incentive and TrueTrade. As both John and Scott indicated, given the enormous opportunity grow in the new areas of the market and to help both dealers and OEMs with their biggest challenges, we will invest some of the savings from our leverage in sales and marketing and G&A into technology and development over the next few quarters. Sales and marketing expenses were $31.3 million or 55.2% of revenue in Q3 of 2014 compared to $19.7 million or 52.4% of revenue in Q3 of last year. We achieved sequential improvement in sales and marketing as a percent of sales of about 170 basis points versus Q2 of this year. The leverage came primarily from improved efficiency of customer acquisition and branding spend related to the TrueCar branded side of our business, specifically we took cost per sale down from $260 last quarter to $210 this quarter and achieved 25% sequential growth in TrueCar units on less than a 1% increase in TV, radio and digital spend. Partner revenue share and loan subvention dollars were roughly flat quarter-over-quarter and we invested in additional sales and marketing headcount as talented people were available. General and administrative expenses were $8.2 million or 14.5% of revenue this past quarter, compared to $6.7 million or 17.9% of revenue in Q3 of last year. As we guided last quarter, we saw meaningful reductions in legal compliance costs this past quarter because we brought Johnny Stephenson and the Alison Sternberg team in-house. In addition, we scaled up the accounting organization this past quarter to support public company obligations and so we’re able to reduce the cost of outsourced services and third-party consultants. We expect to see continued leverage in G&A in the ensuing quarters. Adjusted EBITDA for the quarter was $3.9 million up from $2.4 million last year and up more than 118% sequentially from $1.8 million in Q2. Our adjusted EBITDA margin was 6.8%, well ahead of the 4% to 5.5% guidance we gave last quarter. Non-GAAP net income was $300,000 in Q3 comparing favorably to non-GAAP net losses of $1 million last year and $1.4 million last quarter. Our GAAP net loss was $13.6 million down sequentially from a loss of $15 million in the second quarter. Just to remind everyone, we have three non-cash expenses that flow through our P&L, and those items account for most of the bridge between non-GAAP profit and GAAP loss. Those are depreciation and amortization expenses which came in at $3.4 million in Q3 of this year that was roughly the same as $3.2 million in Q3 of last year; stock-based compensation was $9.4 million in Q3 up from $7.4 in the prior quarter, primarily related to the partial acceleration of vesting of some equity of an executive who left the company; warrant expense, which is primarily related to our agreement with USAA was $3.7 million for the quarter, up over Q2, primarily due to stock price appreciation. In addition, in the third quarter, we also added back approximately $864,000 of litigation expenses related to our dispute with a former customer. Quickly turning to our balance sheet, we ended the quarter with $113 million in cash and cash equivalents and $5 million drawn on our line of credit. We took on the debt to fund $5 million of capital expenditures related to significantly expanding our partnership with Hortonworks. The investment in infrastructure will continue to allow us to ingest huge volumes of automotive data, inventory, pricing, vehicle data, vehicle images, et cetera, and power real-time features in mobile environments. We are also using search algorithms and machine learning to find and optimize transactions for customers, dealers and OEMs. Overall, our liquidity is excellent and the balance sheet is strong. Now I’d the like to turn to guidance and share our outlook regarding the fourth quarter and the remainder of the year. We are raising our Q4 and fiscal 2014 guidance as follows. As we have said in the past, the fourth calendar quarter, based on normal industry seasonality, is generally flat to down 5% versus Q3. In addition, as we intent to make fixed costs investments, primarily in headcount, as we grow the business, we generally expect EBITDA to be down Q4 over Q3. As a result we expect revenues in Q4 to be in the range of $54.5 million to $55.5 million. Units will be slightly ahead of current consensus, but monetization should be $5 to $10 higher. We expect adjusted EBITDA of $2.6 million to $2.9 million or approximately 4.8% to 5.2% of revenue. For the full-year 2014, we now expect revenues of approximately $205.7 million to $206.7 million, which represents approximately 54% growth over 2013. And we expect adjusted EBITDA to be in the range of $9.2 million to $9.5 million. In the fourth quarter, as we said, we plan to continue to invest meaningfully in long-term value creation through building our brand, improving our platform in mobile experience and investing in new product development. And now, I’ll open it up to questions.

[Operator:]

Thank you. At this time we’ll be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Mark Mahaney from RBC Capital Markets.

[Mark Mahaney:]

Great. Thanks. Two clarifications questions. First, Mike, you talked about, I think, half-a-dozen factors reeled off that have been driving that improvement in net funnel efficiency. Could you maybe single out which of those may have had the greatest impact, and/or talk about the sustainability of those factors and continuing to improve the net funnel efficiency going forward? And then, secondly, you talk about now representing or working with 26% of all new car franchises. Can you just remind us of what you think is the right level that you need to get to? Is there a critical mass number that – or a number that you don’t really need to get beyond because you’ll have enough liquidity? Thank you.

[Michael Guthrie:]

Thanks Mark. On the second question, we have always guided that at about 1/3 of our dealers would be a fully-baked dealer network with adequate coverage. So we are at 26% of all dealers today so we’re getting pretty close. On the non-franchise side – sorry, on the franchise side we’re at about 8,150 dealers, and I think that ultimately that number will be about 10,500 when we are fully baked. In terms of things that are driving the financial performance, products is clearly a big one. Our conversion rates continue to be very strong. Close rate is another one as we continue to grow dealers and they become more important individual dealers. Our close rates are going up. But there is also just no doubt that the marketing and branding and creative is working well. When you can growth units in the TrueCar channel 25% sequentially on 1% increase in marketing spend, obviously that marketing spend is getting more efficient and we’re building brands. So that’s probably the most powerful piece.

[Mark Mahaney:]

Thank you, Mike.

[Operator:]

Thank you. Our next question comes from Doug Anmuth from JPMorgan Chase.

[Doug Anmuth:]

Great, thanks for taking the question. I just wanted to go back to the OEM conversation. I may have missed it in John’s comments, but can you talk about what OEM is contributing now in terms of the percentage of revenue for you guys? And then, also a little bit more on the timing, when you think that can become more material? And then, just switching over to TrueTrade, can you help us understand kind of the tasks and the timing of the rollout into 2015 and also how to think about the economics there? Thanks.

[Michael Guthrie:]

Sure. Right now, Doug, the OEM incentive piece is about 7% of our transaction revenue, so that’s a good way to think about it. We’re serving up incentives for about a dozen brands, and that is generating about 7% of our transaction revenue today.

[John Krafcik:]

Doug, this is John Krafcik. Just a little bit more color on how we’re going about it. As Mike said, we working with 12 brands right now. We had pilots. One recently completed with that Asian brand that was very successful. So we’re working to grow that, working with other OEMs directly, it’s one of the reasons I was in Europe a month or so ago, meeting with nine of the OEMs individually. We are also working directly with some of the insurance companies on total loss programs. Those are ideal situations for us to serve OEM targeted incentives, working with our insurance partners to folks who have experienced a total loss.

[Scott Painter:]

Hey, Doug, Scott Painter. Let me just sort of add a couple of comments. I think, first of all, as it relates to OEM incentives, it really goes to an issue of focus, in terms of how we are looking at 2015 and beyond and how we run the business. And I think it relates to your question, Mark, about really where are we going to see continued scale in the company? We really believe that there is multiples of improvement in terms of the customer experience. And today, if you keep it in mind, we’ve got about 5 million unique visitors flowing through all of the TrueCar and TrueCar related websites. About 1.5 million actual new car customers occur in the U.S. every month, so it could be argued that virtually everybody is coming to TrueCar at some point in their experience, and so there just is a significant opportunity to convert and serve those customers better. And we believe that there’s really two ways of expressing that. One is to make the auto buying experience more simple, fair and fun in terms of the technology you interact with. So inherently, that means that we’re going to be focusing on mobile. That means that we are going to be focusing on the user experience. But the second dimension is price; making sure that the customer gets the best possible price that they are entitled to, we think is important. Given the level of OEM incentive spend, getting that number right is becoming increasingly important to the bottom line. And so really, as we look at 2015, one of the sort of double-bottom-line benefits for us in driving incentive revenue is not just seeing new revenue come into the pipeline, but also it makes our offering much stronger for the consumer. So we’ll see it in higher close rates, which ultimately results in better net funnel efficiencies. So there’s a dual benefit there on the incentive front. On the TrueTrade front, let me answer your question about our progress there. Again, along with our focus we do believe that the near-term benefit of just making the experience better and improving NFE is going to be where we get our next sort of gear in terms of performance over the next year. And we haven’t given any guidance in terms of revenue on TrueTrade for 2015, sort of pushing it off to 2016. That said, we are launching a pilot in Q1 and we are rolling out a broader program during the summer. So the teams are working very hard right now on TrueTrade. We do have a Sell My Car app that’s available in the app store, which is really an online condition report. So we are starting to see all of the mechanics of TrueTrade and what would sort of provide the scaffolding for that program going up now in anticipation of that program becoming live, like I said, towards the middle of summer.

[Doug Anmuth:]

Great. Thanks, guys.

[Operator:]

Thank you. Our next question from Debra Schwartz from Goldman Sachs.

[Debra Schwartz:]

Great, thanks. I have two questions. First on monetization, Mike, I think you mentioned that the sequential decline in monetization was due to your subscription states. I’m curious if there was any change in the write-downs or the mix of new and used cars, and then if you could also give us a little bit of – a little bit more of an understanding as to why you expect it to ramp back up in Q4? And then second, as it relates to net funnel efficiency, particularly as you expand the dealer network at the pace you are, can you help us understand some of the initiatives that you have for improving close rates and conversion at the dealers?

[Michael Guthrie:]

Sure. So really (inaudible) that the pricing this quarter came down, generally, because we just had a larger than expected number of units. Right, we are always out setting our subscription rate – in our subscription states based on our forecast of units. We just had a very, very good units quarter. It was strong late in the quarter and so when you have more units in the fixed-subscription pricing your monetization comes down a little bit. Generally, I think, with $2 off of the low-end of the range, I am very comfortable given how strong the units were. That’s what happened. There was no material mix shift, Deb, between new and used that would change it. It was really just this issue. In terms of next quarter, one is, we think we’ll set the pricing better. Normally, in quarters where – October and November are usually pretty let’s say, what to say, sort of flat to slightly up from September. So it is very easy for us to set subscription pricing in those types of months. So we will tend to hit those very well and our monetization will trickle back up again. We also get a little bit of benefit on our OEM incentives and from our independent dealers. The non-franchise dealers that we have been adding do pay a subscription. They do add incrementally to monetization, as we have been growing that network, which is both helps us sell more used cars today and obviously will act as a network through which TrueTrade will take some of the price spectrum. That revenue does in fact bump up monetization by a few dollars. So combination of those things we think will show sort of strong growth in monetization in Q4.

[Scott Painter:]

Hey, this is Scott. Let me take on your question about how to improve net funnel efficiency at the dealership level. Obviously, we already have a very high close rate, simply because price discovery and price confidence happen to correlate in-marketness. And we tend to be unique in that we are an order-generation platform. So psychologically the customer has not only been educated as to what others have paid for the car, but by the time they get introduced to the dealer they have already seen the dealer’s price and they have decided to proceed. So psychologically, they are much further down the process and tend to buy a higher percentage of the time. I think that definitely what we’re learning is that as we begin to get to the optimal or efficient frontier of dealer size, the total size of the growth of the network will begin to decelerate and the real metric underneath will be what’s our share of wallet at that dealer? What percentage of their sales are we originating? What we are learning is that the longer a dealer is on our program, the more that they are able to hold other marketing channels accountable. And there’s definitely a lot of evidence today, in certainly automotive industry trades about third-party marketing channels being cut back. And we are really sort of separating from the pack in this way where as a pay-for-performance and fully-accountable marketing channel, dealers are starting to make very pragmatic decisions, which ultimately turned the TrueCar expense into a cost of goods sold and allows them to remove some of those high variable marketing expenses. But the benefit to the dealers that have been on the program for a while tends to cascade a little bit more deeply into their cost structure where they are able to cut back on commission expense, SG&A, and overhead expense, and depreciation and carry cost on the car. We’ve introduced new tools like Sales Analyzer that really give dealers the ability to use the science of pricing as a way of not only pricing their cars but closing transactions. And then finally, we are starting to see the real effect of brand equity in the marketplace. The unaided brand awareness of TrueCar is definitely growing. But TrueCar being presented into the transaction is now beginning to have a really strong effect in terms of consumer close rates. And we’re seeing dealers almost demand from us badging and certification opportunities where they can really align closely with their brand. There has been a lot of noise lately about others in our state that have run ad campaigns that really do poke fun at the industry and make fun of the dealer and sort of the relationship between dealers and consumers. And we have seen that as a nice way to sort of separate ourselves. We are really, in a lot of ways, a dealer co-op sort of re-instituting or re-implementing trust between consumers and dealers. And that message seems to be resonating, especially at the point of purchase. A TrueCar dealer can turn the screen around and immediately gain the trust of a TrueCar user or even a user off the street. And that brand equity I think is only building momentum. So all of those things combined I think – are starting to have a very virtuous effect. But there is no doubt, once a dealer has been on the program for more than a year, they start to lean in. They tend to hire and staff around the program. They train around the program. They tend to be much more competitive and use the tools that we are now giving them. And I think the product developments sort of rollout plan for the next 12 months is really robust, as it relates to dealer tools to help them retain margin, sell cars, and really close customers in a confident and satisfied way.

[John Krafcik:]

Deb, it’s John Krafcik. A couple more points on how we are improving NFE and dealer conversion. One is mobile. We’re to the point now where about half of our traffic is mobile, and we are seeing a higher close rate, higher NFE attached to mobile, that makes a lot sense. So a lot of what Mike talked about in terms of our future investments are going to come down with our mobile platforms. The second point, in the network is, we’ve still got significant opportunities and upside with some brands. If you look at our penetration on a brand-by-brand basis, we are about 3.7% for the industry as a whole at retail. Some of the domestic brands were around 2%, right, significant upside. We know that with some of our other brands on the Asian side and German side, we can be as high as 6%, 7%, even 8% of their total retail sales. So it’s another way we’re looking at our ability to grow out the network is to target those brands in those metro areas, where we are not necessarily well represented yet. So the good news is, there is still some upside for us.

[Debra Schwartz:]

Great, thanks, and congrats on the quarter.

[John Krafcik:]

Thank you.

[Operator:]

Thank you. Our next question comes from John Blackledge from Cowen and Company.

[John Blackledge:]

Great, thanks. Just a couple of questions. I think Scott mentioned early in the call a mobile platform refresh in 2015. I’m just wondering, if you can provide further details there? And then two other questions, TrueCar accounted for 15% of dealer volume in 3Q, just wondering what that was in 3Q 2013 and what the long-term boogie is? And then you are obviously ramping up the non-franchise dealer base. Just remind us the total number of non-franchise dealers in the US and how a higher number of non-franchise dealers fits into the longer-term growth prospects for the company? Thank you.

[Michael Guthrie:]

Hey, John, thanks, it’s, Mike. There are a lot of non-franchise dealers in the country there. We think there is about 10,000 of them that fit into sort of our target market. And for us, right now, we are at 900 and change. Our goal over the next couple of years is to get to 3,500, and that will give us what we think is the ideal coverage on the non-franchise dealer side. You had asked a question about share of wallet. We are at about 15% right now. The long-term model, we hit our long-term margins at 35% EBITDA margin is at about 30%. So the short hand for us is 1/3 of all franchise dealers and 1/3 of their business, or account for 1/3 of their business, and that gets you to about 10%, roughly overall market share, if you do the math. So right now we are at 15%. We’re 26% of all the dealers. As Scott mentioned, as dealer growth slows down a little bit and our units continue to grow, obviously, the units per dealer are going to go up, and then our share of individual dealer’s business are going to start to go up. So we’ll start to move from that 15% today out towards our long-term target of 30%.

[Scott Painter:]

Great. And then this is Scott. I’ll talk a little bit about the product side. So today we operate predominately as a web-based business with a applications-based API format. We are in the process of essentially burning the boats. Our belief is that over the coming year to 18 months, the majority of our customers will engage us through a mobile or tablet device. And that the process of shopping will really move to your phone and being in your hand at the point of transaction. And so there are a number of initiatives that are, I think, enabled by the move to a mobile-platform orientation. But it really does begin with database architecture and data and content and technology stacks, all being aligned around mobile first, and then making the web experiences more of an API. I think, it also introduces the level of additional sophistication to the business and accountability that we don’t see today. It should have very positive effects on sales matching, for example, the ability to engage customers throughout their lifecycle. We deal with really to existential questions at TrueCar. One is, what is a car worth, new, used now, or in the future? And the second is, who is going to buy a car, and what are they going to buy, and when are they going to buy it? And the ability to actually engage a customer through an app-type frequency allows us to see their activity, their engagement, and also to control, through proxy a lot of the experience in a way that we do not today. So we are excited about taking a much bigger leap into mobile, and rather than just having a great mobile app, which we do today. What we will have is really a mobile platform that enables us to be much more deeply integrated into the transaction. Our initiative around No Surprises, by the way, is really a precursor to enabling that mobile app. The No Surprises position is entirely unique in the industry. If you are shopping for a car using the web, I would challenge you to find any place that lists tax, title, registration, and dealer-installed accessories. These are the things that usually fall out and are listed in either the small print or not at all. And our position is that, if we are an order-generation platform, we want to get to the point, where you can actually have a negotiation-free transaction, and have No Surprises. The initial impact of that is that our pricing and our numbers will look potentially a little bit higher, but they won’t be apples-to-apples with what else is out there in the industry. So we do believe that the additional transparency will drive consumers closer to a transaction. All of that is necessary if you’re going to be in the customer’s hand at the point of sale, because you’ve got to drive to the exact dollar amount. So, again, there are a number of building blocks that we are putting in place. The No Surprises initiative is a very big one. It’s technologically and from an information completeness point of view, very challenging to do, and nobody else has even attempted it. So, again, I think that the mobile app will probably be they view sometime around Q2, but we were already in testing and have made quite a bit of progress in that regard.

[John Blackledge:]

Thank you so much.

[Operator:]

Thank you. Our last question comes from Ron Josey from JMP Securities.

[Ron Josey:]

Great. Thanks for taking the question, guys. So I’m wondering, Mike, you talked about the cost for TrueCar cars sold through the TrueCar branded channel, $210 down from the prior number. Do you think that number can continue to come down? I think in the prior quarters, you’ve talked about where that could go. And if you could provide some additional insights on the efficiencies you saw in marketing? That would be helpful. Thank you.

[Michael Guthrie:]

Sure. So, yes, what we did in the last quarter taking it from $260 down to $210 is nearly 20% improvement, that was one quarter. Our target over the next three to five years is to take that from $210 down to $175, which means effectively the same level of cut that we did in one quarter, we have to do over the next three to five years to hit the long-term. So it’s feels like a lot of runway for us. Can we continue to see improvement? Absolutely, we can and we will, I think, Scott mentioned earlier, we are definitely seeing the value of building a brand, but it’s also, clearly pretty early. We – as I said earlier, we spent 1% more on acquisition and branding in the quarter sequentially, but generated 25% more unit sales. And it is by no means seasonally a 25% better quarter. So the efficiency got a lot better and there is no reason why that shouldn’t bleed into Q4 and into next year. So we’re really optimistic. We think the combination of creative, intelligent buying, brand building, and then, of course, again product, dealer count, all of those things make your marketing dollars more efficient. And so the NFE this quarter was really at a very impressive level. To be at this level of growth and still be at 1.24% NFE and to have this much of our business come from the TrueCar branded channel and have NFE this high, really speaks to the quality of the product, quality of the marketing brand, dealer network, the close rates that we are achieving. So, yes, we can keep and will keep moving that. I don’t know that the decline in cost per sale will be monotonic. You will have seasonal issues and it might bounce around up and down quarter-to-quarter, but generally it’s going to be on a downward trajectory. I would – for modeling purposes, I would assume Q4, it stays about flat to that $210. But we certainly see improvements on our way down to $175.

[Scott Painter:]

Ron. This is Scott. Let me just add a thought. I mean, we acquire unique visitors for about $1.65. We monetize them at $3.74. There is just a lot of operating leverage in the model. I think that, to Mike’s point, it’s not going to be as linear as just a constant drum beat downward. I think what we heard in the last quarter of earnings sort of non-deal road show is that, there was a lot of questions about whether or not we could drive that number down. I think obviously, we’ve shown that we can, but with so much leverage in the business and so much investment going on, I don’t think that we would want to overset expectations too much on this particular thing. And there is also a number of external factors that sort of drive this, whether it’s seasonal quarterly cost of media, or other costs in the business, where we are just seeing seasonal expense that we wouldn’t be able sort of account for in our normal day-to-day. So again, this was a nice surprise I think for this quarter, but our guidance is going to be flat.

[Ron Josey:]

That’s great. Thank you very much.

[Operator:]

Thank you. This does conclude our Q&A portion and our conference call for today. Thank you for your participation. You may now disconnect your lines, and have a wonderful day.