TrueCar, Inc.
Q4 2014 Earnings Call Transcript

Published: 20 Feb 2015

[Operator:]

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

[Alison Sternberg:]

Thank you, operator. Hello and welcome to TrueCar’s fourth quarter and year end 2014 earnings conference call. Joining me today are Scott Painter, TrueCar’s Chief Executive Officer; John Krafcik, President; and Mike Guthrie, Chief Financial Officer. Before we start this call, as a remnder, this call includes statements which may be considered forward-looking including but not limited to statements regarding our growth, adoption of our platform by dealers and consumers, future results of operations and operational metrics, market trends in new and used vehicle sales, investments in branding and product development, new product introductions and geographic and brand expansion beyond automotive. 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 our registration statement on Form S-1 made with the Securities and Exchange Commission, our subsequent quarterly reports on Form 10-Q and our annual report on Form 10-K 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 February 19, 2015 and the following discussion and responses to your questions reflect management’s views as of today. Further, any and 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. I am excited to report that TrueCar closed out our first year as a public company with record growth in all of our key performance indicators. Most importanty, top line revenue growth of 54% to $207 million, unit growth of 53% to 611,000 units, year-over-year market share growth of 35%, keeping in mind that it’s harder for TrueCar to gain share in an upmarket, and strong improvements across all of our profitability metrics. Notably, our TrueCar branded channel grew by over 125% and our customer acquisition costs dropped to $201 per sale, demonstrating remarkable operating leverage. While Mike will provide the details of our results from an accounting standpoint, I want to take a moment to recognize a major milestone for the company in achieving cash flow positive operating results for both the quarter and the full year. In other words, we are putting money in the bank, consistent with our core philosophy developed at a time when we were a capital-constrained venture-backed start-up. We also successfully completed two public financings, fully repaying the cash investment of some of our strategic investors, and we finished the year with just under $150 million of cash in the bank and a new credit facility of $50 million. Most importantly, we've assembled one of the most impressive management teams bar none. Being a newly public company requires that we balance the ever-increasing performance expectations of the business with the long-term mission and vision. I want to be clear that management is extremely confident in our near to medium-term ability to precisely manage and forecast our business. Our results are very intentional as we operate an extremely rugged battle-tested business model that has achived a tipping point of indisputable industry support as evidenced by the continued growth in our dealer network, share of dealer wallet and momentum. We remain a nascent national brand at the upslope of consumer adoption with currently just under 4% share of the total new car market in the US. Our transactional business model differentiates us from our competitors both in terms of monetization and in terms of long-term potential. [indiscernible] the competitive most around our business as rock solid and not replicatable. Keep in mind that as the consumer brand operating a transactional platform, TrueCar will be able to participate in solving the entire automotive experience both for consumers and automotive retail. As such, we occupy a genuinely unique position in the marketplace. We’re aware of the fact that many of our features and value propositions continue to be tested and introduced by others. These initiatives, however, are fundamentally different in two respects. First, they are not part of an integrated customer experience that is focused on buying a vehicle. Rather they are focused on shopping and unearth upper funnel activity. Second, TrueCar remains the only transactional pay-per-sale platform operating at scale in automotive. This is a complex, technical, regulatory and industry set of modes. Most importantly, this activity has been going on since our inception and we have never seen any evidence that imitation or similarity by others operating in our space has impeded our growth, improvement of our core metrics or our financial results. To be clear, we do not believe that there are any credible incumbents or new entrants that will embrace our business model or threaten our unique position as a category leader at this time. As such, our potential is much much greater than that of a traditional automotive publisher. Our long-term intent is to establish ourselves as the global brand that stands for truth and transparency. Establishing our brand in the US around the car buying experience is simply our points of entry. Not only do we teach to expand our unique marketing position in new car sales but we are making significant progress into equally inefficient adjacencies. In the coming years, we anticipate geographic expansion into other countries and we ultimately plan to extend the True brand into other verticals where opacity creates anxiety around large dollar considered purchases. In short, we believe that millennials, the generation that grew up on technology and instant access to information will demand a mobile user interface that is built on big data and transparency as a way of establishing competence, trust and ultimately satisfaction. We encourage those of you that are interested in learning more about this long-term vision to visit our corporate home page at true.com. Most would see going public as the finish line; we do not. As entrepreneurs, we though for capital, talent, partnerships and momentum. In our case, through an industry backlash and one of the most significant economic downturn in decades. Appropriately the great majority of our time, energy and resources were focused on simply surviving. The most powerful thing about having gone public is that today we now have capital, we have talent, we have partnerships and we have industry support and engagement. Now comes the exciting part. We actually get to focus the majority of our time, energy and resources on really solving the problem. The automotive ecosystem is deeply intertwined. Buying a car must, by definition, include consideration of how you’re going to pay for the car, insure the vehicle, accessorize the vehicle, maintain and repair the vehicle and in a majority of cases, it also must include the sale or trade-in of an existing vehicle. Over the coming years, TrueCar will expand into each of these areas with solution that improves the customer experience while at the same time driving efficiency and cost savings for a hypercompetitive industry fighting for margin and increased profits. 2015 will be a critical year for TrueCar. We will maintain our focus on delivering predictable and robust results, while improving the core product. Simply put, we believe that buying a new car still has a long way to go. We believe that buying a new vehicle is inherently a mobile experience. Today over 50% of unique visitors on the TrueCar branded platform are on a mobile or tablet device and we have seen over 1.8 million app downloads. We expect mobile to represent as much as 90% of our total mix over the next 18 months. As a result, we are completely rebuilding our data, content and technology capabilities around mobile. Our ultimate goal is to enable consumers to be in control of the entire transaction and complete it using their phone. If TrueCar is going to be your trusted friend in the car business, then we need to be in your hand at the dealership. It also means that TrueCar must deliver all of the savings that each customer is entitled to. That establishes an imperative for us to have a comprehensive and competitive dealer network and to engage manufacturers in innovative and unprecedented ways. Our dealer network now exceeds 10,000 dealers. In January, we previewed our consumer app at the Automotive News World Congress and unveiled a new ways for manufacturers to get the same level of accountability in their marketing and incentive spend that TrueCar has been delivering to our dealer partners through our pay per sale billing model. Franchise dealers as a group spend approximately $10 billion annually on marketing and advertising. Manufacturers spend an additional $20 billion annually on advertising and another $45 billion on incentives, focused on promoting the sale of new vehicles. TrueCar’s ability to deliver offers and incentives to in-market shoppers in real time based on demographic, psychographic and behavioral patterns and only charge manufacturers if and when those incentives directly result in a sale has never before been available. For those of you that are familiar with the origin of Google’s business model, you should think of this functionality as a form of AdSense for advertising and incentive spend in automotive. It gives the manufacturers the ability to control and position their brands in the very same way that Polo or Nike position their brands within retail environments like Nordstrom [p]. It provides them with the ability to hyper-target their customers and tailor offers for maximum efficiency and effectiveness. At the same time, this platform expands TrueCar’s addressable market opportunity significantly. Now let’s look forward to2015. As John will elaborate, we expect new vehicle sales to reach 17 million cars in light trucks, the highest production level in a decade. Additionally, millennial consumers will enter the market in force this year where they are expected to account for more than a quarter of new vehicle sales. And for TrueCar, as Mike will discuss, we’re expecting another year of exceptional growth and financial performance. Our popularity with consumers is growing and we ended the year with 5 million unique in-market visitors across all of our sites for the month of December. Our continued branding efforts will get a boost in 2015 from our partnership with Owen Wilson who is lending his iconic voice in support of our brand expansion efforts among millenniels. We believe there's a point in the not-too-distant future where virtually everyone that is genuinely in the market to buy a new vehicle will at some point in their purchase process have visited TrueCar or one of the hundreds of auto buying sites that we operate for our partners, such as USAA, Consumer Reports, American Express, AAA, AARP, Pentagon Federal Credit Union and many others. We continue to invest and pilot our TrueTrade platform through our standalone Sell My Car app and the development of our guarantee value pricing product. Our full blown TrueTrade program will formally launch in 2016. We’re extremely excited about this product and the value that it will bring to TrueCar users both consumers and dealers. Leverage in the business will continue to expand. In 2015, we will continue to prioritize re-investments focused on scaling TrueCar for the long term. We plan to spend approximately $80 million on consumer advertising focused on establishing trust with digital natives, the generation of modern consumers that grew up on data transparency and technology. It is important to note the brand effect in terms of customer acquisition costs. Throughout the history of the business, we have always studied the scalability of our customer acquisition model. It is clear that TrueCar is a mass-market consumer brand and that as our awareness grows, our customer acquisition cost declines. And while this won’t always be a linear decline, meaning that from time to time we will experiment to drive growth with new modalities, creative and market timing, we are extremely encouraged by the trend towards our long-term goal of $175 per customer. Conventional wisdom for establishing a national brand is notionally an annual advertising budget in excess of $100 million. In addition to building our brand, we plan to invest an additional $50 million to continue to develop and optimize new mobile centric products that dramatically improve the car buying process for commercial launch in Q2 of this year. We’ve embraced the radical cultural shift towards a greater internal transparency and accountability with respect to hiring and retention with a laser focus on hiring high quality developers, engineers and mobile UX UI designers as fast as we can in our San Francisco, Santa Monica and Austin offices. In summary, TrueCar is operating extremely well and we’re able to forecast and manage our growth precisely. TrueCar is growing and we believe our consumer brand is nearing an inflection point. We remain focused on improving our core product in 2015 while continuing to develop our new product lines. We will deliver meaningful updates on progress on our sales funnel with manufacturers in the coming months and quarters and we've assembled a remarkable team and we continue to attract top talent in all areas of the business. In all, I am thrilled with how we are running the business and we are looking forward to a great 2015 that sets us up for the long-term. And now over to John.

[John Krafcik:]

Thanks, Scott and good afternoon everyone. Let me start by pointing out that January was the latest in a string of solid months for the industry, delivering a 16.7 million new vehicle SAAR. To kick off the year we’re predicting we’ll deliver 17 million units. While this will be the best volume in a decade we also expect new vehicle sales to generate $553 billion of transaction revenue, an all-time industry record, up 4.8% from the $527 billion we saw in 2014. The used car side of the industry also remains robust. We expect 38.4 million used cars to be sold this year with used car transaction revenue totaling $640 billion, meaning new and used car sales in total representing $1.3 trillion in transaction revenue for the US economy.We sometimes take the size of the US auto vertical for granted but it represents a massive portion of overall economic activity. New car transaction prices reached record levels in 2014 with the average new vehicle transacting at $31,916, up 2% from 2013. Fourth quarter transaction prices were the highest of the year, also up 2% over the fourth quarter ’13, reflecting a growing mix of profitable truck and crossover vehicle sales. Automaker incentive spending hit an all-time record of $39 billion and we expect it to surge to $45 billion in 2015. Incentive spending now represents approximately 9% of industry transaction revenue and is certainly the single highest expense line item on the collective industry P&L other than material costs. I’ll talk more about how TrueCar is working with automakers to improve incentive spend efficiency in just a moment. On the dealer side of our business, we recently announced that there are now more than 10,000 active TrueCar certified dealers. This is a big deal and a strong validation of the value of the TrueCar service to our dealer partners nationwide. The TrueCar certified dealer network has nearly doubled in the last two years. We are adding new dealers at the fastest rate in company history and currently work with 40 of the top 50 dealer groups in the country. We’ve also increased our ability to serve the used car side of the business by significantly increasing our representation among non-franchise independent dealers. We ended the year with 1339 independent dealers using the TrueCar service, that’s 263% increase versus 369% at the end of 2013. The importance of this growth will become clear as we grow our ability to serve total loss claimants for our insurance affinity partners and as we bring our TrueTrade product to market. During our last earnings call, I provided insights into the unique position TrueCar has in the industry to help automakers more efficiently deploy their $45 billion of incentive spending. It turns out the challenging economics automakers face is summed up with this simple fact. To raise volume 5%, OEMs must reduce price by 3%. That means for a typical vehicle selling at today's average transaction price of $32,589, the manufacturer using an untargeted consumer rebate or dealer cash approach has $1000 incentive across-the-board to achieve the higher volume goal, which applies to 100% of the sales, not just the 5% representing incremental buyers. And in the fourth quarter alone, there were 1206 of these across-the-board incentive increases in the industry. This boiled [ph] the ocean approach is incredibly expensive and inefficient but it is symptomatic of the marginal unit economics automakers face. Having previously been the US CEO for a major auto brand, I know first hand how very frustrating this is for OEMs. Within this challenging context, the appeal of TrueCar to our OEM partners is two-fold. First, since consumers come to TrueCar and our affinity partner sites seeking price information and price components, we have found they are 4 to 6 times more responsive to OEM incentive offerings than the general market. That means OEMs can sell to 4 to 6 times as many vehicles with the same total incentive spending budget when they deploy ad spending on TrueCar platforms. Second, as we’ve grown our brand, unique visitors and prospects, TrueCar now offers automakers unprecedented access to millions of in-market deep-in-funnel buyers. How big is this pool of TrueCar prospects, in-market buyers, we have fully configured a car provided us with verifiable personal information and are actively engaged in purchasing their next car, well, this year we project we will introduce about 4 million of them to TrueCar certified dealers. That’s up from over 900,000 prospects just three years ago and that prospect pool is growing quickly. By 2017 we will see over 6 million prospects, which means we could be affecting about one out of every five car buyers making TrueCar an essential marketplace for OEMs to deliver targeted incentives. To reach this capability, we are launching a new product in the first quarter called Life Prospect which provides unprecedented OEM access to these 4 million deep-in-funnel car buyers. With Life Prospect we will manufacture [ph] to generate targeted private one-to-one offers to prospects based on their consideration set, shopping behavior, right composition, location and several other factors. These offers will be redeemable not just at TrueCar dealers but at any dealer in that OEM’s retail network. This is a truly game changing approach that can drive step-function improvements in efficiency and incentive spending for automakers while dramatically expanding the scope of TrueCar’s participation in total industry volume. Life Prospect is just one example of the growth in OEM focused initiatives at TrueCar which is being driven by a growing number of OEM focused team members working in products, analytics, operations and solutions. In January, this group also launched a first of its kind private targeted offer program focused on certified preowned vehicles for a major premium brand. With leasing growing over 25% of total industry sales, the management of lease return vehicles has become a key driver of OEM profitability. TrueCar’s CPO private targeted offer program enables automakers to showcase their national CPO inventory, promote the program’s unique benefits and present private offers to attract buyers that might not otherwise have considered their brand. We expect to extend this capability to other OEMs in the months ahead to better serve the overall CPO market which grew about 11% to 2.34 million units in 2014. As Scott mentioned, our traffic is now over 50% mobile. This is hugely important. We are redesigning our entire technology platform to meet the needs of today's car buyers who demand a mobile experience. And the advantage of this approach to OEMs is clear and we heard it in an industry response discussed on Automotive News Congress presentation in Detroit last month. For the very first time, OEMs will have a means to directly reach consumers on their mobile phones while they can figure [ph] and shop even while they are in the dealership. This incremental targeting capbilty has always been contemplated but was never possible. We are now at a point where TrueCar can deliver it. Tight spend [ph], OEM incentive offers appearing magically on a TrueCar customer’s mobile phone. This will allow dealers to close more sales while retainng a higher gross margin. It will allow OEMs to spend less on incentives through efficient targeting which in turn will increase average transaction prices, since discounts aren’t provided to those who didn’t need them while also improving residual values. It’s an incredibly compelling scenario but we are really just beginning to activate. We’re presently serving private targeted offers for 13 automotive brands. Now with the incremenal value that life prospects and our new mobile solution represents, we will be growing our OEM partnerships in the months ahead. And we are in various stages of discussions with almost every major automaker, and first stage proposals to NDAs to detailed terms and conditions. We look forward to sharing our progress with you as we move through our pipeline in 2015. With that, let me hand it over to Mike Guthrie to provide details on the quarter and how we see the year ahead.

[Michael Guthrie:]

Thanks, John. We had another a quarter in Q4 and wrapped up a fantastic 2014. We continued to deliver a high rate of revenue growth while significantly improving EBITDA margins and unit economics. As Q4 is seasonally weaker than Q2 and Q3 for the industry, our marketing team is disciplined regarding acquisition spend in October and most of November. We then ramp spend intelligently with productive new creative, post Thanksgiving and as a result we had a great holiday season. We accounted for just over 4% share of the new car retail market in December while again lowering cost per sale and improving margins for the quarter overall. We accomplished this while growing units in the TrueCar branded channel by 72% over the fourth quarter of 2013. The TrueCar channel accounted for 64,000 units in the quarter or 39% of total. In addition to delivering topline growth over the past three quarters on TrueCar, cost per UV declined 21% from the $1.89 to $1.50 and cost per sale fell 23% from $260 to $201. Driven largely by these efficiencies, we have seen steady growth in the company’s margins over the entire year. Starting in Q1, our adjusted EBITDA margins by quarter were 2.2%, 3.5%, 6.8% and for the quarter just completed 7.7%, phenomenal evidence that we can scale the business profitably. In addition, we generated positive operating cash flow for the fourth quarter and for the first time for the year as a whole. Last quarter our guidance was that we expected revenues to be in the range of $54.5 million to $55.5 million. In addition, we told you that we intended to invest in key growth areas while generating adjusted EBITDA of $2.6 million to $2.9 million or about 5% of revenue. Total revenue for the quarter was $55.5 million at the top end of our guidance. Transaction revenue was $51.2 million, up 32% from the same quarter in 2013 and better than our prior guidance. We generated unit sales of $163,338 in line with guidance, achieving year-over-year growth of 43%, with monetization of $314 or $2 higher than guidance. Data and other revenue most of which comes from our ALG subsidiary was $4.2 million which was a bit lower than some of the analyst models. My message here is don’t worry about it. As we have said, ALG is a strategic asset for TrueCar. It drives close relationships with carmakers and the proprietary residual value data feeds our guaranteed values that are crucial features of TrueTrade. We do not run it for absolute growth and since ALG residual value products and services will continue to be less and less of our overall revenue story, we are not concerned by any perceived shortfall and it has absolutely no impact on the guidance for 2015 that we are about to give shortly. All of our key value drivers improved again in Q4

[Operator:]

[Operator Instructions] Our first question comes from the line of Ron Josey from JMP Securities.

[Ron Josey:]

I wanted to follow up on the incentives business, and maybe a quick one on mobile. So on incentives, lot of exciting new products coming out here. I am wondering with the launch of Life Prospect later in 1Q, how many brands are you expecting to be live on the product when it launches? Is that the right way to think about it? And then last quarter I think you talked maybe 7% of transaction revenues from incentives. Any update in this quarter. And a quick follow up on mobile, please. Thank you.

[John Krafcik:]

Ron, it’s John Krafcik. Life Prospect is now sort of in the product development pipeline and we are working with two different OEMs, I can’t really say, as you might understand, these are sort of private targeted opportunities. We have not been to a point yet where we can talk about using the pipeline but we are working very, very well with two at this point. The second part of your question?

[Ron Josey:]

Just wondered if ther is an update on – I know last – I thought in 3Q around 7% of transaction revenue was maybe from incentives, as 12 brands were on the – where you’re working with 12 brands, wondered if there is an update this quarter.

[Michael Guthrie:]

Hey, Ron, it’s Mike. It is 7% again in the fourth quarter and what we said – and what I refered to in my comments is that the plan right now – the guidance that we’ve given right now keeps that number at 7% throughout the year. So obviously we believe to be better than that but that’s what we’ve built the plan and the guidance that we’ve given.

[Ron Josey:]

And one last one, for Scott and I will jump off. So as more traffic goes through mobile, wondering if you're seeing any change in consumer usage as a result, i.e. time from certificate to sale, is that shorter if anything along those lines? Thank you.

[Scott Painter:]

Sure. Thanks, Ron. So all of the key performance indicators in the funnel are improved when we have a mobile engagement through the native app. So just to be clear consumers can today engage TrueCar through their mobile phone on the web effectively. However if they engage us through the native app, we see almost a doubling in terms of all of those key performance indicators, especially close rates, just because we tend to be in a much more interactive conversation. So obviously getting more native app downloads is the key. I think the consumer launch of the market showcase which is scheduled here before the end of March is really a very good milestone for us. It’s going to open up the OEM capability to really position their brand like I’ve referred to in sort of that Nordstrom’s example where they can actually use the high definition high resolution imagery in terms of presenting their product and positioning it within our app and then also launching into those targeted offers. I think from a consumer functionality point of view, it's a step function better. So we don't yet have any forecast or any prediction built into the model about how much better that will be but we anticipate that it will be pretty significant.

[Operator:]

Our next question comes from the line of Douglas Anmuth from JPMorgan.

[Doug Anmuth:]

A couple of things. First, Mike, I know you said not to worry about UVs but just want to talk about the top of the funnel there, you obviously the funnel [ph] is going through 2014 here. Can you talk more about the impact here and how we should think about NFE and pricing, it would seem that obviously some slowdown on the UV side would put more pressure on those, other drivers? So that’s number one. And then secondly, could you give us some more detail on how Life Prospect will work and I guess are you getting any pushback from some of your existing dealers on life prospects given now that will be opened outside the network as well?

[Michael Guthrie:]

Sure. Dough, thanks. I will take the UV and then a few question, I will let John, Scott talk about life prospects. But briefly on UVs, again you also have a seasonal issue in the fourth quarter. So October and November are pretty quiet and December picks up. So we had well over 5 million UVs in the month of December but October and November are just soft periods in the industry and everyone sees that, coming off of Q3. NFE in every single one of our channels improved last year, substantially in TrueCar 30% on an annual basis. So we are definitely – we are units focused and we also I think have been focused incredibly intently on not over buying the funnel effectively in the consumer channel. So the quality and the efficiency of that funnel is part of why the cost per sale has come down so dramatically over the last couple of quarters and stand poised to dip under $200. So anyway – so we are not – it’s seasonally expected, again the units are there and we’re not – we are buying in a very disciplined way, spending in a very disciplined way on the advertising side.

[Scott Painter:]

Doug, this is Scott. Let me just, before I turn over to John, on the Life Prospect question, just in terms of the way that we look at unique visitors, it’s important to recognize we are at bottom of funnel activity. And so as such we are focused on really addressing customers at that moment prior to making a buy decision which is really around price discovery and price confidence. And that really makes us look very different than some of these high-volume shopping sites where you get just tens of millions of people washing around, keep in mind our monetization is significantly higher and in many cases, it’s 10X higher than some of those kind of shopping sites. And because we’re focused on that lower funnel activity it's worth noting that through all of our different experiences, whether it’s just truecar.com or our affinity auto buying programs, we’re seeing nearly 5 million unique in-market monthly shoppers, there is only about 1.2 million, 1.3 million a month that are actually buying a car. So we’re already at a point of saturation where we are theoretically – and this is not a real stats, but we’re theoretically talking to everybody who is in the market to buy a car and obviously we want to make sure that becomes a true statement and I think that’s obviously the aspiration of the brand but with 5 million unique monthly visitors we believe that the issue is really a focus on quality and who is going to buy what and when, not just adding to the top of the funnel, because that'll ultimately dilute the revenue per unique visitor.

[John Krafcik:]

So I’ve gone a little bit deeper on life prospect. It really is a beautiful thing, this product right. So taking you down the funnel 4 million to 5 million unique visitors. These as they go through the funnel they configure the car, they’re building the car, they are choosing the color. That takes you to about 300,000 to 400,000 of those every month. Those are the things we call life prospect. Within five days or so most of those folks have purchased a car. There are a bunch of them who have it and what life prospect does is allows us to activate those on behalf of our OEM partners. So working with our OEM partners they may decide, for example, they need a little bit of help in the midsize segment and they want to perhaps may want to go back and talk to those consumers who actually configured one of their own cars. So it’s sort of a shooper retention strategy and engage them one more time with an incremental $1000 OEM offer, or they may choose instead to want to work with -- within the competitive set and understand those who are shopping competitive products. So with life prospect, we’re sort of unleashing that capability for OEMs, because they haven’t bought a car in say five days, and finaly [ph] prospected. The second part of your question was – and this is a really cool thing about this new product and approach is we’re able to activate our OEM partners’ entire retail network. This is a big thing for us as it allows us to extend our reach. Your question was, what is dealers’ point of view? Our TrueCar dealers’ point of view about these non-TrueCar dealers on the platform and actually it works pretty well, we already have some experience with this. The TrueCar dealers on the platform still have the advantage of showing and providing full price transparency. So that will provide an actual price that includes that incremental OEM offer. For the non-TrueCar dealers that will be displayed simply as the OEM discount of $1000, lacking the full transparent price experience. So those other dealers will have an opportunity to engage in that sale but we found in past experiences is the TrueCar dealers who were those who are most likely to close the sale because they are providing that transparence and price confident transaction.

[Operator:]

Our next question comes from the line of Debra Schwartz from Goldman Sachs.

[Debra Schwartz:]

Two questions. The first one, additionally on OEM incentive. Given how large the OEM incentive pool is, how do you think about pricing on that product and whether or not there is any leverage on pricing over time? And then two, you talked about unit growth from the TrueCar channel. Curious about the affinity channel and whether or not there were any new affinity partners added in 2014, and how you are thinking about that for 2015?

[Scott Painter:]

Sure. This is Scott. Let me first tackle the targeted incentive question. I think – yes, John is going to jump in.

[John Krafcik:]

Yes, John Krafcik again on targeted incentives. Yes, pricing for this is really interesting, and there are several different ways we can go to market with it. The first and most important point and I like to talk about this a lot. I know you’ve heard me say it a couple of times. But it's extraordinary what the cost for incremental sale is in the industry right now. It’s in an industry where you’ve got, we’re selling $33,000 products on average the cost for incremental sale that we see OEMs doing every single month with this 1000 plus quarterly royalty option across-the-board incentive increases, is over $20,000. That’s the cost for incremental sale right now with non-targeted incentive spending and the industrydoes it over and over and over. So frankly any price below that represents good value for the automakers. And we’re not going to be that bold in terms of our pricing but we’re working with the OEMs on a one-on-one basis just really to establish the thing that works best for them.

[Scott Painter:]

Deb, let me just add a thought to that. So there's sort of a phase one and phase two to this. Today, as Mike reported in his comments, we’ve got about a dozen automakers where we’re generating revenue today and we sort of see it as more of a flat fee style revenue where we are simply inserting them into the process and marketing their targeted offers to our customers. I think when we introduce the fully integrated app that is going to behaviouraly and psychographically target customers as they go through their shopping process, it will allow the OEMs to time their offer, tailor their offer for maximum efficiency and effectiveness. So those offers will be either larger or smaller and as they go up or down and depending on how valuable that customer is depending on where they are in their shopping process, either upper funnel consideration or conquesting lack [ph] at the very last moment, there's going to be greater value for that OEM. So when I made the reference earlier in my comments about AdSense, it is really about understanding how to take advantage of those inefficiencies, we are not looking at phase two being a flat pricing model, which would be very much an open dynamic system, we are depending on the individual targeted offer that is offered to the consumer, that will be both an offer for the consumers, say $1000 offer on a car, and there will be a related fee from TrueCar for that targeted incentive, so $100 and it will again always relate to the value of the OEM and the timing of where the customers are in their process. That is the functionality that we’re building out to be launched later this year. So the existing functionality is more flat fee related and it will become more AdSense like as we roll out phase two.

[John Krafcik:]

Exactly. Right now currently on simple fee structure again not something we can talk about specifically but it has essentially two levels. One is retain customers, some is already looking within the brand and there is a difference price point for conquest or comparison-shopping customers. You also asked, Deb, about our growth in the affinity channel. We did add in Q4 26 new partner car buying sites, 18 credit unions, six employee buying programs, a bank and a membership organization. We are seeing a lot of growth on the employee buying program side of the business with growth of about 120% year-over-year driven by the employee buying program, that’s becoming an increasingly large portion of our partner growth.

[Operator:]

Our next question comes from the line of John Blackledge from Cowen and Company.

[John Blackledge:]

Two questions. On TrueTrade, it’s been in beta for a few months now. Just wondering if you can give some details on learnings from the consumer perspective and dealer perspective, maybe too soon but if you have any color, that’d be great. And talk maybe how the economics may play out on a price per unit basis? And then Scott mentioned entering other verticals earlier in the call. I am wondering if you can give us a sense of timing for that and what the verticals are, and then also discuss the geographic expansion?

[Scott Painter:]

Why don’t I take the latter part of that question first. This is Scott. So in terms of international expansion, or geographic expansion, it’s obviously one of our growth vectors. Clearly expand into two brands around the notion that truth is a more profitable way of doing business, we do believe it has legs and can go into other verticals. We have absolutely nothing scheduled for 2015. We get a lot of inbound interest for geographics and product line expansion. We are evaluating it. It is not part of our plan. In fact, it’s probably more important to reiterate our focus for 2015 is really on the core, new car buying product and we believe that the two-dimensions that we really want to focus on over the next 12 to 18 months are mobile. So what I had sort of referenced in my comments was that the entire data content and technology capability is being built around mobile. It’s literally rebuilding the entire platform and I think that we believe that buying a car is inherently a mobile activity and if we’re going to do that, we’ve got to get out the door pricing, we’ve got to get to the point where we can get the transaction completed on your phone. You can literally buy the car on your phone. And so mobile for us is I think a very big milestone for us because it unlocks a lot of other value. And so the resources of the company are going to be focused there. The second is how we related to manufacturers, we believe that given the size of the overall incentive spend, do not comprehensive and accurately reflect all available incentives to consumers, means that we are not conveying to them all of the savings that they could get. And so we’re really going to put a lot of emphasis on that, nobody has done it right yet and it’s an area where we think we do have the data to be able to get it right. So those two big milestones for 2015 we think we will have a dramatic continued improvement in NFE. In the past in terms of how we’ve see that affect the business positively, we will see that again in 2015 but there is no forecast for entry into any other verticals or geographic expansion at this point.

[John Krafcik:]

John, it’s John Krafcik again. We can start on the first part of your trade question. And I want to get to the real macro point here which is that the TrueTrade product deliver something for dealers if they don't have right now. I think this is one of the most amazing statistics in our industry. For every 100 times consumers buy a new car, 50 of thos times they are selling their car on their own instead of taking it through and trading in with the dealer. They are only capturing 50% of the trade. And it’s a lost profit opportunity for dealer partners, you know there is a 13% used car margin contribut about 3.8% new car margin. So there is tremendous upside to dealers to get them more trades, TrueTrade is a great tool to get that.

[Michael Guthrie:]

John, this is Mike. On some of the questions on metrics, as I said we anticipate about 3000 condition reports that are completed next month. There will be offers from our 500 dealers and quite honestly we expect to have a couple hundred successful transactions in that range. Pricing is not really the big concern right now. The big concern is really running the water through the pipes. Today the dealers make the pricing offers, we’re obvously moving to a mechanism where we’re putting a price on the car, as we call daily values, guaranteed values. And we already have two large dealer groups, who are going to pilot that with us later this year, one major group on the East Coast, one on the West Coast. So again in terms of hitting the big milestone I think we are well on our way and we’re doing a good job work and we are definitely on plan. And again by the sometime in the third quarter, likely the month of December, we think we can actually have a month where we have thousand successful trading transactions and we’ll be ready to go in ‘16 in a much bigger way.

[Operator:]

Our next question comes from the line of Mark Mahaney from RBC Capital Markets.

[Mark Mahaney:]

Scot, at the beginning you mentioned the idea of taking the brand and expanding it into other verticals that maybe could benefit from transparency. Sounded like some long-term thinking on your part. Could you elaborate a little bit on that? And then you also mentioned I think $50 million allocated towards improving the mobile product experience. Could you elaborate a little bit on that? What would that spend be for, what are the – I know you talked about already a little bit, but what are the pieces of the mobile experience that you think could use the most improvement today?

[Scott Painter:]

Well let me start with the mobile question. So we really believe that the mobile engagement is critical because the milleniel buyers are really using their phones in ways that they haven’t in retail before and especially in automotive. And we think of that in order to be a trused the kind of partners, we’ve really got to be in your hand at the time of the transaction and we’ve got to have all the details right. So there are a number of fundamental sort of components to building a comprehensive mobile app. One of them is you need to have an out the door price on the car. Our price check functionality that allows you to walk at throug a car scan and again actually see options and accessories, you can get an actual out the door price with pack, title and registration is a critical component of that for example. All of that I think keeps the fact that we are putting a ton of emphasis on mobile as really the new platform and I think that if you look at the types of engineers that historically we’ve been focused on they have been a little bit more traditional sort of web 2.0 type orientation whereas mobile UXUI developers, light code based developers, Python, Ruby, Jango, a lot of these sort of modern more – sort of innovative approaches to development, or even sort of focusing us to look at work in cities like Austin and San Francisco, typically we don’t have a talent pool in cities like Los Angeles. So for us the allocation of 50 million focused on mobile is really just to emphasize our commitment to mobile as really the product focus going forward. One of the things that we’re doing just to give you a litlte behind-the-scenes is we have historically limited ourselves to only paying within certain pay bands. And what we have found is that just the mobile talent pool that's required to take us to the next level, these are some of the most highly paid sought-after folks intact, which is not jus an automotive talent pool that we are searching through anymore, most of our employees are coming from Apple, Google, Twitter, Facebook and so when we are recruiting from that talent pool, we really have to take the blinders off and open up what we are willing to pay. So what you will see I think a much bigger commitment in our budgeting process to a little bit more expense in that area and that’s really notionally what the 50 million refers to. In terms of True as a global brand, one of the things that we really struggle with and certainly in automotive is the simple comparison that we are like some of the other publishers in our space and these traditional publishers llike KDB or Edmon [ph] or some of these – and even the modern-day classified like Cars.com or Autotrader, are really not at all the same as what TrueCar does. We have a fundamental belief that truth and transparency is a better business model and the poof point of that is that we survived a boycott in an industry that was going through a massive downturn and we’ve now tripled the size of the dealer network and we’re more relevant than ever before. The reason is not because they love TrueCar, it is because it fundamentally works. What TrueCar does at the end of the day s it attacks the cost structure of selling a car by removing friction. We recognize the four major cost synergy in selling a car, the marketing, commissions, overhead of running the dealership and depreciation cost in the car and by attacking those cost centers and removing friction we're introducing more margin to the dealer or the ability to be more competitive on price or in many cases both, which is really a magic trick. And I think that that same exact lesson applies to any big market where you have possibility– it’s very intentional that we own the domain name true.com, it’s very intentional that our ticker is TRUE. We fundamentally believe that if we can prove in a murky space like automotive, while there is a very low level of sort of inherent trust that we can re-introduce trust through objective data, big data, computational analytics and transparency that we can then translate that into other markets. That being said, we are not wanting to get ahead of ourselves. So we really use sort of brand horizon line as a test for everything that we do. The authenticity, the credibility, the validity of the data has to always stand up, so we really cherish that because ultimately the value of our brand is what is going to give us the ability to sort of chip into those other areas and explore things in perhaps healthcare or other big commodity items like financial services, or insurance or even things as simple as mac efficience [ph]. I think every business school has had a case study around the opacity of nitro cells. We think that truth and transparency is a very very expendable concept and we’re looking forward to really getting the business to a point where we can take advantage of that. You won’t see any of that in 2015. But we wanted to speak to it just because it really is a reflection of where we see ourselves and how we manage the business day to day.

[Operator:]

Our next question comes from the line of Keith Deyer [ph] from Craig Hallum.

[Unidentified Analyst:]

Your monetization was up very nicely in the quarter and guidance sort of appears to suggest that continues. Is that just purely mix towards ued or is there another dynamic there and how do you think that progresses throughout the year?

[Scott Painter:]

There is a little of a mix towards used but there is also – we’ve got some subscription rate increases that are going to be flowing through the business here shortly. So we anticipate picking up a few dollars in monetization over the next couple of quarters. We finished at 313 in the fourth quarter. I think that we will see the number in that range for the first couple of quarters and then bump up a little it in Q3 and Q4, we think to finish the year 220 range.

[Unidentified Analyst:]

And you set up 4 to 5 bucks in Q1, if I heard you right?

[Scott Painter:]

That’s right.

[Unidentified Analyst:]

I noticed revenue per franchise dealer was a bit lower in Q4, and we haven’t seen that before. And I don’t think that should be impacted by seasonality but any color there on maybe what you saw?

[Scott Painter:]

No, it is actually impacted by seasonality. So what happens is there is sequentially between Q3 and Q4 units pretty much always come down and so your transaction revenue comes down but you’re still adding dealers. So it’s really a reflection of a very strong dealer adds in the sequentially down fourth quarter on transaction revenue. So the numerator comes down a little bit, the denominator goes up, the ratio of revenue per dealer comes down a little bit. You’d see that go back up in the first quarter and continue up in Q2 and Q3 and potentially they have the same thing in 2015 – in the third quarter of this year. In 2013, just to go back to the fourth quarter of 2013, we actually didn’t have this dynamic. And so let me just explain a little bit. You actually did have sequentially down units in the fourth quarter of 2013, again that's -- even though that’s normal but our transaction revenue went up in the fourth quarter and that’s because we went through a stronger write-off policy with our dealers and so we had a big spike in monetization in the fourth quarter of 2013. So transaction revenue actually grew sequentially even though units came down sequentially and is able to offset the growth in dealers. So that’s why you see a slightly different trend in the fourth quarter of ’14 than you saw in the fourth quarter of ’13. That makes senes.

[Unidentified Analyst:]

And then last question from me, you in the past have thrown out what percentage of your dealer transactions you represented, do you have that off hand or even directionally would be helpful?

[Scott Painter:]

I think it stayed this quarter right at about 15%, again good revenue growth that we are adding a lot of dealers. So the denominator continues to grow, having said that if you go back to the oldest cohorts, when we started we are – we gained 25% share for the older cohorts in our dealer network. And so it’s clear evidence that as dealers are on for longer period of time, then we add to the program more and we become a bigger and bigger share. So the recent adds and for that two overall as we are still adding a fair amoutn of dealers we still have got 15%. End of Q&A

[Operator:]

Ladies and gentemen this does conclude the Q&A session. Thank you for your participation. The call has ended. You may disconnect your lines at this time. And have a wonderful day.