TrueCar, Inc.
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Greetings and welcome to the TrueCar, Inc. First Quarter 2016 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Ms. Alison Sternberg. Thank you, Ms. Sternberg. You may begin.

[Alison Sternberg:]

Thank you, operator. Hello and welcome to TrueCar’s first quarter 2016 earnings conference call. Joining me today are Chip Perry, President and Chief Executive Officer; and Mike Guthrie, Chief Financial Officer. As a reminder, we will be making forward-looking statements on this call, including but not limited to, statements regarding our outlook for the second quarter and full year 2016, management’s beliefs and expectations as to future events, plans and strategies, our ability to improve our relationship with and perception among dealers, changes to our product offerings, planned advertising expenditures and the effects of operational initiatives including investments intended to improve close rates, our technology infrastructure, internal research, the productivity and coverage of our dealer network, dealer training and service and the core experience for consumers and dealers. Forward-looking statements are not and should not be relied upon as guarantees of future performance or results. Actual results could differ materially from those contemplated by our forward-looking statements. We caution you to review the Risk Factors sections of our annual report on Form 10-K for 2015 filed with the Securities and Exchange Commission and our quarterly report for the quarter ended March 31, 2016 to be filed with the SEC for a discussion of the factors that could cause our results to differ materially. The forward-looking statements on this call are based on information available to us as of today’s date, and we disclaim any obligation to update any forward-looking statements, except as required by law. In addition, we will also discuss GAAP and certain non-GAAP financial measures. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measures are set forth in the Investor Relations section of our website at true.com. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Now, I’ll turn the call over to Chip.

[Chip Perry:]

Thank you, Alison. Good afternoon to everyone on the call today. Before Mike can walk you through our final results for the quarter, I'd like to update you on our progress since our last call. At that time, your recall that I outlined our plan to take the company forward by refining how a marketplace work so that can provide the best overall value proposition to car buyers, dealers and OEM. As I outlined on our last call, TrueCar has four important strengths and leveragable assets that give us some clear sources of differentiation in the market. First, our new car pricing transparency model; second, our powerful value proposition for dealers to our fully accountable cost per action model; third, our close relationships with our affinity partners; and fourth, our rapidly growing brand which has a very positive image with consumers. It’s another quarter of operating the company under my belt. I believe even more strongly in the value of these unique assets and in our ability to reenergize the growth of our company. In fact the latest March 2016 comp score audience data supports my confidence in our brand. According to comp score, TrueCar’s year-over-year traffic growth is again by far the highest in our competitive set. While consumer traffic actually declined for fewer competitors, including cars.com, Kelley Blue Book and Edmunds. On our last call, I also outlined some shortcomings in the execution of our model. Clearly the first and highest priority is to turn around the negative sentiment that some dealers feel today towards TrueCar. Dealers are paying customers and we must continue to focus on creating a more balanced marketplace benefiting both consumers and dealers alike. I'm very happy to report we made good progress on this front. Our major accomplishment in the first quarter of 2016 was the creation of our Dealer Pledge which articulates the wide range of changes across our business aimed at addressing the concerns we've been hearing from the dealers over the past couple of years. We rolled out the Dealer Pledge on March 27 and we promoted it at the annual national automotive dealers association convention in early April. A variety of content regarding the pledge is on our truecar. com/pledge landing page and I encourage all of you to read through it. Importantly the pledge has been deeply embraced and internalized by every member of the TrueCar team and has reset our company's internal compass, aligning it towards customer service and marketplace balance. The Dealer Pledge addresses three major areas in which TrueCar is working to improve the dealer experience while also improving our value proposition to consumers. First, we are moving to reduce the use of TrueCar as purely price driven shopping tool and enable dealers to compete on factors other than just price. We're making major changes in our product offering to address concern if TrueCar doesn’t think to hurt dealer profitability and put sands in the gears of cars transaction. The product changes we made include moving move towards win based presentation of TrueCar’s certified dealer inventory to consumers, eliminating the anonymous dealer list page which entitled removing an unbranded dealer pricing page that came before consumers submitted their contact information to TrueCar certified dealers, and adding more dealer specific brand into our environment. In the second key component of our pledge, we are addressing concerns about how we treat dealers as customers by redesigning our data policy, modifying our billing models and practices, and significantly enhancing our ability to have live one-on-one interactions with the dealer customers. As part of the pledge, we clarified our data usage and deletion policy and committed the commissioning of big four auditing firm to validate our strict adherence to these policy. We also committed to begin offering subscription billing option in current pay per action state and clarify the policy around offering sales credits. And finally, we plan to higher approximately 100 deal service consultants so that each dealer can receive a monthly visit from a TrueCar representative thereby helping dealers make better use of our tools and close more sales. In the third component of our pledge, we're making changes to our consumer facing advertising, a website messaging without abandoning our position on transparency. To that end, we're creating more balanced messaging to portray dealers in a positive light. We'll move never over pay from our messaging, particularly taken to imply the dealers overcharge consumers and we're also beginning to highlight more prominently in our advertising the importance of TrueCar certified dealers in delivering a transparent car buying experience. Finally, in the pledge, we also clarified our intention regarding TrueCar's potential future involvement in other key parts of car buying process. In the Pledge, we said that we will only support indirect finance and thus will not offer third party direct finance products through TrueCar.com and any trade-in product we introduced will be based on well-accepted wholesale valuations and will be offered on a dealer option basis. Over the course of year, we’re going to publish progress reports on our Pledge to the industry to hold ourselves accountable to the commitments we've made. At NEDA we received very positive feedback on the Pledge for many TrueCar and nonTrueCar dealers, TrueCar's dealer count and dealer coverage are now beginning to improve reflecting dealers willingness to work with us. Importantly, I believe that this new approach that is enabling us to build a bridge back to car dealers who left us last year including AutoNation which last week agreed to begin testing TrueCar at 55 of its dealership. It will take some time before any of this translates into concrete financial improvement, but I feel confident to have laid the foundation for future growth. In addition to rolling out the Dealer Pledge, in the first quarter 2016 we significantly strengthened the leadership of our dealer sales and service teams. First, we hired Brian Skutta to be our Executive Vice President of Dealer Sales and Service effective February 29. Brian and I worked together at AutoTrader.com and he has an outstanding track record of building innovative digital marketing solutions for dealers and helping them maximize their results from these solutions through strong customer service. Brian joined TrueCar from AutoAlert where he was the President and CEO. Prior to his work at AutoAlert, Brian was the Vice President and General Manager at VINSolutions and Head of Digital Marketing where he led both company's rapid growth following their acquisition by AutoTrader.com. He also served as the first General Manager of AutoTrader.com, Trade-In Marketplace where in 2009 he led the launch of the first of the kind service that enabled consumers to receive liquid, sight-unseen offers for their used cars and redeem these offers from participating auto dealers. We're excited to have Brian on the TrueCar team. In addition to Brian, Jim Menard has joined the TrueCar team as our Senior Vice President of sales, a position that will contribute directly to strengthening dealer relationships across the TrueCar certified dealer network. Jim and I also worked together at AutoTrader.com. We had a great career and was ultimately the Senior Vice President in charge of the entire 800% dealer sales team. He joins TrueCar after spending nearly 20 years in the auto industry bolstering partnerships with all across America. On the product and technology side of the company, as we discussed on the last call, we are taking steps to significantly improve our data and product platform. This will enable us to improve both product quality and increased product velocity so that we can be more responsive to dealers, manufacturers and consumers. This summer, we’ll begin testing alternative treatments of our user experience and include different combinations of the placement of user registration and different and stronger messaging on the benefits to consumers from proceeding all the way through to releasing their contact information to dealers. We believe the insight driving this testing will enable us to pull more car buyers completely through our online experience and dealer introduction process, thereby improving conversion and close rates. Finally, we continue to develop our internal research capabilities. We are now conducting focus group across the country along with significant direct input from dealers in order to assess ways in which we can be a catalyst for improving the overall automotive retail experience for both dealers and consumers. The output of that research will help inform the future direction of our consumer and dealer value proposition. We still have plenty of work to do and while we are starting to see the benefits of the changes we're making, I don't expect to see improved financial momentum until later in the year. Mike is going to give you more details on this. Regardless I'm excited about the early progress we're making and about the plan we have in place to position TrueCar as an category winner in this market and for much stronger growth in 2017 and beyond. I'll now turn the call over to Mike who will explain our financial performance in more detail.

[Mike Guthrie:]

Thanks, Chip, and good afternoon. In the first quarter of 2016, we basically did what we set out to do. With revenue hitting the high end of our $60 million to $62 million guidance even it’s also hitting the high end of 170,000 to 175,000 unit guidance and adjusted EBITDA exceeding our guidance of break-even. In the second quarter, we have started to make more significant investments in our three major focus areas, dealer sales and service, our product and technology platform, and consumer and dealer research. We'll feel the impact of these investments more fully in the second quarter but we'll likely not see top line benefits until later in the year. Revenue in the first quarter of fiscal 2016 totaled $61.9 million, compared to $58.6 million this time last year or 6% growth. Transaction revenue also grew 6% year-over-year to $57.4 million in Q1 of 2016 compared to $54.3 million in the first quarter last year. Units grew 4% to 175,000 in Q1 of fiscal 2016 from 169,000 in Q1 of fiscal 2015. We ended the first quarter with 9,281 franchise dealers, up from 9,108 at the end of Q1 2015 and up sequentially from 9,094 at the end of Q4 2015. The Q1 2016 total does not include the 55 AutoNation stores that began a new trial with us starting on April 29. Our non-franchise or independent dealer count at the end of first quarter was 2,321, up from 1,578 at the end of Q1 2015 and up sequentially from 2,082 at the end of Q4. We ended the first quarter with a total dealer count of 11,602, which is an all-time high for TrueCar. Our sales funnel [ph] experienced similar dynamics in Q1 of 2016 as it has over the past three or four quarters, with high growth in the top of the funnel unique visitors, slightly slower growth in mid-funnel prospects and much slower growth in actual units. In Q1, we actually grew TrueCar prospects at 25% year-over-year and USAA prospects at 24% year-over-year. So Q1 of 2016 marks the third consecutive sequential decline in close rates, given the recent improvements we are seeing in the dealer network and network coverage, I believe that close rates will begin to show sequential improvement in the second quarter. Also, we are starting to see enough positive trends to support our belief that we'll return to healthier year-over-year top line growth, and some margin expansion, by the fourth quarter. Looking at the Q1 funnel and other metrics in more detail, unique visitors were 6.7 million, up 21% year over year. Prospects totaled 953,000, up 18% year over year, and units were 175,000, up 4% year over year. The new/used mix was 70% new, 30% used. Monetization in the first quarter was $328 per unit, which was up 1% sequentially and 2% year-over-year. Transaction revenue per franchise dealer in the first quarter of 2016 was $6,249, up 1% from $6,164 in Q1 of 2015. Net funnel efficiency was 0.9% in the first quarter of 2016 versus 1.02% in Q1 of 2015. In the first quarter of 2016, given our close rates, we reduced acquisition spend in the TrueCar branded channel by 5% year-over-year and drove cost per sale down to $176 while roughly 9% lower than in Q1 of last year. Given our improving network and the seasonality of the industry, however, we expect to ramp TrueCar branded acquisition spend by nearly $3 million sequentially in Q2 while generating better close rates. Turning to the expenses and margins, all of the following financial metrics are on a non-GAAP basis, unless I state otherwise. Gross profit for the quarter was $55.9 million, and gross margin was 90.3%. Technology and product expenses were $12.1 million or 19.5% of revenue in Q1 of 2016 that compares to Q1 of 2015 when tech and product expenses were $8.8 million or 15.1% of sales. The year-over-year growth in expenses is related to investments in our product and technology teams that began in Q2 of last year and incremental investments related to the replatforming project. Sales and marketing expenses were $31.3 million, or 50.7% of revenue in Q1 of 2016 that compares to Q1 of 2015 when sales and marketing expenses were $30.5 million, or 52% of sales. Within sales and marketing spend, customer acquisition cost for the TrueCar branded channel in the first quarter totaled $12.8 million with the resulting cost to acquire of $176 per unit. Partner revenue share and other partner marketing expenses totaled $8.9 million and sales and marketing head count and other costs were $9.7 million for the quarter. General and administrative expenses were $11.4 million for the quarter, or 18.4% of revenue, compared to $9.4 million or 16% of revenue in Q1 of 2015. The growth and spend reflects primarily our year-over-year investment to scale our human resources organization and investments in our accounting team to support the first year of our SOX compliance program. For the first quarter, adjusted EBITDA was $1.1 million or 1.7% of revenue. The primary noncash expense items for the quarter were depreciation and amortization of $5.9 million and stock-based compensation of $5.9 million. In our adjusted EBITDA calculation, we also added back $272,000 of litigation costs. Gap net loss for the quarter was $11.7 million or a net loss of $0.14 per share and includes $700,000 of accelerated software depreciation as we shorten the useful lives of some of our capitalized software in conjunction with our replatforming project. We expect similar levels of accelerated depreciation for the remainder of the year. Our non-GAAP net loss for the quarter was $5.5 million or non-GAAP net loss of $0.07 per share and compares to Q1 of last year when our non-GAAP net income was $0.1 million, or basically break-even non-GAAP net income per share. Quickly turning to our balance sheet, as of March 31, 2016, our net working capital was $111.4 million, with cash balances totaling $106 million and no draw-downs on our $30 million line of credit. So we remain very liquid. Now I’d like to turn to guidance and share our outlook regarding the second quarter of 2016 and the year as a whole. We are starting to make investments in the following three areas of operational emphasis. Number one, bolstering our dealer, sales and support team; two, enhancing our products and technology platforms; and three, building a world-class internal research team. These will continue to be the areas of primary investment throughout 2016. As we stated previously in order to increase net funnel efficiency, we need to improve both the conversion rate and close rates by pulling more car buyers through our experience and increasing overall dealer network productivity. So these will be the areas of major focus this year. With that as a backdrop, we are going to keep full-year 2016 guidance consistent with our last earnings call, 4% to 6% annual revenue growth with break-even adjusted EBITDA. Sequential investments and operating expenses in Q2 over Q1 will be as follows

[Operator:]

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Sameet Sinha from B. Riley. Please proceed with your question.

[Sameet Sinha:]

Yes, thank you very much. Can you speak about the subscription model? I know you were opening it up to your dealer network for them to opt in into that, in case that they prefer that versus the CPA model? Second question is, if you can talk about traffic at your competitors, any sense of why that is declining? Is it because of your brand and advertising gaining significant traction? Thank you.

[Chip Perry:]

Thank you, Sameet. Chip Perry here. Yes, we are moving to enable dealers to opt in to using a subscription model in states where we use, what we call, pay per action approach. We believe very strongly in pay per action because it enables dealers to see us as an accountable marketing medium in which they only pay us when the car gets sold and we influence the sale of that car. So as we offer a subscription option to the dealers, what we'll be doing is maintaining the pay per action underpinning the need for that subscription approach. So we'll make a forecast for our dealers of what their results will be in these pay per action states and then agree to a subscription fee and we'll also continue to conduct our normal sales matching process with these dealers, so they know which of their sales that we were influential in and then we'll enable the dealers then to have that ability to potentially budget themselves, budget their expenses in a more methodical way. This is an approach that many dealers have come up to us and suggested, hey, let us budget ourselves. We're fine with the pay per action underpinnings, we just only want to budget our expenses. So that's why we made that move and we've already experienced and felt quite a few positive reactions. We're going to be testing this. Actually we’re piloting it in the state of Georgia here very soon and we'll be going in out later this year across the whole country. So we're expecting many dealers who have been on the sidelines who want to take another look because that's something they've been asking for.

[Mike Guthrie:]

And many dealers will remain on a pay per action model as well, so there will be plenty of dealers when we roll this out in Georgia, who will prefer to be a straight pay per sale and we'll continue to do that for them.

[Chip Perry:]

Yeah, by no means all dealers opt in for the subscription model and so our business model is different than other third parties because we connect to the top of the funnel unique visitor, all the way through to the sales. So that gives us many opportunities to both market more surgically and target effectively and efficiently to find real car buyers and it also creates a lot of discipline within our marketplace to provide the kind of quality experience and enables consumers to get what they need enough to be able to one who make contact within the business with one of our dealers. So the accountability aspect of the model created a lot of internal discipline that’s very positive for our marketplace and for our customers. And with respect to your question around traffic and competitors, we study the comScore data like everybody does and we're pleased to see that as we have for the past several months had the fastest growth in our category compared to all the other major third parties some of which, as I noted, are actually in decline mode. And the reasons for that, I can't really speak to, all I know is that the feedback we get from the marketplace, consumers and dealers is that our site is very appealing. We won an award recently from J.D. Power where we were named the most useful consumer shopping service on the Internet for new car buyers. Our mobile experience was rated number one by J.D. Power. So I think it speaks to the quality of the user experience as well as to the effectiveness of our marketing team and very efficiently targeting our marketing spending in ways that enables us to attract in market car shoppers.

[Sameet Sinha:]

Thank you. If I can have one follow-up question, used car as a percentage of total units up to 30% now, it was like 20% a year ago, is that by design or is that just as a proportion as new cars sales have kind of slowed on your site or is it – do you think it's an industry trend where used cars are potentially cannibalizing new car sales?

[Chip Perry:]

If you look at our business over the past couple of years, you've seen used cars grow every quarter. And what we've been doing is both enhancing the quality of the listings, and the way in which they are managed and presented to consumers. And we've also improved their access to them, through our site and our various tools. So I would say it's more a matter of us making changes that enable us to meet the needs of the used car shoppers who happen to use TrueCar. As you know, we are mainly a new car shopping and marketplace destination for consumers. But when you attract, as we do, 6 million monthly visitors and there are only 1.5 million, roughly – 1.7 million new cars purchased a month, 2.5 to 3 times as many used cars as new cars are purchased in America. Naturally, you're going to attract a large number of used car shoppers. And we're happy to serve them, happy to introduce them to our dealers, and it's been a growing part of our business. And we're glad to see it, we're going to keep stimulating that side of the marketplace, because we think it has significant growth potential for the future.

[Sameet Sinha:]

Thank you very much.

[Operator:]

Our next question comes from the line of Ron Josey from JMP Securities. Please proceed with your question.

[Ron Josey:]

Great. Thanks for taking the question. Mike, I think you – when talking about full-year guidance, you mentioned top line growth rate should improved and margins expand, maybe, in 4Q. Could you just review what gives you confidence here? You mentioned continued strong growths in prospects, but anything else would be helpful. And then Chip, with AutoNation now re-testing the platform, have you seen other dealers follow suit here? And any additional details about AutoNation's renewal would be helpful. Perhaps around maybe cost per car sold or data sharing, which I think might have been some of the issues last summer? Thank you.

[Mike Guthrie:]

Thanks, Ron. It really has to do with improving network, improving dealer network. And just the earlier signs of our seeing that close rate will actually start to improve. And so it's really a forecast, on our part. But given what we have seen, post NADA and post the pledge, the number one metric for health and well-being has been the response of dealers coming back onto the platform. So given that issue primarily, we believe close rates should start to improve here. And as a result, that starts to give us the visibility to feel confident that we'll maintain the guidance, but be able to grow faster towards back half of the year. The other thing, Ron, just practically, in targeting Q4, is that remember, Q3 last year was unusually strong. We had a large incentives trial with a manufacturer. We don't currently have that in our forecast now. So the comparisons in the third quarter on top line revenue will be affected by that, and that doesn't happen in the fourth quarter. So there's even more time to see close rate and improvements flowing through the business. As Chip said in his remarks, we're also, I think, planning on the products side. So we expect to see those conversion improvements and close rate improvements. And so when you add those up, you start to feel a little bit better about top line growth in the back half of the year.

[Chip Perry:]

And Ron, here is Chip, commenting on your question about AutoNation.

[Ron Josey:]

Thanks.

[Chip Perry:]

We're very excited to be able to have them participate again in our marketplace. They are the largest automotive retailer in America; they've got the biggest brand. They are the anchor of all anchors, and we're excited to have them back. It was one of the first things that I did when I came to the company, was fly directly from Los Angeles to Fort Lauderdale, to figure out how we could build a bridge that they would be willing to cross. It took a lot of meetings, and we reached an agreement late in April that resulted in them beginning their trial of 55 stores on the 29th. So since then, we have seen - actually since the launch of our pledge, which I believe had a huge impact, with a major contributor to AutoNation even to consider coming back into our fold. Since we launched the pledge, we've noticed a good uptick in interest, on the part of dealers all across the country, in working with us. And since the AutoNation announcement, we have seen that uptick continue. Our dealer sales team is excited to be able to walk into a dealer now and say, you told us about your concerns, and we've addressed them. And we go point by point by point, and we get a lot of head nodding from dealers now that, yes, you have listened to us. And yes, you have made the changes that we felt were needed. In AutoNation's case particularly, they are very vocal, as you just mentioned, about data policies. And we made a number of changes in our pledge that were acceptable to AutoNation, made it possible for them to come back. And we've gotten really positive feedback from many other dealers that they liked those changes. Among which were that we would delete all of the information about consumers who bought cars from their stores who were not users of the TrueCar system in any way. That was information we were keeping in our servers and our storage previously. We've now implemented an approach where we delete all that information. The dealers really like that, because from their perspective they own that customer relationship and the data around it, and we agree with them. They own it, and we shouldn't keep it. So that's the kind of change that enabled AutoNation, along with others, including changes in our website, that enable dealers' brands to be better presented, and less of a focus on just price competition in our marketplace. Those are the kind of changes that AutoNation felt were important for us before they would be willing to come back. And it's related to the economics of our relationship. We don't disclose the details of any individual deal, but what I can say is that they were happy with the economics, and I know that AutoNation is happy. We're an efficient - we believe we're an efficient source of prospects and sales to them, otherwise they wouldn't consider coming back, because if it's not efficient, they're not interested. But we're happy with the deal. It definitely will not be dilutive to our overall monetization, going forward. And so we're excited to have those guys back, and look forward to hopefully expanding the relationship. It was really great to hear Mike Jackson say the word partnership when he mentioned that - when he announced that they were joining our network. We aspire for our dealers to see us as partners, so that was quite gratifying.

[Ron Josey:]

That's great. Thank you very much.

[Operator:]

And our next question comes from the line of Dean Prissman from Morgan Stanley. Please proceed with your question.

[Dean Prissman:]

Hi guys thanks for taking my question. So Chip, just following up on the used car question, I was wondering if you had any updated thoughts on how you further differentiate your offering? For example, the product experience across your competitors seems pretty homogenous.

[Chip Perry:]

Yes, Dean, the whole used car search experience is fairly standardized now. And I would say that ours is more in line with all the rest, and standing out in much different way. But we have the ability, because we work with affinity partners like USAA and others, as well as the fact that our dealer network represents dealers who are quite transparency-oriented. And we have the ability to, over time, to create a differentiated value proposition on the used car side of our business. We are in, I would say, in the research mode on that now, but are excited about the possibilities there.

[Dean Prissman:]

Alright. Thank you.

[Operator:]

And our next question comes from the line of Kyle Evans from Stephens. Please proceed with your question.

[Kyle Evans:]

Hi, thanks for taking my questions. I have a few of them. You have made some pretty significant changes to the funnel, with regard to consumer registration and the display of dealership prices, in your efforts to re-balance. Are you making similar changes to the USAA funnel? And what are some of the early results of the changes that you've already made in the branded funnel? And I have a few follow-ups.

[Chip Perry:]

Yes, you’re right. We are making changes in the user experience. We have not really changed much with respect to how the registration process worked. We eliminated one page. We will be testing, this summer, like I said, alternative treatments and where registration comes, and how we benefit message to consumers about the good reasons why they should proceed. But we're making - the changes we're making are affecting all of our channels, meaning USAA, all partners in the TrueCar channel. And we're seeing similar positive results in all of them. We've seen, actually, an uptick in our - modest uptick in our conversion rate as a result of the user experience changes we’ve made. But we think there's a lot more improvement potential out there that we have not yet been able to put our hands on.

[Kyle Evans:]

The uptick you just mentioned, I think we're looking at a low for a net funnel efficiency in the quarter? Am I reading that right?

[Mike Guthrie:]

Yes - I don't know historically how far back. But you also have - remember, you have got a mix shift of new and used, and the used experience has a lower funnel efficiency. So used has been growing much faster than the new side. So you've got - when you net out the NFE on both sides - and you will start to see a sequential increase next quarter.

[Kyle Evans:]

That actually answered my next question, which was how do we have high monetization and low NFE, so that's good read-through.

[Mike Guthrie:]

Okay.

[Kyle Evans:]

Last question, you reported $12.8 million in branded customer acquisition it has been in the quarter, guided up 3 million for second quarter, do you still see 65 million as the end of year number for that?

[Mike Guthrie:]

Well I think probably we'll come in a bit below that. I don't think we'll have to spend 65 to hit the revenue forecast, it is a better way to say it.

[Kyle Evans:]

Okay. Thank you.

[Mike Guthrie:]

I think we'll get there on lower spend. We're doing better on cost per sales and that is in the forecast.

[Kyle Evans:]

Thank you.

[Operator:]

And our next question comes from the line of John Blackledge from Cowen. Please proceed with your question, sir.

[John Blackledge:]

Great. Thank you. Just a couple of questions. Mike, could you talk about the unit mix between TrueCar, USAA and then other affinity? And then general update on affinity partner relationships would be great. Thanks.

[Mike Guthrie:]

Sure. In the first quarter we had about 72.4000 unit sales in the TrueCar channel, 55.8000 in USAA and 46.7000 in our other partner.

[Chip Perry:]

And with respect to a general update on affinity relationships, I'd say they're quite strong. We are seeing by our partners as having the unique ability to bring to their members a transparent car-buying process. And the pricing tools and experience that they enable consumers to have is a strong benefit, compared to walking in off the street. And so - and we had other partners that they could possibly work with. Our business model is very compatible, because of the way we share revenues from the revenues received from dealers back with our affinity partners. So we have a very strong set of relationships there. And it's - and particularly with USAA, where we're excited to see them putting a lot of emphasis on the automotive ownership and car-buying experience of their many millions of members, and they've got a lot of ideas for how to improve that. And we're excited to be able to be partnering with them, to activate some of these ideas within their ecosystem. And so overall, I'm very pleased with the - like I said earlier, they're one of the four big, huge foundation stones of our business model. They give us a chance to differentiate ourselves from all the other third parties, and grow and take share in our segment over time. So yes, the affinity relationships are going well.

[John Blackledge:]

Thanks so much.

[Operator:]

And our final question comes from the line of Blake Harper from Topeka Capital Markets. Please proceed with your questions.

[Blake Harper:]

Thanks. I wanted to ask about the funnel conversion. I know that was a focus of your ship when you first came and it seemed that you wanted to improve that metric before it ran up some of the sales and marketing spend. We were slightly new in that a little bit earlier, so just want to see what is going on there, there was [indiscernible] what you see there that you think that that can improve as your ramping up some of the marketing expense.

[Operator:]

Blake your line is live.

[Blake Harper:]

Hi guys can you hear me now?

[Mike Guthrie:]

Yes. We can you hear you Blake?

[Blake Harper:]

Okay. Sorry about that. I had asked, wanted to ask about the bottom of the funnel conversion. I know Chip you talked about that being a focus of yours and it seemed like you are going to try to focus on fixing that before ramping up the marketing spend, but just wanted to see what it kind of gives you some confidence or what could change to improve that conversion because it seems like you are starting to step up the marketing spend here in the Q2?

[Mike Guthrie:]

Yeah, so Blake, it's Mike. Let me start and then I will hand it over to Chip. There are two things that are going on in the second quarter. The first is seasonality. So, you just have the stronger seasonal quarter in auto retail and so we'll always, on a sequential standpoint ramp it up Q2 over Q1. The second is, what we talked about earlier which is just as we see the network improving and more dealers coming back we start to be a little more bullish in our forecast of close rates and again that allows us to make those incremental marketing expenditures with more confidence that the unit economics will be there for us.

[Chip Perry:]

Okay. Chip here, on the overall NFE, yes I had the same point of view I had on last call back in February, that we have a tremendous potential to improve the yields to our funnel, so today, only 5% of our 6 million unique throughput is registered, meaning 95% don't. And then of those 300,000 that do register, 20% we can track due to sale, which means 80% we don't. So, we have a huge opportunity here to take that 1% NFE and move the needle of it over time and that's what we're working on in a very concerted, deliberate, a methodical way and we're attacking it from two angles, attaching through adaptation of our user experience, which as I described we are going to be doing some test that addresses the obvious reasons why people don't proceed through our experience. Among them being they don't understand the benefit of fully proceeding through our experience in order to be able to activate fully the benefits of TrueCar, which mean that the pricing that they see on our website will be honored by a dealer and it will be honored by a dealer for any car that the consumer wants to purchase on the dealer's lot, and that's a powerful benefit and it's not often fully appreciated at this early stage and a consumer using our site when they are just looking at a pricing curve and believing that they’ve gotten everything they need, so user experience testing is one angle. The other angle is, and that will improve our conversion rate, that will improve our conversion rate car buyers, we fully registered and the other angle we're attacking is yield improving opportunity which is working more closely with our dealers with our new service team, we are calling them customer success managers, client success managers, who will be working closely with dealers to help them get good use of our tools, and we have very specialized tools that enable the dealer to communicate their TrueCar users through, as well as training them on the best practices for top performing TrueCar dealers that are using to obtain much higher than average close rates. There's a wide range of close rates achieved by dealers in our marketplace. And so we're working to understand what the best practices are and training our people up on how to help dealers get the most out of the business we send them. So, it's too early to be calling what the results - our efforts to improve these metrics are, but I remain very confident there's significant, [indiscernible] be able to realize and will start to show that in the second half of the year.

[Blake Harper:]

Okay. Great. Thanks for that color. And the second question I had, you actually touched on it there, a little bit was the client success managers, I think you had said you planned to have 100 of them. I just wanted to understand, have you hired them yet? Are they out there in the sales force, or is that, kind of the plan to, I know you would like them out there I'm sure as soon as possible, but just what would be a realistic time frame for getting them out there and from your dealer cost?

[Chip Perry:]

Yes. So, we announced our dealer pledge at the end of March and rolled it out officially with NADA, which is April 1, so what I can say is our recruiting team is feverishly looking for the right people to staff result and position [ph] and we have hired some, yes, but beginning the ramp and that’s what when Mike talks about increasing our expenses in the second quarter that's a component of what’s driving our expense. We're convinced this will be a good investment because over time, these client success managers will help our dealers achieve higher close rates, improve our dealer customer satisfaction and therefore enable our top line to grow in a more attractive way. We’re excited about that, making that kind of improvement in this business.

[Blake Harper:]

Okay. Thanks Chip.

[Operator:]

There are no further questions in the conference at this time. I'll turn the conference back over to management for any closing remarks.

[Mike Guthrie:]

Nothing else to hear. Thanks everybody for being on the call and we appreciate all the questions and we'll – I think we got a follow-up calls scheduled. And otherwise we will talk to you again in three months.

[Operator:]

Ladies and gentlemen, this does concludes today’s teleconference. We thank you for your time and participation today. You may disconnect your lines at this time and have a wonderful rest of your day.