TrueCar, Inc.
Q4 2016 Earnings Call Transcript

Published: 17 Feb 2017

[Operator:]

Greetings and welcome to the TrueCar Incorporated Fourth 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 would now like to turn conference over to your host, Ms. Alison Sternberg, Vice President of Investor Relations. Thank you, Ms. Sternberg. You may begin.

[Alison Sternberg:]

Thank you, operator. Hello and welcome to TrueCar's fourth 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 first quarter and full year 2017, management's beliefs and expectations as to future events, plans and strategies, our ability to increase unit, revenue and adjusted EBITDA, improve margins and accelerate innovation, the outcome of outstanding litigation and our multi-year operational initiatives and investments including the expansion of our marketplace to include upper funnel shopping, research and digital retailing and the resulting benefit. The development of new dealer and consumer tool and product launches and improvement. 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 section of our Annual Report on Form 10-K for 2015 and our subsequent Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission and our Annual Report on Form 10-K for 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 will turn the call over to Chip.

[Chip Perry:]

Thank you, Alison, and good afternoon, everyone. Today is the first anniversary of my initial earnings call as CEO of TrueCar. We've come long way and we are now at an exciting inflection point as we move from 2016 to 2017. When I joined the company, we were facing three major challenges. First, we had negative sentiment with the broader dealer community in general and specifically with many of our important dealer customers. Second, we were not innovating our product quickly enough against unmet consumer and dealer need and thus we were not generating conversion improvement. And finally, we had some internal operational challenges that limited our ability to scale the business. As a result, year-over-year revenue growth was decelerating, bottoming out in Q2 of 2016 at only 2%. We focused on four key levers to address these issues and to get the business growing again. First, we launched our dealer pledge which includes significant changes to our product, advertising messages and business practices. As a result, we were able to win back AutoNation and attract over 2,000 other high quality dealer to the TrueCar platform. Second, we overhauled our dealer organization in order to improve the level of service and training that we provide to our dealer customers. Over the course of 2016, we added over 100 people to our field team. Third, we shifted our new car product focus to focus on vehicle specific pricing offers known as VIN-based pricing where consumers get real prices on actual cars. And we improved the messaging on our site to make the benefit of registration more clear to consumers. And finally, we improved the internal operations of the company especially in our technology group as we embark on a major replatforming project. And in our planning in internal reporting function to improve functional alignment and coordination across the business. In short, we began to put in place the technology, people and processes that will enable us to scale TrueCar. The net effect of this work is clearly improving operational metric and financial performance. And we are experiencing new found momentum in the marketplace. We are nowhere close to declaring victory, but we exited 2016 with significant velocity. Allow me to share some highlight. From Q4, 2015 to Q4, 2016 these things happen. First, our certified dealer count grew 23% to a record 13,748 franchise and independent dealers. Second, our backyard coverage grew from 38% to 51% which means that over half of the time the closest dealer to a search visitor is a TrueCar certified dealer. Third, research driven product changes that we implemented on our new car experience to our new car conversion rate up by 15%, which means that more consumers are seeing the benefit of registering on TrueCar in order to view transparent upfront pricing offer from our dealer. We are still rolling out research driven product changes across all of our partners and experiences. Fourth, our new car retail market share grew 13% from 3.7% to 4.2%. And finally, we continue to execute on our replatforming initiative and launched our used car experience on the new platform late in the year. This will enable us to innovate more quickly on our used card experience in 2017. As a result of these improvements in the fourth quarter we generated excellent results on key operating and financial metric. TrueCar dealers transacted nearly 219,000 unit sales across our platform, up 19% over Q4, 2015. Revenue was $74.1 million, up 17% over Q4, 2015. And we generated $5.8 million of adjusted EBITDA which is $0.2 million of adjusted EBITDA during the fourth quarter of 2015. As you can see in 2016 we successfully reaccelerated top line growth in our business and saw significant improvement in our dealer relationship. At this point, I can say that I am very confident that we now clearly understand and our hand placed securely on the practical levers that will enable us to continue to drive double digit rate of unit and revenue growth for some time. Now I'd like to shift your attention to where we are taking the business. Not just in 2017 but over the next two to three years. On prior call I have indicated that beyond just reenergizing the company in the short term, I believe TrueCar has a much larger opportunity to become the clear market leader in the online auto space. To do this, we need to broaden our experience to help consumers at every step along the car buying journey. Thereby reducing the need for them to visit other information sources and creating meaningful efficiency for consumers, dealers and manufacturers. Our mission is to be the most transparent brand in automotive and to serve as a catalyst to dramatically improve the way people discover, buy and sell cars. Today, our marketplace delivers only a part of the promised embedded in that mission. First, for consumers we now offer market pricing context, VIN-based pricing, an exclusive OEM incentives and dealer network that stands behind competitive pricing offers. For dealers, we now provide a large exclusive in market audience from TrueCar and its affinity partner and efficient accountable and profitable marketing channel and customer service training in tool design to help them leverage the platform. The progress we made in 2016 is just a start towards the realization of our larger ambition. Starting this year and for the next couple of years, we'll be focusing on expanding our offering to deliver a best-in-class modern online automotive marketplace to provide significantly more value to consumers, dealers and OEM as the consumer goes on a car buying journey. That consumer buying journey starts with shopping and research often called the upper funnel. It then moves into inventory and dealer selection and pricing, which is where we focus today. Finally, the journey end with an in-store purchase that needs to be more convenient, more transparent and more online enabled than ever before. After doing extensive research which included considerable collaboration with dealers, we believe there are four important benefits that TrueCar working with dealer has to deliver in order to build this kind of marketplace that exist in some other verticals but not yet in our category. The first is end-to-end engagement so the consumer can rely on TrueCar during the entire process from shopping to showroom. The second is an intelligent outcome so the consumer gets the right vehicle from the right dealer at the right price. The third the transparency from VIN based pricing in the context of market pricing, as well as the total deal with an out-the-door price that includes trade in incentive and financing, whether leasing or buying, and finally forward accountability with a consumer providing robust reviews all along the process and the dealers operating on an accountable economic model built on their success. We believe the TrueCar is uniquely positioned to deliver these four critical benefits to the market. End-to-end engagement, intelligent outcome, transparency and forward accountability. Today, we are the clear market leader and we focus exclusive on the middle part of the car buying journey. This is where the consumer finds inventory, select the dealer and thus price discovery. Accordingly to the latest JD Power new auto shopper study, nearly 60% of auto internet shoppers is a TrueCar or an TrueCar affinity site and for the third consecutive year in 2016, TrueCar and its affinity site had the highest proportion of site visitors naming it the most useful site. This year we will build on that leadership position and start major effort to build out our upper funnel shopping experience with start of the car buying journey. We'll also begin to help our dealers' better market their high quality in-store purchase experience which is the end of the car buying journey. We'll do this while continuing to improve upon our core business. Let me walk through these specific initiatives. First, the upper funnel shopping experience. This year we've already begun building new and exciting shopping tool for consumers. The current third party shopping and content site have not innovated and has some significant shortcoming, because those sites monetize traffic with intrusive display advertising, we believe that the consumer experience suffer significantly. Consumers have to click through too many pages to see content, they had a difficult time comparing vehicle and there are limited consumer reviews. On the shopping site there is no easy way to connect to a local trusted dealer who has the inventory the consumer want at a price that make sense in the context of market pricing. So in this environment, the consumer had to stop researching and go somewhere else in order to proceed along the path to purchase. We are going to take a different approach. TrueCar will lean into a vehicle transparency by providing consumers with what they want. Fully searchable, robust, verified owner ratings and reviews with no advertising clutter and a clear connection from research to a great buying experience. Based on my 20 years of experience in this industry, I strongly believe that this new approach will be welcomed by millions of car buyers who have been frustrated for many years by the clunky display advertising during the shopping experiences, eject from the old style first generation automotive shopping site which essentially just took the traditional media ad impression model and put it online. We are already investing in the key technologies and content to enable our new vision. And we are working with one of our major affinity partner to launch the first version of this experience later this year. From the dealer standpoint, this experience will significantly increase traffic in our funnel and bring more qualified buyers into their dealership at the right time in the process when they are ready to buy. This added traffic will feed our transaction engine and generally TrueCar will get paid only when consumers and dealers successfully transact and when OEM incentives are successfully redeemed. After upper funnel shopping, the second extension to our business will be the in-store purchase experience and digital retailing. Like many other players in our industry, we see the market moving towards true digital retailing where consumers can not only select car and receive pricing and get a value for their trade-in, but also do much of the work online that has been up until now done in the dealership such as check their credit, apply for financing, consider and compare lease and purchase alternative and pencil a deal that include trade-in and incentive down to the monthly payment. We want to facilitate the adoption of digital retailing technology in a manner which will give our customers can operate profitably while offering a better consumer experience. We'll take the first step into digital retailing in 2017. But this is clearly a multiyear effort that will involve significant collaborate with dealers and there is an extensive ecosystem of companies that we'll be working with to deliver on the experience. And finally we will continue to invest to improve upon our core business in the middle part of this consumer journey focused on inventory and dealer selection and pricing. This is where we focused today and we've identified many improvement opportunities against which to innovate. In 2017, we intend to build on our success last year specifically we intend to first, launch improved used car search tool and enable dealers to provide more transparency about their used car in order to further fuel this rapidly growing part of our business. Second, continue to improve benefit messaging in order to encourage more consumers to register in order to fully participate in our marketplace. Third, enhance our dealer selection algorithm to optimize the matching of consumers with dealers leading to better consumer experiences and higher close rate for dealer. Four, with our new analytic tool to enable our dealers to make smarter pricing decision. Fifth, improve our consumer engagement platform so the dealers can better inform consumer after they register on TrueCar about changes in inventory availability, pricing, incentive and financing offers. Sixth, help dealers improve the way they price, merchandize and present their inventory to consumers. Finally, enable dealers to showcase their unique experiences, trained personnel and the benefit they are making in TrueCar certified dealer. That you can tell this is going to be an important year in TrueCar. When I joined the company, we needed to fix key issues around our dealer relationship, our product and our operations and prove that we can grow again. Having made significant progress in all these front, we are excited to embark on an ambitious plan to create a best-in-class modern marketplace for all our constituent that uniquely leverages our transparency based business model, our close loop accountable system, our unique affinity partner relationship and our growing TrueCar brand. I joined TrueCar because I believe we have the ability to build a $1 billion plus revenue business with high margin to be the leader in the category. We did much in 2016 to position ourselves to begin seriously reaching for that goal. And this year we are going to make the investments to enable us to continue to innovate on the most important unmet consumer and dealer need. Before I turn it over to Mike, I'd like to comment on our recent participation at the annual NADA Convention in New Orleans. I had the opportunity there to meet with nearly 100 dealers over four days. It was a dramatically different and much more positive experience than NADA 2016 when I just joined the company. Last year the negative sentiment from dealers was palpable. This year many dealers complimented on changes we have been making. I want the dealer community to know that I continue to appreciate their valuable feedback and insight. And I'll hear them loud and clear about the work we still need to do. This is why our team will continue to work tirelessly to innovate in ways that can enable us to be a stronger catalyst that helps our dealers grow their businesses in a very competitive market. Lastly, I want to thank again all of the hard working people at TrueCar who made the strong result possible and to let all of you know how excited I am about the work we are doing and our vision for the future. And now Mike will explain in more detail our financial performance and present our 2017 outlook for the current quarter and the full year.

[Mike Guthrie:]

Thanks Chip, and good afternoon, everyone. We are pleased with the financial results in the fourth quarter of fiscal 2016 and believe we have set the stage for strong growth and margin expansion over the next few years. Let's start by reviewing the financial and operating high points for the fourth quarter of fiscal 2016 and then for the year as a whole. Revenue in Q4 of 2016 totaled $74.1 million, up 17% over Q4 of 2015 and above our revenue guidance of $70 million to $72 million. Units in Q4 were 218,807, up 19% year-over-year and above the high end of our 205,000 to 210,000 unit guidance. By channel, TrueCar branded accounted for 94,459 units, up 25% year-over-year. USAA numbers accounted for 68,645 units, an annual growth rate of 16%. In the month of December alone USAA sales were approximately 26,000 units an all time high. As we enter our 11th year as partners with USAA, there is still much to do and we are excited to continue supporting USAA's outstanding auto experience program. In our other partner channel powered by strong growth at Sam's Club, JPMorgan Chase and caranddriver.com, units for the quarter were 55,703, up 15% year-over-year. New car units were 152,082, up 14% year-over-year and accounted for 70% of total unit. Used car units totaled 66,725, up 33% year-over-year and accounted for 30% of total unit. Adjusted EBITDA for the fourth quarter of 2016 was $5.8 million, or 7.8% of revenue, significantly above adjusted EBITDA of $0.2 million in Q4 of 2015, and ahead of our guidance of $2 million to $3 million. For fiscal year 2016, revenue totaled $277.5 million, an annual increase of approximately 7%. Units for 2016 totaled 806,953, up nearly 8% over fiscal year 2015. By channel TrueCar accounted for 343,151 units, up 8% year-over-year. USAA members accounted for 254,241 units, up 9% from 2015 and our other partner channel totaled 209,561 units or year-over-year growth of 5%. The new used mix was 69% new and 31% used in 2016 compared to 76% new and 24% used in 2015. Adjusted EBITDA for the year was $15 million or 5.4% of revenue, up from $7.6 million or 2.9% of revenue in 2015. So we added $7.4 million of adjusted EBITDA, an increase our adjusted EBITDA margin by 250 basis points year-over-year. Our franchise dealer account was 11,151 at the end of fiscal 2016, up 23% over the end of fiscal 2015. Our independent dealer count was 2,597 at the end of Q4, up 25% year-over-year. Turning to our key funnel metric. Monthly unique visitors were 7 million in Q4 of 2016, up 19% compared to Q4 of 2015. Conversion rate across the company grew sequentially to 5.4% in Q4 from 5.2% in Q3. Within the TrueCar, new channel alone conversion rate grew from 5.7% in Q3 to 6.1% in Q4 an all time high. Given the improvement in our dealer network, we grew our close rate 59 basis points sequentially to 19.2%. As a result of the conversion and close rate improvement, net funnel efficiency was 1.04% in the fourth quarter of 2016, up 7% sequentially. Monetization in the fourth quarter was $320 per unit essentially flat with the third quarter. TrueCar acquisition spend was $16.2 million for the quarter, up 17% year-over-year while cost per sale was approximately 7% lower at $171 per unit. These are the best results we've achieved in our branded business during the last three years. For the full year, our cost per sale was $177 versus fiscal 2015 when cost per sale was $197, a 10% improvement. Turning to the expenses and margin. All of the following financial metrics are in the non-GAAP basis unless I state otherwise. Gross profit for the quarter $68.1 million and gross margin was 91.9%. For fiscal year 2016, gross profit was $253.3 million and gross margin was 91.3%. Technology and product expenses were $11.9 million, or 16.1% of revenue in Q4 of 2016. That compares to Q4 of 2015 when tech and product expenses were $13.3 million, or 21% of revenue. For fiscal 2016, technology and product expenses were $47.9 million or 17.3% of revenue compared to $43.4 million and 16.7% of revenue for fiscal 2015. Sales and marketing expenses were $39.9 million, or 53.8% of revenue in Q4 of 2016 as compared to $34 million, or 53.4% of revenue in Q4 of 2015. Breaking down the Q4 marketing cost in more detail, during the quarter we spent $16.2 million on TrueCar channel customer acquisition, incurred $9.4 million a partner revenue share and marketing cost, and recognized $14.3 million in headcount and other cost. In 2017, we plan to invest approximately $5 million on new creative reflecting feedback from our market research and providing more insight into the benefit of using our service and educating consumers about the extension in the TrueCar product for Chip's early comment. For fiscal year 2016, sales and marketing expenses were $148 million, or 53.3% of revenue as compared to $147 million, or 56.6% of revenue for fiscal 2015. General and administrative expenses totaled $10.5 million for the quarter, or 14.2% of revenue compared to $10.4 million, or 16.3% of revenue in Q4 of 2015. For fiscal 2016, general and administrative expenses totaled $42.4 million, or 15.3% of revenue compared to $39.1 million, or 15.0% of revenue for fiscal year 2015. Adjusted EBITDA was $5.8 million, or 7.8% of revenue in Q4 of 2016 compared to adjusted EBITDA of $0.2 million, or 0.3% of revenue in Q4 of last year. And as mentioned before for fiscal year 2016 adjusted EBITDA was $15 million, or 5.4% of revenue, up from $7.6 million or 2.9% of revenue in 2015. The non-cash items excluded from adjusted EBITDA for Q4 of 2016 were depreciation and amortization of $5.5 million and stock based compensation of $6.7 million. Adjusted EBITDA for Q4 of 2016 also excluded $0.3 million of litigation cost and $0.4 million of additional real estate exit cost related to the consolidation of our Santa Monica operation in the fourth quarter of 2015. GAAP net loss for the quarter was $8 million, or a net loss of $0.09 per share as compared to a GAAP net loss of $27.4 million, or net loss of $0.33 per share in Q4 of last year. Our GAAP net loss for the year was $41.7 million or net loss of $0.49 per share as compared to a GAAP net loss of $64.9 million, or loss of $0.79 per share for fiscal year 2015. Our non-GAAP net loss for the quarter was $0.5 million, or a non-GAAP net loss of $0.01 per share. And that compares to Q4 of last year when our non-GAAP net loss was $5.2 million, or non-GAAP net loss per share of $0.06 per share. For the year, our non-GAAP net loss was $11.1 million, or a loss of $0.13 per share compared to fiscal 2015 when our non-GAAP net loss was $11 million, or net loss of $0.13 per share. As of December 31, 2016 our cash balance is totaled $108 million, an increase of almost $5 million from last quarter reflecting Q4 operating cash flow of $5.4 million. We have no outstanding borrowings on our $30 million line of credit. Now I'll share our outlook for 2017 and for the first quarter of the year. We are proud of what we achieved in 2016 and are building on it. In 2016, we grew units by 8% and revenue by 7% and we scale our adjusted EBITDA margin by 250 basis points. In 2017, we believe we can approximately double the annual growth rate on revenue and unit. We also believe that we can scale operating margin by as much as another 250 basis points in 2017, meaning we expect to increase adjusted EBITDA dollars by as much as 60% this year over 2016. Our goal is that adjusted EBITDA will grow each quarter in 2017 versus the same quarter in 2016. We continue to focus on expanding adjusted EBITDA margin for the full year while making the investments required to build out the strategic initiatives that Chip discussed earlier, that will set us for continued revenue acceleration and even greater margin expansion in 2018 and beyond. For fiscal year 2017, we estimate a range of 920,000 to 930,000 units which represents year-over-year growth of 14% to 15% over fiscal year 2016. We expect to generate $315 million to $320 million of revenue or year-over-year top line growth of 13.5% to 15% over fiscal year 2016. Finally, we estimate producing adjusted EBITDA of $20 million to $24 million or adjusted EBITDA margin of between 6% and 8%. In addition for the year we estimate non-cash stock based compensation to be in the range of $28 million to $32 million compared to stock based compensation expense of $24.7 million in fiscal year 2016. For fiscal year 2017, we estimate depreciation and amortization expense will be approximately $23 million to $28 million compared to $23.3 million in fiscal year 2016. For the first quarter of fiscal 2017, we estimate a range of 205,000 to 210,000 units representing year-over-year growth of approximately 17% to 20% and revenue of $71 million to $73 million or year-over-year growth of 15% to 18%. We estimate adjusted EBITDA of $4 million to $5 million, up from $1.1 million in Q1 of 2016. And now we will open it up for questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Steve Dyer with Craig-Hallum. Please proceed with your question.

[Steve Dyer:]

Thanks. Good afternoon and nice quarter guys. Your guidance for 2017 sort of implies accelerating revenue growth in a year when I think SAR wills sort of probably is flat at best. Can you kind of help us think about the sources of that? In other words how are you thinking about increase in NFV, how are you thinking about number of new dealer et cetera?

[Chip Perry:]

Thank you, Steve. Chip here. So over the past year we've been focused heavily on improving the yield through our user experience funnel. You saw us begin to make some changes in the third quarter which produced a beginning out of sequential acceleration Q3 over Q2. We continue those changes in the fourth quarter and that's what producing the acceleration of our revenues. Along with the improvement in our dealer network and the good work that our client success team is doing with our dealers and helping them close more sales from the leads that we send to them. So the combination of those three factors improved conversion, better dealers, better training of dealers so they could improve close rate, that just really driving the revenue growth of the company at the present time. And we believe that we can continue its growth even though the industry overall in terms of new car sales is likely to be flat in 2017. Our audience continues to grow nicely and as our yield improve through our funnel and our revenues will grow accordingly. So we are very confident that we'll be able to continue growing in the face of flattish sort of industry environment.

[Mike Guthrie:]

Steve, its Mike Guthrie. I just want to comment, so you saw market share gains in the back half of the year for us. We talked about it in our prepared remarks on the new car side. So that we obviously can say that continuing for many of the reasons that Chip mentioned in terms of the improvement in our funnel. The second one is obviously on the used car side, Chip talked about an even greater emphasis on used and we continued over the last 8-10 quarters to grow that business somewhere between 30% and 40% on year-over-year basis. And so continuing to grow in used car side of the business where we saw very fairly low share overall, will help us grow faster than the market. And then finally, we did -- we done well on 2016 over 2015. We did well with independent dealers which are mostly reflected in our used car side of our business and we had pretty healthy growth on OEM incentive year-over-year. So those are things that can also augment the growth rate of our revenue versus where the overall new car retail business is going.

[Steve Dyer:]

Got it. Yes, that's very helpful. As you think about the dealer count, you keep adding pretty significantly, while at the same time clearly not sacrificing the quality. Do you have sort of a number in the back of your head -- are there still opportunities, whether it be geographically, brand-wise et cetera?

[Chip Perry:]

As I said on earlier calls, we don't have a specific target for stealing or optimum dealer count in our model at this point. We do know that there are still at least a couple thousand dealers in America that would be very helpful to having our network. And we have dealer sales and service team it's laser focused on serving our current customers well and also attracting the dealer that we don't have that we think would be very great provide for productive addition to our network. So we expect to continue growing the dealer count. Although we don't have a specific target for the year.

[Steve Dyer:]

Got it. Okay. And then one last one from me, and I will hop back in the queue. The operating margin and EBITDA margin guidance is good; it's expanding again this year. And yet, you're still obviously spending heavily on new initiatives. As you look out sort of past this year, does it feel like EBITDA margin improvement will be sort of linear to that target model or are you kind of take it year-by-year, or will there be an inflection point? I guess I'm trying to get at, is this there outsized amount of spend, here on the front end?

[Mike Guthrie:]

Steve, its Mike. There is more -- there will be more investment than in 2017 is more clear benefit against the spend coming in 2018 and 2019. So I think it's probably fair to say as we think about the models going out of couple of years the acceleration in margin in 2018 and 2019 in terms of just basis point of margin should be higher in those years than what you see this year. So this year we wanted to expand margin while making a lot of really critical investment. I think the rate of investment, while it won't stop it will certainly slowdown in 2018 and 2019 versus this year and that we just see the margin expanding at even greater rate.

[Operator:]

And our next question comes from the line of Mark Mahaney with RBC Capital Markets. Please proceed with your question.

[Mark Mahaney:]

Thanks. Three questions please. First, I know you added something like 100 employees as part of your dealer outreach effort. Where is that total count now and how do you think about whether you got the right number in place now or are that something that you will need to continue to build up? And then Chip you had mention these two kind of I know adjacent market opportunities in terms of the upper funnel shopping experience and the in-store digital retailing experience. Can you help us think through what the TAMs associated with those two are? We've all thought about what the TAM is with your core business, but how do you think about the revenue opportunity with those two adjacencies that you're talking about? Thank you.

[Chip Perry:]

Sure. So the dealer team has approximately 259 people in right now that include our Austin office support team as well as our field team. And we will be adding another 30 or 40 people this year to get to close to 300 people. As we fill in more holes in our sales teams as well as we are still working towards the full level of client success manager coverage that we aspire to so we will be adding more those people too. We are happy with the results and the returns we've already got on investment and people we have put in place in terms of very attract, more better dealer network service and better help them improve their close rate. And also we've seen a significant reduction in the churn rate among the dealers who have received client success manager coverage in the last quarter or so. Regarding the question on the TAM, I think the way to think about this is that having expanded the upper funnel we are going to be attracting a larger share and more engagement of car buyers in America because we will be shifting attention away from these display ad-driven sites that I described that have this chopped -up user experiences. And don't have the clear connection between the search and vehicle purchase and pricing that we have. So as we do that we are going to be able to really do three things. We are going to save the need that exist due to the competition not doing nearly as good as job consumer want. Second, we are going to be addressing the need of audience in our marketplace today. Well over half of the people who come to TrueCar now have not yet made the final decision about the car they want to buy. So they are still new search mode. So we are going to be able to having engagement tool to enable them to want to stay with us longer, visit to our site and as a result our transaction machine, transaction engine will process these people and enable them to get connected to the dealer they want to buy the car from and the transaction will flow through that platform, where otherwise it might go elsewhere. The third benefit to doing this is that to increase our organic traffic because without display advertising and with the heavy emphasis on what packaged consumer reviews of vehicle, we believe that the search engine will find our content to be very attractive. And one more benefit is as we go end-to-end in this experience it grows of our overall brand. So monetization will continue flow through our existing business model mechanism which is transaction related revenues, both subscription and pay-for-sale. That's also in the upper funnel and it's relate to digital retailing like I said we are going to be collaborating with dealers and we are going to be working with a member of different providers, software players and others in ecosystem make the rapidly developing in this segment of the industry called digital retailing which enable essentially consumers to get estimates and monthly payment based upon their own situation, their down payment, their credit quality to value their trade, their preference on loan and lease and terms related to that. So they given our industry we believe we can pull these features into our experience by working with our dealers, funnel team will have those features on their site and we will point to them to TrueCar but again our main path of revenue growth will be through expanding market share of the number of sales we can track to our platform rather than monetizing software per se in the digital retailing environment. So that's how we think that TAM is huge, we have 4.2% market share, 4.3%-4.2% so that's the biggest TAM related opportunity just right in front of TrueCar. And we are excited about that.

[Operator:]

And our next question comes from the line of Ron Josey with JMP Securities. Please go ahead.

[Ron Josey:]

Great. Thanks for taking the question. So Chip, lots of things to talk about, and think about on this call. But I wanted to ask specifically on your commentary around the dealer selection algorithm. I think you talked about improvements there. Can you expand a little bit more in terms of how you think this could improve, ultimately do you get to one dealer that's super-targeted with the right car that someone is looking for? And then Mike, you talked about cost per sale coming in at $171 a unit. What's interesting is, I think advertising costs appear to be in line with expectations, as users grew 19%, which really highlights the improvement in conversion rates, I believe. So could you just talk about potential leverage in sales and marketing going forward, and then ideally, if you can help us understand where cost per sale might get to longer term? Thank you

[Chip Perry:]

So Chip here. So we have a lot of opportunities here to improve conversion and close by making specific improvement in the way in which our site enables consumers to configure cars to be introduced to dealers and the way in which dealers are enabled to communicate with consumer after they become registered prospect at TrueCar. Lots of them, the dealer selection algorithm are one I mentioned in the call obviously and that algorithm enables us to introduce one consumer to three dealers. And today we use a variety of factors for that and we are in the process of rebuilding the underlying code for hiring the algorithm, it's part of this transition through our Capsela project to modernize TrueCar. That code base is pretty old. And so we think clearly see some ways to introduce new factors into that algorithm and to make it smarter. And if we do that dealers will get more high quality lead so they can close better and consumers who would match to a better local dealer. So we are happy, we are excited about the improvements we can make down in the balance of that algorithm.

[Mike Guthrie:]

Hey, Ron. It's Mike. On the cost per sale comment, you are absolutely right, it's same spend more unit is definitely focused on the conversion improvement but that's why that happen. And so it's nice to have some improvement in the product because obviously make those marketing dollar more efficient. We talked about that for long time. I think the number can continue to go down. I think it will continue to go down this year. We are not forecasting very much incremental marketing spend in our numbers and not only this year it's mostly been about the conversion improvement but with all the dealers that we are adding the improvement in network, the coverage, the training, I think we also see an expected deleverage on the close rate side as well. So that really does help us continue to make those marketing dollars very efficient. Way back probably three years ago we said we are targeting a $150 cost per sale and I think that number still very much within reach and probably get here faster than we might have otherwise expected. So I still think that's a pretty good target for us. But it is as you suggest it's about -- it's getting because of conversion rate improvement and close rate improvement.

[Operator:]

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

[John Lanterman:]

Hi, this is John Lanterman on for Brian. Just a question on your mix as it stands today and maybe looking forward three to five years. You guys kind of break it down with TrueCar branded versus USAA and other partner and then also new versus used, as you guys grow going forward what do you think the bigger drivers of growth here and it looks like all three TrueCar, USAA and other partners are going pretty well in 4Q. Do you think the runway is pretty strong over the next three to five years?

[Mike Guthrie:]

Yes, John, we do. I think we look at by channel and new and versus used as we wanted to keep growth going in all of our channel, TrueCar, USAA and the branded channel we see a lot of opportunities to continue growing there. And now in the new and used car side, I think the same thing as we mentioned earlier on this call; we are fairly under penetrated on the used car side. We've been really pleased with the growth over the last say 10 quarters and then this fourth quarter we really be accelerating growth on the new car side to about 14%. So we do want to keep growing on both sides. I think it's probably pretty safe to say that we are likely to see the new used mix continue to move a little bit more towards used but we have ever intention of trying to grow the new car side and high rates of growth as well. And then on by channel, TrueCar, every channel grew well this quarter, this past quarter, I think we are optimistic about our is going into 2017 really for different reason. On the branded channel I think we are optimistic because we have seen some great product improvement. We believe there is close rate improvement in front of us. It has made our marketing stand more efficient and it does allow us to be a little more aggressive there to drive growth. So we feel good about where the TrueCar branded channel is. As we look at the USAA channel, we had great growth in the fourth quarter. We had a record in the month of December and as I said in the call we are 11 years into the partnership and still think there is a quite a bit that we can do together with our partners in USAA to continue to make car buying better and better for their members. And so even though that's a very large channel, we still look at the penetration rates there and we know they are reasonably well both on new car and used car. So there is much more work to do there. And then on the other parter channel which have been a bit of challenge for us in 2014 and 2015. Our teams have done a great job of bringing on some exciting new partners that are producing really great growth. And so our JPMorgan Chase, Car and Driver and then Sam's Club, Sam's Club been on the program a little bit longer but those three partners have really produced an awful lot great force and we are optimistic going into 2017. If I had to handicap it-- I would say that part of our business will be the fastest growing on units in 2017. But all the other channels do seem to be set up to good growth characteristics. And remember the product changes and the dealer network changes that we make improvements that we make there benefit all of our channel. So in our case we should be able to do better as a result of better conversion and better close.

[John Lanterman:]

Got it. Thanks, that's helpful. And then for used do you think that could ever overtake new or do you think it would be primarily a new car company?

[Mike Guthrie:]

I mean we are 70

[Operator:]

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

[Kyle Evans:]

Hi, thanks. Two high levels, and then a model question. Chip, could you give us an update on the competitive landscape in your core business? There was a time when some of your competitors were throwing words around like pricing promise? And then maybe talk a little bit about what you're competitive landscape could look like, as you move into the top of the funnel in the dealership in digital buying experience? And then, a few more after you're done. Thanks.

[Chip Perry:]

Sure. Thank you very much. I would say that in our core business we feel really good about the competitive answers we bring relative to the existing players. Most between what I would call old style first generation automotive internet company that have thrived on transporting the old traditional media model of ad impression and putting it on loan to either are charging for it through lead fees or scale ad out impression or subscription related to ad impression. And we really like our close loop success based model that is supportive that our strength transparency we provide consumers and the affiliate partners which give us exclusive flow of consumer car shoppers coming to our platform. So competitive advantages we have I believe are strong and the growth in our site, the ranking we get through JD Power showed as the largest new car shopping site in America. I think is good evidence of the progress the company made. Although obviously we are not standing on laurels here. So we feel good about our ability to capture share by evolving the business as it exist today. However, there is much bigger opportunity out there that we can attack I believe and that is the development of first true end-to-end experience. It has the attributes to the marketplace that I explained, transparency, accountability, consumer focused reviews and information. And so as we look at the top of the funnel, we are going after and targeting competitors who had these display ad-driven business model. And our approach would be to avoid that style of business because it's not consumer friendly and it enable us to hold down to as a stickier relationship and engagement with many car buyers who come to TrueCar, who haven't yet decided on the car they want to buy. So we think there is a really good opportunity to disrupt how the upper funnel works in America today for the betterment of car buyers, dealers and manufactures. And as it relates to digital retailing and in-store experience and like I said that's a big trend in our industry anyway. We are going to break it in a way that's positive for consumers and supportive of how dealers choose to provide those services. It's very much depends upon for consumer to get a deal that the deal on car might be before visiting a dealership, very much depends upon how the dealer chooses to play that in that realm. There are many players who are helping dealers on their own website. And then large dealers like AutoNation had a terrific experience call AutoNation express, they are enabling people to essentially configure and buy a car online. And so we see big opportunity to play there in a variety of way that we will become much more specific about as the year goes on.

[Kyle Evans:]

Would you -- what a great segue? My next question was an update on AutoNation. They were in, they were out, and they were back on a trial basis with 50 or so dealerships. It seems like they're all the way back in now, could you just give us your take on where you are with that important partner?

[Chip Perry:]

Yes. AutoNation is a terrific customer of ours now. We are delighted to deal or serve them and call them a valued customer in our network. Nearly all of their stores are live and active today. And we are working closely with them to a dedicated client service team that supports them both in their Fort Lauderdale, Florida headquarters, as well as throughout the region. So today the relationship is much better than it was. We are working with them on a number of initiatives that enable them or enable them to maximize capitalize on the volume of leads we are sending to them, convert them better in their local stores as well as provide information that will be useful to them in their own online services for consumers. So we are very pleased where the relationship is now. And are thankful that they are going to give us a chance so we could do which is they did last year.

[Kyle Evans:]

Lastly, you guys the company got quite about the OEM incentive opportunity. Last year when you were trying to put dealership network back together, I think I heard you mentioned in the less than three times on the call today. Can you talk about where you are on that and maybe be as specific and give the contribution in the quarter and then may be give an outlook on that? Thanks.

[Mike Guthrie:]

Hey, Kyle. It's Mike. The only incentive business in the fourth quarter was about our $5.8 million revenue stream, still concentrated pretty heavily on programs for USAA and for Sam's Club, the businesses grew very nicely for the year as a whole. And certainly in the back half of the year and year-over-year basis, it grew very nicely. So it's still an important part of broadening our business and our revenue stream. And like I said we've done well with some of our big partners like USAA and Sam's Club and few others smaller program but the lion share of that revenue is with those two partners.

[Chip Perry:]

We believe there still a large opportunity with OEM target incentive in our business. We had to prepare the way though this past year with the dealers to improve relationship that would enable the manufactures to be comfortable about working with us more of them. We are still running those railroad tracks. So I believe the next few years will continue to attract manufactures in this marketplace to its inherent capability of providing a targeted incentive in a private environment that's measurable and given the huge funds that are extended in this category, over $4 billion of incentive are applied every year now. There is a big opportunity for TrueCar to help these clients invest that money in significantly more efficient way than they do today. Apart to the case, beyond our current client still remains to be proven and that's why you are not hearing us talking about it now. But we will going to continue to look dealership in that area and we have high hopes for in future.

[Operator:]

And our next question comes from the line of Douglas Amit with JPMorgan. Please proceed with your question.

[Lina Rudashevski:]

Hi, this is Lina Rudashevski on for Doug. So you all have an exciting vision of an online auto market place that doesn't exist today really. And so, just to help conceptualize, what that would look like a bit better? If I go to TrueCar now, how will it look different, once you implemented everything that you want to, and how would my experience be different if I were to buy a car now versus in a more marketplace kind of -- I don't know environment?

[Chip Perry:]

Sure, Lina. Thank you for the question. Really good question because you are right the marketplace that I described doesn't exist in America today. Today, we play an important role and what I call the middle of the car shopper journey and folks there people are getting close to scoping out an inventory, selecting a dealer and doing price discovery on a vehicle they want to buy. That's where we live, that's where we are strong, and that's where we made a room for our self. But if the consumer car shopping journey today is a multi task to do thing, people they navigate many, many site to try to figure out which car they should buy. They try to piece together the information that they need in order to determine what vehicle right for them and then when they get close to buying a car then they are often needing to visit other site that show inventory or present information pages about dealers and many of those are lead forms or they were having try to visit dealer website which had come they closed to inventory that they think it's local dealers offer. But there is no true end-to-end experience today in the automotive online world. And it's clear that consumers want that. There is a big connection, disconnection between the online experience at different level and from on round to offline. And those of us in the industry have been studying this for a while, have seen this disconnection and you can see why -- we understand why the industry struggle with it. We build as a player that does a good job in the middle of the journey; we have the opportunity to look upstream and downstream. I think we are the best positioned third party to do that in an effective way. The upper funnel like I said is right for innovation. It's operating today the same way it did in the late 90s when the first generation big site that usually have print business legacy went online and they did with information pages and display ad. And as a result, the experiences those sites provide are all chopped up. They require more steps than a necessary for the consumer to get to the information and answer they need because the business model is based upon no display ad mean no revenue. We believe that needs to be fixed. And it's interesting this is one of the last big categories in America where truly consumer centric car shopping and decision shifting doesn't exist. So we have a plan and we got the tool. We got the content. We had the talent in the company to build a much better consumer upper funnel experience that will address the real used cases the people have in very practical tangible way such as how do other consideration based on things that are important to me. How do I side by side compare cars on the criteria that are important to me? How do I understand what other real car buyers think about the car that they own that they like and don't like and how might that on specific criteria is easily found in searchable, haven't make my decision about the car I want to buy. Today consumer reviews are those quite illogical typically and they are basically data dump the consumers have weigh into. So it's just huge opportunity in the upper funnel and that's why we are moving in that direction. So I think over time you will see a marketplace evolve that has the attributes I mentioned earlier to-end engagement, intelligent outcome that had people get to the -- make quicker decision they want to make, throw transparency from all about the vehicle, about market pricing, about dealer experiences, sell transparency and then lastly for accountability where the consumer is able to understand the benefits of different vehicles based on what other people believe about the car and where dealers experience accountability by only having to pay based on the success they receive from the marketplace. So those marketplace attributes do not exist and I believe the market is crying out for that kind of major leap forward. And I think if you look at all the four parties in America, TrueCar is in a best position to innovate against these unmet needs quickly and bring it to market over the next two or three years in a way that we are dramatically improve car buying and selling all across America.

[Operator:]

And our next question comes from the line of Sameet Sinha with B. Riley. Please proceed with your question.

[Sameet Sinha:]

Yes, thank you. A couple of questions. First, the guidance -- you have given guidance assumes about 16.5% growth in the first quarter and for the full year you are talking about 14.5%, but if I remember correctly you spoke about accelerating growth even in 2018, so can you help us are there any new initiatives which are planned for the second half of the year which will drive that acceleration in 2018 because obviously you are implying some sort of slowdown in growth and maybe it's the development of this marketplace. Second kind of on this marketplace topic, you are talking about reviews, wouldn't that put you in kind of conflict with your dealer partners and even your OEM customers and consumers come and give negative reviews and that's the second. And my last question is the technology and development cost a GAAP base I saw that state kind of flat over the last couple of quarters despite the fact that this is a major investment period for you. Is that something that we can expect should go up in the next couple of quarters while you finish up on Capsela and other initiative and then kind of dip down or stay flat after that?

[Mike Guthrie:]

Hey, Sameet, it's Mike. So on taken in reverse order, on tech and investment it has been flat generally through 2016 on a quarterly basis, up on a year-over-year basis. In the 2017 model you should expect that it will go up a little bit. We are obviously what we are really doing is moving people out of replatforming and into some of the new initiatives and back selling people against the platform work. So we make investment in technology personnel in the first couple of quarters. So I do expect that number to go up a little bit. Although as you point out correctly it's been basically flat across all the four quarters in 2016. As it relates to our growth rate and then I'll turn it over to Chip talk about marketplace model and reviews and things like that. Yes, right now we are obviously dealing where growth rates are comparing to a year in 2016 where Q1 and Q2 were fairly weak quarters for us. So in a sense we are competing against weaker quarters in Q1 and Q2. And then we are really competing against much better improvement, much better performance rather in Q3 in the quarter in the quarter we just reported Q4. So just logically as we are modeling the business, it's quite a bit easier to model high growth rate in Q1 and Q2 versus the back half of the year. Having said all that, of course what we are doing in the first couple of quarters is making these investments and it continues give us time to generate the improvement that we talked about, make some progress on some of the initiatives that Chip talked about. Not all of them are new products right. A lot of that what he talked about was like new car and substantial improvement to our core experience. And so we anticipate that we'll start to get some benefit from those things in the third and fourth quarters but from modeling purposes given the discontinuity of the quarters in 2016, it's not surprising you show slightly higher growth rate to front half of the year than in the back half of the year. But we are obviously doing our best to catch up as the year goes on. Is that make sense? Is that what you were asking?

[Sameet Sinha:]

Yes. Thank you.

[Chip Perry:]

And Sameet, thanks for the question about consumer reviews and whether it's a conflict with our paying customers, dealers and manufactures. Today in the automotive industry like many vertical that consumer reviews are quite prevalent in many different places. And so it's become accepted on the part of the sale side of our industry that consumer review cars and they review purchase experiences at local dealership. And so we don't see as a conflict actually. And we will be able to navigate and create review platform for cars that consumers will very much enjoy and if the dealers and manufactures will say yes it's credible. And so they'll work with us on it. Actually we don't have to stand in way of it and we believe that we should continue to have positive relationships with both dealers and manufactures while we do this. So the big thing is the opportunity and improves how the reviews work for consumers, how usable they are and how quickly can get to the information you want. And that's we are all about. And so we got a team working on that right now and we are excited about the early insight that from team that will enable us to produce a real great product later this year.

[Mike Guthrie:]

And just really quickly to follow up, Sameet, on your earlier question about investment in tech and development, if I look at 2017 as a whole they are really it's pretty simple in our business. The things we are adding or that we will be investing in terms of headcount will really be in two areas. We will continue to invest in the dealer organization and then we will be investing more as I mentioned on tech and development. Our dealer investments really accelerated across the course of last year. So we are pulling into 2017 some back ended loaded hiring from 2016 and then Brian and the team are continuing to invest to ensure that we got the right field organization and sales operation organization in their whole team. So this year the investments will be split fairly evenly between technology and dealer. I would say with slightly more dollars going into the dealer organization year-over-year meaning 2017 over 2016 than in technology.

[Operator:]

Our next question comes from the line of Blake Harper with Loop Capital. Please proceed with your question.

[Blake Harper:]

Yes, thanks. Chip, in your prepared remarks, you talked about trade-in, financing. Just wanted to understand, will you be monetizing those financing leads to financial institutions? And just wanted to understand, maybe the model, of exactly how you monetize some of those -- more of those touch points, including the trade-in and financing in your new model?

[Chip Perry:]

Thank you Blake. Like I said we are going to be -- we are cautious now of researching and building those tools. We are collaborating with a number of players in this ecosystem call digital retailing as we speak. As it relates to financing, I said in the past that we believe in facilitating only indirect financing where the dealer arrange it's financing and the dealership. And we are not in the business on TrueCar.com of providing direct to consumer finance that it could be potentially be monetized. And we honestly don't see monetize the dealers ability for what I call usual practice of facilitating a loan which comes with a transaction, it's their business. They make money there, it's important to them and I don't see us being involved in that part of the business financially in anyway. And as it relates to trade-in, we have some ideas on our drawing boards right now but we are not really prepared to talk about them yet. That will be coming in the next quarter or so.

[Operator:]

Now our next question comes from the line of John Blackledge with Cowen and Company. Please proceed with your question.

[John Blackledge:]

Great. Thanks for the questions. From 2013 through 2015, 1Q revenue was up versus 4Q. High end of revenue guide is $1 million below the 4Q revenue. So just wondering if there was some conservatism baked in there? And then from a monetization perspective, should we considered $299 for used -- or $299 for new and $399 for used? Because the unit mix in the monetization rates, there's a bit of a difference between the reported transaction revenue number and looking at the mix? So just wondering if there's something going on there? Thank you.

[Mike Guthrie:]

Thanks John. In terms of the monetization, I think within overall monetization hanging in pretty tightly in the $320 -$323 range. And I think that's the -- I think it's been reasonably flat for that 8 or 10 quarter so I think that's the right way to think about overall monetization. Your other question was around the -- sorry what was the third part of it.

[John Blackledge:]

Yes, there are a lot of questions tonight. The sequential revenue guide is at the high end is a touch below and you were above the -- you -- it grew sequentially 2013, 2014, and 2015.

[Mike Guthrie:]

Yes, in Q1. Yes, I believe that the -- historically from an industry standpoint the quarter are fairly similar. Q4 and Q1 are fairly similar, they are the lower end of the year, Q2 and Q3 are the simply the strongest periods and Q1 and Q4 are seasonally a little bit weaker. So we have a fairly healthy compare -- positive compare versus Q1 of last year. And we are kicking off the year and quite honestly the models are kind of all over the places. It was a good time for us to get everybody into the same place and this kind of growth rate in Q1 that we are forecasting is quite pretty healthy and I guess remains to be seen whether or not that's conservative guidance but the quarters tend to be fairly similar.

[Operator:]

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

[Chip Perry:]

Thank you everybody for sharing your time with us. We are excited about the future here at TrueCar. Appreciate you are login in and happy to take any questions from you at any time. You can call us here in Santa Monica. Take care.

[Operator:]

Thank you, ladies and gentlemen. This does conclude the call for today. And we thank you for your time and participation. You may disconnect your line at this time. Have a wonderful rest of the day.