TrueCar, Inc.
Q2 2015 Earnings Call Transcript

Published: 8 Aug 2015

[Operator:]

Greetings and welcome to the TrueCar, Inc. Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions] I would now like to turn the conference over to your host, Alison Sternberg, VP of Investor Relations for TrueCar. Thank you, ma’am, you may now begin.

[Alison Sternberg:]

Thank you, operator. Hello, and welcome to TrueCar’s second-quarter 2015 earnings conference call. Joining me today are Scott Painter, TrueCar’s Chief Executive Officer; John Krafcik, President; 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 third quarter and full year 2015, management’s beliefs and expectations as to future events, our future growth, the performance of our various channels, enhancements to our mobile platform, improvements to our consumer experience, and our financial and operational metrics plans and strategies. 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 2014 filed with the Securities and Exchange Commission and our forthcoming quarterly report on Form 10-Q for the quarter ended June 30, 2015, for a discussion of the factors that can 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 Mike.

[Michael Guthrie:]

Thanks, Alison; and good afternoon, everyone. Given that we recently pre-announced our expectations for the quarter, we’re going to jump right into the financials. The numbers that we will report today are all right in line with those pre-announced results. TrueCar delivered revenue of $65.3 million in Q2 of 2015. Transaction revenue came in at $60.4 million, representing 31% growth over Q2 of fiscal 2014. TrueCar certified dealers transacted 190,358 units on our platform in Q2, up 27% year-over-year against the backdrop of an overall industry unit sales which grew 4%. The units sold by our dealer partners represented 4% new car retail market share for Q2 of 2015, up 3.4% from this time last year. Breaking down unit sales in a little more detail, the TrueCar branded channel accounted for 82,112 unit sales, or 43% of the total. This represented 46% year-over-year growth. Cost per sale was $216 and that is down from $250 in Q2 of 2014, up sequentially from $194 last quarter, and is consistent with our prior guidance. We remain pleased with the efficiency of our marketing spend and the continued signals that we are building brand. The USAA channel accounted for 58,883 unit sales, an all-time high and up 14% from this time last year. The co-branded marketing campaign we launched with USAA on May 21 bolstered these results, and we saw a significant acceleration in unit sales growth from Memorial Day through the end of June versus the first-half of the quarter. The program will continue through Labor Day and, given its success, we are working with our partners at USAA to continue these efforts in the future. The other partner channel accounted for the balance of the units. This was the fourth consecutive quarter of low to no growth in that channel. Sequential unit growth in this channel was 4.2%, compared to 14.3% at USAA and nearly 18% in the TrueCar branded channel. So we are very focused on adding new partners that can reignite growth. We are also working diligently with our existing partners to create awareness of car buying for their members and employees. That will be a key focus for the team in Q3 and beyond. Monetization was $317 per unit. About 21% of units sold were used cars in Q2 versus the 24% in Q1. Forecast, Consulting and Other Revenue was $4.9 million, up 12% from Q2 last year. We used to call this revenue category Data and Other Revenue, but we have renamed it to make it clear that we do not sell customer data in any way, shape, or form. Turning to the expenses, our gross margin increased from 90.4% last quarter to 91.2% this quarter. Technology and product expenses were $9.8 million, or 14.9% of revenue in Q2. That compares to Q2 of 2014, when tech and product expenses were $7.4 million or 14.6% of sales. We continue to grow our technology team and remain committed to the hiring and retention to technology, engineering, mobile US and UI talent. Though the operating leverage from these investments is not yet evident in the numbers, we believe these investments will enable us to continue enhancing our mobile app and overall experience, thereby helping to grow the top line. Sales and marketing expenses were $39.6 million, or 60.6% of revenue in Q2 of 2015. That compares to Q2 of 2014, when sales and marketing expenses were $28.7 million, or 56.9% of sales, and to Q1 of this year, when we spent $30.5 million, or 52% of sales. I want to bridge the growth in sales and marketing expenses in Q2 over Q1 of this year. First, customer acquisition cost to the TrueCar branded channel totaled $17.7 million in Q2, up from $13.5 million in Q1. As mentioned, our resulting cost per sale was $215, well within our guidance. Second, we invested approximately $1 million in our co-branded marketing campaign with USAA. This program was a success and performed very well from Memorial Day through the end of the quarter, and we will continue this program through Labor Day. Third, we made some front-loaded investments during the quarter in our OEM incentive platform and in exploratory brand building that yielded little to no incremental revenue. These items totaled approximately $1 million. Fourth, we produced new creative and wrote off certain creative assets that we determined would not be used. The incremental expense versus Q1 was approximately $1.1 million. Fifth, we grew headcount in both our dealer team and marketing organization. The hiring in our marketing organization will allow us to reduce agency costs in Q3 and going forward and will generate net savings. And last, revenue share and loan concession to our affiliate partners increased by about $1 million as the result of higher unit sales. General and administrative expenses totaled $9.8 million, or 14.9% of sales in Q2 of 2015. That compares to Q2 of 2014, when G&A expenses were $8.6 million or 17.1% of sales. As expected, we continue to see operating leverage across G&A, as we largely built out our finance and legal departments last year, and expect further improvements for the balance of 2015. Adjusted EBITDA for the quarter was $0.5 million or 0.7% of revenue. Non-GAAP net loss for the quarter was $3.8 million or a loss of $0.05 per share, while GAAP net loss was $14.7 million, or a loss of $0.18 per share. The primary non-cash expense items in the quarter were depreciation and amortization of $4.1 million and stock-based compensation of $9.2 million. In addition, in recording GAAP net income with non-GAAP net income, we added back $2.1 million of certain legal costs primarily related to our litigation with Sonic Automotive. We have now formally settled the case against Sonic. We finished the second quarter with $126 million of cash and nothing outstanding on our $35 million revolving line of credit. Now let’s walk through some of the other key metrics. Average monthly unique visitors were 6 million, representing year-over-year growth of 42%. Unique visitors in the TrueCar channel alone were 4.2 million, representing year-over-year growth of 64%. Franchise dealer count totaled 9,300 as of June 30, while our non-franchise dealer count was 1,802. Transaction revenue per franchise dealer was $6,563 for the quarter. Now, I’d like to summarize our outlook regarding the third quarter of 2015 and the balance of the year as a whole. For the rest of 2015, the focus is going to be on continuing to grow the business, while managing investments and costs and delivering adjusted EBITDA. As we head into Q3, I would like to emphasize the following three points. First, we will continue our very successful co-branded marketing campaign with USAA through Labor Day. The results we achieved in late May and June were strong, so we believe we can take that momentum into Q3 and grow that channel by as much as 15% year-over-year. Second, in the TrueCar branded channel, we have budgeted as much as $20 million on acquisition spend for the quarter. We plan to adjust that number during the quarter based on our desire to achieve efficient cost per sale economics. In any event, we expect to grow units approximately 20% to 25% year-over-year in the TrueCar branded channel. Finally, we are taking a conservative approach to our Other Partner channel. Given four quarters of basically flat performance, we are forecasting sequential declines in Q3 and in Q4. We will, however, focus diligently on working more efficiently with these partners in order to achieve better results. For the third quarter, we anticipate revenues to be in the range of $65 million to $67 million, with units in the range of 190,000 to 195,000. We are projecting break-even adjusted EBITDA. For the full year 2015, we are guiding to $252 million to $258 million of revenue on units of 730,000 to 740,000, and adjusted EBITDA for the year is expected to be approximately $5 million. And I will now turn the call over to Scott.

[Scott Painter:]

Thanks, Mike. While our business performance was solid and all of the fundamentals of the business remain strong, the bottom line is that we failed to deliver the operating results that our shareholders deserve. As the CEO, I bear the ultimate responsibility for our performance in falling short of expectation, including my own. I feel an intensely personal commitment to our shareholders, our employees, our dealer and OEM partners, and the 6 million customers who engage with us on a monthly basis to always do what’s best for the business. TrueCar was born from my love for cars and my entrepreneurial passion for solving real problem. I’ve devoted the last decade of my life to help raise it into the remarkable, purpose-driven company that it is today. I’m proud of the extraordinary management team that we’ve assembled and what we’ve been able to achieve together. But the potential of the business is far greater than its current operating results suggest. I recognize that as Founder of TrueCar, I’ve had a sometimes strained relationship with the very dealer community that we exist to serve. In addition, I do not believe that I’ve always communicated our value proposition to investors as effectively as I could have, those things are on me. And so, after a decade of building TrueCar from an idea into a public company that engages with 6 million consumers every month and a third of all dealers, I’ve come to a conclusion reached by many founders and entrepreneurs in my position. It’s time for a change. I’ve decided to step down as CEO, effective at the end of the year. In the event my successor is selected prior to the end of the year, I will transition sooner. Effective immediately, I will begin working with the Board to evaluate potential candidates and select my replacement, who will work with our world-class management team to lead TrueCar’s growth into its bright future. Once the transition to the new CEO is complete, I will continue my service as Chairman of the TrueCar Board, but I will not be directly involved in the day-to-day operations of the business. Serving as CEO of this company that I love so much has been one of the greatest privileges of my life, and I’ve been blessed to work with an immensely talented and devoted group of employees, all of whom believe and care so deeply about the mission of our business. I couldn’t be more excited about TrueCar’s future. And now, we’ll open it up for questions.

[Operator:]

Thank you. At this time we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Debra Schwartz from Goldman Sachs.

[Debra Schwartz:]

Great. Thank you. Two questions. First, can you give us a sense of how July performed, and then what’s embedded in your guidance for the third quarter for Labor Day and just kind of thinking about the progression of the quarter, if you could give us a sense for July and then how – what you’re expecting for progression from there? And then secondly, you gave dealer count at the end of Q2. Is it possible to give an update on where you are on dealer count currently, given AutoNation exited in July? Thanks.

[Michael Guthrie:]

Hey, Deb, it’s Mike. So we’re not going to – we’ve given guidance for Q3 and Q4, and we’re going to stick with the guidance. Embedded in that guidance is Labor Day and dealers, our product, and all the things that we work on. We’ve obviously reset expectations given Q2, and we’re going to get to work on executing on Q3. We’re obviously comfortable with the guidance that we’ve given right now. But I don’t want to get in the habit of talking intra quarter about how individual months are doing or anything like that. So we’re going to stick with the guidance that we have and go execute against it.

[Debra Schwartz:]

Okay. And then, can you give us a sense of dealer count as of…?

[Michael Guthrie:]

Yes, it’s really the same response. We – again, everything is embedded in our guidance on all the key metrics, and we’re going to go out and execute against those right now. We do have an assumption in our models that in the long run and I talked about this on the call, where we pre-announced – we were at 9,300 at the end of the second quarter, and our goal is to get back to that number by the end of the year.

[Debra Schwartz:]

Okay. Thank you.

[Operator:]

Thank you. Our next question is from Mark Mahaney from RBC.

[Unidentified Analyst:]

Hi. This is Andrew on for Mark. I had two questions also, please. The first one is, can you give a little bit more information on the non-USAA affiliate partners, and have you lost a few there, or just a little bit more information on the quarter-over-quarter declines? And the second one is, how can you improve – what levers do you have to improve net funnel efficiency? Thank you.

[Michael Guthrie:]

Yes. So there wasn’t a sequential decline in the Other Partner channel and there wasn’t a year-over-year decline. But ultimately units and you can just do the subtraction from the numbers I gave you. But we had 49,363 units in that channel, which is an all-time record, it’s just it was below our expectations. Traffic was actually down in the channel quarter-over-quarter, but funnel efficiency improved to a point where we could actually grow units 4% sequentially. And, again, that’s in the – in my prepared statements. But we just need to do better than that. The other channels are growing at a far greater clip. It is not a result of lost partners, so that’s not the issue. I think it’s just really around activation of the partners that we have. And then ultimately, we need to continue to add new partners that can also help us grow the business.

[Unidentified Analyst:]

Thank you.

[Operator:]

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

[Ronald Josey:]

Great. Thanks for taking the questions. Scott, I’m wondering if you can give us – or, Mike, a little more information on what you are looking for in a successor, maybe qualities, background, anything like that would be helpful. And then, Mike, when we you’re talking – when you talked about the pre-announcement, we talked about guidance and whether you still feel confident there. I’m wondering how you are feeling there in achieving the new lower units. And I know you gave guidance on affiliates being flat, is that still part of the guidance? So just confidence in guidance, and then qualities you are looking for? Thank you.

[Scott Painter:]

Mike, do you want to give your – answer the first part of Ron’s question after.

[Michael Guthrie:]

So, sorry, Ron. The first part of your question was what are we looking for, and what was the second part of the question? I apologize.

[Ronald Josey:]

Just your confidence in the guidance that you gave. I know it was lowered from the original guidance, and just how you’re feeling about it. Is it conservative? Do you think you feel good about not coming down again, I guess, is the main question?

[Michael Guthrie:]

Yes, absolutely. We have not enjoyed this process, and so you can imagine that when we sat down to put the guidance together, we certainly did it with a goal of not being in this position any time soon, if ever again, so no doubt about that. Lots of discussions amongst ourselves and the operating team and the Board of Directors before we put that guidance together. As it relates to the ongoing search, the Board has formed a search committee. The search committee will begin working on the search for the new executive. And I don’t think it behooves me to give you any sense of what they’re looking for in particular. We’ll let the search committee get to that and Scott will be a part of that.

[Ronald Josey:]

Okay. Thanks.

[Operator:]

Thank you. Our next question comes from Douglas Anmuth from JPMorgan.

[Unidentified Analyst:]

Hi. This is Diana in for Doug. Just wanted to ask a little bit on the other affiliate partners, if you are planning within the guidance to do any similar co-branded campaigns, or what the specific initiatives are there?

[Michael Guthrie:]

Yes. So every partner is a little bit different, Diana. There are a lot of partners in that category. It’s a bit of what we call the long-tail. So each individual partner has opportunities to engage and create awareness with the member base. USAA is a bit of a unique partner in a number of ways. But obviously, we take a great deal from the successes that we had at USAA and it informs the way the team’s going into the market to engage with all the partners in this quarter and beyond.

[Unidentified Analyst:]

Great. And then maybe just, if you can give a little color on some of the bringing forward the spend in terms of engineers and mobile, what specific initiatives are you working on that can improve the funnel efficiency there and are you seeing any early test results you can talk about?

[Michael Guthrie:]

Yes. So Diana, we have a pretty focused list of enhancements along within the product which we think will generate a better, more efficient process. And a lot of that right now is focused on close rate enhancements, quite honestly. There are a few things that we’re on the front end of the experience that we’re always trying to do. And that’s an ongoing, we literally look at product metrics on a weekly basis to see what things are in the pipeline and what effect they’re having on NFC. We literally do that every Wednesday. And I think we’re pleased and excited by what we have in the pipeline and what’s being turned out. But at the same time, we want to get it out there, show the results first, and we’ll talk about that when we have the next quarter and other things to talk about.

[Unidentified Analyst:]

Thanks so much.

[Operator:]

[Operator Instructions] Our next question comes from Dean Prissman from Morgan Stanley.

[Dean Prissman:]

Hey, guys. So I jumped on late, so apologies if you already discussed this. But looking at the deceleration of unit growth in the non-USAA affinity partner channel, how much of it relates to pressure in same-store sales growth versus hard comparisons in terms of not adding new partners say, in 2015? Thank you.

[Michael Guthrie:]

Hello, Dean. We haven’t lost any partners. We probably could have added at a faster clip. But I think primarily, especially in the partner channel it’s about – and we talked a little bit about this before you joined the call – but it’s really all about activating the members and getting marketing programs in place across a fairly large number of partners. And quite honestly, we didn’t get that level of engagement across the partner base last quarter. I don’t think it has anything to do with same-store sales, quite honestly. I just think it has to do with an individual rollup of a fairly large number of partners and our ability to do activation. You had a seasonally positive quarter, yet traffic was down. And if you look at what we did at USAA, obviously we completely turned traffic around and unit growth is 40% higher, 50% higher than it was in the first quarter. So it can be done, it’s different. You can’t take all the lessons from USAA and apply them, but we can certainly take some of them. And but it really is around engagement and value add for the members and making sure that those programs are in place. And we’ve got a great team out on the field focusing on that, and they’re highly focused on producing a better Q3.

[Dean Prissman:]

Great. Thanks for the color, Mike.

[Operator:]

Thank you. Our next question comes from John Blackledge from Cowen & Co.

[John Blackledge:]

Great. Thanks. Just a question on TrueTrade. Just wondering how it’s progressing. I think it’s – you guys have called it out as a next year event. I’m just wondering if you can give just an update on the progression there. Thanks.

[Michael Guthrie:]

John, you are nothing if not consistent. Next time we start with you, I’m going to say – I’m going to start with TrueTrade before we even get to you. It’s still a 2016 business, as it is…

[John Blackledge:]

It’s real boring talking about those units, Mike.

[Michael Guthrie:]

I’m sorry?

[John Blackledge:]

It’s so boring talking about units all the time.

[Michael Guthrie:]

Let’s talk more about the future. Yes, the TrueTrade, I think, is continuing to develop well. There’s a lot of activity inside the company, both on product development, engagement with dealers. We’re not quite at the stage yet, where we want to be out talking to consumers. We think we have a great general manager running that business for us. We are excited about it. It’s a big market, but it’s still a 2016 business. But I look forward to talking to you about it on Q4 and then all next year, as well.

[John Blackledge:]

Great.

[Michael Guthrie:]

Thanks, John.

[Operator:]

Thank you. Our next question comes from Kyle Evans from Stephens.

[Kyle Evans:]

Thanks for taking my questions. You mentioned, Mike, that you pulled back on the marketing spend in the TrueCar channel in the second quarter, because you weren’t seeing the economics that you were looking for. How should we think about, within the context of the facts that this is probably one of the great sour quarters in anyone’s memory, how should we think about next year, when the super PACs and the candidates start spending around presidential and you guys are looking to add UVs to the top of the funnel?

[Michael Guthrie:]

Yes. So, a couple things, it was a very good second quarter in terms of SAAR and our market share went up. So on a unit basis, it wasn’t what we forecasted or what we guided to, but it was the most units that we’ve ever done and it was the highest market share that we’ve ever had. So we missed on the forecast. I don’t think we missed in terms of enabling our dealer partners to transact a lot of units on the TrueCar platform. As it relates to the elections and things like that, we are now buying up-fronts and locking in our national media buy. A lot of political buying will come into the channel next year, of course. A lot of that’s local, right. A lot of that gets directed on local. We buy national. So it wasn’t an issue, as we talked about in the preannouncement, the $17.7 million was what we thought was the smart spend. You can always continue to spend at high incremental costs per sale, but we generally like – we’re always looking at a certain cost per sale. And the truth of the matter is we could have cleared a little more in radio, because we’ve planned to spend a little bit more. But at the end of the day, 2.16% is pretty close to where we wanted to be. We had said to you guys the prior quarter about 2.20%, and we would be willing to go even a little bit higher. But at the end of the day, we have good unit economics at 2.20% and we were comfortable with that. I think the fact that we’ve spent less should just be viewed as; A, we have discipline on spend, and the fastest way to burn through margin in our business is to over spend on the branded channel. So I think we have a really good sense of what is the sustainable growth rate for that and we spend to it. And I actually think our team really does a great job of nailing that cost per sale. And we know what that impact is on our EBITDA as it ties in to what’s going on in the partner channel, as well. So I would look for more disciplined spend in Q3 and next year, I think we’ll continue to do the same thing.

[Kyle Evans:]

Could you guide or do you have an outlook on legal expenses for the second half of the year?

[Michael Guthrie:]

Yes. It’s a good question. We were actually just talking about that earlier today. It’s definitely coming down, now that Sonic has settled. We do, as you all know, still have other cases pending. But we spent a little over $2 million in the second quarter, and we think for the back half of the year, that spend will be somewhere between a half and three quarters of that number in total, so it’s somewhere between $0.5 million and $750,000 a quarter for the rest of the year.

[Kyle Evans:]

Thank you.

[Operator:]

Thank you. Our next question comes from Sameet Sinha from B. Riley.

[Sameet Sinha:]

Yes. Thank you very much. Scott, all the best on your future endeavors. I wanted to speak about OEM incentive revenues, that’s my first question, if you’d give us a sense of whether it’s still trading in the 7% to 8% range. And secondly, the issue with AutoNation brought up the issue of attribution. And can you give us your thoughts on that about what exactly allows you to charge for that particular unit sold at the particular dealer, what was the unique product that you offer versus all the other guys? Thank you.

[Michael Guthrie:]

Sameet, it’s Mike. So for virtually all of our dealers, we have DMS access and we’re able to match sales through the DMS. And that’s why we have unique attribution. It’s nothing that we haven’t talked about for a very long time. It’s what allows us not to argue about attribution at the end of the day. There are other sources where certain individuals come to a dealership, they’re dealerships that have relationships with consumers individually. But ultimately, our stance has been when they come through our platform and we track them through to the DMS, they are in fact sales that we believe we should invoice for.

[John Krafcik:]

And Sameet, it’s John Krafcik. On the TrueCash or targeted offer question, we’re still performing in line with the expectations we set earlier in the year. And I’d say we’re feeling reasonably confident about the business. We’ve recently added another OEM partner and the business continues to perform, again, in line with the expectations we set earlier in the year.

[Sameet Sinha:]

Great. Thank you very much.

[Operator:]

Thank you. This ends our Q&A session and conference call for today. Thank you for your participation. You may now disconnect.