TrueCar's (TRUE) CEO Chip Perry on Q4 2015 Results - Earnings Call Transcript

| About: TrueCar, Inc (TRUE)

TrueCar Inc. (NASDAQ:TRUE)

Q4 2015 Results Earnings Conference Call

February 18, 2016 04:30 PM ET


Alison Sternberg - VP, IR

Chip Perry - President and CEO

Mike Guthrie - COO and CFO

John Stevenson - Chief Risk Management Officer


Diana Kluger - JPMorgan

Deb Schwartz - Goldman Sachs

Mark Mahaney - RBC

Dean Prissman - Morgan Stanley

Ron Josey - JMP Securities

Sameet Sinha - B. Riley

John Blackledge - Cowen


Greetings and welcome to the TrueCar, Inc. Fourth 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] As a reminder this conference is being recorded.

It is now my pleasure to introduce to your host, Alison Sternberg, Vice President of Investor Relations. Thank you. You may begin.

Alison Sternberg

Thank you, operator. Hello and welcome to TrueCar’s fourth quarter and full year 2015 earnings conference call. Joining me today are Chip Perry, 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 2016, management’s beliefs and expectations as to future events, our future growth, planned investments, our financial and operational metrics, plans and strategies and the effects of operational initiatives including investments intended to improve close rate, our technology infrastructure, internal research, the productivity of our dealer network, our 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 2014 and our subsequent quarterly report on Form 10-Q filed with the Securities and Exchange Commission and our annual report for the year ended December 31, 2015 to be filed 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 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 and good afternoon everyone. As you all know, I joined TrueCar on December 14th. And I cannot tell you how excited I am to be here and to have this opportunity to lead the Company forward and take it to what I believe to be a whole new level of success. I took this job, because I believe TrueCar can become the clear category winner in the online automotive space over the next few years. We will do this by refining how our marketplace woks, so that we can provide the best overall value proposition for car buyers, dealers and OEMs. Sitting here today, I’m totally confident we can do this and while doing so, I believe we will create significant value for our shareholders.

Let me tell you a bit about myself. Rarely does a person get the opportunity of a lifetime more than once. Here at TrueCar, I’m pleased to say what I have it. Roughly 20 years ago, I moved from Los Angeles to Atlanta, where I had the chance to start from scratch. Beginning in 1997 a team of us led the company from a start-up of a one person, myself, to a company that when I left in 2013, generated approximately $1.5 billion in revenue and nearly $500 million in EBITDA. We employed 3,500 talented people that served over 20,000 dealer customers in every OEM. It attracted 16 million monthly visitors to our site, and it earned an equity valuation of $7 billion. It was a chance at that moment in 1997 to build what I called the MLS of the car business, which has never been done before.

Over the 16 years I led, we successfully scaled the company through several stages of evolution. Very importantly, we did this in a way that successfully navigated the transparency wars, which was the inevitable conflict caused by the desire on the part of consumers, of more pricing transparency while buying a car and reluctance of some dealers to provide this transparency. I believe that the key to navigating this tension is to build a well-balanced value proposition from both sides of the marketplace, namely a win-win for both consumers and dealers. This is something I’ve done before.

Here at TrueCar, we have a different opportunity at a different time, and I believe it’s even more exciting than the one I had back in 1997. Based on all my experience, I’m convinced there is a huge opening and unmet need in the market for a company like TrueCar to ultimately bring a new and unprecedented dimension of value to consumers, dealers, and OEMs.

Achieving that vision will take some time. So our focus this year will be on making our existing business model work better and improving our relationships with our dealer and OEM customers. Fortunately, we have a great starting point in this journey, because TrueCar is a company that generated $260 million in revenue in 2015, it has 600 talented and passionate employees that serve 11,000 dealer customers. It attracts over 6 million monthly unique visitors and last year it introduced nearly 4 million consumers to our dealer customers, 750,000 of which, of whom transacted at these dealerships. In addition to this kind of significant scale, we start this process with four important strengths and leveragable assets to give us some clear sources of differentiation in the market.

Our biggest strength is our new car pricing transparency model. For consumers, we put two things in context. Number one, highly relevant market information about what other people had paid for their new cars and two, inventory and pricings information for new cars from our dealers in a way that encourages these buyers to use our marketplace to initiate their purchasing process with our dealers.

Our second big strength is that we have a powerful value proposition for dealers that enables us to be paid by these clients on an accountable basis when a TrueCar consumer buys a car from them. Generally, we do this while charging dealers a per sale transaction fee that is well below their average marketing cost per car sold. As a result, I think TrueCar has the best commercial platform for monetizing consumer-dealer introductions in the entire online auto industry.

Our third strength is our relationship with affinity partners such as USAA, AAA, Sams Club and many others. These partnerships are viewed by our dealers as unique and valuable largely because the very close relationships that our partners have with their members enables them to generate strong interest in the partner branded TrueCar buying service that is prominently featured within our partner’s online portal.

Our fourth major strength is that we have a brand that is growing very rapidly, and has a positive image with consumers. According to the latest new auto shopper study just released by JD Power, the TrueCar network, including our affinity partners was the industry’s largest and fastest growing online resource in 2015, in terms of engagement by actual new car buyers. This study also found that consumers rated TrueCar as the number one overall most useful new car shopping site in the industry, well ahead of,, Kelley Blue Book and The study also ranked TrueCar number one for its mobile experience.

As further evidence of our strong audience growth, the latest console [ph] data shows that TrueCar’s unique visitors grew by 38% during 2015, while in contrast new audiences of Edmunds and Kelley Blue Book actually declined by more than 10% last year. So the consumer has spoken. It is clear that despite the challenges we face, new car buyers view TrueCar as the marketplace of choice all across America.

These strengths are noteworthy and are the main reasons we have come this far in our industry. They are also the main reasons I took this job and why I am so enthusiastic about our future. That being said, TrueCar’s growth has clearly slowed and it is apparent to me after two months on the job that we have some important opportunities for improvement that we need to address to enable this Company to reaccelerate its growth and achieve its full potential.

In my view, these challenges are the result of some shortcomings in the ways in which the Company is executed its business model in the past, not the fundamentals of the model itself. It's a very important point. All of the issues I will discuss now are readily addressable. In 2016 we will focus on these opportunities for improvement, so we can get this Company back on the path to high revenue growth and healthy margin.

I'll now explain, what I believe are the three main areas we need to address. Our first and highest priority will be to turnaround the negative sentiment that some dealers feel today towards TrueCar. Immediately after I took the helm, I began an active outreach to hear directly from our dealer customers, what they like and don’t like about our Company. They’ve given me an earful of very helpful input, which I really appreciated.

I don’t believe any company in our category can build a sustainably great business that serves car dealers unless those dealers believe that company is supporting their success, not undermining them or marginalizing their place in the industry. It is just as clear that by taking a new and fresh approach, we can have TrueCar work in a much more positive way for our dealer customers, while also maintaining a strong value proposition for consumers.

Our second priority is to improve the perception of the major OEMs. We have made nice progress in this area with a number of them, including those who are making good use of our targeted incentives product. But we still have a lot of work to do in this area. It is important to us that the OEMs see TrueCar as a useful marketing channel, because we they influential with our dealers and we have some excellent products that can help them improve the efficiency of their more than $50 billion in annual spending on sales incentives. This process will take some time, and the most important thing we can do in this respect is to win over more of the dealers.

Now, before I discuss our third key priority, let me tell you why I’m convinced we can address the first two. Going back to the recent J.D. Power study, they found that 46% of actual new car buyers visit the TrueCar network within 90 days of purchasing. Let’s do some math. There were 17.4 million new car sales in 2015, of which 14.7 million were at the retail level, that is not retail [ph].

Approximately 75% of buyers go online during their shopping process. So that’s 11 million internet new car buyers. Because 46% of these buyers engaged the TrueCar network within 90 days of purchase, that’s 5.1 million new car buyers on our network every year. That is more than one out of every three new car buyers in America. And this is why, we have 9,000 franchise dealer customers, and why OEMs are increasingly interested in reaching our new car audience.

Last year, of these 5.1 million new car buyers, we monetized only 574,000 of them, which means that we captured only about 11% of the real monetization opportunity readily available to us and the dealers of our network. We can definitely do better. Clearly, we are not giving our new car buyer audience sufficient reasons to see through our experience, connect with our dealer network and purchase a car from a TrueCar certified dealer. These numbers suggest our traffic quality is incredibly high. So our third priority is to improve the overall yield to our user funnel. In 2016, we’ll be investing in product and technology in order to evolve our user experience in a way that enables us over time to dramatically improve our yield.

To move our user experience forward more rapidly, we need to rebuild several key parts of our technology infrastructure. The good news is that this work was well along when I arrived in December and the solutions are well understood by our technology team. But this will continue to be a major area of investment in 2016.

Stepping back from this assessment of our situation; the management team of TrueCar and I are setting a new strategic direction for the Company that will build on the strong fundamentals of our business model while making major improvements in the ways in which this model is executed. That is the first and most important part of this process. Everyone at TrueCar, beginning now, is embracing a new philosophical rudder, and a new set of core business principles.

To start, we define our business as a specialized two-sided digital marketplace that aspires to reduce the inherent friction in automotive transactions, deliver the best car buying experience for consumers and provide dealers and OEMs an excellent ROI on their marketing dollars. Second, we will manage our marketplace to produce a win-win for both consumers and dealers. TrueCar recognizes that dealers and OEMs are our revenue generating customers and we are passionate about helping them succeed in our marketplace, while also enabling consumers to obtain pricing transparency, leading to a high level of confidence in their purchasing decision.

Finally, we will explain our value proposition to consumers in a way that does not reflect negatively on car dealers, while continuing to provide actionable information that improves their overall purchasing experience. This new philosophical rudder and new set of core business principles will guide our decision making in 2016 and beyond. In addition to the time I’ve spent out in the deal [ph], meeting with our dealer customers. I’ve also been working closely with our financing business operations team to understand our operating metrics and the key drivers of our financial performance.

We analyzed the key performance metrics of our sales funnel in order to understand the performance of our business. Traffic; where unique visitors are at the top of our funnel, while prospects within market buyers who decide to connect with TrueCar certified dealers are in the middle of the funnel. Unit sales happen at the bottom of the funnel. Since most of our business flows through a pay per action model, our revenue is driven by the unit sales at the bottom. It is clear to me right now we don’t have an upper funnel issue. Our high quality traffic continues to grow at high rates, well above all our competitors. The middle of our funnel where people become prospects, is also growing substantially through not as fast as our traffic. And as I said earlier, many real car buyers are not proceeding past the very top of our funnel. So there is a lot of work to be done to encourage them to become prospects. In addition, our close rates declined in the back half of last year, due to a shift in the mix of dealers in our network. Michael will explain this further in a few minutes.

So we will focus our attention and direct the majority of our investments this year to addressing these issues. Put simply, this year, we will divert some top of funnel marketing dollars to areas lower in the funnel to improve conversion and close rate, increase yield, and grow units and revenue. While this reallocation of resources may slow down our top line growth in the near term, it will position us for much more rapid growth in 2017 and beyond.

To execute the strategy, we will have three major areas of investment. First, we will be significantly bolstering our dealer sales and service team. During my visits with dealers, I heard from many of them, they do not see a TrueCar representative in their stores as frequently as they would like and that the in-store training should be stronger so they can better capitalize on introductions we provide and increase their close rate.

To address this issue, TrueCar will invest in creating a best-in-class, high-touch dealer sales and service team. By year-end, we plan to build the capability to have a high quality, consultative in person service visit with nearly every TrueCar certified franchise dealer at least once a month.

The second major investment area will be growing our product and technology teams. We run a complex technology infrastructure and it will be important this year to invest significantly in order to manage our data better and improve product quality and product velocity. Then importantly, we believe these investments will ultimately enable us to lower our operating costs.

Finally, we are building a world class internal research team that will fit in our marketing group, but will be tightly linked to our product and dealer team so that insights can be quickly implemented for the benefit of our dealers and consumers. This plan is going to unfold over the course of the year and we have significant work to do. I appreciate your patience while we do that. Fortunately, we have the resources we need to achieve our plan. We are well capitalized and have a strong and liquid balance sheet and we have a talented team, great customers and a growing brand. Our business model is sound and extensible, and we are well positioned to be the category winner in this market over the long-term.

In closing, I would like to say again just how excited I am to be here at TrueCar. As we move forward in 2016, TrueCar is an excellent foundation for future growth. All of us here believe there is a huge market opening and unmet need for the kind of digital marketplace that we are building and we are laser focused on being the first one to create it.

I will now turn the call over to Mike to walk you through our numbers.

Mike Guthrie

Thanks, Chip and good afternoon everyone. Financially Q4 was a silvering quarter for the quarter, representing the close of a challenging year. We have made however, a number of important changes at the senior level of the Company, most notably with Chip joining us as a Chief Executive Officer in December. We have started from a good base and we have a plan in place to make the investments necessary in order to excel over the long-term. As you recall, we experienced a net loss of 600 franchise dealers between July and September of 2015. We ended the fourth quarter with 9,094 franchise dealers, up from 8,702 at the end of Q3. Some automotive brands however consistently achieved higher than average unit sales volume per dealer. And so, while our dealer count has improved, a disproportionate number of those dealer additions represented relatively lower unit volume stores. As a result, our close rates fell in Q4 as compared to the first three quarters of 2015 and we were unable to generate unit growth commensurate with our growth in traffic and prospects.

That decline in close rates drove the miss in our fourth quarter versus our guidance. Recognizing that issue, we are redoubling our efforts to win back these higher unit volume stores. The trend is obvious when you break down our funnel in detail in Q4 of fiscal 2015. Our upper funnel UVs grew at 33% year-over-year. Prospects grew at 28% year-over-year, but because our close rates declined by over 10%, unit growth was more muted 12% versus the same quarter in fiscal 2014.

As we navigated the quarter, we pulled back on branded acquisition spend, as declining close rates led to increasingly inefficient unit economics on the marginal dollar spend. As a result, our units were below our forecast, we ended the quarter with a sequential decline in cost per sale, coming in at $183 per car. As Chip discussed, while the fundamentals of the business remain solid and we have healthy overall unit economics across our partner and branded channels, we have issues at the middle and bottom of our funnel which need attention. In order to restore our business to acceptable growth rates, produce healthy and growing margins and build brands, we will improve the dealer network and invest in delivering a better experience to consumers and dealers. TrueCar delivered revenue of $63.6 million in Q4 of 2015, up 15% over the fourth quarter of 2014. Transaction revenue was $59.3 million, representing year-over-year growth of 16%. For fiscal 2015, total revenue was $259.8 million, up 26% year-over-year and transaction revenue was $241.4 million for the year, up 27% from 2014.

TrueCar certified dealers transacted 183,157 units on our platform in the fourth quarter of 2015, up 12% year-over-year. Fourth quarter units in the TrueCar branded channel grew 18% year-over-year to 75,490. USAA members accounted for 59,040 fourth quarter unit sales, up 12% over 2014, while units from our other partner channels totaled approximately 48,627 units in the quarter, up 4% year-over-year.

For fiscal year 2015, total units were 750,108, an annual increase of 23%. The TrueCar's branded channel accounted for 316,865 units representing year-over-year of 35%. USAA represented 234,233 units, up 14%, and the Other Partner channel grew to 199,010 units or year-over-year of 17%.

Total monthly unique visitors reached 5.9 million in Q4 of 2015 or year-over-year growth of 33%. Traffic in the TrueCar branded channel was 4.1 million, up 45% over last year, and traffic in our USAA channel grew by 46% year-over-year. Monthly traffic in our Other Partner channel was $1.1 million for the quarter, flat year-over-year.

For fiscal year 2015, total average monthly unique visitors were 6 million, representing the year-over-year growth of 40%. As Chip said, TrueCar is the fastest growing new car marketplace in America. In the branded channel average monthly unique visitors were 4.2 million, an annual increase of 55%. USAA came in at 600,000 average monthly UVs, representing 16% year-over-year, and Other Partner registered 1.2 million unique visitors, up 13% over fiscal 2014.

In the middle of the funnel, our prospects in Q4 were 936,000, representing year-over-year growth of 28%. Prospects in the branded channel were 469,000, up 40% annually, with USAA prospects at 189,000, up 32% and all other prospects at 278,000 or 9% year-over-year growth. For fiscal year 2015, prospects totaled 3.7 million or 25% growth year-over-year. In the branded channel, prospects totaled 1.8 million representing 39% growth. USAA prospects came in at 700,000 or 12% annual growth and the Other Partner channel had 1.1 million prospects or 30% growth year-over-year.

Monetization was $324 per unit, flat sequentially. About 27% of our units sold were used cars in Q4, versus 24% in Q3, which was a new record for used volume and used share. Franchise dealer count totaled 9,094 as of December 31, up 4.5% sequentially and 7% year-over-year, while our non-franchise dealer count was 2,082, up 4% sequentially and 55% year-over-year. Transaction revenue per franchise dealer in the fourth quarter of 2015 was $6,662, up 8% from $6,156 in Q4 of 2014. Net funnel efficiency was 1.04% in the fourth quarter of 2015, roughly flat versus the prior quarter, and down year-over-year compared to 1.23% in Q4 of 2014.

Turning to expenses and margins, all of the following metrics are on a non-GAAP basis, unless they state otherwise. Gross profit for the quarter was $57.8 million, and gross margin was 90.9%. Technology and product expenses were $13.3 million or 21% of revenue in Q4 of 2015. That compares to Q4 of 2014 when tech and product expenses were $8.7 million or 15.7% of sales.

Sales and marketing expenses were $34 million or 53.4% of revenue in Q4 of 2015. That compares to Q4 of 2014 when sales and marketing expenses were $28.6 million or 51.6% of sales, and to Q3 of 2015 when we spent $43 million or 59.3% of sales. Within sales and marketing spend, customer acquisition cost for the TrueCar branded channel in the fourth quarter totaled $13.8 million with the resulting cost to acquire of $183. Additionally, we spent $10.9 million on partner revenue share, loan subvention and other partner marketing expenses. Lastly, sales and marketing head count and other costs were $9.2 million for the quarter.

General and administrative expenses were at $10.4 million for the quarter or 16.3% of revenue, compared to $9.1 million or 16.3% of revenue in Q4 of 2014. For the quarter, adjusted EBITDA was $0.2 million or 0.3% of revenue. From fiscal year 2015, adjusted EBITDA was $7.6 million or 2.9% of revenue. The primary non-cash expense items for the quarter were depreciation and amortization of $5.1 million and stock based compensation of $16.4 million, of which $10.7 million related to the departure of certain executives who left the Company late last year.

In addition, in our adjusted EBITDA calculation, we added back $400,000 of litigation cost, $3.2 million of cash severance related to executive departures and $2.2 million of real estate exit cost comprising estimated rental shortfalls from subleased properties, broker fees and exit penalties for a terminated lease. These all related to our consolidation of our Santa Monica operation from five buildings down to two.

GAAP net loss for the quarter was $27.4 million, or a net loss of $0.33 per share. Our non-GAAP net loss for the quarter was $5.2 million or a net loss of $0.06 per share and that compares to Q3 of this year when non-GAAP net loss was $2.1 million or net loss of $0.03 per share. Quickly turning to our balance sheet. As of December 31, 2015, our cash balance has totaled $112 million and we have no debt. So we remain very liquid.

Now I’d like to turn to guidance and share our outlook regarding the first quarter of 2016 and the year as a whole. During Chip’s comments, he highlighted three area of operational emphasis. Number one, bolstering our dealers, sales and support teams; number two, enhancing our products and technology organization; and number three, building a world-class internal research team. These will be the areas of primary investment in 2016.

In order to increase our close rates, we need to improve overall dealer network productivity, and that will be the major focus. We are going to add field sales professionals, including those focused on major accounts. We will make an even bigger investment in our field services and support organization, so that our dealers are better trained and supported.

At the same time, we will continue to drill down into our product performance to understand key opportunities for improving net funnel efficiency. Within our tech and product organization, that will require more developers. We also need to make upgrades to our technology to enable greater product velocity as we seek to improve our overall product experience.

With that as a backdrop, our financial guidance for the year is as follows. We are targeting 4% to 6% annual revenue growth for fiscal 2016. We are going to modulate the necessary investments in the Company, while making surgical efforts to lower our fixed cost in order to minimize negative adjusted EBITDA early in the year. For the year we are targeting breakeven adjusted EBITDA, but expect there will be volatility early as we make these key investments, especially in our dealer organizations that are so critical for long-term value creation. For the first quarter of fiscal 2016, we are guiding to units of 170,000 to 175,000 and total revenue of between $60 million and $62 million, which are approximately 2% and 4% above last year respectively. We’re targeting breakeven at the adjusted EBITDA line for Q1.

And now, I will open it up for questions.

Question-and-Answer Session


Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Douglas Anmuth from JPMorgan. Please go ahead.

Diana Kluger

Hi, this is Diana Kluger on for Doug. Just like to first talk about the investment in the field sales force and maybe what the potential impact to long-term margin is? How impactful and the size and magnitude of this type of long-term investment? And then would also just like to quickly touch on the used car growth, that was picked up pretty nicely in the quarter, if this was an intentional push to get more non-franchised dealers on and if this is something, how we should project that going forward? Thanks so much.

Chip Perry

The field sales team is an important part of our strategy to improve our relationship with dealers and the quality of the service we provide in the field. This new service and support group of people will be ramping up during the course of the year. We believe that we will do this in a methodical way, so that by the end of the year like I said, we’ll have the capacity in place to [indiscernible] in-depth, do this with each of our dealers at least once a month.

Now this is the kind of quality service that our dealers expect from a provider like us. It is -- they’re investing as much money as they are with us to the tune of being more than $2,000 a month on average. So we're very excited about how this will be received. We’ve gotten good feedback from dealers that they are hoping for it and expecting it. And it will be one of the major ways in which we signal to the dealer body of America, that TrueCar sees them as an important customer, and it’s all part of our strategy of turning around the negative perception that many of them have toward us today, as I said in my -- a few minutes ago. But regarding the shift towards used that you see, what you see happening at our TrueCar is, we serve mainly a new car shopping audience, but because we attract such a large audience, many of these folks are straddling the new and used car purchase decision.

So, what we’ve done here in the past few years is not what I call fairly traditional internet classifieds search product, that is attracting the interest of a fair number of our users. And so what -- at the present time, we are enabling consumers to find cars at the TrueCar dealer network and then they’re proceeding to go ahead and buy those cars from our dealer customers. So we’re happy to be able to serve the needs of the used car shoppers as well as new, although our primary emphasis will remain on the new car side of the industry.

Mike Guthrie

And Diana, your question about investment and margin. As we invest in the dealer organization, we honestly think that we will see improvements in close rates that will very much paid for the investments that we’re making and also I think you’ll see the savings and the need for more marketing dollars to see the top of the funnel. So at the end of the day we don’t see this is a change overall to margin structure. Just it’s really one of the areas as we said, where you’ll see a reinvestment of dollars' form one area to other areas in order to improve the efficiency and serve all of the car buyer traffic that we actually have.


Thank you. Our next question comes from the line of Deb Schwartz from Goldman Sachs. Please go ahead.

Deb Schwartz

I’ve two questions. First, just a high level. You talked about how you’re looking to refine the marketplace, how the marketplace works and you described your strategy to fix it. Have you evaluated transitioning business models, something similar to AutoTrader. And it seems like you’re not going in that direction, but what gives you confidence in this new strategy? And then I have another question after that.

Chip Perry

Sure, Debra. Thank you. So, when I came here after having spent nearly 20 years in the online automotive industry and during that time I was able to become quite familiar with all the existing models. And I had admired the TrueCar model from afar for many years. But I also saw it as one in which there were many flaws in its execution. So essentially, I saw a company that was a diamond in the rough that had unnecessarily broken a lot of China with car dealers and had dramatically underperformed financially, compared to what a company of this size should expect to produce in terms of profits and value to shareholders. So I jumped at the chance to come here for those reasons.

And so, when I look at our strategy going forward, it’s all based upon this belief that the core fundamentals of our model are very strong. We have the ability to provide a unique form of transparency to consumers. We have a unique ability to be compensated on an accountable basis when cars are sold. We have a unique set of affiliate partnerships that provide a strong flow of consumers into our marketplace, and we've got this really wonderful brand name and audience that has been the massive result of all the hard work which we’ve done here. So when I look at the Company, I see huge potential.

And when it comes to the improvements in our -- in our model, every one of them will -- will affect at the end of the day to, that funnel efficiency. So what I see is a company that -- when I came in the door and had a chance to look under the hood and work closely with the team and go out and visit with dealers, and listening to them about their perceptions of the company and our role in the industry, and what’s working and what isn’t, there's a lot of things down in the detailed, inner working of this business that can be adjusted and improved upon in a way that will enable us to be seen much more positively by dealers, and also help consumers along their purchasing journey as strongly as it has historically.

But the improvements will be touching NFE more than the top of the funnel of this business. We will continue to grow traffic at the top of the funnel. We have a strong marketing budget plan for 2016. So we’re going to continue to grow. But the emphasis would be around NFE. So when you look at the kind of indicators that we will be examining internally, and that we’ll be able to be sharing with you are as a result of improving the service we provide to dealers, and making a number of other changes in how our consumer experience and dealer tools work, we’re going to see a shift in our dealer mix that will enable us to better match supply and demand. That will immediately affect the close rates through the website. Another one will be when we put our field support people in front of dealers more often, we’ll enable them to understand, what are the best practices necessary to improve their ability to connect with the TrueCar shopper, the TrueCar buyer who is coming into their store and to close them more effectively.

And then thirdly, you heard Mike and I describe how -- the way our funnel works today, there are a very large number of new car buyers, who do not register to become prospects on our site. More than 90% of the real car buyers do not do that. So, what they’re doing essentially is receiving the really great information they desire about what other people are paying for cars and they get a sense for what the possible purchasing price of the car might be, through what’s called the TrueCar estimate. They can [indiscernible] but they don’t really have the ability to activate those -- that opportunity to work with a TrueCar dealer unless they registered. So there is a 90% fallout in our funnel. And I believe, that what we -- that’s the result honestly of a lack of obsession around conversion of people through the funnel that's existed in the company. Most companies that produce outsized financial performance and are leaders in their category, end up focusing on and obsessing on certain operational activities that produce great value for customers and they beat the competition by doing it better.

So, that kind of operational obsession around the way the funnel works has been a bit lacking here. So, we’re going to institute that. The research effort that Mike and I mentioned will become part of that. So I’m really confident that the changes we’re talking about making here in this company, will enable us to significantly improve performance. At the same time, we don’t have visibility of the impact yet of the improvements that we will be making.

I’ve been in situations where I’ve been able to stand up in front of investors in the past and talk about much faster, higher growth rates on top line and bottom line and be very confident about projecting those and delivering them. In those situations, I always had in our rear view mirror a whole set of operational metrics that we could be confident about projecting in the future arm. Here, we don’t have that in some of the areas that we’re talking about making improvements on. Why? Because they just haven’t been focused on, as much as they could be. So, those are the areas that we’re looking on and I’m very confident we will reenergize the top line of this Company, and because we’ve got really great operating leverage, the improved revenue growth will transfer and translate into nice bottom line growth over time. Does that help answer your question?

Deb Schwartz

Yes. That was really helpful. If I may just follow up on one area of that. You talked about the challenges that you’re having with yield and with close rates. And you’re clearly not seeing it as strongly -- and you need from the top of the funnel. Is it an issue of leakage where consumers are getting the value or the benefit of TrueCar and you’re just not able to get paid for it, and then I think you addressed several areas to address that, but can you go into more specifically, what you’re doing on the technology side, such that you’ll be able to properly get paid for the benefit that consumers get from TrueCar?

Chip Perry

Yes, Debra, you’ve put your finger on it. There are many car buyers, real car buyers who use us for informational purposes, but don’t proceed through our funnel experience to register and then be able to activate the information they received from dealers in a way that enabled them to lock in the savings guarantee and have a good purchasing experience at a TrueCar dealer. They just don’t proceed through, because the way our site works is today, it doesn’t message strongly enough the benefits of proceeding, and it enables folks to get a tremendous amount of information which they think they can activate, which they think is actionable. It is not as actionable nearly as it could be if they registered. So we’ll be working on testing a variety of new pathways through this funnel and messaging approaches that will, I believe, enable us to pull more real car buyers through this system. It remains to be seen how many yet. That’s why we’re not projecting improvement. We don’t have historical experience in doing it.

The reason why we're making the technology investments is that the way it was set up today, we have a number of systems that were engineered a number of years ago, and we need to rebuild them in fundamental ways in order to enable some of this testing and funnel adaptation to occur. I'd love to say that it’s all modular and plug and play and testable today. It isn’t. So that’s the work we’re doing to enable us to more rapidly make changes in the way the user experience flows on the website.

And so you’ll see those investments happen this year. You’ll start to see some important improvements in the way the funnel works and that will flow through the NSE. This is a company that, over the course of this year, you’re going to see a large number of incremental improvement in many aspects that will have a -- I believe a significant and cumulative effect on how consumers see this side of the experience related to the car-buying process, and how dealers and OEMs view it as a viable, attractive, high ROI marketing environment for them to do business in. So it’s not any one big thing. It’s a whole series of incremental improvements that when you put them all together, you end up having a really significantly positive impact on the business.


Thank you. Our next question comes from the line of Mark Mahaney from RBC. Please go ahead.

Mark Mahaney

Thanks. Let me throw out three questions, please. Chip, your thoughts on the franchise dealer account from here, do you think you are close to the right level or do you expand that -- do you think it’s the right idea to keep growing that for the next several years? Secondly, any updated thoughts on TrueTrade? How does that factor into your strategy going forwards? And then finally, third, any new thoughts on the affiliate strategy? It does -- it sounds like you're pretty happy with what you found when you got there, but could you just comment on that? Thank you.

Chip Perry

Yes. So, the franchise dealer count today represents about a third of the franchise dealers in America. We are able to enable consumers to get matched up with a good franchise dealer in most brands, in most markets. That being said, the mix of the dealers that we have in the network today, as you can tell from our performance in the second half of the year, following the loss of our relationship with automation, the mix shifted in such a way that we weren’t able to match supply and demand as well as we did in the first half of the year.

So I see ongoing evolution of our dealer body, our dealer network, but not the need for a significantly larger number of dealers, honestly. So we’re providing better service to our existing dealer body and bringing on the dealers that are important to enable us to do the matching of supply and demand will be the focus in 2016.

Regarding TrueTrade, that is a product that’s been in development here for a long-time. It’s been spoken of as a high potential revenue channel for the Company. I believe it still represents a very interesting opportunity for the future. However, it in my view is not the highest priority to focus on at this moment in time. So when I came into the company, I said there were going to be some things we would speed up, there’d be some things we slowed down, some things we would emphasize more and some things we emphasize less, as we evolve to the future.

TrueTrade is one of those very interesting products that enables consumers to -- would enable consumers to have a little more transparency and confidence around that part of the nominal transaction. I have significant experience touching this segmented product in my work, in my prior life, where we launched a product called trading marketplace that enabled consumers to get a liquid offer for a used car side and seeing [ph] redeemable at a participating dealer. So there are some critical ingredients to do this right. I believe that they’re in our grasp. So we don’t have them readily implementable today. So we’re going to be working on this. It will be done in a way, that our dealers find it very comfortable and exciting to work with, as well as consumers being able to -- consumers can get very helpful transparency in what the used car is worth. But it’s not something that we’re going to be pushing the accelerator on this year. We've been preparing a way for it, and I believe it will be a strong future opportunity for TrueCar, probably beginning next year, not this year.

Your third question about the affiliate network. Yes, I am very pleased and excited about the quality of the partnerships that TrueCar has built historically. And we’ve been very impressed with the amount of work that these partners do to build solid relationships with their members and then bring them into a car booking experience that TrueCar happens to fulfill in a cobranded way.

And so, the access to those car buyers is a very important part of the audience flow that we receive, and our dealer body really appreciates it and respects that part of the business that we bring in. And until I think it will -- we have good opportunity to continue to grow that segment, because there’s always optimization that can be pursued with our partners. And again, our technology team will be making some investments, will enable us to become more flexible and to do more different things with different partners.

So today we’re -- we live in a world where we have to tend to be fairly standardized across the partnerships. We will be more flexible in the future, that will enable us to over time, differentiate the offering that we provide through partners a bit more strongly, which I think will activate even better revenue growth with those partners in the future. Again, that won’t happen this year, but it will start to come into the picture next year as our technology investments start to bear fruit. Did that help, Mark?


Thank you. Our next question comes from the line of Dean Prissman from Morgan Stanley. Please go ahead.

Dean Prissman

So Chip, along the lines of some of the previous questions, when you look at your consumer experience today, what are some of the gaps that exist at dealer stores, which are holding conversion back?

Chip Perry

So one of the gaps that are in our consumer experience that are holding back our ability to convert them into prospects that actually do business with our partner dealers.

Dean Prissman

Yeah. And specifically -- and specifically like consumers are in the store. So, you have your account teams that are going to be focused on your dealer relationships. I’m just curious, do you see any sort of drop off in conversion based on the interaction between your dealers and the consumers there?

Chip Perry

Well, today like I said earlier, the user experience could be improved in the sense of providing more compelling reasons to register and proceed through the experience. When it comes to when people actually register and become a lead in a dealership, there is a lot we can do to help dealers successfully convert those leads better than we do today. There’s a lot of nuances in how the TrueCar system works, and the ways in which we enable dealers to interact with prospects after they have registered with us. And since we have some special office tools and communication tools that enable the dealer to touch consumers, and work those leads and convert them into sales. And so we haven’t -- that's I believe to educate the dealer body on the best practices associated with a high conversion rate.


Thank you. Our next question comes from the line of Ron Josey from JMP Securities. Please, go ahead.

Ron Josey

Great. Thanks for taking the question. Just one on dealer tools and then I'd like a quick follow-up on your guidance. On dealer tools, I think there was an emphasis coming out of 3Q to build out dealer tools to improve those prospect close rates that we spent a lot of the call talking about. And now, with the view to be more high touch with dealers which makes sense, I’m just wondering if you can provide an update on where those service tools are? Have they been implemented? Where are we in that, and how that parlays with the build out of the sales force? And then secondly Mike, I think you said -- I'd just like some more details. I think you said there might be volatility early, especially in the dealer organization. So any insights on what that meant would be helpful?

Mike Guthrie

Yes, hey Ron. What we said is there can be volatility in EBITDA earlier in the year, more so than later in the year. And the reason for that is, we have a lot of investments that we’ve targeted in terms of investments in the dealer organization and in the tech and product organizations. Those are long-term investments that we believe we need to make and we should make and they’re the best thing for the company to drive value. And so the improvements we’re going to see over the course of the year obviously are more likely to happen as the year goes on.

To the extent we make more of the investments early on and they’re not matched by some cost cutting, we could have more volatility at the EBITDA line at the front half of the year versus the back half of the year. So that’s all I was saying is you tend to front load your investments over the course of the year. And so, if your -- overall you’re targeting breakeven, you might see a little more volatility early on, as you decide to make some of these calls. Does that make sense?

Ron Josey

Yes, it definitely does.

Mike Guthrie

And then in terms of tools, so we continue to invest in dealer tools. I don’t think there is a substitution effect that says if you’re training more, you don’t want to give dealers tools and technology to improve the overall experience and help them close consumers. It is all part and parcel of arming our dealer customers with the capabilities to close the consumers that come from TrueCar and land on their dealer lot. And so those investments will continue as well as the training that Chip has been talking about, and I think this is an area in terms of a training and service that we just -- we really underinvested in. So now we need to -- we need to do a better job there.

Chip Perry

As an example also of how the tools are evolving, yes, we did have some improvements last year but they’re ongoing, and now we’re moving towards enabling dealers to do a better job of sending win based [ph] offers for example, to consumers who have registered an interest in buying car at their dealership.

And so when we\re seeing -- what we're seeing is when dealers activate those tools and provide an offer at a specific vehicle level, there’s a message to the -- personal message to the consumer about the car. That’s an example of best practice that needs to be more embedded in our dealer body, better trained in our dealer body, so that they can improve close rates. Those tools are continuing to evolve. So we’re always looking for ways to provide more and better information as part of those offers to enable the dealer to present and attract the interest of a car buyer and make sure it meets car buyer’s needs. So we’re going to continue to evolve in that area as well.


Thank you. Our next question comes from the line of Sameet Sinha from B. Riley. Please go ahead.

Sameet Sinha

Yes. Thank you very much. Chip, my first question was -- it was interesting that you said that your focus is going to be on new vehicle sales, considering your past experience with used vehicles. Can you talk about why such specificity there? Secondly, as you speak to dealers and as you try to get feedback from them on operations and execution at TrueCar, could you talk about any sort of concessions that they have asked for -- be it in terms of attribution vendors or data sharing?

Chip Perry

Sure. So, why new -- why our focus on new? The historical strength of this Company is as a marketplace that provides fantastic transparency for new car buyers in a way that enables them to be confident about the purchase when they walk in the dealership. That’s the USP -- that’s the USP of the Company, unique selling proposition. It will continue to be so.

Because we have a very large automotive audience that comes to TrueCar, 6 million a month, grew 38% last year, we're a fastest growing player in our space by far. We’re going to naturally attract a good -- a good number of used car shoppers and buyers, and people who are straddling the decision like I said. So we look at used as a potential ancillary revenue stream today, that -- and product that will meet the needs of car buyers, also meets the needs of our dealer customers as well. So -- but it’s not the centerpiece of our strategy. So we think that -- we think that it is a nice part of our business, will continue to grow very nicely.

And regarding the second part to your question. No, I haven’t heard from dealers the desire for concessions or anything like that. What they’ve told me is that they believe that TrueCar’s approach to providing transparency could be improved upon so that it reduces what they call the race to the bottom effect in the industry. That’s been a well discussed aspect of our business. And so they’ve talked about that, they’ve also talked about how some of the information on our website is sometimes confusing to car buyers. They’d like to see that improved. They’ve also raised issues with the way in which we bill them sometimes; not all the time, but sometimes. They’ve also asked for better service in the field. We’re clearly responding to that.

So the perceptions of the dealer body, I believe are what they are. We have many dealers that are very happy with us. There's a large segment of the dealer body out there who sees us as providing a strong flow of good leads into the dealership from whom they can sell cars and make money. There is also a segment of our dealers that look at us and say, well, we don’t like the way you’ve approached this business as a third party philosophically. And that’s why we’re making a major change in the philosophical orientation of the business, so that we can provide a better, stronger and more positive win-win for both sides in a very obvious clear and pleasant way.

So what I’ve learned from our dealers is that many of them have these concerns. But even with the -- even the ones that have the strongest negative perceptions had told me, we won’t forget, but we will forgive. In other words, they’ll give us a chance. And that’s what I’m seeing out there in the market. The dealers who have -- it’s not like the TrueCar hasn’t been the kind of positive player they’d like to see, among the third-party world that they work with. They’re saying okay, we will suspend judgement while you make these improvements. And so, I’m very confident that like I said, there’s this large number of incremental changes that are made in the way we do business this year. Many, many dealers will pick up their heads and say, yes, we can do business with these guys. They can help us sell cars in a profitable way. At the same time, we’re going to continue to help consumers get a fantastic level of transparency that drives confidence in their purchasing decision. So I’m very confident that we’ll be able to move the dealer body forward in a positive way this year.

Sameet Sinha

Appreciate that. Mike, one final question. Have you specified the level of ad spend in 2016?

Mike Guthrie

No, I haven’t. But we’re basically targeting pretty modest growth over -- if you’re talking about just the TrueCar branded channel, we’re talking about pretty modest growth over last year. So 2015, this whole number was $62.5 million and I think we’ll be in the $65 million range in 2016.


Thank you. Our next question comes from the line of Kyle Evans from Stephens. Please go ahead.

Chip Perry

Hi. It’s Tommy [ph] in for Kyle. Thanks for taking our questions. One just to follow up on consumer ad spend for the year. Should we think about that in roughly equal amounts across the quarters, or do you anticipate any different strategy around the election season in the back half of the year? And then, my second question, could you give us a quick update on the CNCDA lawsuit? Thanks.

Mike Guthrie

Sure. I’ll take the ad spend and then John Stevenson is here and he will talk about CNCDA and any other legal questions that you have. So spend is not equal across the quarters. We tend to spend more in Q2 and Q3, just due to seasonality of car buying and we have fairly similarly pattern, as we had last year.

So it will run very much in parallel with the way we did it last year. So last year, just as a reminder, we've seen $13.5 million on branded spend in the first quarter, $17.7 million in second quarter, $17.5 million in the third quarter and $13.8 million in the fourth quarter. That was $62.5 million. Right now we’ve got a model at about $65 million of spend and the way that is spread across the quarters will be very, very similar to what you saw in fiscal 2015.

John Stevenson

Okay. And on the CNCDA litigation, in early January, the trial judge dismissed that case in its entirety. That would then be the second time that case was dismissed, since it was originally filed back in early 2015. The judge did however grant the CNCDA leave to file an amended complaint, which is not unusual and they refilled their amended complaint in early part of this year. We have moved to dismiss that compliant and we now have a hearing on our motion to dismiss that is set for March 23.

So there will be a hearing. It will be the second time we had a hearing on a motion to dismiss before this judge on those claims. The last time, we had a hearing, the judge dismissed them, allowed them to amend. And so we’ll be back before her in March and will seek dismissal fully and finally of the claims. We continue to believe those claims are meritless and we remain optimistic about the outcome, but that’s where we are procedurally.


Thank you. Our next question comes from the line of John Blackledge from Cowen. Please go ahead.

John Blackledge

Great. Thanks for the total questions. Can you just remind us again, the function of the internal research team? Second question is how many field sales people do you expect to add over the course of the year? And then the third question is how do you revise growth and kind of like the other affinity channel? I think it grew like plus 4% -- units grew plus 4% year-over-year in 4Q? Thank you.

Chip Perry

You bet, John. As far as our research is concerned, we’re going to be adding a team that will enable us to have the capability to deeply understand how consumers perceive TrueCar and the competition at all aspects and all phases of their shopping and purchasing process. And that team will work through a variety of tools and mechanisms including online surveys, focus groups, quantitative online surveys, phone surveys, talking to people who use TrueCar, people who don’t use TrueCar, people use the competition. We'll also be using this team to help us research on an ongoing basis, the important pain points and unmet needs the consumers are experiencing in the car buying process. And I very much believe that we’re in a space that there are a lot of large companies operating today, including TrueCar, called the third party space and they’ve evolved over the last 20 years or so. Most of those companies are rooted in value propositions and basic business models that were pioneered in the late 1990, have been evolved only incrementally since then. So there is a lot of room to still improve for consumers how they shop for cars and a lot of purchase cars, a lot of room to improve manufacturers and dealers, the efficiency of their marketing effort as a catalyst in our industry.

So in order to prioritize the best opportunity, it’s important that we reach outside our four walls and talk to a lot of people and get a lot of objective information and insight. So that’s not been the core strength of this company historically. We’re going to build that muscle here. I’m very excited about that.

Regarding the number of sales reps, I don’t want to talk about a specific number yet. But like I did say, we will by the end of the year have the capability to have an interesting consultative, high quality conversation, service call with each of our franchise dealer customers in person once a month. So you can kind of do the math on what that will take. We’re still planning the details of how that will work, but we’ve got the money budgeted in our plan and over the course of the year, we can advise you later on exactly the number of people we’re putting in the market. I don’t think it’s advisable for me to say the exact the number right now.

Mike Guthrie

And John on the other partner channels, because we talked about before over the last maybe quarter, so we have new leadership with just sort of old leadership back on the partner side with Bernie Brenner, who is one of the founders of the Company and he has been doing a good job, reigniting growth throughout the partner channel, better calling in coverage and I think certain number of partners that maybe lost a little bit of altitude with us over the last couple of quarters and months -- I’m sorry last couple of quarters and years. He is doing a good job with the team, reinvigorating the engagement around those. So I think that’s actually the primarily a way that we’ll reignite growth in the other partner channel. The second one is, obviously when we add new partners and the biggest new add last year was Sam’s Club. So for most of the quarters in 2016, really for all of the quarters in 2016 are pretty favorable compares for Sam’s Club in particular. So that should drive some incremental growth in that channel overall in 2016.


Thank you. Ladies and gentlemen, there are no further questions in queue at this time. And this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!