TrueCar (TRUE) CEO Chip Perry on Q2 2016 Results - Earnings Call Transcript

| About: TrueCar, Inc (TRUE)

TrueCar, Inc. (NASDAQ:TRUE)

Q2 2016 Results Earnings Conference Call

August 4, 2016, 04:30 PM ET

Executives

Alison Sternberg - Vice President, Investor Relations and Communications

Chip Perry - President and Chief Executive Officer

Michael Guthrie - Chief Financial Officer

Analysts

John Blackledge - Cowen & Co.

Kyle Evans - Stephens

Ronald Josey - JMP Securities

Sameet Sinha - B. Riley

Blake Harper - Loop Capital

Operator

Greetings and welcome to the TrueCar second quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. And interactive question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

And I’ll turn the conference over to your host, Alison Sternberg. Thank you. You may begin.

Alison Sternberg

Thank you, operator. Hello and welcome to TrueCar second quarter 2016 earnings conference call. Joining me today are Chip Perry, President and Chief Executive Officer, and Michael 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 2016; management’s beliefs and expectations as to future events, plans and strategies; our ability to improve our relationship with, and perception among, dealers; changes to our product offering; planned advertising expenditures; the outcome of outstanding litigation; the entry into new affinity partnerships; the anticipated seasonality of our business; and the effect of operational initiatives, including investments intended to improve conversion and close rates; net funnel efficiency; our technology infrastructure; internal research; the productivity and coverage of our dealer network; dealer training and service; and the core experience for consumers and dealers. Forward-looking statements are not and should not be relied upon as guarantees of future performance or results.

Actual results could differ materially from those contemplated by our forward-looking statements. We caution you to review the risk factors section of our annual report on Form 10-K for 2015 and our subsequent quarterly report on the Form 10-Q filed with the Securities and Exchange Commission and our quarterly report for the quarter ended June 30, 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 our non-GAAP measures to the most directly comparable GAAP measures are set forth in the Investor Relations section of our Web site at true.com. And 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. I’m pleased to say that the turnaround at TrueCar that started back in December when I joined the company is starting to show signs of gaining traction. We’ve made some great progress this past quarter. We hit the milestones we set for ourselves in Q2 and we have a solid plan for improvement for the rest of the year.

At the halfway point of the year, we’ve exceeded our revenue expectations while making important investments across the company and generating significantly more adjusted EBITDA than we estimated. We’re operating better. And we still have a lot more work to do, but I'm very pleased with the progress so far.

Before I share some of our specific results, let me remind everyone of the big picture changes we are making. Shortly after I joined TrueCar, we launched a companywide effort focused on four key areas. The first is reinventing the way we do business in order to repair our relationships with our dealers and OEM clients. The second is reaccelerating our revenue growth. The third is strengthening our affinity partnership. And the fourth is positioning the company to become the clear category leader among third-party automotive sites.

To do these things, we developed a new operating plan with a clear focus on these four major priorities and we are now funding a targeted series of investments in our people, our product, and our technology infrastructure, all aimed at enabling TrueCar to operate a more well-balanced and efficiently managed digital marketplace that creates a strong win-win for both consumers and car dealers.

Our first major priority this year has been fixing the issues that had alienated many car dealers the past. We did this by launching a publicly transparent Dealer Pledge in late March to comprehensively address the concerns we had been receiving from our dealer customers.

To implement our pledge, we made some important changes on our Web site that enhanced its value for both consumers and dealers. We revised our policies on the retention of consumer data. We began hiring more field-based service people to help our dealers better use our tools and improve their close rates on the introductions we send them.

We rolled out an optional dealer subscription model in Georgia with the intention of going nationwide with this approach by year-end. And we removed messaging from our consumer advertising that cast dealers in a negative light.

We will soon release a mid-year progress report to dealers on our pledge that summarizes our work so far and outlined some additional improvements that we will be making in the second half of the year based on ongoing dealer input.

So far, the feedback we received from dealers about our pledge has been very positive. I believe the best measure of our progress is shown on our total dealer count, which, at the end of the second quarter, hit an all-time high of 12,669 franchise and independent dealers.

On the franchise side, in Q2, we added 854 net new dealers, our most productive quarter ever in terms of franchise dealer additions. To put that into context, the prior record for net quarterly add was 607 in Q1 of 2015. We ended the quarter with 10,135 franchise dealers and this is the first time we’ve ever crested the 10,000 dealer mark.

The highlight for us in Q2 was the rapprochement that we accomplished with AutoNation, the largest dealer group in America. As you know, a bitter dispute caused them to pull all their nearly 300 stores at the time off TrueCar in July of last year. After listening closely to their concerns and implementing our Dealer Pledge, they began a pilot experiment in late April by placing 55 of their stores back on the TrueCar network.

Since then, and after making operational improvements designed to tune-up how their inventory appears on TrueCar and also providing intensive store-level training and support, AutoNation has significantly increased its presence on our site. Just last week, AutoNation’s CEO, Mike Jackson, publicly stated that AutoNation will expand the pilot in the third quarter. And subject to another review, his expectation is that by the end of the year, TrueCar will be implemented in all AutoNation stores.

This turnaround is very gratifying and we very much appreciate the support that AutoNation and hundreds of other dealers are now giving TrueCar as a result of the changes we made in our Dealer Pledge.

That being said, we fully understand that despite the recent improvements in dealer count and the return of AutoNation, the sentiment among many dealers is still negative to neutral toward TrueCar, which means that we have a lot of work to do.

There’s definitely a flywheel effect at work here. It takes quite a while for our positive changes to break through the clutter of the dealer retail environment and change opinions across the dealer body. Many of these negative opinions are quite deeply historically rooted.

More specifically, our new research team recently completed a dealer customer satisfaction survey, which shows that, despite of our best efforts, awareness of the pledge is by no means universal. And although dealer satisfaction is trending positively, we’re not yet where we wanted to be. These findings show that our dealer relations are still very much in the recovery stage, but I'm confident that the substantive changes we're making over time will continue to have a measurable, positive impact on overall dealer customer satisfaction.

In addition to our strong franchise dealer number, in the second quarter, I'm pleased to say, we added net 213 independent dealers which brought our independent dealer count to 2,534. This represents a 41% increase in our independent dealer body over Q2 of last year and the surge in independent dealers contributed to the rapid growth on the used car side of the business, which Mike will elaborate on more later.

While I'm talking about our dealers, I want to say we made some fantastic hires within our dealer sales and service team in Q2. We continue to be a magnet for top talent, and that’s shown by the addition of five senior people with significant leadership experience with other third-party sites.

Paul Edmonds, a long-time veteran sales leader at Autotrader.com joined TrueCar as Senior VP of Dealer Marketing Operations. Jason Groesser, also an Autotrader.com alum, is now a Senior Director of Client Insight. Giovanna Scognamiglio is a long-time veteran of Edmunds and CarsDirect is now our Senior Director of Dealer Services. And Chris William, who was a key trainer for many years at Autotrader.com, is now our Director of Sales Training. Finally, Sally Lauren, who is a former Autotrader.com sales person of the year, the top producer among their 800 field reps, has joined the strategic accounts team at TrueCar.

As you can see, we are really beefing up our dealer team with top talent from around our industry. In addition to these new leaders, since April, we’ve hired just over a third of the 100 new field-based dealer service people that we announced as part of our dealer pledge. Based on the changes we’re making at TrueCar and the improved protections of dealers, we’re very pleased about the quality of the candidates we’re seeing for our growing sales and service teams.

Our second major priority this year is to reaccelerate our revenue growth, which, as you know, has flattened out over the past year following several years of very strong growth.

The best lever we have for growing revenue is improving the yield or the net funnel efficiency to our user experience funnel, which has been hovering at about 1% since late 2014. We are continuing to nicely grow our audience at a double-digit rate even though we have reduced our marketing spending year-over-year. But it’s very clear that moving the NFE needle is the key to our future unit and revenue growth.

Our Dealer Pledge is helping us with NFE in two ways – by attracting key dealers in local markets that allow us to better match demand and supply within our marketplace and by enabling dealers to improve their close rate to stronger local in-store support with our new best practically-driven training module. In fact, at dealerships where we’ve had the opportunity to train and provide better in-store support, our dealer customers have seen very nice results with significant close rate improvement.

The other big thing we’re working on reaccelerate our revenue growth is to pull more real car buyers through our experience, so they can become fully registered in our system and thereby eligible for all the benefits of TrueCar.

As we’ve explained on prior earnings calls, since late 2014, only about 5% of the unique visitors who use TrueCar give us their name, address, phone number, becoming fully registered users which we call prospects. This static performance in conversion rate to prospect really stood out to me when I joined the company. And now, as a team, we’ve identified it as one of our major improvement levers.

In January, we launched for the first time on-site surveys of users to learn about their views of our site and the benefits of registration. We continued this research in the second quarter with a series of focus groups across the country, most of which I attended. This research has clearly shown that many consumers don’t understand very well the benefits of fully registering on TrueCar and releasing their contact information to local dealers who can sell them the car they want to buy.

Rather than seeing TrueCar as a live digital marketplace to which they can transparently view what other people pay for the car they want to purchase and then receive transparent upfront pricing on the car they want as well as live upfront pricing on all the inventory available at local TrueCar dealers, many people see TrueCar just as a pricing information tool that gives them all the data they need without registering on our system.

Our research has helped us identify several new ways of communicating our value proposition to consumers and we've just begun a series of AB tests of new user experience treatment that will run for the next few months. As I suggested back in April, these upcoming tests will give us the insights we need to enhance our user experience in ways that will encourage more real car buyers to become fully registered users. When that happens, our conversion rate to prospects will rise. And when combined with the dealer-driven close rate enhancements that I described earlier, we should start to see some nice improvement in overall net funnel efficiency.

There are still a lot of moving pieces, but the trends we now see are positive. We’re just starting to understand how these improvements will manifest in our financial results. And Mike will provide some color on this in his section of the call.

Very importantly, in parallel, with our user experience testing, we’re continuing to invest in on our major re-platforming project which we call Capsella. While this project is moving forward, we are freezing some aspects of our user experience at different times to enable the code in different parts of our site and infrastructure to be rewritten without the intrusion of changes in the front-end experience that consumers on the various versions of the main TrueCar site and in our hosted partner sites. We can continue our testing work while Capsella is proceeding, but the speed of our testing is being affected by the Capsella project.

This is a huge project for TrueCar. And it is proceeding very well in terms of milestone delivery and cost relative to budget. When the Capsella project is fully complete in mid-2017, we believe we’ll be able to modify our front-end user experiences and back-end tools and databases much more quickly and efficiently.

Our third major priority for 2016 is to strengthen our network of affinity partnership which is clearly a unique differentiator among all the major third-party sites in the automotive industry. Currently, our affinity partners are driving approximately 30% of our unique visitors, 50% of our prospects and 60% of our unit sales.

USAA is our largest and most important affinity partner and they drive one-third of all our units. We’re excited to be a major partner of USAA. They have an incredibly strong franchise with members of our Armed Forces and their family and they place a very high corporate priority on the auto experience for their members. We have seen improved growth with USAA this year and we're working with their large and dedicated auto experience in San Antonio where we're collaborating on new services and marketing program to USAA members.

Another big partner we’re seeing good growth from this year is Sam’s Club, which is starting to promote our white label car buying service more aggressively to its member base of almost 50 million people. In addition to strong unit sales, Sam’s Club members are taking advantage of targeted incentive offers from our OEM partners and our monthly revenue from the Sam’s Club platform has increased over four times since the start of this year. We’re also working on significant new affinity partnerships, which we expect to announce in the back half of this year.

The fourth major priority for this year is to position TrueCar for much more rapid growth in 2017 and beyond by securing the market leadership position among the major third-party sites that serve consumers, dealers and OEM.

As I said on my first earnings call in February, I believe TrueCar’s business model has the potential to do great things in our industry because today's consumers are demanding evermore transparence in their car shopping and purchasing experiences and many progressive dealers are moving aggressively to meet their need. I believe our transparency-oriented platform, together with our affinity partners and our accountable pay-per-sale revenue model will enable TrueCar to out-innovate our competitors over the next three years by meeting both consumer and dealer needs better and faster. We’re still in the early stages of identifying all the changes we’ll need to make to assert market leadership.

To help in this effort, this year, we began building a strong internal research team, which is being led by Art Olacek [ph] who, for many years, was one of the top research professionals at Autotrader.com and Equifax. Art is now working closely with our product and sales teams to help them develop our next generation of user experiences and dealer training program. We’ll have more to report on these developments later this year.

As part of our overall turnaround program at TrueCar, we’re continuing to defend some lawsuits that were filed against us before I joined the company. Among these is a case filed by the California New Car Dealers Association or the CNCDA that alleges we are operating as an unlicensed auto broker in California, among other things. We believe that the CNCDA’s claims have no merit on either a legal or a common sense basis.

The case was filed over a year ago and so far the court has not heard arguments or ruled on the merits of the claim. The court has dismissed part of the case and has recently permitted the rest of the case to go forward to the discovery phase, which simply means that the parties will now provide factual information to each other about their claims and defenses. We respectfully believe the court’s decision to allow part of the case to go forward is legally incorrect and we will be filing a petition seeking to appeal that decision to the California Court of Appeal. Again, the only issue decided so far is purely procedural and there have been no consideration of the substance of the CNCDA claim, which we believe lack merit. We will vigorously defend this case and we expect to be fully vindicated.

In the meantime, we’re very proud to say that nearly half of the franchise dealers in California are active members of the TrueCar network.

Now that I’ve provided this review of the company's high level strategy and progress against key priorities, I'd like to turn the mic over to Mike Guthrie who will walk you through the highlights of our financial performance in the second quarter and our guidance for the rest of the year.

Michael Guthrie

Thanks, Chip. And good afternoon, everyone. In the second quarter, we continued to make progress against our turnaround plan and we exceeded guidance on our key financial and operational metrics. As Chip referenced, we had record dealer growth in Q2.

Transaction revenue per franchise dealer grew about 2% sequentially, which helped us exceed our revenue guidance. However, revenue per franchise dealer is still substantially lower than in prior quarters, so we know there is significant upside.

New dealers on our platform typically have a ramp up time to sales and all dealers tend to perform better once we’re able to get our teams on-site for training and so we will continue to hire dealer support and training personnel as fast as we can in order to improve close rate and continue growing revenue per dealer.

On the cost side, even though we’ve made substantial investments across the company, we're spending more efficiently. And that has enabled us to generate significantly more adjusted EBITDA in the second quarter. In each of the next two quarters, this focused, disciplined approach to spend should enable us to remain comfortably ahead of our earlier adjusted EBITDA guidance of breakeven.

In the second quarter of fiscal 2016, revenue totaled $66.4 million, above the high-end of our $64 million to $66 million revenue guidance. Units were 192,531, also about the high-end of our 185,000 to 190,000 unit guidance. Units and revenue were each up between 1% to 2% from Q2 of 2015.

Adjusted EBITDA for the quarter was $2.4 million, beating our guidance of a loss of between $2 million and $3 million and up significantly over adjusted EBITDA of $0.5 million in Q2 of 2015.

Now let me bridge the approximately $# million positive delta between our earlier adjusted EBITDA guidance and what we reported. In addition to the small revenues beat, we had the following expense related items. First, we had a $1.2 million positive variance versus guidance on headcount-related costs. The majority of this reflected hiring, mostly related to our dealer service organization where we clearly had over-budgeted. We're seeing real momentum in our recruiting efforts in this area and expect we will be able to hit our target of hiring 100 field service personnel by the end of the year.

In addition, as we had referenced on our last call, we took the opportunity to reduce our fixed cost by restructuring certain parts of our organization. As a result, headcount costs are essentially flat sequentially in Q2.

Second, we spent $2.2 million less than embedded in our guidance on outsourced services. The primary savings here were related to technology expenses on our re-platforming project where we had forecasted more aggressive use of outside consultants, but decided to get more of the work done by our internal team.

Third, our branded media spend was $1.3 million under guidance. We did not see meaningful closure improvements from growth in the dealer network until later in the quarter. As a result, we did not think we would see adequate incremental return from marginal marketing dollars. The third quarter is typically seasonally stronger than Q2. And that, combined with the fact that we are seeing signs of improvement in the dealer network and anticipate further closure improvements, will warrant more aggressive spend sequentially in Q3. More on that later.

Turning to our key operating metrics, monthly unique visitors were 6.7 million in Q2 of 2016, up 12% overall compared to Q2 of last year. Prospects exceeded $1 million for the quarter for only the second time in the company’s history and grew year-over-year by 14%.

Units of 192,531 were up 1% year-over-year as an approximately 10% year-over-year decline in new units was offset by over 40% year-over-year growth in our used business. However, we expect new car unit growth to resume by Q4 and we expect our used business to continue to grow in part due to the anticipated release of our first-ever used car TV creative during the third quarter.

As we predicted on our last call, close rates did, in fact, increase sequentially from 18.4% in Q1 to 19% in Q2. With the large influx of dealers and our focused effort to train, we think the stage is set for more significant close rate improvements throughout the back half of the year. The new use mix in Q2 was 70% new, 30% used. This compares to Q2 of 2015 where the new use mix was 79% new, 21% used.

Monetization in the second quarter was $321 per unit, which was up 1% year-over-year and down 2% sequentially. Net funnel efficiency was 0.96% in the second quarter of 2016, a 10% improvement sequentially over Q1 of this year when NFE was 0.87%.

TrueCar acquisition spend was $14.2 million for the quarter, down 20% compared to $17.7 million a year ago. Cost per sale was 17% lower at $180, reflecting healthy unit economics.

Due to favorable seasonality, the ongoing growth in the dealer network and anticipated continued NFE improvements, we expect to grow TrueCar acquisition spend by 20% sequentially to $17 million in Q3.

Turning to the expenses and margins, all of the following financial metrics are on a non-GAAP basis unless I state otherwise. Gross profit for the quarter was $60.3 million and gross margin was 90.8%. Technology and product expenses were $12 million or 18% of revenue in Q2 of 2016. That compares to Q2 of 2015 when tech and product expenses were $9.8 million or 14.9% of sales.

The year-over-year growth in expenses is related to investments in our product and technology team that began in Q2 of last year and incremental investments related to our re-platforming project, partially offset by headcount-related savings as a result of our restructuring we concluded during the quarter.

Sales and marketing expenses were $35.9 million or 54% of revenue in Q2 of 2016. That compares to Q2 of 2015 when sales and marketing expenses were $39.6 million or 60.6% of sales. Of the $3.7 million decline in sales and marketing expenses, customer acquisition costs for the TrueCar branded channel accounted for the vast majority.

The balance of the sales and marketing expenses in the quarter were partner revenue share and other partner marketing expenses totaling $10.7 million and sales and marketing headcount and other costs which were $11 million for the quarter.

General and administrative spend was flat year-over-year with expenses totaling $10 million for the quarter or 15.1% of revenue compared to $9.8 million or 14.9% of revenue in Q2 of 2015. For the second quarter of 2016, adjusted EBITDA was $2.4 million or 3.7% of revenue, which compares favorably to $0.5 million or 0.7% of revenue in Q2 of last year.

The primary non-cash expense item for the quarter were depreciation and amortization of $5.9 million and stock-based compensation of $5.9 million. I want to note that our stock-based compensation is down $3.3 million or 36% compared to Q2 of last year.

In our adjusted EBITDA calculation, we also added back $2.7 million in additional lease termination costs associated with the consolidation of our offices in Santa Monica, which took place in the fourth quarter of last year. This charge represents additional estimated losses from sub-leasing properties as the local real estate market has softened.

In an otherwise strong financial quarter, the overhang from real estate remains a frustrating issue that reflects softness in the local market today. We have hired new real estate advisors and feel comfortable that we have a better approach to subleasing our excess space. We also have a dedicated internal team that is focusing on optimizing our real management going forward.

Finally, we also added back $1.8 million in severance charges related primarily to the reorganization and we added back $150,000 of litigation costs.

GAAP net loss for the quarter was $14.7 million or a net loss of $0.17 per share as compared to GAAP net loss of $14.7 million or a net loss of $0.18 per share in Q2 of last year. Our non-GAAP net loss for the quarter was $4.1 million or a non-GAAP net loss of $0.05 per share and that compares to Q2 of last year when our non-GAAP net loss was $3.8 million or a non-GAAP net loss of $0.05 per share.

Quickly turning to our balance sheet, as of June 30, 2016, our cash balances totaled $103 million and we have no outstandings on our $30 million line of credit. We remain in a very strong liquidity position.

Now, let’s turn to guidance and share our outlook regarding the third quarter of 2016 and the year as a whole. When we first modeled fiscal year 2016 and in all of the subsequent modeling that we've done in preparation for giving guidance each quarter, we have assumed that Q3 would present a difficult year-over-year revenue growth comparison because we had a large targeted OEM incentive trial of approximately $2 million in 2015 that will not be in our numbers this year. I think we all talked about that during the last quarterly call.

In our modeling, we also assume that Q4, which presents a more favorable comparison, will be our best year-over-year growth quarter. And in both quarters, we also assumed overall operating improvement based on things like the Dealer Pledge and certain planned product enhancements and that as we move later into the year those factors will have more time to take hold and affect the results positively.

Those trends seem to be playing out. Throughout this year, we've been guiding to 4% to 6% revenue growth and breakeven EBITDA for fiscal year 2016. That implies a $270 million topline and about 780,000 units with zero adjusted EBITDA.

Through the first half of the year, we have generated $128.3 million of revenue on 367,515 units or about 2.5% to 3.5% year-over-year growth on the top line metric. And we generated $3.5 million of adjusted EBITDA, well in excess of our breakeven guidance.

For Q3, we now believe that units will come within a range of 200,000 to 205,000 and total revenue will be between $70 million and $72 million with $1 million to $1.5 million of adjusted EBITDA. A quick subtraction tells you that those results are basically half of what we need to hit our fiscal 2016 guidance.

Now, normally, Q4, due to seasonality is in the range of 5% lower on units and revenue than Q3. However, as we catalog the positives in our business and their potential impacts, significantly more dealers, close rates reacting positively to dealer training and support, the possible return of all of the AutoNation stores by the end of the year, product improvements that are rolling out in Q3 and relative strength in our targeted incentives and independent dealer businesses, we believe we will grow through the seasonality to hit our previous guidance.

In summary, we are maintaining topline guidance of 780,000 units and $270 million of revenue and increasing our adjusted EBITDA expectation to $5 million to $6 million for the year.

And now, I will open it up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from John Blackledge from Cowen & Co. Please go ahead.

John Blackledge

That is great. Thanks for the questions. Chip, could you just talk about some of the key drivers of the strength and the growth in the dealer network this quarter? And also, if you could provide some more details on the AutoNation trial. I know they were positive last week and you mentioned it earlier in the call, but any further details would be great. Thank you.

Chip Perry

Thank you, John. Chip Perry here. So I would say that the main driver of the improved dealer count numbers we reported in the second quarter is the effect of the Dealer Pledge we made toward the end of the first quarter. We launched it at NADA at the end of March. It hit with strength, full force in April. And through that effort, we’ve made a number of changes that are designed to make, like I said, TrueCar has a stronger balance, a better win-win between consumers and dealers, and specifically addressed a number of concerns the dealers have been making to us over the past few years, are concerns around how do we affect the profitability to how our website works and how we handle consumer data and our subscription billing or not subscription billing policies as well as our advertising. So we made a raft of changes. And as a result of that, and more importantly, as part of it, we began hiring of a much larger field service team. The field service team is starting now to touch dealers in a much more significant way that we have been able to before.

So the combination of the pledge plus better service in the field has enabled us to attract many more dealers to the network. Like I said earlier, it’s gratifying to see that. And at the same time, we recognize we still had many challenges based upon the past perceptions that dealers have had of TrueCar. And those perceptions live today and they change slowly. So by no means are we out of the woods, but we are very pleased to see the progress and the way in which dealers have responded in positive ways.

I think you heard me say that the dealers have long memories and now they won’t forget, but they still forgive a vendor that is doing positive things [indiscernible] responding to their concerns. So that’s great to see.

And with respect to AutoNation, they have, like I said in our call here, they have increased their presence. We’re not saying exactly how many stores they have on the system, but it’s good to see Mike Jackson in his earnings call last week say that things continue to go well, that they hope to have all their stores back on our site over the coming two quarters. So what we’ve done there is work really hard to TrueCar work for them. We put in place very significant service effort, working with the individual stores, TrueCar's tools and user experience changed quite a bit. I think they left last July, so we had to retrain their people. They are very receptive to our input and we've seen them engage very well, very strongly. And they’re starting to see the goals that they have set for themselves in the pilot be achieved, so that’s why they are encouraged to go further. So really it’s just a been just a matter of good old fashioned hard work applied with them, and their cooperation that has enabled us to out and make that announcement today, which is a fairly significant watershed for our company.

John Blackledge

That’s great. Thank you, Chip.

Operator

Our next question comes from Kyle Evans from Stephens. Please go ahead.

Kyle Evans

Hi. Thanks. Great work on the dealership count. Chip, under prior management, the 30% of dealerships kind of used to be the upper limit of what was perceived to be optimal on dealership count. I always thought it was around an arbitrary sounding number. What are your thoughts on total dealership count over the long run? And I have some follow-up questions. Thanks.

Chip Perry

Sure. At this stage of the game, we still want to add dealers across America. We have some places in our network that the coverage is not what we would like it to be, in some brands and in some cities. And like I said, there are many dealers who still have negative opinions toward our company that we need to overcome. So we have a lot of work to do. At this stage, we’re not really focusing on what the ceiling should be or could be. There is a lot of work to do just to strengthen the network as it is. If we grow another quarter or two like this, that will be terrific. We’re not really focused on trying to pick an optimum size of the dealer network at this point.

Kyle Evans

Okay, thanks. On the used cars where new versus used at 70 and 30 and I believe I heard you say you're going to roll out creative on the used side. Any kind of long-term strategic vision that you could share with us on where used fits? I have always found it odd that you had 30% of your units on used and not one single bit of creative on that front. Just could you help us think about that going forward?

Chip Perry

Sure. Among all those major third party sites, there is a mix of new and used ratio of audience. So we tend to skew very heavily toward new. Other major sites skew heavily toward used. But when you’re a major site, you’re going to track a lot of used car buyers no matter what. So we’re excited to be able to introduce people who want to buy used cars to the franchise and the independent dealers who are on our network. And, today, we’ve had a fairly, what I would call, industry parity shopping experience. We’ve done well with it. We also have some affiliate partner relationship, the insurance companies particularly, and mostly importantly USAA where members who have total losses are going to the portal – the member portal and then get introduced to used car shopping at TrueCar. So that has been an important driver of our business. And I would say also that we’ve seen good growth in natural search on the used car side of the business.

Going forward, I believe you would be able to inject into our used car shopping experience, just to help with our dealers and to earn a deep collaboration with our dealers, significantly greater transparency in the used car shopping and purchasing process. That is really the governing idea behind TrueCar right now, is helponig consumers meet their needs for transparency and shopping and purchasing that they like, that they desire and enabling dealers to meet those needs through our third-party experience. And we believe we can apply that principle in a more significant way on used car side. We can’t really say specifically how that’s going to work yet, but that’s on the drawing board at this point.

Kyle Evans

Great. One last one. I believe Mike mentioned new products rolling out in 3Q that would help drive sequential growth in 4Q. I was wondering if you could give us a quick review of those products?

Chip Perry

So what we’re doing right now is testing new user experience treatments on TrueCar. You can’t really see it very much if you just go to the Web site because it’s happening on desktop, it’s happening in mobile at different times of the day, in different markets around the country. But we’re testing new treatment that are providing much more compelling benefit messaging around the reasons why consumers proceed all the way to the TrueCar experience. That’s the product improvement work that we’re doing right now. We believe that – like I said, that will point us in the direction of finding ways to pull more real car buyers through. We have had a fairly static performance funnel, 5% conversion rate from unique visitor to prospect, roughly 20% from prospect to unit sales, overall 1%. It’s been flat. And the user experience is a new reason for that. And that’s why we’re working on that very intensively and I'm encouraged that the research that we’ve done has helped us uncover some very interesting new ways to message how to TrueCar really benefits consumers. And that’s what we’re working on here. So, hopefully, a good time next quarter, we’ll have all the report on that.

Kyle Evans

Great, thank you, Chip.

Operator

Our next question comes from Douglas Anmuth from J.P. Morgan. Please go ahead.

Unidentified Analyst

Hi. This is Lena Riduchowski [ph] on for Doug. Can you just talk a little bit more about the pricing on the subscription model and just more color around how many dealers have expressed interest and would it be kind of a one-size-fits-all plan that's the same for everyone or would there be different levels of service? Thanks.

Chip Perry

Sure. Did you say Lena?

Unidentified Analyst

Yeah. Lena.

Chip Perry

Hi, Lena. So in the subscription pricing – that’s the recently rolled out. It’s in the State of Georgia. And so Georgia is technically what we call a pay-per-sale state. But we rolled out subscription pricing with – we still have sales data. So we know what the units look like. And so, the pricing still reflects an accountable marketing model. We had about just under 10% adoption in the State of Georgia and we’re going to roll it out statewide – around the country. And we don’t know how many dealers will actually take it. So, in George, so far about 90% of the dealers have stayed on pay-per-sale. But across our entire business, our subscription business basically monetizes at the same rate as our pay-per-sale business does. And so, there’s really no meaningful difference in pricing.

Unidentified Analyst

Thanks.

Operator

Our next question comes from Ronald Josey from JMP Securities. Please go ahead.

Unidentified Analyst

Hi guys. This is Andrew Boon [ph] on for Ron. I just had a question on the dealer fee to consultants. Can you guys provide an update here in terms of a number? And then for the dealers that are already seeing these consultants, have there been any uplift in terms of conversion, any early wins that you can share would be helpful. Thank you.

Chip Perry

Hi, Andrew. It’s Chip Perry here. So, yes, like I said, we have about a third of the 100 or so field service consultant. We call them client success managers. We’ve already hired them. They’re up and running. They’re getting trained and they’re interacting with dealers today. And we’ve also developed what we call best practices driven training module which enables dealers to understand the best practices that are being perceived by dealers who achieve much higher than average close rates on our system and enabling our dealers to benefit from that insight all across our network. The roll out of that training is really, obviously, just beginning. We’re only a third of the way through the hiring. But we have built some nice successes at the local dealer level when the training modules are employed and implemented and embraced by the local dealers.

And what was the second part of the question again?

Unidentified Analyst

You basically got it. Okay. If I can sneak one more in…

Chip Perry

Sure thing.

Doug Anmuth

Prospects were up 14% and units sold were up 1%. Can you guys just kind of help me – help explain the delta between the two? What you guys are seeing there? Thank you.

Michael Guthrie

It’s close rate. Since last year, the close rate has come down on a year-over-year basis. So we were up sequentially, but we’re still running a couple of hundred basis points lower than we were at this time last year. So that’s why you see the difference in units not growing as quickly.

Chip Perry

That’s a phenomenon, a pattern you’re seeing from us the last few quarters where unique visitors were growing faster and prospects growing faster than unit sales. And that was really being caused by the erosion in the close rate, as Mike said, which was the result of the retooling of our network that happened in the second half of last year, carried through the first quarter and the second quarter because we really didn’t announce the pledge under the end of the first quarter and it gathered momentum through the second quarter. So it really hasn’t had its effect yet in terms of being able to truly impact close rate in our business.

Unidentified Analyst

Thanks, guy. Appreciate the color.

Operator

Our next question comes from Sameet Sinha from B. Riley. Please go ahead.

Sameet Sinha

Yes. Thank you very much. I had a question. For the third quarter guidance, you are implying like 5% unit growth. You had pretty strong unit quarter in the second quarter. Are you seeing anything in the third quarter which gives you caution. I'm just looking historically and it seems like it's seasonally a really strong quarter for the industry. That’s the first one.

The second thing is, in terms of monetization, number of used car units went up about 44% year-over-year, while monetization was flat year-over-year. Is there anything in terms of the revenue per car sold or new or used type that ticked down this quarter?

Chip Perry

So, Sameet, the first question was on units for Q what that your question?

Sameet Sinha

Q3.

Chip Perry

Okay. [indiscernible] for Q3, 200,000 to 205,000. And what was the question?

Sameet Sinha

It was [indiscernible] sequential growth that you are implying with that, and historically, that number has been much greater. So the question was, is there any reason why you're being conservative with that? Are you seeing in the marketplace or are you just being conservative?

Chip Perry

Am I being conservative based on a sequential growth rate?

Sameet Sinha

Correct.

Chip Perry

No, I don’t think so. It’s just our forecast for the quarter. You can look at sequential growth rates and seasonality as one way to look at our forecast. The other way is, obviously, much more bottoms up, right, where we look at things like individual channels, how they are performing, we look at the conversion rates and the close rates, we make forecasts on how those will improve or not, and then that falls into – we also look at individual programs in terms of how much we’re going to spend, how much we believe we can spend especially on the branded channel, different marketing programs that we have with our partners and that’s rolling out during the course of the third quarter. So I won’t comment on things that are happening within the quarter, within the third quarter. We’ll talk about that on the next call. But when we sat down to do the forecast, I would say it’s much more bottoms up than it is just looking at growth rates quarter to quarter.

The other thing that’s a bit different than in prior years, of course, is the mix of used is a little bit larger. So some of the things that you’re looking at in terms of trying to engage and judge probably a little bit off because there is more used in our business right now than new. And a lot of that has to do with the fact that we pulled spending back on marketing on the new side. The fact that we talk about spending increase in Q3 sequentially would only happen if we expect the funnel to be stronger. Otherwise, spending those dollars would not have good economic impact. The marginal dollars wouldn’t be very productive. So we’re, obviously, making a statement with the targeted brand spend that says we believe the funnel will be working better in the third quarter, and so we can actually afford to spend more. But part of that also is the seasonality. Q3 tends to be stronger than Q2 as well.

Operator

Thank you. [Operator Instructions] And our next question comes from Blake Harper from Loop Capital. Please go ahead.

Blake Harper

Yes. Thanks. I had two questions. First, Chip, maybe if you could just provide some thoughts on the higher level industry as far as overall car volumes? They seem to be doing really well, but some manufacturers are doing better than others. And just maybe hear your thoughts about that at all and if that does affect your business or thinking at all or if it's really not just kind of the operational stuff with the dealers that you're thinking of?

Chip Perry

Thank you, Blake, for the question. We believe that, like many forecasters – we have a team that forecasts the industry here – that it would be a good year for the car business in terms of car volume. It won’t be a strong growth year in the car business in America, but be strong in terms of 17 million units and that’s plenty of action for dealers to do well in the retail environment. So we do see the normal ebbing and flowing of market share across OEMs and that’s visible. But, honestly, given the state of the industry as it sits now, strong unit volume, north of 17 million, most brands in a good condition – obviously – some perform better than others, we e don’t see macro industry trends affecting us much this year. We are performing quite well in terms of our goals as we said. I don't really see anything on the industry horizon that causes to want to make a comment about it relative to our performance.

Blake Harper

Great. Okay. Thanks, Chip. And then one more maybe for Mike. You mentioned the real estate and headcount stuff. I just want to understand if you get yourselves to an optimal level of the headcount that you want to by the end of the yearand you're able to sublease the space that you want and get your real estate and your headcount footprint right-sized, what is there that's kind of in the model right now that you would say is kind of a delta between where you are right now and what that optimal would be under that scenario?

Michael Guthrie

Well, the real estate is below the line, so there’s nothing in terms of the guidance that would be affected. I feel like we have properly reserved for the real estate.

The headcount – if you’re talking about headcount, the hiring, at the end of the second quarter, we are about 36 heads into the 100 headcount goal for the field organization. I think the faster and the better that we do that, the faster and quicker and more meaningful the impact would be on our dealer customers and their ability to grow their business with us, increase close rates. So we are very clearly pushing very hard to make that happen. And I suppose if it happened a little bit more quickly, we might put in some of the revenue that we talk about in terms of the back of the year.

Having said that, we modeled it as more third quarter weighted than fourth quarter weighted. So I think it’s embedded in that right now. We’re finding good people. The only issue we had in Q2 was we just assumed way more heads would come in at the beginning and that was, I think, A, just aggressive modeling and, B, probably unrealistic in terms of just the ability of recruiting organizations to find that many people and keep the quality bar high. So again, we’re just probably more aggressive on the modeling side of it, which is fine.

So we’re seeing people and the people that we have hired have been great. Chip went through some of the leadership of the organization that we brought in and they are very strong as well. And we really also focus very much on getting the right leadership in place as we brought in the actual field organization. But I think that’s sitting really right where we want it to be. I'm pretty happy with all the headcount-related planning and growth that we have in the business right now. I feel like we’ve got the cost structure in a good place and it’s – we will be scale margins as revenues grow at a pretty healthy clip in 2017 and going forward.

Blake Harper

Great. Thanks, guys.

Operator

Thank you. There are no further questions at this time. This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.

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