TrueCar, Inc. (TRUE) CEO Chip Perry on Q3 2018 Results - Earnings Call Transcript

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About: TrueCar, Inc (TRUE)
by: SA Transcripts

TrueCar Inc. (NASDAQ:TRUE) Q3 2018 Results Earnings Conference Call November 6, 2018 4:30 PM ET

Executives

Alison Sternberg - SVP, IR

Chip Perry - President and CEO

John Pierantoni - Interim CFO and CAO

Analysts

Mark Mahaney - RBC Capital Markets

Steven Dyer - Craig-Hallum

Sameet Sinha - B. Riley FBR, Inc.

Doug Anmuth - J.P. Morgan

Kyle Evans - Stephens

Daniel Kurnos - The Benchmark Company

John Blackledge - Cowen & Co.

Operator

Greetings and welcome to the TrueCar Inc. Third Quarter 2018 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Alison Sternberg, SVP of Investor Relations. Please go ahead.

Alison Sternberg

Thank you, operator. Hello and welcome to TrueCar's third quarter 2018 earnings conference call. Joining me today are Chip Perry, President and Chief Executive Officer; and John Pierantoni, Interim Chief Financial Officer.

As a reminder, we will be making forward-looking statements on this call, including, but not limited to, statements regarding our guidance or outlook for the fourth quarter and full year 2018, including revenue growth and margin in the fourth quarter of 2018 and for 2019; management's beliefs and expectations as to future strategies; marketing campaigns; and planned product offerings including the timing and monetization of these offerings; our ability to expand our penetration of our extended affinity partner audiences; our ability to increase growth and productivity in our core dealer business, including our efforts to align pricing, grow our dealer base, and expand unit monetization; our ability to rapidly scale our OEM business and achieve OEM revenue growth targets; the timing and expansion of TrueCar trade, its dealer network, customer base, revenue contribution and market coverage; the effect of additional marketing spend on any of the foregoing; our overall position in the retail new car market; completion of our technology platform initiatives, it's timing and impact on conversion, close rates, consumer satisfaction, engagement, and our ability to introduce new product innovations, as well as our ability to successfully transition from our legacy systems to the new platform and to manage any issues arising from that transition; our ability to improve and build out our consumer experience, increase brand awareness, and identify and undertake necessary investments to accomplish this us, and the outcome of outstanding litigation.

These 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 2017, our quarterly reports on Form 10-Q for the first and second quarters of 2018 filed with the SEC, and our quarterly report on Form 10-Q for the third quarter of 2018 when filed with the SEC for the discussion of the factors that could cause our results to differ materially. The forward-looking statements on this call are based on information available to us as of today's date and we disclaim any obligation to update any forward-looking statements, except as required by law.

In addition, we will also discuss GAAP and certain non-GAAP financial measures. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measures are set forth in the Investor Relations section of our website at true.com. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

Now, I'll turn the call over to Chip.

Chip Perry

Thank you, Alison and good afternoon everyone. Operationally, TrueCar had a strong third quarter with in line financial results on revenue and adjusted EBITDA. Today, you'll hear about the great progress that we are making on the key initiatives to drive our future growth.

Now that we're in the second half of the year, with third quarter revenue growing at 14% year-over-year on the strength of our dealer and OEM business, we believe we'll post even faster revenue growth in the fourth quarter and a higher margin that we posted last year.

We remain laser-focused on implementing the changes in our business that we believe will enable us to further accelerate growth next year and deliver on key -- our net market needs as part of our end-to-end vision.

As we said before, we expect this growth to flow from our upcoming powerful new consumer experience, the continued growth of our trade and OEM products, and the expansion and increased productivity of our dealer network, all benefiting from of the accelerant of a larger and efficiently deployed marketing spend.

We continue to see new car marketing dollars paid by OEMs and dealers shifting towards our platform, allowing us to grow our share of marketing spend and reach a record high of 5.2% of the retail new car market.

This share gain reflects the strong efficiency of the marketing solutions that we provide dealers and OEMs. We believe this market share demonstrates TrueCar's number one position in new car sales among the automotive industries third-party players.

John will give you more details on our financial and operating metrics later on the call, but I would now like to dig into the progress we saw in the third quarter, our plans for continued traction against our key strategies for the balance of the year, and how this sets us up for 2019 and beyond.

Let me begin with an update on USAA and our broader affinity partner channel. One of our primary areas of focus coming out of 2017 and over the course of the first half of this year was a level of unit volume coming from our largest affinity partner, USAA. As you will recall, units in of USAA channel started to show improvement in year-over-year comparisons during the first half of 2018, even though they were still behind the prior year.

I'm pleased to report that as we expected, in the third quarter, we generated positive growth in terms of USAA unit volumes, which were up 11% year-over-year. Even more notable is that our third quarter unit volumes were very close to the levels of USAA unit volume in Q2 2017 before they changed their site experience.

Our continued recovery with USAA throughout this year and into this quarter has been largely driven by continued collaboration between USAA and TrueCar around the optimization of the USAA site and marketing to USAA members.

We have been able to do this together, while at the same time, USAA had successfully woven into its experience some advice-related tools and content that help its members make smarter purchasing decisions.

We're very pleased with the recovery of the channel and our ability able to partner with USAA to drive performance of the car buying service, while also supporting its mission to serve the military community in an exemplary way.

Turning to our extended partner channel, this channel showed continued strong performance in the third quarter, with unit growth at 13% year-over-year, driven by the expansion of high growth partners in our membership, finance, and publisher segments.

As we mentioned previously, our focus is on the digital activation of these member basis. We believe there's significant potential to more deeply penetrate these audiences through multiple tactics, including the continued expansion of our trade pilot and our OEM product offerings.

As a reminder, the reach of our affinity partner network with car buyers is significantly greater than the unique visitors we publicly report. In fact, affinity partners serve over 300 million members in America. This gives us the opportunity to leverage the brand loyalty within these audiences to acquire very end market consumers.

Our unsurpassed reached with new car buyers provide by partners and the TrueCar brand is highlighted in the latest J.D. Power New Autoshopper Study, where TrueCar is the far and away leader amongst our third-party peers in terms of total usage among new car buyers.

As you've heard me say before, achieving market leadership requires a superior value proposition for both sides of the marketplace, meeting the consumers demand side and the dealer and OEM supply side.

Our unique new car pricing transparency is the current centerpiece of our consumer value proposition, which we believe gives us a durable competitive advantage and a key point of leverage for building out our upcoming end-to-end consumer experience.

On the supply side of the marketplace, our strong dealer coverage enables us to provide a better experience to our growing consumer base and creates the capacity to efficiently absorb future traffic growth resulting from increased brand awareness, higher organic traffic, and increased marketing efforts.

Now, I'll provide more detail across our key initiatives that we laid out at the beginning of the year. Our first key initiative is dealer revenue growth and monetization. Over the course of this year, we have highlighted growing our core dealer business through investments focused on three key go-to-market strategies designed to balance network growth, while maintaining strong rate integrity, specifically.

First, aligning pricing with the value we've been delivering based on our unique closed-loop attribution model; second, further enhancing our dealer acquisition strategy to strategically fill coverage gaps across the network; and third, rolling out a new strategy around independent dealers designed to grow our independent dealer base and increase used car inventory.

I'm pleased to say that these investments continue to bear fruit as not only has our dealer network reach record size of 16,031 dealers, with 497 net additions during the quarter, but we've also seen growth in revenue per franchise dealer of 6% year-over-year, along with a meaningful reduction in churn.

All of this comes as a result of our more surgical approach to renewals and confirms the strength of our value proposition. This being said, John will be providing more detail on what's happening in the fourth quarter, which is not starting off as strongly as we performed in Q3.

Our second key initiative is OEM. As we've said on earlier calls, we believe our efficient, success-based attribution model is growing in appeal to OEMs relative to the traditional impression-based display ad model employed by our competitors. Our capability to efficiently deliver OEM incentive offers behind registration walls in ways that help OEMs avoid brand and residual value dilution is truly unique in the auto industry.

In Q3, OEM incentive revenue more than doubled over Q3 of last year. This exciting growth was driven by the addition of new OEM programs that were not in place during Q3 of last year, coupled with the expansion of existing OEM programs. We continue to expand our business with our existing long-term OEM clients through ongoing marketing optimization and deeper extender partner penetration and activation.

As a reminder, OEMs spend upward of $18 billion annually advertising new cars. This spend is significantly higher than the cumulative new and used car advertising budgets of franchise and independent dealers.

The vast majority of this OEM advertising spend is going to traditional media and display advertising and paid search channels that charge based on audience reach, clicks, and impressions, without any mechanism in place to clearly demonstrate attribution.

The rapid growth in our OEM revenue over the past few quarters demonstrates that OEMs are beginning to recognize the value of TrueCar's unique closed-loop attribution model and as a result, they are leaning into our marketplace.

Needless to say, we're very pleased with the growth of our OEM business, as we are on-track to grow revenue by more than 90% year-over-year in the second half of 2018 and we remain confident that OEM revenue will experience over 35% growth for the full year.

All of this being said, we are still in the early days of getting OEMs to understand and embrace our value proposition, and we believe this category has significant growth potential in 2019 and beyond.

Our third key initiative is our national rollout of trade. We continue to see positive momentum with our exciting new TrueCar trade product. As we roll out this offering nationwide, we're introducing a new form of transparency into one of the greatest sources of consumer dissatisfaction with the car buying process, which is the trade-in component of the deal.

Our product provides market-leading transparency and competitively differentiated valuation insight through dynamic interface, backed by the third-party credibility of the TrueCar brand.

In contrast, our competitors provide static forms that generate a single output or range of values without any clarity or context for the consumer around how the car's value is derived. Our product actually does this and that's why consumers and dealers like it.

We now have approximately 600 dealers activated on our program or in onboarding and we continue to add more through a highly targeted dealer acquisition effort to ensure that we have gained right distribution of dealers and OEM brands in specific markets.

To-date, we've gone live in 45 markets, covering two-thirds of TrueCar users. Many of these markets were added during the quarter, including Miami, San Antonio, Washington, D.C., Detroit, and St. Louis. Consumer and dealer feedback from our initial market rollouts has been excellent and we are on-track to enable 80% of truecar.com visitors to have access to our trade product by the end of the year.

In Q3, we tested local TV and radio marketing campaigns in three markets; Seattle, Phoenix, and Chicago. Based on very positive consumer and dealers' response in these markets, we've decided to move up the launch of our national marketing campaign to later this month, instead of early next year as previously planned.

Recall that we expect to generate small revenues from trade this year, but the starting point is the foundation for our larger customer base and a much more significant revenue contribution in 2019 as we look to unlock opportunities to turn on this product across our affinity network.

Trade is also a vital element of our upcoming end-to-end shopping-to-showroom consumer experience because it provides an upfront transactional component that is needed to calculate an accurate monthly payment.

In addition to our trade-in product, we are continuing to investigate product improvements and investments required to enable consumers to obtain penny-perfect monthly payment offers from dealers that includes lease and loan terms and F&I products, which will unlock further puzzle piece of our full end-to-end vision.

Our fourth key initiative is Capsella. I'm very pleased to report that our major re-platforming initiative is on-track for completion this year. Behind the scenes, we have been actively testing and migrating all of our underlying data, infrastructure, consumer, dealer, OEM, and mobile experiences to the new technology stack running on Amazon Web Services. We expect a fully seamless transition as we cut over the final portions of the platform later this year.

We're already starting to reap many of the benefits of the new platform, including significantly faster site speed and faster product cycle-times with continuous integration and deployment capabilities.

Our used car product team has been leveraging these capabilities to launch a fully redesigned used car search experience and rapidly iterate based on performance data and consumer feedback. We are seeing very positive improvements in our used car funnel metrics as a result.

Completing our re-platforming project will enable new and faster product innovations that we expect to unlock higher consumer conversion and close rates, higher consumer satisfaction, and stronger consumer engagement with viewers.

It will also enable us to further build out the major components of our end-to-end experience, including our future research and discovery product and market differentiated digital retailing tools.

In closing, as you can see, we continue to make good progress across all of the key initiatives we set forth for 2018 and we expect to exit the year with a strong double-digit topline growth rate.

We set ambitious operational goals at the outset of the year that were key drivers to unlock our long-term growth potential and we are pleased by the progress we have made so far this year.

We have three quarters of good execution behind us. And we believe that the cumulative effort to-date has positioned us well, both to attract more consumers into an improved experience, enabled by a more agile and flexible technology platform, and to fulfill demand with our growing and increasingly productive dealer network and an expanding OEM client base.

Based on the progress we made this year, we believe we can significantly accelerate our revenue growth in 2019 and we have created a foundation for building what we believe will be the industry's only true end-to-end online shopping-to-showroom experience.

I'm now going to hand it over to John to walk you through the numbers and discuss our financial performance in more detail.

John Pierantoni

Thank you, Chip and good afternoon everyone. As Chip highlighted in his earlier remarks, the third quarter of 2018 was a strong quarter for TrueCar, with revenue totaling $93.6 million, up 14% over last year. This was in line with our revenue guide of $93 million to $95 million and it reflects strong execution across all of our key business initiatives.

In our OEM business, revenue totaled $9.5 million, up 129% from $4.1 million last year and up 19% sequentially. This strong growth was due to revenue from newer OEM incentive programs, as well as strong performance from our longer term OEM customers.

Turning to our core dealer business, revenue from franchise dealers totaled $70.2 million, which was up 8% over Q3 of last year. During the quarter, we continued to demonstrate success with our dealer go-to-market strategies, resulting in continued reductions in dealer churn and a 6% year-over-year increase in monthly revenue per franchise dealer, which totaled $1,878 in the quarter.

And sequentially, franchise dealer count increased by 181 to 12,549 dealers. We also continue to show momentum in our independent dealer channel. Revenue from our independents was $9 million in the quarter, up 9% over last year. Independent dealer count was up 19% year-over-year to 3,482 and it increased by 10% or 316 dealers sequentially.

Monthly revenue per independent dealer declined 5%, both year-over-year and sequentially to $907. This decline was in line with our expectations, due to the shift in our sales strategy towards more small to mid-sized independent dealers. Our strategy is designed to diversify our inventory to better meet consumers' shopping needs.

Overall, we are pleased with the progress we made to-date within our franchise and independent dealer businesses. However, we set aggressive goals for ourselves at the outset of the year.

And while we have made meaningful traction against our targets, we started the fourth quarter a bit slowly and therefore, we may not see the same level of net dealer adds in the fourth quarter. I'll provide more details on this later.

Moving on to trade, during the third quarter, we generated $1 million of trade revenue and to-date have approximately 600 dealers active or onboarding. And finally, forecast, consulting, and other revenue was $4.9 million in the quarter, which was flat year-over-year.

Units in the quarter totaled 268,026, up 6% year-over-year, which is approximately 6,000 units below our unit guidance range of 274,000 to 279,000 units. Breaking it down, in our TrueCar branded channel, we generated 105,616 units, down 3% year-over-year. In our USAA channel, we produced 71,660 units, an increase of 11% year-over-year. And in our extended partner business, we achieved 90,750 units, which was up 13% year-over-year.

And as for the new used mix, we noted a mix of 70.6% new, 29.4% used in Q3 of 2018 as compared to 68.2% new, 31.8% used this time last year. As Chip mentioned earlier, on the new car side of the business, we continue to demonstrate strength, noting an all-time high new car market share of 5.2%, which is up 13% year-over-year, while retail SAAR declined 4% in the same period.

Monetization also experienced positive trends, hitting $331 per unit in Q3 of 2018, which is up 8% from $306 last year. This increase was due to the growth in our OEM and trade businesses and we're pleased to see the diversification of our revenue streams contribute to monetization expansion.

And now turning to expenses and margins, where we're demonstrating operating efficiencies in most of our expense categories and profit measures. As a reminder, all of the following metrics are on a non-GAAP basis unless otherwise stated. Gross profit in Q3 of 2018 was $86.3 million, which was up 14% from last year and gross margin was 92.2% in Q3 of 2018, up from 91.8% last year.

Technology and product expenses totaled $12.5 million, which decreased by 2% year-over-year. We are very pleased with the operating efficiencies that our product and tech teams are generating even as we continue to invest in our technology re-platforming initiative.

Our sales and marketing expenses were $53.2 million or 56.8% of revenue in Q3 of 2018 as compared to $45 million or 54.6% of revenue last year. The increase in sales and marketing expenses reflected growth in our partner businesses and investment in expanding our dealer sales and service teams.

Breaking it down further, in our TrueCar branded channel, we spent $16.3 million on customer acquisition costs, which was flat year-over-year. And our branded channel cost per sale modestly increased from $151 per unit in Q3 last year to $154 per unit this year.

As a reminder, branded media spend has remained flat for the past three years, as we've intentionally redeployed incremental dollars towards investment in trade, OEM, and scaling our dealer network.

As we move into 2019 and are able to innovate on the product experience after the completion of Capsella and continue to realize the benefits of our trade and OEM investments, we will begin more aggressively deployed branded media spend.

In our partner channels, marketing expenses totaled $17.9 million as compared to $13.1 million last year. Our affinity partner cost per sale increased 22% year-over-year from $90 to $110 per unit. This increase was primarily driven by increased revenue share in our extended partner in USAA channels. In addition, we increased digital marketing expend with some of our high growth partners, where we continued to invest in expanding these programs.

And finally, sales and marketing related headcount and other costs were $19 million, up from $15.5 million last year as we continued to grow the team to support our new products and offerings.

As for G&A expenses, total costs were $10.6 million or 11.3% of revenue in Q3 of 2018. We continued to see operating efficiencies in G&A, where we decreased our spend as a percentage of revenue by 70 basis points year-over-year.

And adjusted EBITDA for the third quarter of 2018 was $10 million or 10.7% of revenue. This compares to $8 million or 9.7% of revenue last year and was within our adjusted EBITDA guidance range of $10 million to $11 million.

The non-cash expense items, excluded from this quarter's adjusted EBITDA were depreciation and amortization of $6 million, stock-based comp of $10.2 million and $300,000 of certain litigation costs.

GAAP net loss for the quarter was $6.3 million or a net loss of $0.06 per share. This compares to a GAAP net loss of $9.5 million or a net loss of $0.10 per share last year. Our non-GAAP net income for the quarter was $4.3 million or $0.04 per share, which compares to non-GAAP net income of $1.9 million or $0.02 per share last year. And on our balance sheet, we continued to maintain strong cash balances, which totaled $218 million at the end of the quarter.

Before turning to our guidance for the fourth quarter and full year, I'd like to highlight a few considerations regarding our business execution and financial results. When we started the year, we implemented an operating and financial plan that required significant business execution.

We've been focusing our efforts on simultaneously working to complete Capsella, build out our trade business, grow our OEM business, refocus our dealer go-to-market strategies, and return USAA to growth.

As Chip and I both reported earlier, all of these business initiatives are on-track for strong execution in 2018 and they're helping us to build a strong foundation for accelerated growth next year.

During the first half of the year, we generated single-digit topline growth as we began these efforts amid headwinds from our USAA channel.

During the third and the fourth quarters, we plan for mid to high-teen topline growth, reflecting improved performance in all parts of the business, including significant growth in our OEM business and contributions from our new trade-in offering. We're encouraged that we achieved our plans in the third quarter, realizing 14% year-over-year revenue growth.

While we still expect revenue acceleration in Q4, we're lowering our fourth quarter revenue range modestly to account for potential unit softness and fewer net dealer adds in the fourth quarter due to slower-than-expected hiring in our dealer sales and service teams.

And now for more details on guidance. In the fourth quarter, we expect revenue to be in the range of $95.5 million to $97.5 million, which represents 16% growth at the midpoint of the range.

A couple of areas to highlight includes our OEM business, where we expect greater than 70% year-over-year growth, driven by the continued performance from new and recurring OEM programs and our trade business, where we continue to rollout our trade offering nationwide, with the national advertising campaign beginning later this month. We expect approximately $1.4 million of trade-in revenue in the fourth quarter.

During the fourth quarter, we expect units to be in the range of 262,000 to 267,000, which represents 10% year-over-year growth at the midpoint of the range. Breaking it down by channels, we expect our TrueCar branded channels to be slightly down year-over-year and we will continue to hold our acquisition spend steady in Q4.

We expect our extended partner channel to experience double-digit unit growth. This will be driven by high growth partners in our membership, finance, and publisher segments. And we expect the USAA channel to achieve greater than 20% unit growth as this channel continues to regain momentum with user experience improvements from the product changes they made last year.

Adjusted EBITDA is expected to be in the range of $10 million to $11 million or 10.9% EBITDA margins at the midpoint of the range. Full year metrics reflect the reductions that we've made to Q4 expectations.

For annual revenue, we estimated range of $358 million to $360 million and adjusted EBITDA is estimated at a range of $34.7 million to $35.7 million. And as for units, we estimate a range of 1.10 million to 1.15 million units, which would represent the first time that we surpass the 1 million unit mark.

As we move into the last quarter of the year, we continue to drill into all of our key metrics and operational goals, so that we can deliver on expectations next year. We have strong conviction that our accelerated fourth quarter growth, along with the completion of Capsella, will help us build the foundation for further topline revenue acceleration in 2019.

Chip and I would like to personally thank all of the employees of TrueCar for their continued hard work and execution throughout the year. And now, we'll open it up for questions.

Question-and-Answer Session

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions]

Our first question comes from the line of Mark Mahaney with RBC Capital Markets. Please proceed with your question.

Mark Mahaney

Okay. Thank you very much. Just wanted to ask about kind of the tempering a little bit in your outlook for both Q4 and next year. And I know you referred to this slower than expected hiring in dealer sales -- in your dealer sales teams. Was -- are there any other material factors?

And how do you think about that -- is that kind of part of the operate -- challenge of doing business and these things -- these kind of challenges come up from time-to-time? Is there any structural change here that you really need to pivot materially against? So how do we think about how is this a temporary or a longer-term problem, just give us some context around that. Thank you very much.

Chip Perry

Sure thing, Mark and thank you for the question. Chip Perry here. We did take down our guidance a bit in the fourth quarter. And there are a few factors at play here we cited in our prepared remarks, hiring and with our dealer team.

Overall, with our dealer team's efforts in this field, we've been able to significantly grow our dealer count this year, as well as raise revenue per dealer and reduce churn. So, we're quite pleased with the acceptance of our value proposition in the field.

We did have some challenges with hiring the right people. And toward the end of the third quarter, we had some attrition to try to raise the quality of our team in the third quarter. And we weren't able to catch-up with hiring to the level that will allow us to have gross dealer additions that we had earlier hoped for in our original plan. So, we're a little bit behind there, but not discouraged at all. I'm very positive about our outlook for continuing to grow our dealer business quite strongly.

The other factors that are at play here, John mentioned modest weakness in units. We have encountered some challenges with Google's latest algorithm update. And so that's affected some of our direct traffic. But we also have plans in place to next year address this kind of a challenge.

As I mentioned, we have our research and discovery product in development. We have a strong offering with very appealing make, model pages that we believe will be attractive in a Google organic search world. So, we're addressing that issue.

And then, the other aspect is that our traffic overall is soft in the fourth quarter. We have relocated some of our marketing spend towards this trade product launch, which we think will be a great boon for that product, but we do feel a modest effect of that from audience.

Overall, conversion level is going quite nicely. I mentioned that our used car conversion rates are up. And that's the result of the great work our product and tech teams are doing. So, we always have movement in various metrics. But I'm certainly not discouraged or I don't see any fundamental or systemic issues with respect to our dealer efforts or our dealer team and our ability to grow that part of our business.

But I did want to signal and be transparent that this is an operational challenge that we're working our way through. But as you said, Mark, you kind of like, you hit these situations and work through them, but it's not systemic.

And so we're pleased that overall about how the company's performing and the fact that we can accelerate in the fourth quarter beyond what we have even done here in the third quarter. And our outlook remains very positive for further acceleration in 2019 over 2018.

Mark Mahaney

Thank you, Chip.

Operator

Our next question comes from the line of Steve Dyer with Craig-Hallum. Please proceed with your question.

Steven Dyer

Thanks. Good afternoon. Just like to dig into OEM a little bit, obviously, a strong quarter as you had signaled and it looks like you expect another strong one in Q4. Maybe just a little bit more texture, I guess, around that. Just in terms of, are you seeing a lot of new interest from new OEMs? Are you seeing sort of follow-up deals with those you've gotten engaged earlier? Maybe just any color? And then again, maybe how we should think about that specific area next year?

John Pierantoni

Thanks Steve, this is John, I can take this one. In regards to the OEM business, as you know in the quarter, third quarter, we had quite significant growth and we're also expecting a very strong fourth quarter as well. It comes from a mix of both the core customer dealer -- customer OEM that we have, as well as some of the newer programs too.

So, some of the prior ones that we've announced that have tried pilots, they're back on for recurring programs. There are a couple of additional OEMs that we're talking to and we're also doing some pilots in the fourth quarter as well. So, it's really a mix of both the core anchor tenants that we have in the platform, some of the newer programs are starting to stick a little bit longer. And then, we'll also have some new pipeline and other things that we're looking forward to doing in 2019 as well.

Steven Dyer

Okay, great. And then just wondering if you could kind of refresh us on TrueTrade. Obviously, big potential. That said, over the course of the last six months, there's a lot of people sort of instituting VIN-based valuation and/or purchasing. Can you just kind of again walk us through your monetization in model there and how that works?

Chip Perry

Sure thing. Our trade product is highly differentiated in the market today because it gives consumers a good understanding of why their car is worth what's it worth, through a dynamic interface that changes the value based on inputs provided by the consumer. The consumers like that because the traditional process tends to be very opaque and all of our competitors have static forms. So, you're right, there's a lot of activity in this space but we do have a unique and very powerful product that we're bringing to the market.

And dealers like it too because it enables them to be transparent with their customers on why their car has the value it has and it helps both those -- both parties, the buyer and the seller, establish a good basis for understanding what a fair market value for the vehicle is.

And the way we monetize this is through a subscription fees with dealers who use this product to capture potential trades that are coming in from TrueCar sellers, as well as a tool that they can place on their website and use in their store to improve the quality and customer satisfaction of their trade-in process and to create a basis for good solid used-car trading economics on their end.

So, the product is doing quite well. It also -- our product is also strong and unique with respect to how it provides the dealer a backstop for the value that the tool presents to the consumer.

Our tool shares with the consumers a guaranteed value, sight unseen for their used car that they desire to trade in as part of their purchase transaction. When you buy a used car sight unseen, it has to be done based on the disclosures of key information by the seller -- by the consumer seller about their car.

Our tool enables the consumer to very quickly work through the factors that are most important to drive the value. And as long as they disclosed the information correctly about their car, they're guaranteed to receive that price. When a dealer receives that car and pays that price, the dealer has the opportunity or the option to sell it back to us if they don't choose to retail it in their local market.

So, this form of transparency is very powerful for the consumer. It is also very useful and exciting for the dealer to know that they can receive the car and if they feel like the algorithm produces a price that's too high, they are protected on their end. We also receive a very small percentage of these cars turned in.

So, it's a -- to call the market very accurately, it's a good solid wholesaler number that the consumer can be quite pleased with. And, obviously, it's a wholesale number that enable dealers to take cars in at a price point that allows them to turn around and retail them at a reasonable margin on the other end.

So, it's a great product. We're very excited about it. And the fact that we're able to pull forward our national launch, we weren't going to do this until early next year, but the reception has been so positive. And the test that we conducted in the third quarter in those three cities resonated quite strongly with consumers and dealers.

We saw nice bounces in traffic. We saw big whoops in the number of consumers who are booking their cars into our system and bringing them into dealerships. So, we decided to move up the launch and that, I believe, will also help to facilitate a pick-up in dealer sign-ups because they're going to start seeing our ads for our new TrueCar Trade product on national television very soon.

Steven Dyer

Got it, that's helpful. And then I guess, lastly, housekeeping-wise, what was NFE in the quarter, both kind of whole company as well as broken out with new and used? Thanks.

John Pierantoni

Sure. No problem. In regards to NFE, what we're seeing from a total company perspective in the quarter, it was about 1.12%. And then, if you go to new, it was 1.8% roughly and used was about 0.76%.

Steven Dyer

Thank you.

Operator

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

Sameet Sinha

Thank you very much. Couple of questions. So, first, just talking about -- Chip, you mentioned that used car conversion was up -- I mean, all media reports are indicating that used car seeing strong kind of uptick and seasonally strong in the third quarter. Is there anything specific that you can point to? Is it kind of an industry thing or maybe it was, like you said, Capsella is already producing results, so that could be it?

Second thing, talking about the partner CAC and if I'm looking at customer acquisition cost and if I'm looking at it, it started to go up in fourth quarter of 2017 in the -- in kind of the mid-20s range and it has been continuing. So, fourth quarter of 2018, should we start to think about it kind of leveling off -- this growth leveling off and then that continuing into 2019 as well? Or are there sort of marketing plans and pressures in place which could potentially drive this revenue share up further in 2019?

Chip Perry

Thank you, Sameet. Appreciate your questions very much. On the used car side of our business, you've heard me say that we've had our used car platform loaded and up and running in our new Capsella environment for a number of months.

While our team has been driving to the finish line to complete the overall transformation of our tech stack and get ourselves completely up into the cloud with AWS, for the past two or three quarters, we -- even though we had the used car platform in a new environment, we weren't significantly innovating on it.

In the last quarter or so and now as we speak, our team is working on that. We're starting to see some nice upticks in conversion, particularly on the used car side of the business. So, TrueCar remains very strongly a story of high potential for conversion rate improvement and NFE improvement across both the new and used car segments of our business.

We're starting to see that in used. And next year, I believe, post-Capsella, we'll start to see it in new as we continued to optimize the experience and as we move toward our new consumer experience, which you've heard me describe in the past.

John, why don't you talk a little bit about consumer acquisition cost and how they're trending?

John Pierantoni

No problem, Chip. And Sameet, in regards to, what we did see was a very modest lift an acquisition cost. We see that going down a little bit in the fourth quarter with some of the conversion improvements that we're seeing in the business. As it relates to your affinity partners, we are seeing some increases in our acquisition cost there.

As you may recall, we've been investing incrementally in some marketing programs on Facebook, with some of our high-potential partners. And so we see a bit of that coming into play and that's consistent with prior quarters as well. So, we're continuing to do that to really help to grow those programs and the basis of those programs and sharing those marketing events with Sam's and others as well so that they can lean in further.

We're also seeing some rev share increase as it relates to growing the OEM business as well. So, we see little bit of that leaning in there too. And as it relates to Q4, we don't see that increasing in Q4. We see probably a flat level of spend on a per unit basis in Q4.

Sameet Sinha

Excellent. Thank you.

Operator

Our next question comes from the line of Doug Anmuth with J.P. Morgan. Please proceed with your question.

Doug Anmuth

Thanks for taking the questions. First, can you just talk about 2019? And do you still expect 20% revenue growth next year? And just how do you get there? And then second, if you could talk a little bit about the impact of the higher marketing spend on financials next year after Capsella and the product innovation? What that can do in terms of margins? Thank you.

Chip Perry

You bet, Doug. Thanks for the question. Look, we have -- we believe very strongly in our ability to accelerate further our revenue growth in 2019 over 2018. We're getting close to the end of the year and I think it's a bit early to providing specific guidance for next year.

The key levers that will enable us to accelerate our growth we have been speaking about, we still feel very strongly about them. They include ongoing improvements in our user experience, which will improve conversion rates and flow through into our marketplace. We have the addition of our ongoing Trade product growth and our OEM product growth.

And I should mention that with our Trade product growth, when I described it earlier, I used a term that we -- that said we buy that car if the dealer doesn't want it. We actually have a partner that does that. So, TrueCar isn't in the business of buying cars from dealers.

On the OEM side, we have a significant further growth potential, a lot of headroom there as OEMs are further embracing our value proposition. And then, as we increase our marketing spend next year, based upon our improved user experience and stronger conversion dynamics; that will be another aspect of a tailwind in our revenue growth.

So, all those four factors are the key levers that we've been focused on all this year, preparing ourselves for, for next year. So, we're very excited about the potential next year. I'm just not going to call specifically what the number will be until our guidance, which we will deliver in February of next year, after the fourth quarter is finished this year.

Regarding the higher marketing cost, it will affect CAC to some extent, but we think it's going to be an overall positive thing for the business and we'll be able to do this in the context of improving unit economics based upon the growth in our core business as well as trade and OEM contributing to improve monetization.

Doug Anmuth

Good. Thank you, Chip.

Chip Perry

Sure thing, Doug.

Operator

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

Kyle Evans

Hi, thanks for taking my questions. Could we -- could you please put some firmer timelines around Capsella? Maybe kind of bracket when you're going test it so we can start looking for it, when you're going to launch it and when you're going to start marketing the change all around kind of the user interface for dealer contact?

Chip Perry

Sure, Kyle. Thanks for the question. So, as we've been saying, Capsella is a project that enables us to replicate all of our existing functionalities and business performance in a new, dynamic, flexible agile environment in the cloud. Finishing Capsella by itself does not allow us to launch our new user experience, as I've said in the past. It creates the foundation for a tremendous amount of innovation that we'll be able to put in place next year.

Historically, last couple of years; we've had 80% of our development team focused on rebuilding what we already have. Next year, we'll have 80% of our capacity building new stuff. We're very excited about that. And one of the key things we're examining right now is, how are we going to deploy all of the scrum teams across all the different opportunity areas that we find so exciting in this business. And that's something we're planning and narrowing down as we speak.

So, what you'll see next year then is a rolling series of improvements. We will finish Capsella before the end of the year. Our teams will get redeployed onto new projects that will drive consumer experience improvements, as well as a dealer tool improvements, as well as fundamental improvements in how we present new vehicle and new vehicle information on our website in our current experience.

So, you'll see those roll out over the course of the year. You've heard me talk about a new user experience in which we will enable consumers to have more control over when their contact information goes to dealerships, which we're very excited about that prospect.

And the way that will roll out is in the first half of the year, we will be doing tests in local markets to identify how our funnel and conversion metrics will change as a result of this experience -- new experience -- and we'll be testing a new go-to-market strategies with dealers to determine the best way to monetize this increase in business we'll be driving into our dealership customers' stores.

And then second half of the year, we expect to take the learnings from the first half and begin rolling out a broader go-to-market strategy with our dealer body as these improvements and the way -- the best ways to monetize them become better understood. So, we will -- we will definitely move over to this cloud experience before the end of 2018 and I'm confident we can do that.

Another piece of the puzzle next year will be our upper funnel experience, which we plan on launching piece parts of and have it progressively grow over the course of the year. A big part of that will be significantly improved make, model information pages that will be richly populated with strong user reviews and other content that we think will have a -- provide a significant boost to our organic traffic as well as begin to flush out our potential as an upper funnel player in the third-party industry. So, we're very excited about that as well.

So, those are the markers that we're putting down now for how we expect to evolve our user experience, based upon the completion of Capsella this year.

Kyle Evans

You have a lot of development goals. Can I assume that the dealer contact user interface is at or near the top of the list of things you would like to accomplish next year?

Chip Perry

Absolutely. Absolutely, Kyle. I mentioned that testing in the first half of the year in selected local markets. And then based upon the learnings there, we'll determine what the best way to roll that out is across the country.

Kyle Evans

Okay. Thank you.

Chip Perry

Sure thing.

Operator

Our next question comes from the line of Dan Kurnos with The Benchmark Company. Please proceed with your question.

Daniel Kurnos

Great. Thanks. Good afternoon. Just wanted to go back to some high level questions just around marketing and traffic trends. But first, Chip, since you did bring it up, we knew that there was kind of a big Google change back in August, and there were several companies impacted significantly with their organic search rankings. So, I don't know if you can quantify that or give us some more color on exactly why you guys were impacted by the change.

And then, just high-level kind of brand versus pay channel. I know that you guys are waiting for the consumer experience to press more upper funnel type marketing. But by the same token, sort of the announcement of testing for a trade-in is pulling it up a little bit seems -- it seems like an interesting trade off or decision at this point, given where you are with Capsella and the developments you're making.

So, acknowledging that you have massive potential traffic in your affinity channels, just can you talk about the balance near-term of pushing more national spots versus paid channels, given all the commentary you have made around ROI, expectations in paid channels and how you think it will impact traffic over the next call it, three to six months?

Chip Perry

Okay, Dan, very interesting question. A lot of interesting issues you bring up there. So, first of all, TrueCar differs in our categories from other players in many respects because we have less organic traffic in our mix than some of the other players do. Organic, meaning SEO-driven.

And we have -- it's a company that got established through strong partner-driven traffic as well as brand-driven traffic, which was built through effective offline and online advertising and marketing.

So, when we see a modest softness in organic, it's not a huge factor for us. I just noted that it's something that we're working through, but it's not a major -- it doesn't have a major effect on our total traffic.

And with respect to the balance of national and product-related spots and our trade campaign, we believe overall that next year will be a year when we lean into significantly higher brand-related marketing for TrueCar because we'll have a stronger user experience to market.

We're also sitting here that opportunistic moment in time when we have a very attractive new product to bring to market. So, that's why and we're having initial success both with consumers and dealers who in the introductory phase of it. So, when we move up the launch, it helps propel that new product revenue stream. It also has in general, a positive rub-off value for the TrueCar brand, even though it's a specific product-related promotion.

And I think what you'll see is, next year us continuing to have a good balance between digital and offline brand- related advertising. We think it's time after three years of holding our marketing budget relatively flat as we invested our incremental revenue growth dollars into our product and dealer teams.

We thought that was appropriate, we have been able to grow our traffic -- I'm sorry, we have been able to grow our revenues significantly in the face of flat overall raw traffic. And that -- that's a testimony to the strong conversion rate opportunity that exists within this company, which we'll continue to see that conversion rate opportunity next year where we have a lot of headroom, but it's going to be accelerated by a stronger marketing budget next year.

We'll be more specific in our first quarter call -- fourth quarter call in February about what we'll be doing in marketing next year. But we're bullish about the future here and we think it's time to start -- to start amping it up with respect to brand -- brand-driven traffic here at TrueCar.

Daniel Kurnos

Got it. Thank you.

Operator

Our next question comes from the line of John Blackledge with Cowen & Co. Please proceed with your question.

John Blackledge

Thanks so much. Just going back to the trade product. Could you talk about what it cost the dealers, the subscription cost growth? And I think you had mentioned last quarter maybe getting to like 1,000 dealers by the end of the year, I think you said you had 600. Just wondering like where that's going to be by the end of the year? And then the trajectory of dealers next year or how we should think about it as we try to kind of model that segment out.

And then, just another question, which I think you just alluded to, Chip, just on the marketing side, do you expect it to be a point of deleverage next year or will it kind of grow in line with the revenue growth? Just any way to frame that. Thank you.

Chip Perry

On the second point, it will be more in line, most likely probably not above our revenue growth, but still a nice incremental pop on our ability to promote the TrueCar brand across the country.

And with respect to dealers, we said we have about 1,000 that was a mix between franchise and independents. We're doing great with independents. We're a little bit light, we'll be a little bit light in the fourth quarter, I signaled that. We had a good solid third quarter, we had acceleration in dealer count in the second quarter after having some flatness in Q3 and Q4 of last year and Q1 of this year.

So, our new dealer go-to-market strategies are improved. The newer approach with our dealer body, our larger sales and service staff, are all paying off. So, we feel pretty good actually about where we are with the dealer body.

We'd love to have more staffing in the right places right now to be able to produce more growth in the fourth quarter. But like I said in answering Mark's question, that's a temporary phenomenon and we'll be working through it this quarter. We expect to be fully staffed entering early next year.

John Blackledge

Yes. And I was asking -- I know you guys are asking on trade -- I was asking on trade -- the dealer -- the total dealers that will be I think 600 dealers on the for the trade product that was--

John Pierantoni

Yes, no problem I can take that one. In regard to the trade dealers, that's right, it's about 600 right now. We'll probably closer to roughly 800 by end of the year is what we're expecting on a rooftop basis.

The pricing for the product varies, but roughly it starts at around for the quarter core product at the $600 range per month and it grows up from there, depending on the size of the dealership. There's also this core subscription fee and in certain jurisdictions we also have a transactional charge for the number of trade-ins.

So, it does vary based upon those. And as we launch the product, we're getting more details as to kind of where we think that monetization is going to end up. But it starts at the low end, around 600 and goes from there.

John Blackledge

Okay. Thank you.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back over to management for closing remarks.

Chip Perry

Thank you very much everybody for joining us for this call. You can tell we're excited about the future here at TrueCar. We continue to execute on all the things we said we'd do at the beginning of the year. And to be able to say that we're accelerating the way we said we would and have strong potential for even faster growth next year is something that gives this company a big energy shot in the arm.

So, thank you to everyone at TrueCar who is enabling this progress, this performance, and this potential. Look forward to talking to you in a few months. Thank you. Bye.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for participation.