Q3 2023 TrueCar Inc Earnings Call
Good day and welcome to the Truecar third quarter 2023 financial results Conference call. Please note. This event is being recorded.
Now I'd like to turn the conference over to Mr. Dan Sheehan, Braggers Mann, President and Chief Executive Officer of Truecar. Please go ahead Sir.
Thank you operator, Hello, everyone and welcome to the Truecar third quarter 2023 earnings Conference call. Joining me today is Oliver Foley, our new Chief Financial Officer.
I Hope I hope you all have had.
The opportunity to read our third quarter stockholder letter, which was released yesterday after market close and is available on our Investor Relations website at IR adult Truecar don't go.
Before we get started I need to read our safe Harbor I want to remind you that we will be making forward looking statements on this call, including statements regarding our revenue growth expanded adjusted EBITDA as well as aspirational goals regarding our three year plan forward looking statements can be identified by the use of words, such as believe expect plan.
<unk> and dissipate become seek will intend confident and similar expressions and are not and should not be relied on 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, our quarterly reports on Form 10-Q, and our reports and filings with the security and Exchange Commission for a discussion of factors that could cause our results to.
Differ materially the forward looking statements we make on the score 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 certain GAAP and non-GAAP financial measures reconciliation of all non-GAAP measures to the most directly comparable GAAP measure are set forth in the Investor Relations section of our website at IR build true Gardot call.
The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with gaps.
With that I will provide a summary of the quarter as highlighted in our shareholder letter. This is an exciting quarter. Okay. We.
We have surpassed our guidance were back to year over year revenue growth for the first time in nine quarters and achieve positive adjusted EBITDA a quarter earlier than originally indicated in our previous guidance, we have a clear vision and we are working hard to realize it.
The macroeconomic environment is showing signs of improving and both consumers and dealers are an increasingly greater need of Truecar sufferings U S monthly inventory exceeded 2 million used for the first time since March 2021, a year over year increase of 53%.
The percentage of new car sales over MSR be decreased to 39% a decline of 37% year over year and in September average, new car incentives climbed 129% year over year to 2000 and $367.
We still have a ways to go before the microeconomic environment returns to historical norms, but it appears that diet has started to turn in our favor. We believe our focus on enabling transactions for both consumer and dealers through a more comprehensive journey, rather than selling page views impressions or ads will set us apart from our competition and any.
In new ways, and enabling the right consumer to find the right car with the right financing at the right dealer is essential to this experience, but actual online transaction enablement that includes the execution of key deal documents requires more than the these components specifically it requires an experience.
That integrates seeming seamlessly with the processes and software are relied upon by dealers lenders and other third parties building out. These third party integrations is a complex challenge that requires time, but we're laser focused on meeting this challenge.
We continue to make good progress on our product flow, having launched what we call our unified flow.
This flows designed to resemble tradition traditional online commerce checkout flow whereby consumers are provided with relevant transaction details landed costs and next steps to complete the purchase of the product Theyre buying we have also successfully launched our economic cohort in our convenience <unk> workflows, and we're well on the way to launch our E V flow in December.
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We continue to refine each of these three cohort flaws as we reduce friction eliminate unnecessary steps and learned from product focus groups and consumer behaviors, we truly have shifted the organization to our product testing mindset and talent base and we and the build out of these cohorts clauses emblematic of that shift be.
Beyond these three golar flaws, we see revenue opportunities stemming from the possibility of regaining dealers. We have lost over the past several years expanding value added services to enhance dealer operations and further strengthening our OEM and affinity business.
As we look forward, we believe we have tremendous growth opportunities, but we also know such girls cannot come overnight. We're building a company that can endure and sustain and it can help shape the automotive industry over time.
It happens from the ground up while making sure we have the right people in the right seats with the right focus and core values all aimed towards pursuing both growth and profitability.
For the fourth quarter of 2023, REIT, we reiterate our expectation of returning to double digit year over year revenue growth and breakeven or positive adjusted EBITDA.
In the longer term, we're focused on the importance of sustained revenue growth and positive free cash flow. We are in pursuit of both we.
And the importance of the rule of 40 as an indicator of a healthy growing at a healthy growing companies with good profitability metrics. We believe that what we need to do we believe that we need to do to drive long term shareholder value for all of you is to simply execute and prove ourselves consistently.
In light of newness in light of this we have established three year aspirational goals by the end of 2026 were pursuing in excess of 300 million annual revenue and greater than 10% free cash flow. We realize these are ambitious goals, but if we meet them. We would have combined revenue growth and free cash flow margin of at least 40% by the end of 2020.
Thanks.
Which we believe with emphasize our financial health under the rule of 40 as well as the value accretion opportunity. We believe we have ahead of us.
We believe that we have the.
Unity the platform and the talent to execute our strategy and now the macro starting in our favour join us in this journey as we reshape the car buying experience.
Now operator, let's open the goal for questions from our analysts.
Thank you we will now begin the question and answer session.
I ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Rajat Gupta with JP Morgan. Please go ahead.
Oh, great thanks for taking them.
Okay.
Execution in <unk>.
Just under 26 target because I mean, you have a target.
Out there I know, it's still you're still calling it you know aspirations are ambitious.
Maybe if you could give us some sense or like a bridge.
From how we get there from today.
Gonna be 100% organic is it M&A.
M&A and organic combined.
And then how should we just think about you know the operating leverage.
From that revenue growth.
Going forward as well, maybe not to the 300, but like just going forward as well how should we think about operating leverage.
As revenue comes back in 'twenty four 'twenty five in God I have a follow up thanks.
Absolutely so reside thanks, so much for the question so.
Our goal in the first part of the answer is organic.
If you think of the overarching building blocks right.
Obviously, like which is normal to an equal merge play is mitigate juror in no particular order, but mitigate churn get new dealers onboard expand the offering of dealers, obviously interesting opportunities in the OEM and affinity space and then obviously rollouts and the digital transaction effectively right <unk>.
Plus.
It through that overtime and the ability to then increase monetization.
So those are the rough building blocks you are looking at overarching Youre question is whether this is organic or includes M&A. This is pure organic the way, we're thinking about it and the opportunity we see ahead of us.
And then the other part is our operating leverage I think we've always had very strong as an organization and I think we've alluded to that in some of our last conference calls as well, which is the cost base of this organization is relatively flat and remember it's really three buckets its people its marketing and its effects.
The fixed overhead charge.
You think of marketing roughly as 50 as it stands today, it's 50% partner marketing, 50% effectively discretionary performance marketing from our and so would we over time like to deploy more in the marketing space.
And obviously as we launched fully launched and nationwide launch more of the digital experience the answer's, yes.
And so that's that's one bucket and over time, if you think about adding people.
And really where you would add over time is more on the sales and service side.
More than anywhere else and so I think you could assume that the cost structure is relatively stable, obviously somewhat growing in proportion to obviously the size of revenue growing but the overarching operating leverage should be really healthy and really strong as we also feel that we have a lot of monetization.
Opportunities.
Does that answer your question.
I understood. That's helpful color and then maybe just as a follow up on capital allocation.
And you obviously have a significant amount of cash on the balance sheet.
Alright.
Based on you know the EBITDA cadence here in the fourth quarter in 2024.
It looks like you know you read generating positive free cash flow it really soon hum.
How should we think about you know and you also mentioned that there was you know 100, plus an organic opportunity here.
Do those targets.
Is it reasonable to assume that you know you would take a more serious consideration to its buyback here in the near term just in the context of you know the target that's out in the fact that you already.
Positive EBITDA.
Yeah.
Yeah.
It's a great question. The answers we review all opportunity of capital allocation, obviously buybacks as one opportunity of several that we have I do think that impacts of buybacks are disproportionately greater once you have positive E. P. S.
And so there's a consideration Daryl so round when if you do buybacks when do you do buybacks and in what form do you do buybacks, but is buyback something that is on our menu of options and something that we continue to consider seriously and we always continue to consider seriously. The answer is absolutely. Yes, we do also know that.
Look we've gone through now we've done nine quarters of decline. This is the first quarter of both of those.
We know we want to prove ourselves obviously over the next couple of quarters.
It's still a little bit of given date and the broader macro.
At the right time, we'll readdress that.
The broader cash balances et cetera in a more broad way. The answer is absolutely, yes, but buybacks are always a consideration for us at any point in time.
Got it got it great. Thanks for the color I'll jump back in queue.
Thank you.
The next question will come from <unk> Khan with B Riley Securities. Please go ahead.
Hi, This is Ryan asking question on behalf of that Con could you talk about conversions high.
Can you talk about conversions and United flow compared to the traditional Truecar experience and then could you also talk about conversions between the convenience cohort and the economic cohort. Please.
Yeah. So we have we have this closed so first of all the United So the United flow and we've all launch dates in the last couple of weeks. So it's hard to give.
Give like definite answers across the board I mean, we gave some indication obviously in the letter where for example in the economic flow right. We exposed it to like 50000 people of which 9000 effectively.
Immediately we started actually going through the proper flow.
And submit their information and appropriately engage so these are these are attractive numbers. What we are seeing also is that because these flows are much more personalized before actually engaging.
We also obviously see that we still have in certain areas too many steps or there are certain things that are unclear.
Or right like things that for all seem to be very obvious Arnold necessarily obvious for the consumers and so we're clearing all of that up but the in all honesty, there's it's a little bit too early to provide real like conversion metrics that are comparable at this stage because we have only been doing this effectively for a couple of weeks so.
This is something that we would love to be able to talk about in some more detail. Obviously on the next call. But these are good questions well, we have seen though is that the engagement is very very high.
And that the engagement in each of the cohorts of like given it's a personal personalized flow is high and so that obviously also shows that the demand is there and it.
The willingness to go to these flows is very high but the actual conversion metrics is probably too early to talk about.
Thank you and then a follow up as well.
When would you expect her United fluid to go out to all regions. Please.
Yeah, the United slow will be there will be will be alive across in short order.
What is most important to always remember that the Unitas law the unified flow what happens is.
It's not yet it doesn't include the final pieces of paperwork. So that's the piece that is still a.
The last effectively the last.
He got to get the full transaction online.
And so we're working through that and that obviously led product development roadmap does not solely depend on us.
But once we have done that that at least the experience for the consumer it already fully baked in a full commerce effectively flow.
But it will be online for for pretty much everybody in short order.
So it's going to be a new experience for people to go through the truecar flow at the <unk>.
He said, we have to finalize that there'd be some paperwork.
Thank you.
The next question will come from Chris Harris with Needham. Please go ahead.
Just.
Two.
Can you help us think about some sort of upper bound on.
Do you OEM incentive revenue.
Nice sequential growth again, this quarter and it just kind of want to get a sense of should it be higher than it was pre COVID-19 because of where inventories are or like should normalize at some sort of I don't know how to and I know, it's going to be lumpy, but I just kind of get a sense of where this can go.
Yeah, I think Chris I think that's a good question I think it's they got all I'll give you. Some obviously, it's a it's tough to predict.
But.
I'll give you some parameters, which is we obviously think that didn't have high interest rate world right. Some element of participation of Oems and captives to support their consumers is important.
There's also.
With relatively low brand loyalty. There is obviously also a great focus of Oems to two effectively somewhat vague recapture Gus.
Customers they've lost over the time over time.
There is an interest obviously to help boost our there are dealers with EV et cetera. So long story short I think there's a great emphasis of Oems to support their relevant businesses.
Which is which is great and obviously, there's a huge opportunity there because of the triangulation weekend due between affinity partners between our dealer dealer partners and then obviously between the OEM. So do we see this as an increasing opportunity. The answer's, yes, do we see this as an.
<unk>.
Historically was attractive to us and historically have growth opportunity. The answer is also yes right. So yeah. We think that this is important to us. The other thing is also you're going to have.
The ability to help support Oems really get in front of the right consumers into right way and so it's not just not just did you think about programs associated the rebates for example, but even like co marketing programs et cetera are all things that are possible.
And so yes, so the hard part is over the years to come it's a little bit hard to assess what the really the upper bound is.
The issue to the issue of this is these are often lumpy program started a little bit harder to predict but do we know that there's a real willingness and we also understand that there's a macro does effectively demands for a greater need of support by the Oems. The answer is also yes. So do we see the broader opportunity.
And do we think that we have a unique value proposition within the area. The answer is also yes, so it's hard to quantify.
What the actual upper bound is.
Okay.
When you do one of these programs do you also get dealer revenue because it leads to a transaction as well, yes revenue on the marketing side from the OEM side of the world.
It depends very much on the programs, but the answer is in many cases, yes.
Okay.
Okay. So in theory, it somewhat of a leading indicator on dealer revenue with the lumpy backdrop. So it's hard to model okay perfect Yeah.
And then the letter talked about regaining lost dealers can.
Can you just kind of touch on the game plan. There are you seeing outreach dealer inventory pileup worried about you're going to dealers talking about yeah.
Hey, we're more moving to subscription that hey, we have T plus.
What's the question of the call on that side of the world.
Yeah. Good question I think the short answer as always.
We have a bias towards action as a firm so we will always engaged and be and be aggressive and proactive.
We do see a really healthy portion of our dealers coming back on our network. So that's really good.
And it's really mostly also reaching out and just re engaging incorporating engaging and it's also engaging into different form. So we haven't really spoken about it in this letter but.
We have two tremendous leaders one on the sales side and one on the service side. So we've also did a greater separation of the sales and service capacities and the service programs associated to that we've obviously been doing research and historically, we've done research, where it's clearly show that NPS score.
Core's with dealers was very high if you touched them within 30 days, obviously and negative if you touched them at 90 days and so there are there there are a lot of opportunities for us to just engage much more in a consulting form and engage with providing insights and training as.
Most to trying to be there as a salesperson and remember that one of the beauties of Truecar and we have a lot of data we have a lot of insights and we have insights not only on obviously the sales that happened at a respective dealership, but also lost sales or our capture rates are all these type of things are pretty much everything that.
Within the DMA with heads of respective dealer and so there's a lot of opportunity for us to just have a different form.
The dialogue and this all sounds.
Really no.
I'm not super sophisticated and it doesn't need to be sophisticated it just means that you need to be engaging with the dealers to right way, which is exactly what we're doing now and so yes. So the short answer is it's very much proactive from us.
We do have dealers call back in but it's very much still proactive from us and it's also much more focused on how do you actually do sales how do you do service how do you do handoffs toward service what does it actually mean to do service, how often do you Dutch dealers, what do you provide them.
How are you the best partner you can be.
With the dealer partners in a world, where they really need our help.
Okay. Thank you.
Again, if you have a question. Please press Star then one our next question will come from Marvin Fong with <unk>. Please go ahead.
Hi, good morning, Thanks for taking my questions and congratulations Oliver on the new role. So first question I, just like to revisit the long term revenue.
Margin targets for 2026.
You you are jumping you you you mentioned several of the building blocks I mean is it fair to say that T. C plus is the largest component.
How you plan to grow revenue.
And could.
Could you add some color on sort of the assumptions you have behind like adoption of T spot.
How many dealers won't be part of that program et cetera that maybe a little color would be very helpful. Thank you yeah. So.
So Marvin great question. So the answer is.
Interestingly enough, it's hard to predict adoption over of a product like D. C plus I actually think and I'm a firm believer otherwise I wouldn't obviously be here, but like once tcf losses actually fully fully operational with the consumer and dealer experience. We envision it is capable of.
I think this will be a huge there will be huge adoption of that product that product now it's hard to assess and it's hard to predict when and how and what form but I do I'm a firm believer that we see that consumers really want to do full transactions online and.
We see that dealers really want to effectively expand their their addressable markets and want to maintain or even increase their margins and greater sales volumes and so we think that there's a real value here to provide.
As part of that planning to answer your question I actually think that there's a really big opportunity deal for a lot of the historical truecar revenue lines to to come back to growth right. So whether this is just providing the currency to absorb all of the products that we provide better.
Right focus on the EV side of things.
Focus on the OEM side of things et cetera, So interestingly enough and this the growth that we're looking into this aspirational model is not actually overly dependent on the PC plus side, because it's so hard to predict.
In many ways. There is a segment to D C plus and the piece of D. C. Plus really if you think about it holistically and you go back to the 30000 foot view one of the metrics you will start hearing us talk about more and more over time will be revenue per dealer that is currently still a little bit of a murky murky number.
Obviously, you have a lot of.
Dealers inside and there was a long deal to the DLR. So at some point <unk> will become a little bit more clear on that but the revenue per dealer is a metric that I've started talking about more and more internally as well as the concept of the appropriate like two sided marketplace, where you match supply and demand.
And so where revenue per dealer will be obviously, we're seeking to move up pretty dramatically over the next couple of years and one of the ways to move that up is not only to sell better and more services to dealers, but also over time is to obviously add new product lines in there and one of those product lines will be.
D C plus do I think that discipline is a huge opportunity the answer is yes.
Is this predominantly based on actually the more historical to guard. Your answer is also yes, so its actually less dependent on D C plus.
Okay, that's great and I guess, a follow up just on.
On dealer count So I think the franchise dealer count declined for the first time after several quarters of positive growth.
Two what might've changed this quarter to kind of cause that.
A number of reverse.
The prospect of a strike, which I don't know.
I think it turned out to be less bad than most people thought did that play any role that thing.
Any color you can add.
Terrific.
Yeah.
And.
Absolutely its a little bit of a wash in a just murky right now so we transited to this more service and.
The sales organization Bart and so we are we're working through that right now there's a little bit of like shaking out of like like also like historical dealer. So there may be.
A little bit less.
Our quality oriented towards consumers, there's just a little bit of give or take happening as were now prioritizing.
Really our dealer customers and consumers and so.
Net net as you will see this wash happened a little bit it might take a quarter or two parts a little bit murky in terms of shifting up and down it's really about focusing on the standard distribution of the dealer, who really want to focus on that are our bread and butter and it really provide the right experiences and on are the right forward leaning dealers.
And so you'll see that's always a little bit fluctuate, although I think that we've obviously hit the trough in and they should start going up over time.
There's a little bit of a given day. If you look at any given month in terms of types of dealers coming on and coming off what I really care about obviously is the type of dealers coming on and the type of deals going off and that's the piece we really are.
Unlike a hawk so I'm less concerned about some of the dealers coming off as long as they are.
The dealers, we are not necessarily looking to seek to service in the long term anyway.
Gotcha, Okay. That's great. Thanks, so much.
This concludes our question and answer session I would like to turn the conference back over to Mr. Rikers Mann for any closing remarks. Please go ahead Sir.
Great. So thank you everyone I would like to thank everybody for taking the time to participate today I also would like to thank the team for all their continued dedication and hard work with art of people with other people. None of these results are possible. So I really appreciate it and we ask a lot of them so with gratitude.
Thank you all and appreciate you everybody waking up early.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yes.
Thanks.
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