TrueCar Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 21, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to the TrueCar 4th Quarter 2023 Results Financial Call. Please note this event is being recorded. I would now like to turn the conference over to Jantoon Reagrisman, President and Chief Executive Officer of TrueCar. Please go ahead.

Speaker 1

Thank you, operator. Hello, everyone, and welcome to TrueCar's 4th quarter 2023 earnings conference call. Joining me today is Oliver Foley, our Chief Financial Officer. I hope you have all had the opportunity to read our stockholder letter, which was released yesterday after market close and is available on our Investor Relations website at ir.truecar.com. Before we get started, I need to read our safe harbor.

Speaker 1

I want to remind you that we will be making forward looking statements on this call. These forward looking statements can be identified by the use of words such as believe, expect, plan, target, anticipate, 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 ks, our quarterly reports on Form 10 Q and our other report and filings with the Securities and Exchange Commission for a discussion of the factors that could cause our results to differ materially. The forward looking statements we make 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.

Speaker 1

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 measures are set forth in the Investor Relations section of our website at ir.crugar.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. With that, I'll provide a brief summary of the quarter. We continue to deliver as promised.

Speaker 1

In Q4, we achieved 13% year over year revenue growth and achieved adjusted EBITDA profitability of $2,100,000 a $12,100,000 improvement year over year. Meanwhile, we saw encouraging signs of a potential bottoming in our total active dealers at the end of Q4 versus 11,503 at the end of Q3, driven by the net addition of 135 franchise dealers offset by the net loss of 138 independent dealers in Q4. This is consistent with our viewpoint that while independent dealers continue to be challenged by today's high interest rate environment, franchise dealers in particular are increasingly in need for TrueCar services to help them cope with growing new car inventories. Further highlighting this trend, new vehicle sales compromised 59% of the total units sold on TrueCar in Q4, which is up from 50% of total units sold in Q4 2022 and up from 56% of total units sold in Q3 2023. We believe TrueCar's leverage towards franchise dealers combined with our unique ability to offer targeted OEM incentives to our 250 plus Affinity partner audiences positions us to capitalize on the growing focus on new vehicle sales.

Speaker 1

Coinciding with our presence at the National Automobile Dealers Association also called TrueCar Marketing Solutions, also known as TCMS. The development and launch of TCMS was informed by and in response to feedback shared by many of our dealer partners related to their most common challenges around 1, identifying and reaching targeted audiences of in market consumers 2, standing out from the sea of competing dealers in a consumer environment lacking the brand loyalty of the past and 3, cost effective ways to showcase and promote inventory not being surfaced by the more common search algorithms. The result is a new offering that is not only highly complementary and accretive to the core listings lead gen business for which dealers have come to know us, but also represents a new cost effective alternative to the traditional digital marketing channels that presently capture a significant share of dealers' digital marketing budgets. Therefore, we're confident that the rollout and adoption of our TCMS products will serve as a key building block for our near term growth objectives by helping us attract and retain key dealer partners while growing revenue per dealer. Let us also briefly turn to TUKAR Plus.

Speaker 1

To be clear, the launch of TCMS is in no way deviation in strategy and our singular focus remains on our pursuit of what we believe to be the Holy Grail of Automotive through an entirely digital online transaction. For consumers, that means an experience built upon the trust and transparency we've always offered where they can, number 1, shop millions of listings nationwide to find the right deal for them 2, select between a range of aftermarket products offered by the dealer 3, receive offers and secure financing from a range of competitive lenders regardless of their credit score 4, receive a firm offer on the trade in that is directly incorporated into the value of the deal 5, build out a fully transparent deal that includes all taxes, fees and rebates 6, digitally execute a retail installment contract and 7, schedule pickup or delivery of their vehicle all from the comfort of their couch. For dealers, we want to offer: 1, an expansion of their addressable market and the ability to compete for consumers who are nationwide 2, superior attachment rates across the dealers' customizable F and I menu 3, a significant improvement in sales volume and efficiency by delivering a completed transaction ready for fulfillment and 4, access to a risk free trade in.

Speaker 1

We believe this is what a true online buying experience looks like. We are hopeful that TrueCar will enable the first true online purchase of a new car within the first half of this year and we're partnering with several key external stakeholders to make this happen. This is not trivial work and even though we have a clear product development road map, we know the significant level of effort and coordination takes the stakes, including some out of our control. Once completed, the current TC Plus product effectively still a Super Lead will be replaced with a complete online transaction and at that point only cars that are fully transactable online will be classified as TC Plus. DC plus to date has been a vital learning platform for us to get to the product development and experiences we have today.

Speaker 1

Lastly, our outlook for this quarter and beyond. As a reminder, our goal is to return the business to $300,000,000 in revenue with 10% free cash flow margin by the end of 2026, implying a compound annual growth rate of 24% from 2023 to 2026. We believe we can achieve this goal by focusing on the following 4 building blocks. Number 1, activate new dealers. Number 2, limit dealer churn number 3, grow average revenue per dealer through our expanded product offering and 4, continue to grow our OEM partnerships.

Speaker 1

Progress against each of these building blocks will take time, but should have a compound effect over the course of the year. We aim for 10% year over year growth in revenue growth in Q1 and around breakeven adjusted EBITDA. As a reminder, our Q1 of the year adjusted EBITDA flow through is typically seasonally lower due to payroll related and NADA expenses. Looking beyond Q1, we anticipate an acceleration of our revenue and EBITDA growth and are confident that we can achieve positive free cash flow in the second half of the year. Now operator, let's open the call for questions from our analysts.

Operator

Yes. Thank you. We will now begin the question and answer session. And today's first question comes from Navi Khan with B. Riley Securities.

Speaker 2

Hi, this is Ryan on behalf of Naved. Thank you for taking my question. 2, if I may. First, incentive revenue has grown pretty material. And materially, how do you expect the growth trend to look in 2024?

Speaker 2

And then second, in the shareholder letter, you alluded to the opportunity to incorporate TrueCar Marketing Solutions and subscription packages. Can you talk about the timeline for that? Thank you.

Speaker 1

Absolutely. So I think we so this is Joon Toon. In terms of the revenue growth, as we outlined, we are obviously very focused to return to the $300,000,000 revenue target

Speaker 3

set by

Speaker 1

the end of 2026. So that's a compound annual growth rate of roughly 24%. So, growth rate of roughly 24%. So remember in Q3, we had single digit growth, Q4 now we've had double digit growth. Obviously, growth is up to the right, never is perfectly linear.

Speaker 1

And we are confident that we're building up the building blocks required to get to this effectively compound growth rate that we're seeking over the course of the next 3 years. So I think we'll we know what we need to do and we have the building blocks, but also remember we're just coming out of the trough of the first time that we were actually growing again in Q3 and we'll be accelerating and building that up over the course of this year. Vis a vis TCMS, so we have launched this at NADA, which was a couple of weeks ago. Some of these products are currently being launched, others are being finalized. But I would argue that the real impact should be seen over the course of Q2 and going forward, although there will be some marginal ability for dealers to already effectively sign up in Q1 and some revenue will flow in Q1, but you'll see or you should be seeing an increase in revenue per dealer over the course of this year as these products will roll out more widely.

Speaker 4

Ryan, this is Oliver. I'll just chime in on that second question. If you look at the description that we provided on each of the TCMS products, you'll see that some of them are, I think very programmatic and they're really good candidates to be incorporated into our existing subscription bundles. Others are more bespoke where we're effectively running targeted campaigns on the dealer's behalf, right, and really sort of trying to capture some of their digital marketing spend that would go to sort of more traditional channels. And so our hope is that by the very beginning of Q2, our subscription tiers will reflect some of these more programmatic TCMS products, the ones that really are designed to sort of provide incremental on-site awareness for dealers, branding opportunities and sort of additional being an additional traffic driver for them.

Speaker 2

Thank you.

Operator

Thank you. And the next question comes from Tom White with D. A. Davidson.

Speaker 4

Hey, this is Wyatt on for Tom. Thanks for taking our questions. Could you talk a little bit about what your outlook assumptions are around TrueCar Plus for 2024? Is there an explicit monetization benefit from TrueCar Plus this year? And if not, when do you think it could impact TrueCar's revenues in a more meaningful way?

Speaker 4

Thank you.

Speaker 1

Yes, good question. And I think it's a similar question that was asked in the past, and I'll repeat what we said then too. I think for 2024, the focus really is around the 4 building blocks that we mentioned. So it's getting dealers back onto the platform, limit churn, increase revenue per dealer by expanding the product offering and really focus on the OEM opportunity. We're not assuming a significant contribution of Tugger Plus throughout 2024.

Speaker 1

Obviously, that is a high focus for us from a product development perspective, but we're also well aware that as we roll that out, there are always going to be some learnings that you'll do as you commercialize that more fully and as you expand that and put more dealers on that program. So for this year, assume that there is no real or limited financial contributions and that would should kick in obviously into 2025 beyond.

Speaker 4

Got it. That's really helpful. And Wyatt, I'll just I'll chime in quickly and say that in my view, the number one way that BlueCard Plus will be monetized in 2024 is by helping us attract new dealers and retain existing dealers. The reason I say that is because I do believe that once we do transact that first entirely digital online new car purchase, we have a very differentiated marketplace that provides a very unique value proposition to dealers. And we sort of outlined some of those sort of those key value props for the dealer, whether it's expanding their addressable market, it's improving their ability to drive F and I sales.

Speaker 4

And so once we do prove that we can execute that, hopefully in the first half of this year. I do think we have a marketplace that's truly differentiated from all the others out there and that'll help us sort of regain our share of dealers and hopefully retain our existing dealers. Okay, great. Thank you. And then just one follow-up, could you update us on your capital allocation priorities for 2024?

Speaker 4

Yes. I'll jump in quickly there. I mean, I think we've long said that once we get to free cash flow breakeven, we will be sort of actively engaged in the capital allocation strategy. Right now, we still maintain over $135,000,000 on our balance sheet. And we are very keen to sort of come up with a deliberate strategy for the second half of this year, given that we do expect to be free cash flow positive in the second half of this year.

Speaker 4

So as we've said before, everything is on the table, whether it be strategic acquisitions, it be share repurchases, it be supercharging the growth of TC Plus with a more robust marketing budget. All those things are on the table for the second half of this year. Got it. Thank you both.

Operator

Thank you. And the next question comes from Chris Pierce with Needham.

Speaker 5

Hey, good morning. On revenues specifically, can you talk about OEM incentive revenues? Is there any seasonality there or is there a pipeline that you can speak to there? I just want

Speaker 4

to get a sense of how

Speaker 5

to think about that revenue line into 2024?

Speaker 1

Yes, Chris, it's so I don't think there's any seasonality per se. It's much more these are effectively more to more project based and as a result are a little bit more lumpy in nature. And so it's less about consistent revenue. It's more that there's project like different programs that we're effectively running with the different OEMs. We have multitude of conversations at any point in time.

Speaker 1

There are different forms of programs we're often suggesting and depending a little bit on the priorities of the OEM, some programs are more relevant at different points in time than others. And so it's a little bit hard to predict very well the future components of, okay, how is that like revenue line growing exactly quarter to quarter and it's always a little bit fluctuating. But overarching, we see a huge opportunity in the OEM side in general. So we do feel that there's a large like if you look at it on a yearly basis, for example, there's a large opportunity for us to obviously grow that revenue line. And obviously, we as part of the longer term trajectory that we've outlined, we obviously feel that we should get back to historical OEM numbers and beyond as we start looking in the outer years.

Speaker 1

But the short version is, yes, we have active dialogues, we have different programs that are very interesting to pursue for the OEMs. But it's hard to perfectly predict that or outline that or forecast that.

Speaker 4

And Chris, I'll just add that I think that the seasonality in the OEM business is really just tied to new vehicle sales, right? So because it is still very much a pay for performance type model, meaning these are rebates, they're based on the volume of new car purchases. And so generally speaking, in Q4, you see seasonally higher volume because that's generally when you see a ton of new car sales. Q1, it always seems to come down slightly. And so I would say that's really sort of the seasonality behind the OEM side of the business.

Speaker 4

It's really just tied to new vehicle sales.

Speaker 5

Okay, perfect. And then on expenses, talking about building out TrueCar Plus and the learning is strong, is this a good run rate for tech and development expenses or does there need to be further investments there? I just want to know the right way to think about that going forward. That's come down pretty dramatically the past couple of quarters.

Speaker 4

Yes. So I'd say, when you look at Q4, one thing to call out is that there were just over $1,000,000 of accrual reversals. So we had sort of a one time benefit in Q4 around certain headcount accruals that were reversed in the quarter. So I would say the tech and dev expense in Q4 is slightly below what the run rate should be. I think something closer, maybe slightly above $7,000,000 is sort of the run rate that I would expect, whereas we came in at, believe, at $6,400,000 in Q4.

Speaker 4

So that definitely does reflect the sort of that non recurring benefit that we had in Q4. Okay, perfect. Thank you.

Operator

Thank you. And the next question comes from Robin Fong with BTIG.

Speaker 3

Good morning. Thanks for taking my questions. So first question, apologies, I hopped on a little late, if this is already asked. But you just kind of speak to your expectations for the independent dealer channel? There was an uptick in the churn in the Q4 and understand that I think the Q4 typically is seasonally a little bit higher, but do you expect independent dealer churn to continue throughout 2024 or how do you view that?

Speaker 3

And then on TC Plus, just I know it's super early days, but what sort of your thought process behind your plans to roll that out? Do you plan to just keep that on the marketplace or could it simultaneously roll out as a white label solution for dealer websites or even OEM, maybe you could expand a little bit more on your thinking there? Thanks.

Speaker 1

Absolutely. Hi, Marv. So on the independents, yes, there think of the independents, obviously, as almost I mean, there are obviously many, many groups within that. But think about it as if you oversimplify it, you have smaller independents that obviously are going through a rough time with financing high financing costs and therefore, right, limited affordability for consumers. And so for them, it's hard to acquire inventory as well as sell inventory.

Speaker 1

And so a lot of them are either going out of business, they're being acquired and rolled up into effectively roll ups, etcetera. So there's a lot of moving and shifting on the smaller independent space. We're obviously very focused still on the larger independents and we see good traction there, but they obviously run a very different business. So yes, we see a continued decline of smaller independents throughout the year, but obviously, a good traction with larger independents and good traction with franchisees. So that's I think that's the any questions on that specifically before I go over on TC Plus?

Speaker 3

No, that was a great answer. I got it.

Speaker 1

On TC Plus, yes, I think look, there are 2 different parts to your question. One is how do you think about the rollout? Number 1 is I think we're TC Plus. We're not going to have every single dealer partner on TC Plus in the future. It's really about making sure we have the right dealers on and then obviously really focus on supply demand.

Speaker 1

And so there is going to be a prequalification that's going to happen around the dealers can be on, because obviously we want to make sure that experience is a really good experience for both consumer and dealer. And that we're really making sure we're very thoughtful about consumers being able to find the right inventory and where the right inventory is available. And so at the end of the day, it's really about scaling that by identifying the right dealers and then making sure that they're on and then doing that also in a very consistent manner. So it's also not something that you're going to flip a switch and have thousands of dealers on. You're really thinking about tens of larger dealers on initially having the right amount of inventory and then start pushing from there.

Speaker 1

Vis a vis your question on white labeling, those are things that are absolutely very interesting opportunities for us. In online transaction space and you think about the entry point that every consumer has, then there are very interesting opportunities for us to already capture people at the earlier stage and think of, hey, you're a lender and you have a very committed consumer who wants to lend with you and through you, but wants to find their car and already be effectively prequalified on your own side, then all those things should be possible and you should be able to navigate and then through almost like a different type of TrueCar Plus experience where they see very specific inventory for their lending as an example. So the answer is yes, there's a lot of opportunity to that. We obviously are in the near term very focused on getting the marketplace and the transaction enabled the way we've always envisioned it. And we finally broke the back of that camel in order to actually make that happen visavis the paperwork.

Speaker 1

But opportunities like white labeling are big opportunities for us going forward.

Speaker 3

That's great, Jantoon. Thanks so much.

Operator

Thank you. And this concludes the question and answer session. Would like to turn the floor back over to TrueCar's President and CEO, Jon Tien Riegersman for closing remarks.

Speaker 1

Awesome. So I would like to thank everybody for taking the time to participate in our call today. I also want to thank the entire team at TrueCar for all their continued dedication and perseverance. We have a huge opportunity ahead of us and the team is doing tremendous work. So I'm really proud of them and want to thank them for all the contribution they're making.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now

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Earnings Conference Call
TrueCar Q4 2023
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