Q2 2023 TrueCar Inc Earnings Call
Participants
Jantoon E. Reigersman; President & CEO; TrueCar, Inc.
Teresa Luong; CFO; TrueCar, Inc.
Christopher Alan Pierce; Senior Analyst; Needham & Company, LLC, Research Division
Marvin Milton Fong; Director & E-commerce Analyst; BTIG, LLC, Research Division
Naved Ahmad Khan; MD of Internet Equity Research; B. Riley Securities, Inc., Research Division
Rajat Gupta; Research Analyst; JPMorgan Chase & Co, Research Division
Thomas Cauthorn White; MD & Senior Research Analyst; D.A. Davidson & Co., Research Division
Presentation
Operator
Good day, and welcome to the TrueCar Second Quarter 2023 Financial Results Conference Call. Please note, this event is being recorded today. I would now like to turn the conference over to Jantoon Reigersman, President and Chief Executive Officer of TrueCar. Please go ahead.
Jantoon E. Reigersman
Thank you, operator. Hello, everyone, and welcome to the TrueCar Second Quarter 2023 Earnings Conference Call. Joining me today is Teresa Luong, our Chief Financial Officer.
I hope you all had the opportunity to read our second quarter 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. 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-K, our quarterly reports on Form 10-Q and our reports 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.
In addition, we will also discuss certain GAAP and non-GAAP financial measures. Reconciliations of all non-GAAP measures to be -- to the most direct comparable GAAP measures are set forth in the Investor Relations section of our website at ir.truecar.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.
That was fun. Now with that, I will provide a summary of the quarter. So now we get into the real stuff. It is an exciting time at TrueCar. It's time of change and a time of focus. We've turned the ship and are laser-focused on growing the business.
In Q2, we achieved quarter-over-quarter revenue growth, significantly improved our bottom line, and we're targeting Q3 year-over-year revenue growth, followed by double-digit revenue growth and adjusted EBITDA profitability in Q4.
In mid-June, we streamlined our organization and eliminated 102 positions or 24% of our headcount. Although these are always difficult decisions. It was an important step to be nimbler as a company and a more focused company. We have so many diamonds in the rough that are ready to shine. We're excited to polish those together over the many quarters to come and transform this business for long-term success.
As an example, did you know that more than 50% of the nationwide supply of electric vehicles, excluding Tesla, is available on TrueCar? We have a unique opportunity to disrupt our markets and redefine our value propositions to both our consumers and dealers throughout various cohorts. We're excited to bring you along on this journey with us, and we'll elaborate more on this in the coming quarters as we launch our cohorts. Now operator, let's open the call for questions from our analysts.
Question and Answer Session
Operator
We will now begin the question-and-answer session. (Operator Instructions) Our first question here will come from Rajat Gupta with JPMorgan.
Rajat Gupta
I had a question on the OEM incentive revenue. Obviously, pretty solid in the second quarter, big pickup sequentially and likely a big driver of the EBITDA as well. Could you help us understand how the activations work here? And how should we be thinking about the sustainability of these levels going forward? Did these incentive programs continue into the third quarter? Do you anticipate to see further contribution? And just how to think about the cadence here or the recurring versus nonrecurring aspect of this? And I have a follow-up.
Jantoon E. Reigersman
Absolutely. Rajat, thanks so much for the question. So yes, we're excited on the OEM revenue, obviously, we're excited for 2 reasons. One is it's great to see OEM incentives coming back. It has obviously been an important part of our business in the past. And this dried out over the last couple of years. And so it's exciting to see that this is coming back. Not only is the OEM incentive piece is really interesting. It's also the combination of doing this together with our affinity partners.
So it also articulates the strength of the platform we have as TrueCar, which is really combining the various stakeholders together and provide value to all of those involved. And so in this case, the combination of doing things with Sam's Club, American Express and Mercedes is something that is incredibly valuable for all parties involved. We hope to do more of these type of programs. We hope to grow this type of business over time. it will always go a little bit with ebbs and flows still in the near term as obviously the macro is resetting, but we do believe and expect this to be a longer-term growth business for us.
Rajat Gupta
Got it. In the NBA USA program in the second quarter, is that -- does that go on for a few quarters? Like would it be refilled by other manufacturers? I mean just curious like what the...
Jantoon E. Reigersman
Yes. These are like almost individual programs. So it's always hard to predict. The way it works is they -- we established a program, they run well. We then determined to continue the program or slow down the program. We obviously do similar type of programs with other players as well. So it's a little bit of a give and take. And so it's always -- it's hard to say, "Hey, this is the steady growth." Because these are always programmatic basis. This is not necessarily like an ongoing revenue flow always.
But this program, obviously, has been very effective. It's something we're continuing at the moment. And then will that be replaced with other programs over time? The answer is yes. That's obviously what the teams are working on very much. And so over time, can you expect that we will do more and more on the OEM revenue side? And we have greater traction with the variety of these type of programs. The answer is yes. Will that be a perfect straight line? The answer is probably no.
Rajat Gupta
Understood. That's very helpful. And then just a question on OpEx, the cost actions were executed, I would say, in the later part of the second quarter. Your guidance for the third quarter OpEx is flattish sequentially. I would have thought it would go lower with the full effect of the actions. I'm curious like what the offsets are. You talked about some additions needed in the sales organization. But I was curious if you could add any more color on how we should think about the cadence of the OpEx through the remainder of the year.
Teresa Luong
Yes, Rajat, for that question. I'll provide some clarification around that piece. So in regards to the headcount, we did receive some benefit in Q2. So in regards to Q3 and Q4, we do expect some benefit but not to the full extent that we disclosed in regards to the $20 million annualized savings. But we do expect some benefit.
So when you think about our cost structure, there's headcount, marketing and other expenses. And as we said, marketing, we expect that to be fairly flat quarter-over-quarter, but we're continuously monitoring the efficiency and effectiveness of those marketing spend. So we're able to adjust in real time as needed based on the trends that we're seeing. And then with other pieces, we do expect that to stay flat. So overall, in total, I would say that we expect some benefit in Q3 and Q4 from the savings from the workforce reduction.
Operator
Our next question will come from Naved Khan with B. Riley Securities.
Naved Ahmad Khan
Great. It's nice to see sequential growth in the unit. And I'm just curious if the increase was driven mostly by more favorable macro, so more of a general improvement? How much of this is really driven by TrueCar+ versus the improvement in general?
Jantoon E. Reigersman
Yes. So a very good question. So it's actually -- I think it's 2 things, but not TrueCar+. So TrueCar+ to date is still immaterial compared to the bigger numbers. So that's not the big driver. However, we continuously improve the platform, close rates, focus on conversions on the site et cetera. And so it's a combination of, obviously, macro resetting as well as continued improvements that the teams are doing in terms of the type of fleets they provide the conversion rates on the site itself.
So there are 2 drivers for that: TrueCar+ is having good traction. Obviously, now with the cohorts, we're going to go into a much more narrow field there. And so we're going to report out accordingly as well going forward. And that's really focused on the transaction side, obviously, going forward. But right now, the number of TrueCar+ units in there is effectively immaterial.
Naved Ahmad Khan
Got it. And then you had previously talked about rolling it out nationwide. Is that still on track? How do you kind of view that by year-end.
Jantoon E. Reigersman
Yes. Naved, it's a very good question. So the nuance we're doing is if you think about the lessons we've learned on TrueCar+ is to date, it was very much effectively a person finding their own way in the product flow. And that's obviously never a really good experience because every person has a very different buying expectation and a very different engagement with the product. And so what we realized is we had to personalize those flows much more and take out constraints that appear as you go along. I'll give examples. If you are a lower credit profile, then obviously, lending will become a big issue. And then lending will become a big issue, not only for the consumer because they need to find the right lender that can lend against the right rates.
But also for the dealer because depending on the type of lenders, it might actually affect the margins of the dealers a lot. And so at the end of the day, we realized that we need to have a much more personalized journey, which is why we landed on the 3 cohorts to start with. Over time, obviously, we'll do more cohorts. But if you look at the cohorts in more detail you will realize that each of them will have a very unique flow. And therefore, we're solving a lot of the friction points inside the product immediately by having that more personalized flow.
The idea there is, obviously, the ability to be nationwide also much quicker. Remember that you can be nationwide with used without any issue. It's harder to be nationwide with new because there are restrictions either by OEMs or others or certain states. And so as a result, with the cohorts and launching the cohorts, it actually will facilitate us to be nationwide faster and sooner, and we'll anticipate to do that, obviously, depending on the type of cohorts and the type of cars.
But as an example, in the form of the economic cohort, we're seeking to be pretty much nationwide. It depends on certain states given the financing requirements, but pretty much nationwide, almost from the outset. So net-net, it depends a little bit on the type of product, and it depends on the type of cohort, but the answer is yes, we'll seek to be nationwide by the end of the year.
Naved Ahmad Khan
Got it. And then last question. On the monetization, that went down sequentially. Is that just a reflection of the mix between new versus used? How should I think about that?
Teresa Luong
Yes, I think that's correct. I mean I think if you look at our new used mix, our used mix dropped down to, I think, about 44% where in the last few quarters, it was closer to 48% and 49%. So definitely that did have a factor in that mix there.
Operator
Our next question will come from Tom White with D.A. Davidson.
Thomas Cauthorn White
Great. Just one for me. I guess it's been a couple of quarters now you guys are talking about kind of these 3 kind of buyer cohorts. I guess -- and I guess I'm thinking about your commentary around the sales and marketing probably being flat sequentially. Can you just talk a little bit about whether this kind of change in the way you're viewing the audience or your segmenting the audience is requiring you guys to acquire traffic or acquire would be car buyers in different ways? Do you use different channels? Any just kind of differences or changes to kind of your marketing mix or marketing spend that go along with this?
Jantoon E. Reigersman
Yes, Tom. Very good question. The answer is absolutely yes. So I think one of the beauties of doing the cohort is that the value proposition for each cohort consumer is slightly different. The value proposition even for the dealers is slightly different, even though as a dealer, you could obviously serve multiple cohorts. But the answer is absolutely yes. It allows us to not only capture people within that value prop at certain places and have a more targeted approach. It also -- and so effectively, we're allowing people to find a journey either by the way we target on the marketing side or as they obviously arrive on the sites, there are going to be different entry points in which they can take certain cohort paths.
Remember also, don't misunderstand that the 3 cohorts are just the start of many more cohorts, but the 3 cohorts given the focus that we have as a company, obviously, those 3 create real opportunity for us. Remember, the economic cohort is one that is a very large unserved market. To date, if you look at TC+ engagements, a significant part of the people that are seeking TC+ transactions are actually within this cohort already. And so it was one of the triggers whether we actually have the current product flows set up the right way. Then if you think about the convenience cohort, that's much more of the historical bread and butter of TrueCar, but also it allows us to really then focus and align a little bit better with the different affinity partners and even lenders.
So as you start segmenting cohorts that actually facilitates everything. So it does not only facilitate the targeting of the marketing, which absolutely is true and is something we're now embarking on. But it's also targeting effectively with partners that we have on the affinity side as well as the different lenders that are more specialized in each of these cohorts. So the answer is yes. The -- in terms of overarching dollars on the marketing side, that's not expected to increase per se, but it's much more the allocation of dollars and being smart about that, which is -- which we're now working on.
Operator
(Operator Instructions) Our next question here will come from Chris Pierce with Needham.
Christopher Alan Pierce
I shared a question on the macro and then a follow-up. Kind of looking at new car SAAR, it seems like fleet is kind of driving some of the recovery. Do you think we haven't really seen a consumer recovery yet, and that's sort of -- there's further growth to come from the business where you guys kind of are more levered to. Is that kind of -- would you agree with that? Is that the right way to think about it?
Jantoon E. Reigersman
Yes. Chris, I think the answer is absolutely, yes. So I think you are in a world where price is still held fairly high over time. I agree that the fleet, obviously, was an important driver. But also remember that there's a lot of pent-up demand in the markets. And I think you can see that even from -- right, like the used cars still holding fairly steady. Even though, obviously, new car prices are coming down, there is a lot of demand, and you can see that even across all of the different platforms is that the demand in the UVs are very high because people are looking for cars.
And so the answer is yes. I think that there's a -- the healthy mix has come back. I also think that now the days in inventory has started increasing. And so all in all, I think the macro is turning very much into our favor, which is a good thing for us, obviously, and we can be more and more helpful for our dealer partners, which is also always a good thing for us. It is still a little bit sporadic. So it still depends a little bit on the brands and the mix et cetera. But we expect this to iron out over the course of the next several quarters.
Christopher Alan Pierce
Okay. And it looks like you guys added franchise dealers or it looks like franchise dealers might have bottomed in the third quarter of 2022. Can you just kind of walk me through what's kind of resonating with those dealers? Is it because prices are still high. They're relying on leads more? Is it because of the changes you guys have made? Is it TrueCar+? I just kind of like to get a sense of what's driving the franchise dealer count back to positive...
Jantoon E. Reigersman
It's a great question. It's a combination of all. So I think there is an element of dealers, obviously, now having more inventory than they had previously and have a greater need of help. Obviously, as the markets are coming back, we also have something that's called lost sales, right? So you walk into a dealership and you can show that they have actually lost sales in certain ways in their own area. And you can show like, hey, if you actually were to do ABC, it's actually much more beneficial to you. And so it's all very data-driven because obviously, now the markets are turning, and we have all the data available.
It's also because we're improving on the product flows and starting to offering -- offer interesting new opportunities. I'll give you an example. We're launching sponsored listing, for example, for new cars. We only used to have that for used cars. And so there are opportunities there also to play for dealers. And then the other thing is also just overarching the opportunity to, especially as you start segmenting in the cohorts, obviously, that's resonating really well for the dealers because many dealers have some form of specialization in some shape or form. And so segmenting in cohorts actually allows them to really do what they do best. And so for us, having that type of traction is important.
The other thing also that I think is important to our underlying is that historically, our sales forces were often driven by rooftop count or those type of metric that has all shifted to really focusing on effectively net revenue generation. And so it's normal that you see a natural shift happening of some dealers coming off that are very low and often very small independent players and that we're really focusing on often a little bit more valuable revenue-generating larger independents or franchise dealers, which is obviously the historical -- bread and butter of the firm as well.
So yes, so these are normal natural shifts to happen for us, but there's a value proposition that is good. I think one thing to highlight as well is we're also focusing now that we've started segmenting on the cohorts. We've also gotten much more in tune with the value proposition that we have for both consumers and dealers. And so this is an effort that we'll continue conducting over the next couple of months where we're really refining on what are the biggest strengths that we have and articulate that differentiation much better than we have in the past.
I think overarching even for the financial community, if you actually look, right, it's hard to assess what makes the different companies actually different. And so it's a concerted effort we're conducting right now where we are articulating this much better and also will come forward much cleaner and clearer with our articulation on what makes TrueCar actually so much different from many of the other players in the market.
Operator
(Operator Instructions) Our next question here will come from Marvin Fong with BTIG.
Marvin Milton Fong
Just one question on conversion rates. Units were up although traffic was down quarter-over-quarter. Just wondering if you could maybe break that down a little bit more. Are you attributing that to improvements on the website? Or are you noticing any changes in consumer behavior? And then I have a follow-up.
Jantoon E. Reigersman
Yes. I think, Marvin, I think it's both. So we're continuously making improvements, and we're always getting smarter on the product side and also thanks to TC+, we're learning a lot on like where people drop and what happens and what makes people tick effectively, that's number one. But it's also -- don't forget that at the end of the day, a large part of conversion is also driven by car prices and car availability.
So if you look in the -- like a couple of quarters ago, when the conversions were relatively low. Two of the big drivers were obviously lack of availability of the cars or when they were available, the pricing was disproportionate in the eyes of the consumer. And so now that, that becomes more in the realm of possibility for the consumers themselves. I think that's a big driver. But in addition to that, we're obviously making the right continuous improvements on the site itself. And then we think that, that's obviously only going to improve over time as we become more focused on these cohorts.
Marvin Milton Fong
Got it. And my follow-up is, I understand, everything you're saying a question ago about a lot of the lower value dealers are going to be churning off as you focus on net revenue. But just as you talk about the independent dealer count like what's your visibility there? Should we continue to expect that to decline? Or do you think that might be stabilizing?
Jantoon E. Reigersman
Yes. There are -- like the ones that are turning are often going out of business or merging or so those are often smaller players. I think that just needs to kind of wash through the system. I anticipate this to happen for some time given -- on the independent side, given that those -- we have quite a lot of smaller players still like in the long tail effectively.
So on the rooftop number count there's still some left. And the question is a little bit depending on how the markets normalize or how they are able to adapt their business lines. It's hard to say whether they will be able to make that or not. But for the time being, like while the interest rates are relatively high, and obviously, used car prices are where they are, some of them will probably struggle and that will stay like that. So I would anticipate just to keep going for a little bit and then at some point that will level out.
Operator
And this concludes the question-and-answer session. I'd like to turn the call back over to TrueCar's President and CEO, Jantoon Reigersman for any closing remarks.
Jantoon E. Reigersman
I would like to thank everybody for taking the time to participate on our call today. I also wanted to thank the entire TrueCar team. So the team is working tremendously well, coming together. It's a smaller team. It's a nimble team. And the team continues to work super hard. So it's an exciting time for the company, and we look forward to sharing more about our continued progress with all of you on our next couple of calls.
Operator
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.
