Q3 2023 TrueCar Inc Earnings Call
Participants
Jantoon E. Reigersman; President & CEO; TrueCar, Inc.
Christopher Alan Pierce; Senior Analyst; Needham & Company, LLC, Research Division
Marvin Milton Fong; Director & E-commerce Analyst; BTIG, LLC, Research Division
Rajat Gupta; Research Analyst; JPMorgan Chase & Co, Research Division
Unidentified Analyst
Presentation
Operator
Good day, and welcome to the TrueCar Third Quarter 2023 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Mr. Jantoon Reigersman, President and Chief Executive Officer of TrueCar. Please go ahead, sir.
Jantoon E. Reigersman
Thank you, operator. Hello, everyone, and welcome to the TrueCar's Third Quarter 2023 Earnings Conference Call. Joining me today is Oliver Foley, our new Chief Financial Officer. 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.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 looking statements on this call, including statements regarding our revenue growth, expected adjusted EBITDA as well as aspirational goals regarding our 3-year plan. 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 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. 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.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.
With that, I will provide a summary of the quarter, as highlighted in our shareholder letter. This is an exciting quarter, okay? We have surpassed our guidance. We're back to year-over-year revenue growth for the first time in 9 quarters and achieved 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 in increasingly greater need of TrueCar's offerings. U.S. monthly inventory exceeded 2 million units for the first time since March 2021, a year-over-year increase of 50.3%. The percentage of new car sales over MSRP decreased to 39%, a decline of 37% year-over-year. And in September, average new car incentives climbed 129% year-over-year to $2,367. We still have a ways to go before the macroeconomic environment returns to historical norms but it appears the tide has started to turn in our favor.
We believe our focus on enabling transactions for both consumers and dealers through a more comprehensive journey rather than selling page views, impressions or ads will set us apart from our competition in new ways, 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 these components. Specifically, it requires an experience that integrates seamlessly with the processes and software 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 flow is designed to resemble traditional online commerce checkout flow, whereby consumers are provided with relevant transaction details, landed cost and next steps to complete the purchase of the product they're buying. We have also successfully launched our economic cohort and our convenience cohort flows, and we're well on the way to launch our EV flow in December.
We continue to refine each of these 3 cohort flows as we reduce friction, eliminate unnecessary steps and learn from product-focused groups and consumer behaviors. We truly have shifted the organization to a product testing mindset and talent base and we -- and the build-out of this cohort flows is emblematic of that shift. Beyond these 3 cohort flows, 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 growth cannot come overnight. We're building a company that can endure and sustain and it can help shape the automotive industry over time. This 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, 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 understand the importance of the rule of 40 as an indicator of healthy growing companies with good profitability metrics. We believe that what we need to do to -- 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 this, we have established 3-year aspirational goals. By the end of 2026, we're 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 2026, which we believe would 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 opportunity, the platform and the talent to execute our strategy and now the macro is turning in our favor, join us in this journey as we reshape the car-buying experience. Now operator, let's open the call for questions from our analysts.
Question and Answer Session
Operator
(Operator Instructions) And the first question will come from Rajat Gupta with JPMorgan.
Rajat Gupta
Congrats on the execution in 3Q. Maybe just on the $300 million '26 target, I mean you have a target out there now? And it's still -- you're still calling it aspirational or ambitious. Maybe if you could give us some sense or like a bridge from how we get there from today? Is it going to be 100% organic? Is it M&A and organic combined? And then how should we just think about the operating leverage from that revenue growth going forward as well? Maybe not to the $300 million, but like just going forward as well, how should we think about operating leverage with as revenue comes back in '24, '25 and beyond. And I have a follow-up.
Jantoon E. Reigersman
Absolutely. So Rajat, thanks so much for the question. So our goal -- on the first part, the answer is organic. If you think of the overarching building blocks, right, it's obviously like -- which is normal to an e-commerce play is mitigate churn -- 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 roll out the digital transaction effectively, right, TC+ through that over time and the ability to then increase monetization so those are the rough building blocks you're looking at overarching. Your 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 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. Remember, it's really 3 buckets. It's people, it's marketing, and it's effectively the fixed overhead charge. If you think of marketing roughly it's 50 -- as it stands today, it's 50% partner marketing, 50% effectively discretionary performance marketing from our end. So would we, over time, like to deploy more in the marketing space? Obviously, as we launch -- fully launch and nationwide launch more of the digital experience, the answer is yes. So that's 1 bucket. And over time, if you think about adding people, 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 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?
Rajat Gupta
Understood. No, that's helpful color. And then maybe just as a follow-up on capital allocation. You obviously have a significant amount of cash on the balance sheet, I mean based on the EBITDA cadence here in the fourth quarter and into 2024, it looks like you will be generating positive free cash flow very soon. How should we think about -- and you also mentioned that there's 100% organic opportunity here to those targets. So is it reasonable to assume that you would take a more serious consideration towards buyback here in the near term, just in the context of the targets itself and the fact that you're already positive?
Jantoon E. Reigersman
Yes, it's a great question. The answer is we review all opportunities of capital allocation, obviously, buybacks is 1 opportunity of several that we have. I do think that the impact of buybacks are disproportionately greater once you have a positive EPS and so there is a consideration there also around when -- if you do buybacks, when do you do buybacks and then what form do you do by back? But is a buyback something that is on our menu of options and something that we continue to consider seriously, and we always consider seriously. The answer is absolutely yes. We do also know that look, we've gone through now -- we've done 9 quarters of decline. This is the first quarter of positive. We know we want to prove ourselves, obviously, over the next couple of quarters. It's still a little bit of give and take in the broader macro. At the right time, will we address 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.
Operator
The next question will come from Naved Khan with B. Riley Securities.
Unidentified Analyst
This is [Ryan] asking a question on behalf of Naved Khan. Could you talk about conversions -- can you talk about conversions in 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?
Jantoon E. Reigersman
Yes. So we've disclosed -- so first of all, the United flow -- so the united flow we've all launched this in the last couple of weeks. So it's hard to 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 50,000 people, which 9,000 effectively -- immediately, we started actually going through the proper flow and submit their information and properly engage. So these are attractive numbers. What we are seeing also is that because these flows are much more personalized, people are 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 us seem to be very obvious are not necessarily obvious for the consumers.
And so we're clearing all that up. But in all honesty, there -- it's a little bit too early to provide real like conversion metrics that are comparable at this stage because we only have 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. What 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 personalized flow, is high. And so that obviously also shows that the demand is there and that the willingness to go to these flows is very high. But the actual conversion metrics is probably too early to talk about.
Unidentified Analyst
And then a follow-up is when would you expect for United flow to go out to all regions, please?
Jantoon E. Reigersman
Yes. The United flow will be live across in short order. What is most important though is remember that the United flow -- the unified flow, what happens is it's not yet -- it doesn't include the final piece is of paperwork. So that's the piece that is still the last -- effectively the last hiccup to get the full transaction online. And so we're working through that. And that -- obviously, that product development road map does not solidly depend on us. But once we have done that, that at least the experience for the consumer is already fully baked in a full commerce effectively flow, but it will be online for pretty much everybody in short order. Yes. So it's going to be a new experience for people to go through the TrueCar flow. The piece that we have to finalize is the piece of paperwork.
Operator
The next question will come from Chris Pierce with Needham.
Christopher Alan Pierce
Just 2, can you help us think about some sort of upper bound on OEM incentive revenue. It had a nice sequential growth again this quarter. And I just kind of want to get a sense of should it be higher than it was pre-COVID because of where inventories are? Or like should it normalize at some sort of level? I just don't know how to -- and I know it's going to be lumpy, but I just can't get a sense of where this can go.
Jantoon E. Reigersman
Yes. I think -- Chris, I think that's a good question. I think it's a -- like I'll give you some -- obviously, it's tough to predict but I'll give you some parameters, which is we obviously think that in the 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's obviously also a great focus of OEMs to effectively somewhat like recapture customers they've lost over time. There is an interest, obviously, to help push their dealers with EV, et cetera. So long story short, I think there is a great emphasis of OEMs to support their relevant businesses, which is great. And obviously, there's a huge opportunity there because of the triangulation we can do between affinity partners, between our dealer partners and then obviously, between the OEM, so do we see this as an increasing opportunity? The answer is, yes. Do we see this as an opportunity that historically was attractive to us and historically have growth opportunity? The answer is also, yes, right? So yes, 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 in the right way. And so it's not just that you think about programs associated to 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 really the upper bound is. The issue -- the big issue of this is that these are often more lumpy programs that are a little bit harder to predict. But do we know that there's a real willingness and do we also understand that there's a macro that 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.
Christopher Alan Pierce
Okay. But -- and when you do one of these programs, do you also get dealer revenue because it leads to a transaction as well? Or is it just revenue on the marketing side from the OEMs side of the world?
Jantoon E. Reigersman
It depends very much on the programs, but the answer is, in many cases, yes, both.
Christopher Alan Pierce
Okay. Okay. So in theory, it's somewhat of a leading indicator on dealer revenue with a lumpy backdrop. So it's hard to model. Okay. Perfect.
Jantoon E. Reigersman
Yes.
Christopher Alan Pierce
And then the letter talked about regaining lost dealers. Can you just kind of touch on the game plan there? Are you seeing outreach from these dealers as inventories pile up? Or is it about you going to dealers talking about, hey, we're more moving to subscription? Hey, we have TC+? What's the push and the call on that side of the world?
Jantoon E. Reigersman
Yes. Good question. I think the short answer is always, we have a bias toward action as a firm. So we will always engage 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 us reaching out and just reengaging and properly engaging. And it's also engaging in the different form. So we haven't really spoken about it in this letter, but we have 2 tremendous leaders, one on the sell side and one on the service side. So we 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 clearly showed that NPS scores with dealers was very high if you touch them within 30 days, obviously, and negative, if you touched them in 90 days, and so 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 opposed to trying to be there as a salesperson.
And remember that one of the beauties of TrueCar is that we have a lot of data. We have a lot of insights and we have insights not only on, obviously, the sales that happen at a respective dealership, but also a lost sales or capture rates or all these type of things are pretty much everything that happens within the DNA of that respective dealer. And so there's a lot of opportunity for us to just have a different form of a dialogue. And this all sounds really 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 handoff towards service? What does it actually mean to do service, how often do you touch 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.
Operator
(Operator Instructions) Our next question will come from Marvin Fong with BTIG.
Marvin Milton Fong
Congratulations, Oliver, on the new role. So first question, I'd just like to revisit the long-term revenue and margin targets for 2026. You -- Jantoon, you mentioned several of the building blocks. I mean is it fair to say that TC+ is the largest component of how you plan to grow revenue? And could you add some color on sort of the assumptions you have behind like adoption of TC+, like how many dealers will be part of that program, et cetera. Just maybe some more color would be very helpful.
Jantoon E. Reigersman
Yes. Great -- so Marvin, great question. So the answer is interestingly enough, it's hard to predict adoption of a product like TC+. I actually think, and I'm a firm believer, otherwise, I wouldn't obviously be here, but like once TC+ is 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. Now it's hard to assess and it's hard to predict when and how and what form. But I do am 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 addressable markets and want to maintain or even increase their margins and do greater sales volumes. And so we think that there's a real value here to provide. As part of the planning, to answer your question, I actually think that there is a really big opportunity of -- for a lot of the historical TrueCar revenue lines to come back to growth, right? So whether this just providing the current suite of 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 TC+ side because it's so hard to predict. So in many ways, there is a segment to TC+ and the piece of TC+, really, if you think about it holistically, and you go back to the 30,000-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 number because obviously, you have a lot of dealers inside and there's a long tail to the dealer. So at some point, we'll become a little bit more clear on that. But revenue per dealer is a metric that I've started talking about more and more internally as well as the concept of a proper like 2 side of marketplace where you match supply and demand. And so well 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 TC+. Do I think that TC+ has huge opportunity, the answer is yes. Is this predominantly based on actually the more historical TrueCar? The answer is also, yes. So it's actually less dependent on TC+.
Marvin Milton Fong
Got you. Okay. That's great. And I guess a follow-up just on dealer count. So I think the franchise dealer count declined for the first half after several quarters of positive growth, could you just speak to what might have changed this quarter to kind of cause that number to reverse, the prospect of the strike, which I think, turned out to be less bad than most people thought. Did that play any role? Just any color you could add would be terrific.
Jantoon E. Reigersman
Yes, it's a -- yes. And -- absolutely, it's a little bit of a wash and -- or just murky right now. So we transited to this more service and sales organization part. And so we're working through that right now. There's a little bit of like shaking out of like also like historical dealers that are maybe a little bit less quality oriented towards consumers. There's just a little bit of give or take happening as we're now prioritizing really our dealer customers and consumers. And so net-net, as you'll see this wash happen a little bit. It might take a quarter or 2 but it's a little bit murky in terms of shifting up and down. It's really about focusing on the standard distribution of the dealers.
We really want to focus on our bread and butter and it really provide the right experiences and are the right forward-leaning dealers. And so you will see that's always a little bit fluctuate although I think that we've obviously hit the trough and this should start going up over time. There's a little bit of give and take, 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 dealers going off. And that's the piece we really are on like 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.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Reigersman, for any closing remarks. Please go ahead, sir.
Jantoon E. Reigersman
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, without our 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.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
