TRUE - NASDAQ

Good day, and welcome to the TrueCar Second Quarter 2022 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Ms.

Thank you, operator. Hello, and welcome to TrueCar's second quarter 2022 earnings conference call. Joining me today are Mike Darrow, our President and Chief Executive Officer; and Jantoon Reigersman, our Chief Financial Officer and Chief Operating Officer. By now, I hope you've all had the opportunity to read our second quarter stockholder letter, which was released on Tuesday, August 2, after market closed and is available on our Investor Relations website at ir.truecar.com. Before we get started, I want to remind you that we will be making forward-looking statements on this call. These forward-looking statements can be defined 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 upon as a guarantee 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 other 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. 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 turn the call over to TrueCar's President and Chief Executive Officer, Mike Darrow, for some opening comments. Mike?

Thanks,

Thanks, Mike. I'll start with a question that has a couple of parts. Can you provide an update on TrueCar+? What are our plans to expand TrueCar+ beyond the Florida market? And finally, how is what we're planning to deliver with TrueCar+ different from peers who say that consumers can already buy a car online through their marketplaces?

Thanks,

Thanks, Mike. I'll build on what Mike has said before. After we enable paperwork on TrueCar+ which is a key step, we're seeking expansion out of Florida really across two different paths or tracks, one for new and one for used cars. As you can imagine new cars are harder to transact across state lines. And so we focus new very much through geotagging and through eventual delivery address to ensure that people are within the state to acquire new vehicles. So for the new vehicles, our expansion will be state-by-state. And we plan to roll out in additional three to five states by the end of this year. On the new side, the U.S. inventory we will make available nationwide. So we'll continue to push that nationwide rollout for used with TrueCar+ by the end of 2022. We also recently began making distance retailing available for TrueCar+ or TrueCar certified dealers across the U.S. and that's really a forefront or at least the start of enabling TrueCar+ to happen afterwards. So as we enroll dealers in the program, we're laying the groundwork for vetting and enrolling dealers for the broader expansion, and most importantly, to really see and make sure that they're able to do distance retailing in the back end flow of their dealerships. I just want to add that the rooftop balance will not be a primary metric for TrueCar+, instead, we will grow and curate a network of dealers that we have, and a depth of inventory, and who are committed to delivering a world class marketplace experience to consumers will be prioritized as dealers. And we also know that obviously, the inventories to a certain level is important or at least rooftops are to a certain level of important, scarcity is much more important. So the curation will be something we'll be very focused on. Mike, back to you.

Thanks, Jantoon. I'll address how TrueCar+ compares to what our peers are doing. Our focus with TrueCar+ is to deliver a transactional marketplace through which a consumer will be able to find a new certified pre-owned or used vehicle that suits their needs in the inventory of one of our dealer partners. Through the product roadmap we shared for TrueCar+, we plan to deliver a marketplace through which consumers will be able to arrange for financing, sell or trade their existing vehicle, get an accurate price, purchase protection products, sign required documents and arrange for delivery with the dealer. The third party marketplace peers that were most often compared to do not offer a transactional marketplace that makes these steps possible. Given that we're planning to deliver -- given what we're planning to deliver with TrueCar+, we just don't see these peers on the same journey. Vertically integrated players are focused on used cars and other market participants that have added a transactional digital channel to their brick-and-mortar presence are limited to their own inventory and brands. Once we enable paperwork within TrueCar+ and continue to add scale, we will have a unique opportunity to offer a true asset light marketplace for new used and certified pre-owned vehicles across multiple brands. Let's have the next question,

Thank you, Mike. Jantoon, the next one's for you. Last quarter, you provided a framework for thinking about revenue and expenses for 2022. Can you provide an update to that framework?

Most definitely. Thanks. I think the main caveats to the framework we provided on our last call was that the macro environment and close rates have remain stable. That didn't over really hold in Q2 or throughout Q2. The supply side did not improve and in some cases, maybe even became more constrained. Across the industry dealer inventories remained low or prices remained above normal. Beyond this, there's also variation across the different brands. With the Asian brands that our consumers prefer still experiencing above average constraints and available inventory at 14 days versus 26 for the industry overall. For us, this means that vehicle scarcity remained a significant issue during Q2. In addition to this, the Fed has been raising rates aggressively and the government economy has started to slow rapidly as a result. Vehicle pricing continues to be a factor and as measured by the CPI both new and used vehicles hit new peaks in June. Affordability remains a concern for consumers due to both high prices and rising interest rates. The combination of these factors continue to put pressure on our second quarter close rates. During the second quarter, vehicle saw a peak in April and then dipped in May and June to about 13 million, where it still remains by our analysis in July. Additionally, we estimate the unit sales across the industry will decline 10% year-over-year and 2% sequentially in July, which signals to us that the industry sales during the second half will remain muted. In this environment, we plan to continue to manage our fixed expenses tightly. However we plan to invest in brand awareness and marketing to support TrueCar+ and on adding new capabilities as we lay the groundwork to expand TrueCar+ beyond Florida. Due to these factors, we expect non-GAAP expenses to be both the base or 50 million per quarter run rates. We therefore still expect adjusted EBITDA to be negative for 2022 but the second half of the year will show a greater impact from these planned investments. We're managing our business and deploying our cash very, very carefully. And we've proven to do so in the second quarter as well. Our balance sheet was nearly 200 million in cash and zero in debts that can support this step up investment very well. Further next question,

Thank you, Jantoon. Mike, back to you for the next question. Can you speak to the rationale for the acquisition of digital motors and maybe share the terms of the purchase?

Thanks,

Thanks, Mike. And before we open it up for Q&A, we have a question from our retail investors. What are your plans to increase sales when the economy is taking an overall hit? Mike, do you want to take that one?

Sure,

Thank you, Mike and Jantoon. Now operator, let's open up the call for questions from the audience.

Thank you. Our first question will come from Rajat Gupta with JPMorgan. Please go ahead.

Great. Thanks for taking the questions. I just have a few quick ones here. Jantoon, just to clarify on the EBITDA path for the rest of the year. Is it safe to assume that just given the expenses are going up and inventory still remains tight that the EBITDA loss run rate in the second half should be higher than what you had in the second quarter, if you could clarify that? And I have a couple of follow-ups. Thanks.

Yes. So the short answer is yes, given the additional investment we're planning to make for TC+ going forward. Yes. So that's also what I mentioned earlier in the Q&A Yes, absolutely.

Great. Thanks. And maybe just on the new vehicle side. You highlighted your differentiation there. There are a lot of domestic brands who are moving to online bookings for the newer electric vehicle models. I'm curious what conversations you're having with them on how they are perceiving TrueCar+? I mean how do you integrate that solution with those kind of purchases? Thanks.

Thanks, Rajat. I'll take that one. We're in our very initial conversations with our OEM partners around TrueCar+. What we're trying to explain to them is regardless of how they go to market from their platforms, we have a steady flow of 7 million to 9 million consumers who like to do a portion of their shopping in an open marketplace like ours. So what we'll continue to encourage them is to do what development work they're going to do around how they're going to go to market with their vehicles. Some of them have asked us if we can play a role in that, and we're exploring some of those conversations. But what we try to continue to tell them is we want to take our dealers' inventory, their dealers' inventory as well and make it fully transactional on our marketplace. And that message is resonating with them. They're beginning to understand and various ones are looking for ways to support how we want to bring that to market.

Got it. Then just one last one, following up on some of your initial comments on the TrueCar+ progress. Can you give us some insights on to the expanded distance retailing features as well? What kind of traffic or conversion rates are you seeing? And curious like if you're having to make any incremental investments via incentives or discounts to ramp up that offering, how competitive would the rate be in comparison to a Carvana, for example, that has a similar model to be delivered from Florida to another region in the country? How do you make sure like your offering is competitive enough in terms of those rates? Thanks.

Yes, it's a great question. I think I would actually think about this in two ways. So one is, we're actually providing very interesting opportunities for dealers to expand outside of their home markets, and we do this very efficiently together with our partner, Acertus. So this is for many of them the first time that they're actually able to go out in a much more expanded geographical area. We have not disclosed any specific information around this, but the pilots that we were doing were very beneficial and to such an extent that we're now rolling it out nationwide. And so there is a real appetite for this, and it is working really well. However, having said that, this is really a prelude to obviously, the adoption of TrueCar+ in the long term. So the idea here is not necessarily that this is a stand-alone business model. This is a very interesting opportunity for us to have really good conversations with our dealers and really start working with them on how to conduct sales in a remote flow environment. In other words, remote sales do not happen in an unusual flow of our usual CRM flow as it were at a dealership that are more used to have people walk-in to the door. And so it's a great opportunity for us to engage with them. It's a great opportunity for us to also work and train them and how to work through remote flows, et cetera, et cetera. So the distance retailing element besides the fact that stand-alone is an interesting program that works. It's really a prelude to who is interested in TC+ and how can we then also already train them prior to rolling out TC+ and are actually adopting to these like retail, remote retail flows effectively. So that's really where the crux is. This is really to build further on the overarching TrueCar+ experience in the future.

The next question will come from Naved Khan with SunTrust. Please go ahead.

Thanks. This is Robert

So on taking out the cost we have been doing that. So I think it's a statement to the last couple of quarters. I think you're effectively looking at a, call it, a run rate on the cost side of things, except for additional investments as we push into TrueCar+, right? So one of the things you've seen is obviously, we've been pulling back pretty aggressively on the marketing side. That's for two reasons. One is because we look at the efficiency of our marketing spend. And so we're wise around that. But also we've been holding off on deploying too much of the broader branding marketing side because as we do that, we want to make sure we also start educating the market around the TrueCar+ offering. And so as we start expanding outside of Florida, you can expect that also we're going to push harder on having made people aware that TrueCar is not a lead generator stand-alone anymore, but actually is a full digital marketplace where people can now effectively transacted by a new used or certain car. And so we're finalizing those elements with the paperwork that we've articulated. So there's still some work on the product development side to be done before we scale outside of Florida. But as soon as we do, we will deploy further on that branding and marketing side. Also, remember that as we pulled back on the branding side, it's a great testament to the company that actually our monthly units have not come down, that margin have been very stable. However, unaided brand awareness, obviously, has come down over time, and it's something we obviously need to be mindful of. And so at some point, we'll lean further in. But overarching your first question on the operating business model, I think we're pretty much at where we want to be, and it's really hard for us to find further cost savings.

The next question will come from Chris Pierce with Needham. Please go ahead.

Good morning. I know you guys talked about still kind of working through conversion methodology, but how should investors think about monetization methodology on these TrueCar+ complex units, you did, I think, $467 per car in the current method of paper sale and some lean base, so I'm kind of thinking about how should we think about monetization as the TrueCar+ move forward on a premium basis?

Yes, Chris, very good question. And I know it's a question that many of you have been asking for, for quite some time. At some point, we'll obviously go into more detail on future monetization opportunities for TrueCar+. We have a lot of thoughts around that, and we've already been doing a lot of tests and market tests around that. For the purpose of currently, any lead effectively or whether it's through TrueCar+ or through our original platform is effectively charged at $299, $399. So we're not anticipating any effectively any revenue assigned to TrueCar+ for this year, so for the calendar year of 2022. However, we obviously assume for '23 we will start monetizing and we will articulate this in more detail to you guys in one of our later calls. But for now, it's really for on finalizing the product flow. And so the dealers that are currently on our platform we effectively are working with them on their working processes on the back end on the dealerships, et cetera. And so we want to avoid this concept of always as a TrueCar+ lead or is it a core lead or how does that work? It's really about making sure we get consumers on that will, and we need to finalize that rules all the way to paperwork, which we haven't done yet. And so whoever we bring to those dealers, we're -- we continue to charge the $299, $399. So for this specific year, there is no assumption made on additional revenues effectively and we will elaborate on this in much more detail in the future as we articulate how we're actually going to monetize TrueCar+ for which there are various opportunities for us.

And Chris, I would just add to that, that I think we're still optimistic that by the time we get to 2023, while I've identified additional monetization opportunities around these units. We just haven't seen enough flow yet in order to get our hands around that, but we're very optimistic and you want to look at more of these units coming through. So we've really taken the pressure off of the product for 2022. We want to get the product right for consumers, for our retail partners, and then we'll put together a plan that we're still very bullish on around how we'll monetize these units before we get into 2023.

Okay. And then just lastly, on the 3,300 orders you spoke about in your investor letter. Is there any way to kind of -- how should we think about as some of this new versus used? Is some of that buy versus lease? Just kind of there are some things that are gaps that I think digitally if you're helping deal with lease new cars, that's something that's kind of would be unique to you guys versus used the few other players out there, I'm just curious how to think about the breakdown of those units?

Yes. We didn't provide any of that breakdown in this call, Chris. As we get more and more volume through there, we'll start to look at that. But just off the top of my head, I would say it's a combination of new and used, probably predominantly a little heavier used right now because of the inventory situation around new but it is cash. There's some cash deals going through that we're getting a chance to look at. So there's some cash and there are certainly lease and finance deals going through as well. So we'll get more and more info on that and begin to break that out as we have additional numbers there. But we're encouraged. It appears like there are all types of buyers who are engaging with TrueCar+ and finding a way to work through the process, find a car, build the deal they want, apply for credit if they're a finance or lease person and then continue to move forward. So we're excited by these mid-funnel metrics we put out there. They continue to advance from where they were in June. So we're excited about that part. We'll add more dealers, more inventory, we'll expose more consumers to it. And I think as the data grows, we'll be able to get more specific as to your question as to what specific type of buyers are we seeing come through. But right now, we're getting the full spectrum. We're getting a chance to see new, used, lease, loan, the whole deal.

[Operator Instructions] Our next question will come from

Good morning, guys. Thanks for taking my question. This is

Yes. Thanks,

Got it. Thank you. And then I guess my only other question would be on the acquisition of Digital Motors. Could you elaborate a little bit on what part of the technology in particular appeal to you? And additionally, if there are any other elements of TrueCar+ that you might consider accelerating through acquisitions?

Yes. I think,

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Mike Darrow for any closing remarks. Please go ahead.

Thanks, operator. I'd 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 hard work as we work to deliver on our near-term road map for TrueCar+ and lay the groundwork for expansion beyond Florida. This is an exciting time for our company, and we look forward to sharing more about our progress with you all on our next call. Thanks for spending time with us this morning.