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Good day, and welcome to the TrueCar First Quarter 2023 Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to

Thank you, operator. Hello, and welcome to TrueCar's First Quarter 2023 Earnings Conference Call. Joining me today are Mike Darrow, our President and Chief Executive Officer; Jantoon Reigersman, our Chief Operating Officer; and Teresa Luong, our Chief Financial Officer. By now, I hope you've all had the opportunity to read our first 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 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 believes, 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 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. Reconciliations 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'll turn the call over to TrueCar's President and Chief Executive Officer, Mike Darrow for some opening comments. Mike?

Thanks,

Before we open the call up for live questions, we're going to address some questions around key topics.

Thank you, Mike. The first question is for Jantoon. Jantoon, what factors drove the behavior of independent dealers in Q1? And how are you factoring this into the go-forward plan for rebuilding the core business?

Absolutely. So the used market has been experiencing headwinds in recent months. Higher interest rates have hurt many independent dealers as their floor plan financing costs have risen. The price and supply dynamics are less favorable and affordability issues remain a challenge for consumers. The combination of these and other factors have put pressure on dealers' gross profit per unit, especially for smaller independent dealers. Our net independent dealer count was lower by 277 in Q1. However, there are a couple of points to make. The vast maturity of these dealers were smaller independents and feelers where we understood the reason of their departure, over 40% are either acquired or went out of business. In one case, a single group actually had 95 rooftops on our platform that was acquired. Although, obviously, the rooftop count was lower, it had very minimal impact on the MRR. As we rebuild our core business in 2023, it is our intention to add the right dealers with the right inventory to our network that matches the demand from our shoppers. This will be particularly important as we focus on converting our traffic and on developing personalized shopping journeys for the three initial consumer cohorts that Mike mentioned. Further, we see some of the major franchise and independent dealers centralizing their efforts for online transaction, which actually is clearly to our favor. This will represent a single connection point for TrueCar by dealer, but with significantly more inventory behind that single connection point and the dealers with greater ability to deliver a better consumer experience. So we see overarching a bunch of changes happening, which are effectively turning into our favor, which is good.

Thank you, Jantoon. The next question is for Mike. Mike, can you explain why we are launching TCWS valuations? And how this is different either from what was used previously or other existing sources of used vehicle valuations.

Thanks,

Thank you, Mike. The next question is for Jantoon. Jantoon, can you tell us more about the three consumer cohorts we've identified? And explain how we plan to use the new experience flows to drive higher conversion.

Absolutely. So we continue to make big strides in TrueCar+, improvements like unified [BDP] (ph) and streamlined checkout flow, as highlighted in our letter. I also urge everybody to look at the visuals because again, I think you clearly see that it's a much more efficient flow. While we have spent time building the various features for an online transaction, we've also started to hone in on developing a more defined experience flow to help match consumers with vehicles in our dealers' inventory that suit their wants and needs in order to drive higher conversion across our strong top of funnel traffic. Matchmaking higher up in the funnel will therefore become increasingly more important for us. We have identified three initial consumer cohorts to focus on: economic buyers, convenience buyers and EV buyers. Each have different wants, desires and budgets, motivations for shopping for vehicle. Economic buyer has a lower credit score and will have the ability to search for inventory qualified for their buying power. The convenience buyer has a higher credit score, focused on comparability, is most likely new or certified pre-owned, probably interested in leasing. The EV buyers seek different information, not only on range or battery life but also considerations around buying a used EV, for example, or even a comparison against an internal combustion engine. Both the convenience and EV buyers are also very attractive profiles for OEMs as they look to reengage their incentive programs and figure out how to penetrate deeper into these markets. This is especially prevailing and important in a rising interest rate world where OEMs would like to subsidize for their consumers. The cohort identification also allows us to target our top of funnel more efficiently and allows us for more targeted and curated dealer engagement too. So overarching, it just creates a greater focus for the company.

Thank you, Jantoon. Our final question before we open up the line is for Teresa. Teresa, market conditions remain mixed. What are the drivers of the double-digit year-over-year growth and breakeven or positive adjusted EBITDA by the fourth quarter of 2023 that we're expecting?

Thanks,

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

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Rajat Gupta of JPMorgan. Please go ahead.

Grear. Good morning. And thanks for taking the question. Just wanted to follow up on Teresa's comments at the end. How should we get comfortable with the bridge from the $11 million EBITDA loss to a positive -- breakeven to positive EBITDA in the fourth quarter. I know you mentioned like the revenue drivers, but just from a profitability perspective, like how should we get comfortable with that bridge as it seems like a pretty big hill. But if you could give us some more color there would be helpful. And then maybe if you could comment anything around just the linearity within the first quarter -- like did the profitability improve through the course of the quarter and into April? Any color on that also would be really helpful, and I have a follow-up.

Thanks, Rajat. I think as it comes to expenses, we've been very disciplined in how we invest into the company and where to spend wisely into the different types of strategic objectives that we have. When we look at the first quarter, especially, I think normally, we have slightly higher expenses in the first half of the year. We're always looking for efficiencies throughout the year. So this is something that we'll continue to do, and we'll keep a tighter focus on that. The other big bucket that we always look at is really on the marketing side. As we've mentioned, that our focus this year, one of our core priorities is to focus on the higher conversion. We have a pretty healthy top funnel and without really adding [indiscernible] spend there. So I think being able to keep that marketing spend down, while keeping the top funnel healthy and then really focusing on converting those unique visitors into sales will really help us drive that home. But in regards to expenses, it is something that we're watching closely, and we'll always look for efficiencies where we can.

Yes, I think I'll also -- Rajat, thanks for the question. I'll also articulate a little bit on the top end. So remember that we effectively realigned our field team at the end of Q4 of last year. It basically means getting their stride. It was a separation of two roles that we implemented, provided the teams with their books of accounts and targets throughout the early parts of Q1. So to your question around the curve, it's very obvious that already in March, April, in particular, in May, obviously, we've gone through the worst of that and the trajectory has gotten a lot more positive. So I think we're comfortable in reiterating the top line end of what we're looking at. So it's pretty much on plan for us. In terms of the first quarter, it was pretty much on plan, and the broad plan we originally had. So this is -- it's still work in progress, but we've gone through the worst for us as a business.

That's helpful color. And then maybe just on the independent dealer comment. You gave us some color around the 40% number. Were digital dealers also a part of that? I don't know how much exposure you have to digital used car dealers, but were they a part of that sequential decline as well? Was there any churn because of some of the pricing actions that you might have taken with TrueCar+? Just wondering if -- any more detail you could give us -- and have you seen these trends continue into 2Q as well? Thanks.

Yes, those are all -- so, a good question. So first of all, I think last time we articulated -- so number one, digital dealers. So if you think of players like Carvana, for example, they are only on our platform with one single rooftop. And so the rooftop numbers themselves are not super big. The other thing is also -- it's always a little bit tricky because, on the one hand, a concept of rooftop is important because it shows you effectively a number of clients you have. But one of the things we've started shifting towards, and we've been really focused on is much more revenue and revenue contribution by our customers. So it really depends on the type of dealers that are turning off. Overarching, smaller dealers here are [indiscernible] rising interest rate world, similar to the past. So if you look at historical numbers 10 years ago, very similar profiles were happening. A lot of Moms-and-Pops stores that don't necessarily have very strong financing. We'll start suffering as well as, obviously, a greater M&A activity around especially midsized dealers that are looking to acquire some of the smaller ones. So that will continue to happen. If you look at other reasons for people to come off, it's often for themselves, gross margin, nervousness, et cetera. So it really depends. Some still don't have a lot of inventory or have difficulties accessing inventory. As Mike mentioned, a lot of our dealers are seeking to get access to used inventory. So if you're a smaller dealer with less footprint, it's going to be harder to get access to inventory. So there are multiple reasons effectively for us. I think overarching though, if you look at our team, they've been really good at walking into our dealerships, making sure there is an active engagement with our network. And I think that's already bearing a lot of the fruits, if you look at our numbers. So overarching, I think we're in a really good spot. In terms of Carvana specifically, which I think was your digital dealer question. Obviously, and I think this was mentioned last time as well, there was a moment where some of the larger digital retailers effectively turned off any external support. Those are things -- we're obviously in active dialogue with all of our clients at all times and various clients will try new things or different things in this environment that is constantly changing, but we feel very confident about the customer base that we have across the board. We're very much revenue focused as opposed to purely rooftop count focused.

[Operator Instructions] The next question comes from Tom White of D.A. Davidson. Please go ahead.

Great. Thanks for taking my questions. Good morning. I guess, first off, thanks for the color and some of the background behind thinking about the new customer cohorts and the personalized e-commerce flows that you guys are kind of developing or focusing on. I guess, when I think about how that might change your kind of customer acquisition or your audience acquisition, I'm just curious, I guess, how much of a change does it require you guys to -- this new kind of approach, how much of a change does it require you to make on the traffic acquisition or customer acquisition side of things? Does it mean new marketing channels or new tactics, and how confident are you that you can acquire kind of audiences that specifically are tailored to these new profiles, if you will, in an efficient way? And then just secondarily on OEM spend, and I guess this is tied to your commentary on new inventories, but it's still -- that revenue line is still pretty depressed. Just curious if there's any change to how you're thinking about the trajectory of that revenue line this year. Thanks.

Thanks, Tom, this is Mike, and great questions. Let me start with the first one you put out there. We're seeing so much more and understanding so much more about our shoppers with the evolution of the TrueCar+ flow that we're able to identify these cohorts in a much more specific way. The three that we mentioned became very evident early on, these are initial cohorts that we'll be able to pursue. As we see folks progress through deal-making, requiring trade-in values, doing soft pulls, applying for full credit online, we get so much data that it's really helping us understand our customer traffic at a much deeper level. That then could be spun around, as you mentioned, into leveraging that in buying the type of traffic that fits the supply of vehicles we had. So we're working both sides of that equation. We're out there looking for dealers who can provide the type of inventory that our shoppers seem to be predisposed to. And then on the acquisition side of marketing, we can get more aggressive in marketing specifically, the vehicles we have on our site and leaning into those cohorts as they work on the flow. So we're getting and seeing much more information about both sides of that, and we're utilizing it and being more effective. We made some changes in the marketing side of our organization. I'll let Jantoon provide a little more color on that. But this is an area where we'll continue to get better and better. We'll learn more about our shopping patterns, of our traffic, and then be able to lean into more efficient acquisition spend.

So I'll go -- like there are obviously a lot of nuances here. But number one, we already have in our audience quite some of these identified cohorts. Number one. Number two, we're also shifting a little bit the length of how we think about the journey of the buyers. So where historically, we were very focused on the seven days prior to purchase, we're actually now moving to a 98-day cycle prior to purchase where people can really start thinking about discovery and finding the right cars for them. So there are a lot of things we're moving. The good thing is that we are very -- we have been very efficient. I think we've also continued showing marketing efficiency. So these are cohorts that we already have, but also, we feel are good and easy for us to attract and some of them are highly under-served. So it's an attractive opportunity for us. It's also cohorted -- we've been identifying, already engaging very actively with TC+. So we feel that each of these journeys effectively can have a much more experienced flow. So in other words, really thinking about an economic buyer start to finish, will engage very differently with our product than a convenience buyer. As a result, really let's actually create that as frictionless as possible because for one, for example, registration, which would be much more important than for another word, for example, prefinancing would be really important. So as opposed to having a generic person arrive on the site and have to do self-discovery, we're going to make more predetermined funnels, which then enables us to actually have greater amount of conversion.

Then I think, Tom, the second part of your question was around the OEM business. We're seeing probably the same signals you have in the marketplace. The big issue that everybody in the vertical is trying to address is affordability. The OEM's first steps in that seem to have been buying down APRs through their captive [indiscernible] leases and those sort of things to address affordability for consumers. But we are very active in our discussions with the OEMs more active than we've been in the past as they seem to be more receptive to those discussions. I think as Jantoon mentioned, as we get more specific about these cohorts, the convenience shopper is going to be a very attractive cohort for our OEM partners as well as the EV shopper. So they'll have the opportunity to come in and actually insert themselves in key stages of that cohort buying process and try to influence those outcomes. So the discussions and the pace of discussions are picking up on the OEM side. We've had some success, as I mentioned, with expanding the Stellantis program and then extending the program. We've been running with Mercedes-Benz on to additional affinity partner sites. So we expect that OEM business to continue to get more active throughout the year.

Great. Thank you.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the call back over to TrueCar's President and CEO, Mike Darrow for closing remarks.

Yes, I want to thank everybody for taking the time to participate and I also want to thank the entire team at TrueCar for all the hard work over the last few months as we work to execute on our clear priorities for 2023. It's an exciting time for our company, and we look forward to sharing more about our progress with all of you on our next call. Thanks for joining.