TrueCar, Inc. (NASDAQ:TRUE) Q3 2023 Earnings Call Transcript

TrueCar, Inc. (NASDAQ:TRUE) Q3 2023 Earnings Call Transcript November 7, 2023

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 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 are back to year-over-year revenue growth for the first time in nine 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 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 consumer 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 are 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 are buying. We have also successfully launched our economic cohort and our convenience cohort flows and we are well on the way to launch our EV flow in December.

We continue to refine each of these three 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 the build-out of these cohort flows is emblematic of that shift. Beyond these three 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 are 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 are 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 realized 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.

Operator: Thank you. [Operator Instructions] And the first question will come from Rajat Gupta with JPMorgan. Please go ahead.

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Q&A Session

Rajat Gupta: Great. Thanks for taking the question and congrats on the execution in 3Q. Maybe just on the $326 million target, I mean you have a target out there now? And – but it’s still – you are 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 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 a nationwide launch more of the digital experience, the answer is yes. So that’s one 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? Thanks.

Jantoon Reigersman: Yes, it’s a great question. The answer is we review all opportunities of capital allocation, obviously, buybacks is one 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 nine 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, etcetera, in a more broad way? The answer is absolutely yes. But buybacks are always a consideration for us at any point in time.

Rajat Gupta: Got it. Thanks for the color. I will jump back in queue.

Jantoon Reigersman: Thank you.

Operator: The next question will come from Naved Khan with B. Riley Securities. Please go ahead.

Unidentified Analyst: Hi, this is Ryan asking a question on behalf of Naved Khan. Could you talk about – 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 Reigersman: Yes. So we’ve disclosed – so first of all, 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 latter 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 have only 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: Thank you. And then a follow-up is when would you expect for United flow to go out to all regions, please?

Jantoon 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 pieces 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 as the piece of paperwork.