TrueCar, Inc. (TRUE) Earnings Call Transcript & Summary

Great. Good morning, everyone. Thanks for joining. Also thank you, everyone, on the webcast for joining as well. Very pleased to have with us from TrueCar, President and CEO, Mike Darrow. My name is Rajat Gupta. I'm a member of the Automotive Equity Research team at JPMorgan. Mike has a few slides that he would like to run through. And after that, we will dive into Q&A. Thanks, Mike.

Thanks, Rajat. Good morning, everyone. It's good to be here and get a chance to talk to you this morning. I'd love to get out and tell the TrueCar story. I'll walk you through a few slides, probably 6 or 8 minutes' worth of slides to kind of do some level setting and then I'll sit down with Rajat, and we'll do a Q&A session. So typical safe harbor wording. I'm not going to read this to anybody. You can all look at it, know what's in there. Move to the first slide. So just to kind of set a baseline for the company, we are a trusted national brand. We've sold 6 million units with our retail partners since 2014. We are one of the few listing sites, oftentimes we're clustered in a group with Cars.com, CarGurus and AutoTrader. We're one of the few sites that have a closed-loop attribution system. So we actually track the units that our retail partners sell through the introductions we make to them. So that's how I'm able to put the number in front of you of 6 million. Those are real sales. It's probably more than that. Those were just the ones we were able to track through our system. We have about -- in 2021, we had 8.6 million monthly unique visitors. That number has been running somewhere between 7.5 million and 9 million this year. We have over 250 exclusive affinity partners, very unique asset for our company. We white label buying channels for major brands like American Express, AARP, AAA, Sam's Club. We have a white label buying program for Navy Federal Credit Union, largest credit union in the world, supports the military community. And about half of our unit volume in Q2 came through our affinity partner network. So we have a truecar.com website, and then we have our affinity partners that contribute to our vehicle sales at our retail partners. And we have about a little over 12,000 retail partners that work with us. About 8,000 of those are franchise dealers and about 4,000 of those are independent dealers. So as you look at automotive and certainly automotive is a massive category and a very underpenetrated opportunity from a digital perspective, you can see what's happened on the digital side since 2019. Digital sales were less than 1% of the marketplace. It grew in 2020 because of the impact of COVID and people couldn't go into dealerships anymore. So certainly, the dealers started to find solutions to get vehicles to consumers without them coming to the dealership. We had an independent study done by a company we were using to build out our strategy, and they made a projection to us that by 2025, they felt 40% of automotive sales would be digital. And I'll come back to that number in the presentation, which is a big piece of what we're going to be talking about here today. We have -- we talk to our consumers on a regular basis, and we do surveys continuously with our consumers. 62% tell us if they found the right process, they would buy a vehicle completely online. Now the numbers between what's actually happening and what consumers are saying are very different. We think that's because the ideal product, the ideal solution for them is not out there yet, and that's what we're working on. Also, you could see the impact of digital buying across other platforms, other categories where it's far more advanced than what it is in automotive. So really to be inspired and to take note on where we wanted to take our business, we believe the automotive industry is in dire need of a modern day marketplace. There just isn't one in our industry. So we look outside of our industry to kind of get inspiration as to where we think we could take this. And it's happened almost across all other industries, right? You got Expedia and Travel, you got Amazon for just general shopping, Zillow, Grubhub and Etsy. These are all great marketplaces. And the commonality between all of them is they make it easy to buy and to sell, right? So that's why I'll come back to you on when we set the groundwork, we've got the traffic, the buyers, we've also got the dealer network, the sellers. So what we have is an opportunity to pull that together. So TrueCar+ is a new product we've been working on. We launched it in Q4 of 2021. We're piloting in the state of Florida. And what we're doing is we're working with our retail partners there to take their inventory, put it on the TrueCar platform under the banner of TrueCar+ and create a fully end-to-end digital retail buying experience. So we're building this marketplace. That's where we feel the industry needs to go. We're making a lot of progress on it. For those of you who heard our Q2 earnings calls, we're beginning to see some metrics come out of that marketplace that are very encouraging to us. We have over 80 dealers on the program in Florida. We have over 7,000 pieces of inventory. These are all numbers as of the end of June and what we disclosed on the earnings call that have changed a bit since then, have been growing. But at that point, we had a little over 7,000 dealers, and we've begun to get consumers flowing through it. And we had 3,300 consumers place an order through TrueCar+ in Florida. And the way we described an order was found the car they were looking for. They built a deal, started a credit application to show their intent to buy from the dealership. And those were coming in at about 250 a month -- I'm sorry -- a week in the month of June. So the momentum is building in Florida. We're learning a lot. And the pushback you get on a digital marketplace or digital retailing around automotive is, it's too complex, right? It's too detailed, too complex of a process to put online. So what we did was we broke it down into 4 categories. There's really 4 elements, 4 major elements to buying a car. First one is the discovery and shopping. That's been a part of our background, a part of our heritage from the beginning. We represent all the new car brands. We represent used cars across the nation and a consumer can come to our site, go through the shopping process, identify the vehicles they're interested in and decide, really narrow down the consideration set. The pieces we've added for TrueCar+, there's a deal building phase, right, deal building and comparison. And in the deal building phase, what we enable the consumer to do is get a guaranteed cash value for their trade-in, right? They fill out a few questions for us, give us their license plate number or their VIN. We have to run them through a process. We'll give them a guaranteed cash value for their trade that they can use in building a deal. We also have built a digital process to reach out to their lending institution to find out if they have a payoff on that trade so they can net out that amount when they begin to work it in their deal. And we also have a real dealer desking system that we've integrated into our site. We bought a company called DealerScience about 3 years ago and DealerScience started in the business by building a platform for dealers, Honda dealers at the time to actually desk deals in a showroom. So once you've got a value for your trade in the deal building phase, you can move into telling us what you have to put down, what you want your monthly payments to be, are you a loan or a lease customer, what type of term are you thinking about, are you 48 months, 60 months, God forbid 72, 84. Numbers keep going up. I hear we're doing some 96 financing now out there, which is crazy, but that can all be built on our site in this deal building phase. We've got that part done. The third piece of that is actually the purchase process, which is the financing piece of it, about 85% to 90% of consumers these days are finance buyers, right? 15% -- 10%, 15% are cash buyers. So we've got the opportunity through a company called AutoFi for a consumer to go directly to the lending institutions and get their financing work done. They fill the credit app out on our site. We send it out to the lenders that that particular dealer works with. We get a return directly to the customer on their credit app. So we've got the credit piece in place. The other piece for the purchase process is the paperwork. That's the piece we're still working on. Many of you have bought a car know that there's an actual term for all that paperwork. It's called a deal jacket. It's a crazy thick folder that a dealer keeps and has all the forms that you have to sign when you buy a car. So we're working on building that piece out. It's a little more complex than what we had thought initially. But when you think about it, there's local issues, there's tax issues, there's lending issues. There's all those pieces that have to be pulled together. There are folks out there that are doing it, and we're in the process of integrating that in our site. So once you found the vehicle, built your deal, signed the paper -- got your financing, signed the paperwork, the last piece is delivery. We did a -- we have a deal with a company called ACERTUS. They're a national shipping company out of Florida. We now have a process to ship vehicles across the U.S. anywhere in the country. So we've built that piece out. So we believe we're getting extremely close to delivering this marketplace. We still have some work to do, but we're excited about the opportunity that brings for us. Keys to this, as you think about it for a marketplace, and we talked about those other brands that have created marketplace, it's got to be easy for the consumer. It's got to be efficient for our retail partners, and it's got to be transparent. You've got to build trust with the consumer if you're going to let them or ask them to build a deal on your site. So those are the things we've been focusing on. There are some differentiators that I've listed at the bottom. The biggest one I'd touch on is where we call ourselves differentiated. We have an asset-light what we call model. Some of the vertically integrated used car dealers like a Carvana, like a Vroom who do something similar just for used cars have a very asset what we call heavy, right? If Carvana wants to sell 100,000 more cars, they've got to go buy 100,000 more cars. They've got to recondition 100,000 more cars. They've got to stage them. They're going to do the logistics for it. For us to sell 100,000 more units to our platform, we just need to sign more dealers up for the program. They carry the assets for us. So it's what we call a very asset-light type program. It can scale very, very quickly. And again, new cars, used cars and certified preowned vehicles. And I'll end it with this. This is the last slide I just want to touch on quickly. If you look out to 2025 and the industry is about 57 million units, that's new and used, and that's a pretty consistent number year in and year out. 23 million of them are projected to be digital. That's what consumers are telling us. That's where we think we can take this. So we think we can play a big role in this. We see it expanding all across the ecosystem. The OEMs are talking about it. Big box retailers are talking about it, vertically integrated used car players are doing it. But we think we can be the real first full-blown modern day marketplace in the automotive space to allow consumers to come in and do the type of shopping they're used to do in other categories. So Rajat with that, I think we can open it up to questions.

Great. So maybe if we could just start with a little bit of just more of a macro question. What are you seeing from a consumer demand perspective? One of your peers sounded a little concerned earlier this week. Are you seeing material softening in your metrics, traffic, just due to affordability or other concerns? Any particular demand trends you're seeing across different regions or creditors? Any color you can share on that would be helpful.

Yes. I think that's a quickly shifting marketplace that we're participating in right now. So the demand for new cars certainly still outstrips the supply. The industry finished with less than 1 million units, new cars in stock at the end of July. Manufacturers like Toyota talked about having 14,000 units in inventory on the ground after selling 156,000 units. So new car inventory is very, very scarce right now. Pricing is at an all-time high. The average new car price in July was $47,000. The average monthly payment eclipsed $700 for the first time ever, and the average term was 71 months. So I think the biggest thing macro that the automotive industry is going to face is affordability, right? How do we continue? The demand is there. I've seen studies that said in 2020 and 2021, there was probably 7 million units of demand that got pushed out of the system because of COVID and chip supply shortage. So there's no shortage of demand out there. The issue is availability and then how is inflation going to affect pricing in our vehicles. I think most of the new car discretionary demand right now is sitting on the sidelines, right? The only people buying new cars right now are the folks who need one, right? Their vehicle broke down. They had a total loss accident. They just had a new driver in their family. I unfortunately just bought a car because I have a daughter who turned 16, had to get another car. Otherwise, I wouldn't have been in the market myself right now. So I think the biggest thing we face right now is affordability. Everybody is keeping their eye on that. It's probably going to get more difficult before it gets better because inflation with interest rates going up are going to drive payments up. So we'll just have to keep an eye on how that goes. We feel we play a role for dealers either way. If demand gets restricted, they're going to be looking for customers, and we have them on TrueCar.

Got it. That's helpful color. I do have like a bunch of questions in TrueCar+, but maybe before that, just for directional sense, curious how like the business would hold up in a recession, maybe a mild, moderate, severe, different scenarios. How do you see the company navigating those scenarios? We obviously have lower inventory here. And then as inventory remains low and then we also start to see some worsening consumer backdrop, it's kind of like a double whammy. So how does that impact your business?

Yes. The first thing I'd say is, for those of you who follow us or track us, we have a pretty solid balance sheet. We have about $200 million worth of cash on the balance sheet and no debt. So we think we're in a good position to weather any type of macro elements that we may be facing going forward. And a recession is never good, right? It'd be crazy to think that there was benefits to a recession. But what happens for us, if a recession pushes demand down below supply, then dealers will have more need for us and we'll come back to our platform. So we'll have to keep an eye on how that goes. The biggest thing, I believe the inventory -- the industry needs is a rebuild of new car inventory. That will stabilize new car pricing then which will keep the lid on used car pricing, which would set the industry back on a better balance, but inflation is sitting out there in front of us, and I think it's something we're going to have to pay attention to.

Got it. And just on the supply recovery point, you mentioned on the earnings call that the close rate trends will typically lag production, inventory recovery. Could you give us a sense of the magnitude of that lag? And how do you see revenues, units close rates trending once supplier starts to recover, maybe meaningfully at some stage?

And just to give a little backdrop on close rate. The way we measure our core business is we comp the upper funnel unique visitors. They come through our site, they become what we call a prospect, which means they give us their name, their address, e-mail and phone number. We provide that to a dealer and then the dealer begins the engagement process. So they go from visitor to prospect than to sale because we have a closed-loop system where we're tracking that. What we've seen is the upper funnel numbers are good. Traffic is good. We've restricted our marketing and our traffic numbers are holding. And I think people realize, and I'm sure you folks see it every day, when you drive past the dealers' lot, there's not a lot of cars there. So if you're going to go out into the marketplace and look for a vehicle, I think you're going to go online first and find out what's out there and nowhere to go. So from an extreme upper funnel metrics, our numbers are good. Traffic's good. Prospecting actually is good too. Folks can find the car they're looking for. Where we're seeing the biggest drop-off in our business is what Rajat mentioned, which is the close rate, which is we believe we're sending qualified buyers into the stores, they're just not coming out with a vehicle, right? They either get turned away because they can't find exactly what they're looking for or there's some sort of addendum sticker on the vehicle or the pricing is at a level where they decide not to make the purchase. So there's a lot of buyers out there in the marketplace, but a lot of them can't find either the vehicle they want or the price they want, and that's affecting what we call close rate or a closed sale.

Got it. Maybe shifting to TrueCar+, could you highlight the approach you're taking with TrueCar+? And how will that help solve for some of the current or limiting factors for digital enablement for automotive retail.

Yes. And I think it's important. The reason I showed the slide with all the other marketplaces outside of automotive, that's truly where we're trying to get our inspiration for what we need to build for the automotive vertical. We just hired a new product lead about 8 months ago from outside the industry. And he's done marketplaces before. He's worked for Target and for Match.com and for different marketplaces. Ticketmaster where he's brought buyers and sellers together in an environment. And there's such a great opportunity to really build that connective tissue, a digital platform to take buyers and sellers and bring them together online to complete a deal. And all the barriers that were out there before complexity or lack of willingness were broken down, I think, by COVID in many ways. And I think there's a real good opportunity in the very near future for us to build out a platform that is very user friendly. It's transparent and reassuring and it's something that can be done. And I throw a number in another conference, 71 million Americans filed their income taxes in 2022 unaided. And that comes from the IRS. 71 million with no aid. Now if you could file your income taxes online, you can certainly buy a car online, right? It can't be harder than following your income taxes. So it's just nobody's built it. And that's the piece we're working on. You've got to build something intuitive, got to build something simple, and you got to build something that both consumers want to use and dealers want to participate in.

Got it. Just want to check in if anyone has a question in the audience. It's one there.

Just as it relates to the macro question, you kind of addressed it on the used side. I guess, what are you seeing on the used side? That seems to be a little bit more economically sensitive, lowering customer, harder to finance. Just curious what you're seeing there?

What we're hearing from our retail partners is the used car business is starting to split. And the mid to lower end of the used car business, the pricing area below about 25,000 seems to be still very active in churning. The used cars that are getting tough right now are the big full-size SUVs that are very expensive and sitting on dealers' lots and have probably crossed that threshold of affordability. So I think you'll see the same issue on used cars that we're seeing on new is that affordability is going to be an issue. Consumers are going to be looking for good deals. Some of the impacts that's going on in the marketplace right now have some long-term impacts on our industry. And I know our OEM partners are paying attention to it, but I think I mentioned, leasing dropped to 17% in July. For those of you who track the industry, it used to run around 35%. Leasing created the best used cars for the franchise dealers because they got those cars back in 3 years, generally low miles, generally very attractive used cars. So as leasing goes down, the whole landscape for the future used car business is changing. You're writing longer terms. People are going to hold their cars longer. They're going to have more miles on them when they come back into the marketplace. So a lot of things happening around used cars right now. We think it's still pretty vibrant. It's starting to slow at the upper end.

Got it. That's great color. Any other questions? One here in front of the back. You could start. Okay. I think the mic is there. Okay, no worries.

Assuming that key elements in your business is different system integration because from dealer side, you have to update the current information to your platform and you have to deliver the right information to consumers to the car dealers. So I'm curious about how you're building how team or your technology partner to make sure a guarantee that all this information flow frequently and correctly?

That's a great question. And you're absolutely right. In order to build a really authentic and transparent digital retail platform, the data has got to line up. You've got to be able to pass the data back and forth. We have a unique proprietary system in which our dealers send us their inventory and price it uniquely for us. So oftentimes, a dealer will price their inventory one time and then they'll have an inventory provider send it out across all the platforms. We don't take any feeds that way. We get it directly from a dealer through a product we call dealer portal, where they enter in their pricing and send it to us that way. When we sign a dealer up for TrueCar+, we work through all their lending partners, their waterfall system, all their markups. So we already have their vehicles. We have the price they're willing to sell the vehicle at. We then get all their lending information and begin to extend that process. So all of that information is tested on a flow-through back and forth. We built some, I guess, you'd call them mock deals where we say, okay, here's a customer on this car, here's what it would look like, make sure the pipes are working. And then that's the big piece to it is, can the dealer -- our goal is to replicate a deal that a dealer can look at and understand that it looks similar to something that would have been done in a showroom, only the consumer hit it in their home. They didn't have to go into the store to do it. So to do that, you've got to get good data coming in. You got to make sure you've got the right processes set up to do it, and that's what we're working on.

If I am a consumer looking to buy a car, let's say, a Subaru or Ford, a new one. Usually, I go to the dealer, right? I must say old fashion, but now this is -- so if I go to your website and look at the deal, how can I be certain I'm getting as good a deal as I can go in there, high go over with the salesman always give me a great deal. So how can I be -- well, this is -- you're trying to get people to your side one of them, people like me who is very good negotiating with the live sales manager, right?

So we did an analysis of the consumers who typically buy a car during year. There's about 9 different consumer profiles that we looked across for the type -- some people like yourself are looking for the very best deal. If you're truly focused on spending the time necessary to haggle to the lowest price, you may be able to get a better deal by going into the dealership. But what the other profiles tell us is time is very important to those folks, efficiency is important. Transparency is important versus lowest price. So we'll build products that cater to folks who want a fair deal and know they're not overpaying, but don't want to spend 2 or 3 weekends at the dealership, arguing with a salesperson, trying to get them down to a number. Those folks are still probably going to be better off going into a dealership.

The side is more cater to the people who are little shy?

Well, they're shy and time is more important to them than maybe $100 trading.

10 years for me. So I don't mind, just go there for 2 hours, I get done. I already know what I want. So -- but I see you have an audience, people who are shy, you intimidated with salesmen. So they'll come to you.