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

Great. Thanks, everyone, for listening. Next up is TrueCar. We have Mike Darrow, President and CEO; also in the audience, Teresa Luong, Chief Financial Officer; and Zaineb Bokhari, Vice President, Investor Relations. So I believe Mike has a few quick prepared remarks, and then we can dive into Q&A.

Great. Thanks, Roger. I just want to give everybody a little bit of a background on TrueCar. Many of you may be familiar with us, if not, we entered the public markets in 2014, mostly as a listing site, generating leads, strong brand affiliation to the new car side of the business. That's how we got into the space. And the platform, the foundation of the brand was pricing transparency around new cars. We created a bell curve for consumers so that they could look at the new car price, determine what other cars were selling for in the marketplace of the same type and make some good decisions around pricing, and that really got us into the marketplace. Over the past 3 years, we've been moving to build what I would characterize as the first automotive modern day marketplace. And there's a difference -- you've got to look outside of the automotive vertical when you think about a modern day marketplace because there aren't any in our space right now. And the good examples of it, Expedia and travel, there's a lot in travel where they've consolidated and done some really cool things and a really modern day marketplace is you take consumer demand, you take supply and you make really good tech, connect them and make good matches. And that's what we want to do on the TrueCar side. We want to create that modern day marketplace. It's different than building digital tools, right? And I just want to make that statement is it's not Uber, for example, didn't digitize the taxi process, right? They looked at ridesharing and they built a better mousetrap. They talked to consumers, they talked to drivers and they built something different. So in my mind, there's a difference between digitizing an analog process like selling cars and building a real marketplace. And that's what we're trying to do. We'll get into that with the questions Rajat has laid out, and you folks can jump in if you want. But I just wanted to clarify that everybody's building digital tools. If you sat in an automotive conference right now, you'd hear litany of folksing, we've built digital tools. We've digitized this. We've digitized that. Those things are helpful. Consumers use them, but we really want to create a marketplace where a consumer can go from discovery all the way to delivery online, right, and really be a marketplace. So that's kind of the setup for the discussion. I know Rajat, you have a lot of questions you want to ask. So let's get into it.

Great. Great. Thanks, Mike. Maybe I'll just start like an easy 1 to get in on just the broader macro, we asked CarGurus the same question a little while ago. But what are you seeing in terms of latest trends in the consumer -- just on consumer demand into the second quarter, like April, like since earnings. Any pockets of concerns or changes within new or used or maybe geographically, are there any differences that you're seeing in search metrics or traffic trends? Maybe we start with that and right?

So there's a lot of different ways to look at consumer demand. One of the first ways we look at it is our upper funnel traffic. Our traffic is up 19% year-over-year, and our marketing expense is actually down. Now a lot of that's being driven by the macro, folks drive past dealer lots and don't see a lot of cars. So the days of taking 1 of your Saturdays and trying to go look at 300 cars on a dealer lot and find it doesn't exist anymore. So people are coming online and looking for the vehicles before they go shop. So that's helped us quite a bit. We've spent a lot of time on SEO. We've made some advances there, and we're getting better and better every day with our acquisition marketing. So upper funnel demand is good. And if you listen to a company like J.D. Powers, over the past 3 years, there's probably been 10 million new car sales pushed to the sidelines in the market. right? These folks were buyers ready to come to market, COVID hit, chip shortage hit and they went to the sidelines. So they're sitting there waiting to come back into the market. The thing that's keeping them out of the marketplace now is very high prices on the retail side and rising interest rates. So some of the macro elements we look at all the time, pre-COVID, there was about 3.5 million to 4 million new cars in dealer inventory pre-COVID going at the end of 2019. In 2022 at its lowest point, it got under 1 million units. So it started to build back up. At the end of March, there was about 1.7 million new cars in dealer inventory, so it's starting to rebuild. But that rebuild is very different by franchise. The domestics have trucks big SUVs. If you're looking for those sort of things, you can find them, but the marketplace really hasn't come back. And what we look at is at about 2.5 million, you start to get some balance to the marketplace, supply and demand begin to equal out, and you get a really good balanced marketplace. So there's still a way to go on the new car side to build that. So short supply raise new car prices and the one true driver to used car prices is the new car price. That's the cap on the used car, right? So as new car prices went up, used car follow them right up. As new car prices come down, used car prices will come down with those. So that's why there's an importance to both new and used for new car inventory to rebuild. We're seeing good signals, but there's still a lot of work to be done there. In March, the OEMs pulled the fleet lever. Many of you probably saw that, they moved about 250,000 units into fleet instead of shipping them to their dealers and building up inventory. So there's different places OEMs can go with production. For any of you who have rented a car recently, you may have noticed it's got about twice as many miles on it as a normal rental car when you rent them because they just weren't able to turn them. There was no backfill from the OEMs. So that's changing a little bit. The OEMs are starting to fill in those fleet orders. That bucket will fill up quick and they'll start pushing these back into their dealer inventory again. And we think -- we hope to see that 2.5 million in the second half of this year right, is that the inventory builds and the OEMs continue to run the production lines.

Got it. Yes. That seems like a pretty sizable jump from the 1.7 we are at right now. Maybe just 1 more broad macro question. I know we talked about this last year at the same time as well. Do you have any view on -- or how do you see just a used car supply dynamics changing for the medium term, like next 2, 3, 4 years, given the fact that we've have you've sold [some of] your new cars in the last few years, there have been lower leases on them. There's a lot of pent-up demand for new cars to be fulfilled. Like what's -- how do you see like just the used car supply backdrop playing out? And any way to tie that in terms of impact to your dealers or like the business itself, like maybe just...

I think -- and that's a great question, Rajat. What we hear from our dealers is 1 of their biggest priorities is always used car acquisition. Over and over again, they tell us that. So when you think about -- we took 10 million new cars out of the system, usually 40% to 50% of new car purchases had a trade in. So when you take 10 million new out, you took 5 million used cars out of circulation that would have come back in and been sold as used cars. So the used car supply is still restricted. What's happening is the market's bifurcating a bit and the higher-end used cars are starting to sit right? Some of the big SUVs, the pickup trucks, the cars that our dealers are scrambling for right now are that sub-25,000 kind of range, low miles. And what's happened is because of the change in leasing, leasing was running at about 30%, 35% pre-COVID. It dropped down to less than half of that over the past couple of years. Those 3-year cars are coming back, right? So those were great used cars for dealers and created a good used car market. So there's a hole there in the current model used cars, and there seems to be still a lot more demand than supply on that low end $25,000 and below.

Got it. Got it. Moving to like TrueCar specific question, just to first talk about like the 2023 guidance that you have out there. You've reiterated your path to breakeven in the fourth quarter. Could you talk about the cushion there is in that guidance from here till fourth quarter? What market factors are you dependent on? How much is just self-help versus macro? And maybe within self-help, like how much is it -- how much of it is like just TrueCar+ dependent versus just the core legacy business -- legacy platform?

Well, there's certainly some macro elements into that guidance, but we always track the progress of those versus how the business is performing so that we can check them and just not kind of cross our fingers and hope. So new car inventory is starting to build. We've seen franchise dealers begin to return to our platform, and we've grown our franchise dealer count in Q4 and in Q1. Additionally, we've seen our top line growth return. In March and April, we saw our top line growth go up from where we had been in the past. So we're seeing signals that the market is starting to come back. There's really not much cushion Rajat in the numbers. There's a lot of execution. We've got to execute what our plan is. We put out 4 elements to a business plan that were critical for us for this year. Number 1 was to rebuild our core volume footprint, continue to expand our TrueCar+ product. We're going to lean into used cars because that's always going to be a big deal for our dealers and then converting our 9 million monthly uniques into sales for our partners. So if you think about 9 million folks coming to your site and listen, we have some of the smaller upper funnel numbers than some of our competitors, you'll hear from who have ad models. It's more important for them to drive big numbers because they're selling eyeballs and doing all those things. But if we convert 1% of 9 million monthly shoppers, that's 90,000 units a month. That's 1 million-plus units that we deliver to our dealer partners. Our model works very well in that type of an environment. So that's why we're very focused on the conversion. We think we have the upper funnel traffic we need. We have the supply we need. Now we just need to make that connection and get people back into the [buying mode].

Got it. Got it. Just wanted to briefly pause and see if any questions from the audience? No. Great. sorry.

Here's one.

So you're talking a little bit earlier about building marketplace versus digital tools. Can you talk a little bit about how you partner with your dealers and kind of the consistency of data that you're pulling in terms of like pricing because I mean, we all know the dealer network across the U.S. can be very variable. So I was just kind of curious about that.

Yes, it's like [herding cats]. Yes, you're absolutely right. First of all, the ability to create a modern day marketplace starts with pricing. So in the third-party space, we're the only platform that has a proprietary pricing tool where the dealers price to us. The rest of the third-party sites get a feed that dealers send out and it goes to all the different sites, Gurus, cars.com, Autotrader, all get the same feed on pricing. We have our own proprietary pricing. If you're going to sell something online, you've got to have a sales price, right? So that's the first thing we ask our dealers to give us. The other thing we have is we have a closed attribution system with our dealers so we can begin to track all the way through the process. So that's a big piece of it for us as well. And we've -- what we believe in a marketplace environment, you can't run a one-size-fits-all search process. So we're beginning to develop cohorts of consumer groups that we see show up on our site. So the biggest one we've seen recently is an economics cohort, which is we list cars on our site and our competitors do it well, do the same with a 5-digit number. The car is $37,000, $42,000, whatever it may be, consumers think in 3-digit numbers and that 3-digit number is generally a monthly payment, right? What can I afford to pay on a monthly basis? And what can I put down, right? So we're beginning to shape our thinking where we bring payments for much further up funnel for an economic buyer qualifications, another big piece of it, right? We have around 1 million units on our site. If someone's a 620 FICO score and below, there's no sense in showing them some of that inventory, right? The Full-size BMW and Mercedes are out of their reach and you end up wasting their time if you do that. So we're trying to take all the pieces we know about the consumers and build shopping flows and do matchmaking, which is what really good marketplaces do, right? They connect those things. They take all the data they have. And we're beginning to see results that consumers will take the time to lean in. That's always the question is, if you ask a consumer a question, will they answer it? Will they spend the time to give you the information. And what we're learning is they'll take the time. That answer your question?

Yes. That's helpful. Maybe some of the changes you've made to like just your business model in terms of how you're getting paid by the dealers, the pivot to subscription. Could you just share your thoughts on this increased emphasis on a subscription-based business model. Any particular industry dynamic or projection that may have prompted the move as opposed to paper sale? And how big was like TrueCar+ a factor here?

Yes, I think it's important for us. Our monetization model will always be at the unit level for a dealer. What we're transitioning to is a subscription billing model. So the difference is because we have this closed loop system, we can tell every month how many cars our dealers are selling. And actually, with the monetization number, determine what value we're delivering to them. What we've done is rather than having that regenerate every month based on math, we set a subscription value. It allows them to understand their payments. And then every 6 months, we go in and adjust it. So we are still very much an attribution model. We're going to be based on helping our dealers sell cars and trucks. We're just delivering it to them in a subscription, so they have consistency of pricing and then as we grow our business, we'll go out and talk to the dealers about. If you add more value, dealers are willing to pay you more generally. And that's the key for us. Pricing discussions are tough. What we should be talking about is can we add more value to our dealer relationships. If we add more value, they'll generally pay us.

Got it. That's helpful. Maybe pivoting to TrueCar+ us, more specifically TrueCar+, where are you in the development innings there relative to where you would like to -- where you see the end state? Maybe there is no end state you have in mind right now. But just where you are in the innings of finishing that product. Anything you can -- just following up on the previous question, any more color you can give us around the monetization plan of TrueCar+ or any color on the size of incremental investments needed for that platform as well going forward?

Yes. So I'll start with the learnings piece of it. We've been at this a little over 1.5 years. We've gotten a tremendous amount of learnings from our dealer partners and from consumers who have used the TrueCar+ platform. And I think what we've seen is if you're willing to iterate and you can get the initial group of dealers involved in your program, they have to want to be part of this process. So we have about 12,000 dealer partners, we know we'll never have 12,000 TrueCar+ partners. It's going to be a curated piece of the network. It's going to be the dealers who are really leaning into the digital aspect of this. And I think it's going to be the dealers who see value in it and don't have the resources to do it themselves, right? A lot of the dealers we talk to, if you want to get into the digital retailing business, you got to build the tech, you got to drive the traffic, you got to iterate the product every month. And that's not what dealers are really good at. We do that piece of it. All they have to do is give us the inventory, price it, tell us when they sell it, we pull all the data out of their system. So it's their pricing, their lenders, their markups, their accessories, their insurance products, the whole way through. So what we've done is what we consider to be the heavy lifting, we built that tech to connect them with the demand coming on our site. So we think there's a lot of opportunity for growth there. We were in 6 states. We're adding 10 additional states to that probably over the next few months. A lot of that came out of NADA where we had dealers come into our booth, learn about what we're doing and asking us to come to their market. So we're in Ohio. We're in Virginia. We're in Maryland. I'll probably miss some of these. I think we're going to Colorado. What are some of the others, does that cover most of them. There's a few others, but Pennsylvania. So we've got dealers coming to us saying, "Hey, I want to be part of this", that's dictating our rollout plan more than a real geographic kind of thing. And we've also found that there's a different approach needed for new cars and used cars, right? Franchise dealers certainly control that new car market. They have concerns about the rules, their OEM partners have built around DMAs and proprietary markets. So we have to be a little more careful there. The used car market is more like the Wild Wild West, right? You get a big used car dealer who wants to sell his cars nationally, and he thinks you can help him, they lean in. They're interested and want to be part of that. So we're accelerating some of the used car development. In our last earnings call, we talked about our independent dealer count actually going down. What was happening was we were losing the smaller dealers on the lower end of that challenges with their business, going out of business, inability to really service for us because they were so small, and we're adding dealers on the top end. And there's probably 50 dealers, independent used car dealers who have in excess of 1,000 cars available to them. So you can build a network out around those dealers just by getting them into a marketplace and getting their products there. It tends to be inventory sub-$30,000 which is what consumers are shopping for now. So we're going to be on 2 separate paths, 1 for franchise dealers and 1 for independent used car dealers and used car will build that more quickly. Surprisingly, our brand started out as a new car brand. We now have franchise dealers who are on our core product new and then they're in our TrueCar+ product for used because they see. They got less constraints, less concerns about how their OEMs are going to feel, less concerns about how their neighboring dealer is going to feel about getting into the marketplace business. So we're going to see those separate a lot of opportunity on the used car side.

That's interesting. On the -- just on the franchise dealer side, I just wanted to ask about AutoNation, took us by surprise when that investment was made. Maybe since that announcement, what's been the discussion with them, what kind of partnership do you have with them or you're planning to have in the future? From my understanding, they're still not using -- there's still a lot on TrueCar. I think it's still in discussions on like how to go about it. But -- if you could just elaborate on that investment, what they see in it, what's there for you, just round it out there.