TrueCar (TRUE) Q1 2021 Earnings Call Transcript

TrueCar (TRUE -3.78%)
Q1 2021 Earnings Call
May 06, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to your TrueCar first-quarter 2021 financial results call. [Operator instructions] At this time, it is my pleasure to turn the floor over to Scott Watkinson. Sir, the floor is yours.

Scott Watkinson -- Senior Vice President, Deputy General Counsel, Assistant Corporate Secretary

Thank you, operator. Hello, and welcome to TrueCar's first-quarter 2021 earnings conference call. Joining me today are Mike Darrow, our president and chief executive officer; and Jantoon Reigersman, our chief financial officer. As a reminder, we will be making forward-looking statements on this call.

These forward-looking statements can be identified by the use of words such as believe, expect, plan, anticipate, becoming, toward, will, intend, confident, and similar expressions and are not and should not be relied on 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 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 to 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 true.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. Now, I'll turn the call over to Mike.

Mike Darrow -- President and Chief Executive Officer

Thank you, Scott, and good afternoon, everyone. I'll start my remarks today with a brief review of Q1. I'll then remind everyone of where we're headed as an organization with a specific emphasis on where we play in the ongoing digital transformation of the automotive vertical. And finally, I'll close with some industry observations.

I'm pleased to report that, through the unwavering and tireless efforts of the entire TrueCar team, Q1 is another strong quarter for TrueCar. Overall, we ended Q1 above both guidance and consensus forecast with revenue of $65.1 million and adjusted EBITDA of a positive $2.1 million. Quarter-over-quarter revenue increased by 2%. Unit growth, driven by a 26% increase from TrueCar.com and an 8% increase in affinity partner units, was up 17% year over year, excluding USAA.

Throughout the first quarter, we continued to see slightly better-than-forecasted dealer churn in spite of the recent macroeconomic headwinds from chip shortages, which I'll come back to at the end of my section. And finally, due to the focused efforts of our field sales team, we saw quarter-over-quarter revenue growth generated through additional dealer products of 15% in Q1. I would now like to highlight three of our key initiatives, starting with our deal-building capabilities. As I mentioned in our last call, in November 2020, we launched the ability for consumers to build their ideal deal online from the comfort of their homes, which we refer to as Deal Builder.

TrueCar Deal Builder is a flexible experience that guides a consumer through the process of configuring an accurate car deal, personalized to them based on their trade-in valuation, preferred lease, or loan terms, down payment preferences, credit profile, and all taxes and dealer-reported fees and accessories associated with the transaction. Deal Builder solves for the most challenging part of online retailing, namely the creation of accurate deals across millions of cars and thousands of dealers and a transparent guaranteed cash offer for trade-in. In March, we saw 20% of TrueCar.com new prospects. In other words, consumers that have created connection with a dealer and a vehicle engaged with TrueCar Deal Builder, representing an increase of 74% since Q4.

Since the November launch, 78% of our franchise network has adopted our solution, further underscoring the value dealers see in the TrueCar approach in helping each of them address the current consumer desire. Equally important, this now means that our consumers have access to over 523,000 new vehicles when they build their deal. It's important to note that we're building a two-sided marketplace, and efficient penetration and healthy growth in both sides of the market, dealers, as well as consumers, is critical. While we do have 78% in growing adoption by dealer partners, our continued focus will be to grow prospects engagement with Deal Builder.

In addition to increased adoption of the tool from our dealer partners and our progress in rolling out Deal Builder to our partner network, in Q1, we also launched this capability to our used-car experience, starting with certified pre-owned. This launch brings TrueCar Deal Builder capabilities to roughly 10% of our used inventory. As we continue to expand our deal-building capabilities to used vehicles, by the end of Q2, we expect to have more vehicles than anyone in automotive with respect to enabling accurate monthly payments. Our second initiative I would like to address is our checkout flow.

While providing online deal-building capabilities supports a more stress-free process for consumers and efficiencies for dealers, we know that once a deal feels right, consumers are going to want to proceed to a purchase. This remains an area where there are still a few more pieces to address, specifically the final checkout purchase process. We refer to these final steps as the checkout flow, which includes aspects such as credit applications, finalization of aftermarket products, e-contracting, in-vehicle delivery, or pickup. It's important to note that we believe there are two ways for a flexible approach to solve for the checkout flow: a checkout flow by integration with other SaaS platforms and a native checkout flow process.

Let me address the checkout flow by our retailer platforms integration first. A significant portion of franchise dealers lean on SaaS partners to provide their digital retailing experience, including the checkout functionality. The numerous high-quality solutions being adopted by OEMs and retailers means that flexibility is key. For that reason, we've designed an open API spec for API-based integrations to standardize the transfer of data from our auto-buying platforms to dealers' digital retailing tools.

That way, we can provide a fully digital experience to our consumers, enabling a seamless transition from deal building to deal finalization while, at the same time, we ensure active dealer participation in our marketplace. As part of this, we started a dialogue with various digital retailing vendors in order to support transitioning the consumer into the dealer's preferred checkout flow. Those conversations have progressed well. And in April, we launched our first pilot program in partnership with Roadster.

Our two companies share more than 500 mutual dealer partners who can begin supporting consumers designed to complete numerous purchase aspects digitally. Once a consumer completes all aspects of building their deal on our site, they are offered the ability to transfer this deal into dealers' Roadster checkout process, which seamlessly integrates all deal details and allows the consumer to continue with the deal as built on our site. We're excited about this innovative pilot initiative and look forward to seeing how it progresses. While partner integrations are important, we certainly also see real value in keeping our consumers within the TrueCar ecosystem by providing a native checkout flow solution.

We are assembling our own native checkout solution in order to support any dealer who doesn't currently have a digital retailing vendor solution and to support consumers who wish to use our experience. This can be especially important for our smaller franchise and independent dealers who perhaps don't have the resources to invest in a more comprehensive digital retailing infrastructure. Ultimately, we believe checkout flow, in combination with our existing deal-building and shopping capabilities, will transform our platform into a leading automotive marketplace that enables complete online car buying at the scale of millions of vehicles. The third initiative I would like to discuss is our TrueCar Military and affinity partner network.

Our Q1 performance was driven, in large part, by strong performance in our affinity channel with multiple partners breaking monthly prospect volume records in March. Sam's Club, PerkSpot, and over a dozen other partners across all of our various affinity segments at all-time highs. In addition to these record-breaking performances, the launch of the Navy Federal car-buying service has exceeded all of our expectations. The teams are working together on an exciting campaign, which is expected to start in June and run through the summer.

While it is still very early in the program's history, we're very excited about the potential and the initial performance of this partnership. With partnerships with GovX, First Command and Military AutoSource are also expected to launch campaigns in Q2 and continue to expand the reach of our TrueCar Military platform. Between TrueCar Military and our new partnership programs, we are very pleased with the progress we are making in reaching and servicing the auto-buying needs of the more than 40 million people that make up the military community, and we'll continue to expand upon our efforts as we progress throughout the year. Lastly, as I mentioned earlier, I want to touch on the issue of the chip and inventory shortages.

As we've discussed on numerous occasions previously, as a two-sided marketplace, we sit squarely between demand and supply. While our fundamental demand-side metrics show clear signs of strength with sequential traffic and prospect growth of 16.5% and 14.7%, respectively, supply side restrictions continue to mount. Since last year, beginning with disruptions caused by the pandemic, the auto industry has experienced a decline in inventory supply. The inventory constraints have continued into the current year with the global chip shortage.

The limited supply of new and used vehicles in some brands has resulted in significant unmet consumer demand and led to an increase in prices that dealers charge consumers. The reduced new-car inventory levels, paired with strong natural consumer demand, has retailers closely monitoring demand-generating sales and marketing expenses, which we believe will put pressure on our dealer count. We are also seeing supply side shortages impact our OEM revenue as certain OEMs have opted to pause their current incentive programs due to limited inventory. We share the widely held view that the chip and inventory shortages will be temporary.

In the meantime, we remain focused on opportunities to help introduce the right car to the right consumer and nurture them with rich content to help them get to a buying decision. I'd like to end by thanking our employees as they continue to push and focus on our end-to-end consumer experience in transforming our business to a true digital marketplace despite the continuing global pandemic in various other adverse circumstances. And with that, I'll hand the call over to Jantoon.

Jantoon Reigersman -- Chief Financial Officer

Thank you, Mike. Let me start by underlining how impressed I am with the team continuing to operate so effectively in an ever-changing market environment. The TrueCar team continues to push forward and focus on our transformation as we keep gaining momentum. Before we touch on our first-quarter performance, I would like to take a step back and remind everyone of the significant addressable market opportunity in front of us.

By 2025, the total addressable market of car sales is expected to reach 57 million units and, according to industry reports, 40% of which is anticipated to be purchased -- by 2025, the total addressable market of car sales is expected to reach 57 million units. And according to industry reports, 40% of which is anticipated to be purchased digitally, a total of 22 million. This represents roughly 6 million new and 17 million used cars. We are well under way toward offering a full end-to-end experience for our customers to address this need in both markets.

We have a highly respected consumer-facing brand and a strong dealer network, making us uniquely suited to enable this two-sided marketplace and provide consumers and dealers alike an awesome digital car-buying experience. I'll now review the strong financial and operating results for the first quarter of 2021. Revenue in the first quarter came in at $65.1 million, down 18% year over year but up 2% quarter over quarter. The year-over-year decline was expected with the largest driver being the loss of USAA unit volumes following the end of the partnership in September of last year.

As Mike mentioned, unit growth, excluding USAA, is a good proxy for our performance, and we delivered a strong 17% growth year over year by that metric. Franchise revenue ended the quarter at $47.9 million, flat quarter over quarter. Independent and new dealer products came in at $10.4 million and $3.8 million, respectively, with quarter-over-quarter growth at 5% and 15%, respectively. OEM revenues ended the period at $2.8 million, up 3% quarter over quarter.

We ended Q1 with 14,148 dealer customers, down just 2% from the end of Q4. Total units for the first quarter ended well above 165,000. Year over year, TrueCar.com units were up 26%, and extended affinity units were up 8%. As mentioned before, total Q1 units, excluding USAA, were up 17% year over year.

Monetization for Q1 came in at $391, flat compared to the same period last year, demonstrating our continued ability to preserve revenue in spite of the lingering impact that COVID-19 has had on units. As mentioned in our last call, we expect gradual downward pressure on monetization over the course of the year as we anticipate unit growth to outpace rate capture. Rate capture will always lag behind unit performance because of our subscription billing models as rates can only be altered when a dealer is eligible for a service renewal. Now, turning to expenses and margins for the first quarter of 2021, where all of the following metrics are for continuing operations and reported on a non-GAAP basis unless otherwise stated.

The business generated $59.7 million of gross profit in Q1 with gross margin of 92% and in line with prior quarters. Technology and development spend of $10 million was up from the fourth quarter due to seasonal expected higher headcount costs associated with payroll taxes but down year over year, driven by the strategic restructuring effective June 1, 2020. General and administrative spend was $10.5 million for the first quarter, up from Q4 due to higher payroll taxes in Q1 but down year over year, driven by lower bad debt in 2021, resulting from improved collection efforts and forecast assumptions. Sales and marketing spend, our largest expense category, ended up at $37.1 million, down 15% year over year, driven by lower creative and brand experience spend.

As a percentage of revenue, sales and marketing remained about the same as Q1 of 2020 at 57%. Within sales and marketing, TrueCar.com acquisition spend was up 12% year over year, ending the quarter at $14.1 million. TrueCar.com units were up year over year 26%, resulting in a cost per sale of $155, 11% below the prior year. The difference in year-over-year performance between acquisition spend and units reflect the macro environment we faced last March, in which we saw a large decrease in sales at the onset of COVID and, therefore, had an inflated cost per sale.

Part of our marketing spend was $10.2 million in the first quarter, down 14% year over year. Sales headcount and other, the final category within sales and marketing, ended the first quarter at $12.8 million, down 34%, primarily driven by the reductions in headcount that went into effect in Q2 of 2020. In summary, significant efficiencies across all categories of our sales and marketing spend drove a 15% reduction in non-GAAP expenses, resulting in adjusted EBITDA of $2.1 million or 3.2% of revenue. GAAP net loss for the first quarter was $8.4 million or $0.09 per share, compared to a loss of $10.4 million or $0.10 per share in Q1 of 2020.

I'd now like to provide commentary on our expectations for the rest of 2021. Despite an improving retail environment, there remains a heightened level of uncertainty, especially around the industry implications due to the inventory shortages. As such, we will not be providing formal full-year guidance at this time. The year-over-year comparisons for the first three quarters of 2021 will be further complicated by the USAA transition and the impact of the pandemic, specifically, the significant drop in unit volumes beginning in March of 2020 and the broad-based subscription discounts provided throughout the second quarter.

We will only be providing a range of our expected revenue performance for the second quarter of 2021 of $65 million to $66 million. As it relates to adjusted EBITDA, we expect adjusted EBITDA to be above breakeven for the quarter. We are keenly aware of the marginal unit economics for both TrueCar.com and extended affinity channels and anticipate deploying ad spend more aggressively to take advantage of improvements to on-site conversion, monetization, or customer acquisition costs when new inventory levels return back to normalized levels. And with that, let's go to questions.

Questions & Answers:

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator instructions] We'll take our first question from Steve Dyer with Craig-Hallum. Please go ahead, sir.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

Thanks. Good afternoon, guys. Just a question on dealer count. You talked about some of the challenges around inventory and so forth.

But with that said, we've seen maybe a couple of your other competitors, I guess, modestly add dealers, nothing enormous. But I'm wondering if there was some residual maybe dealer falloff from USAA that you feel like maybe is contributing to the dealer softness?

Mike Darrow -- President and Chief Executive Officer

Yes. Steve, thanks for the question. And what we said in the call, and I think what we saw in Q1 was, clearly, we did see a small drop-off in dealer count, but it was actually slightly better than we had forecasted, anticipating that there might be some residual fallout still from the USAA transition. So we actually came in a little bit above where we had projected our dealer count to be, which was virtually flat for Q1.

There are some additional headwinds that everybody is mentioning in their calls around new-car inventory and some of the things that are starting there to be discussed, but we see our dealer count as fairly stable, and we're working on it on a day-to-day basis to make sure we're delivering value to our network as we see it.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

Got it. OK. And then just a question on Roadster. Is the idea with that from a monetization perspective that that's a separate -- almost a SaaS solution or a separate, I guess, subscription versus the monetization you get from actually selling a vehicle? Or how do some of these extras get monetized?

Mike Darrow -- President and Chief Executive Officer

We haven't completely finalized all the monetization thoughts around that pilot program. The key was to get it out there and test the consumer experience and give our consumers a chance to fully build the deal out on our site and then smoothly transition them into the Roadster checkout process and let them finish the deal there. So we think there'll be a number of different ways to monetize that one. You mentioned potentially as an additional product.

The other would be, we're hoping to see a better -- because of the better consumer experience, we're hoping to see a higher close rate. So we think there'll be a lot of good outcomes that come out of this test. We do have consumers flowing through the process already. Not really enough data yet to talk about, but we're excited with what we've seen so far.

And we truly believe this is another big step for us in bringing more and more digital capabilities onto our platform and being the first real digital marketplace, modern-day marketplace in the automotive vertical.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

Got it. Makes sense. Last one from me. I guess, generally, as you look around the industry, you're seeing more, I guess, vertical e-commerce solutions, whether that's from some of the big dealer groups themselves or some of your competitors and things like that.

I mean, as you go to market in what's become a very, very kind of crowded marketplace, and end-to-end is obviously the buzzword, how do you sort of intend to differentiate going forward? Thanks.

Mike Darrow -- President and Chief Executive Officer

Yeah. I think we probably -- we talked about two solutions that we have to address that. Number one is we want to build a very flexible format on our side and an open API so that we can work with the folks out there hard in developing their own solutions. So the large dealer groups or even the fully integrated used-car players who are out there now are members of our platform.

So we'll come at it from two approaches. We'll make sure we have a flexible process that feeds into the software and solutions that the large dealer groups and the verticals are building. And then we'll have our own native solution that we'll continue to pursue to give consumers a chance to go end-to-end fully on the TrueCar platform. And a lot of dealers out there are still figuring out what their digital retailing solution is going to be, and we'll provide a solution for those dealers.

So we're going to go at it from two different ways. We think this Roadster test is a big step in the first direction of integration into some of the effective platforms that are out there, and then we'll continue to work on our own flow, adding on to Deal Builder with a checkout process as we move through 2021.

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

All right. Thanks, guys.

Operator

[Operator instructions] We'll take our next question from Nick Jones with Citi. Please go ahead, sir.

Nick Jones -- Citi -- Analyst

Great. Thanks for taking my questions. I guess looking kind of throughout the rest of the year here, how should we be thinking about your kind of sales and marketing efforts, both on driving more traffic and winning dealers, if inventory is expected to be constrained, I think, at least in the next quarter and probably throughout the rest of the year due to chip shortage and then the pressures that it puts on used cars so dealers kind of have lower inventory? How are those conversations going and trying to regain dealers?

Mike Darrow -- President and Chief Executive Officer

Yes. Thanks for the question, Nick. And I'll start with the traffic side of the business. We're seeing good traffic growth, both organic and efficiency on paid on our -- both our TrueCar.com platform and our affinity partner platform.

We've added some new partners to the network. We've talked about Navy Federal Credit Union being added and some real record months from some of our affinity partners. So we really look at the demand side of our marketplace as being extremely strong right now. Traffic in the upper funnel is good and growing.

Conversion to prospect is good. We've also, due to our investment in the used-car space over the past quarters, seen growth in our used-car business. So all the signals on both the demand side for new and our used car business are very, very strong. We'll continue to monitor the inventory situation and make sure that we're delivering value to our dealers, and we're staying in line with what we're able to deliver to them.

But we see the supply side issue being short-term. Hard to guess what short term really is now. I've heard forecasts that we could begin to see improvements beginning as early as June. Other forecasts say that may be an issue that we're dealing with through Q3.

So we'll continue to focus on the demand side. All those indicators are strong and good, and we'll continue to drive value to our dealers. And if we have more of a shift to use during this low supply side on the new-car side, we're prepared to deal with that.

Nick Jones -- Citi -- Analyst

Great. And maybe one more if I can. There's some reports that Google is testing maybe getting more involved in kind of classified listings of local autos. Any thoughts on how that could potentially challenge organic traffic? Or is this something they've tried before and failed? Just any thoughts on those reports? Thanks.

Mike Darrow -- President and Chief Executive Officer

Yeah. Anytime you hear rumors of Google getting involved in something, it's something certainly worth paying attention to. We think what differentiates our site is not just the listings but the comprehensive market data that we can provide around the vehicle listing and provide to consumers as they enter into the buying phase of the shopping experience. So we think our transparency around pricing and educating consumers around not only what vehicles are available, but what a fair price is for that vehicle, what vehicles similar to that are selling for in their marketplace will continue to differentiate us.

And like I said, all of our demand-side metrics are strong right now. So we're looking forward to the spring and summer selling season, and we hope this supply side pressure is short-lived and that we find a correction for that.

Nick Jones -- Citi -- Analyst

Great. Thank you.

Operator

[Operator instructions] Mr. Darrow, there appear to be no further questions at this time.

Mike Darrow -- President and Chief Executive Officer

Thank you, operator, and thanks to everyone who took the time to join us today. I'd also like to thank -- again thank our TrueCar employees for their unwavering commitment and dedication to the transformation of the TrueCar to the first truly digital modern-day marketplace. So thanks for your time today and look forward to chatting to you again.

Operator

[Operator signoff]

Duration: 30 minutes

Call participants:

Scott Watkinson -- Senior Vice President, Deputy General Counsel, Assistant Corporate Secretary

Mike Darrow -- President and Chief Executive Officer

Jantoon Reigersman -- Chief Financial Officer

Steve Dyer -- Craig-Hallum Capital Group LLC -- Analyst

Nick Jones -- Citi -- Analyst

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