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TrueCar (NASDAQ:TRUE)
Q3 2021 Earnings Call
Nov 04, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the TrueCar third quarter 2021 financial results conference call. Please note, this event is being recorded. I would now like to turn the conference over to Zaineb Bokhari, vice president, investor relations. Please go ahead.

Zaineb Bokhari -- Vice President, Investor Relations

Thank you, operator. Hello, and welcome to TrueCar's third quarter 2021 earnings conference call. Joining me today are Mike Darrow, our president and chief executive officer; and Jantoon Reigersman, our chief financial officer. Our third quarter stockholder letter, which was issued on Wednesday, November 3rd after market close, is available on our Investor Relations website at ir.truecar.com.

We also issued a press release across PR Newswire with a link to the letter. Before we get started, I want to remind you that we will be making forward-looking statements on this call, including statements regarding TrueCar Plus and our prequalification, home delivery and cellular car experience solutions, our partnering arrangements, including those with Navy Federal Credit Union and OEMs. And our dealer marketing spends and the macro environment, including automobile inventory levels. These forward-looking statements can be identified by the use of words such as, belief, expect, plan, anticipate, become, seek, 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 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 will turn the call over to TrueCar's president and chief executive officer; Mike Darrow, for some opening comments. Mike?

Mike Darrow -- President and Chief Executive Officer

Thanks, Zaineb. Good morning, everyone, and thanks for joining us. By now, I hope you've all had the opportunity to read our first stockholder letter that we issued yesterday after the market closed. I hope you all appreciate our new process, and I invite all of you to read about the vision we've shared for TrueCar Plus, our modern automotive marketplace that connects consumers with dealers to complete a vehicle purchase entirely online.

We believe TrueCar Plus is unique because it will offer a true end-to-end car buying experience. In our marketplace, ready-to-buy consumers will be able to access a broad selection of hundreds of thousands, if not millions of vehicles from dealer inventory as we scale TrueCar Plus. Once they identify a vehicle, consumers will be able to complete each key step of their car buying and selling journey within the TrueCar Plus environment. This means they'll be able to build a personalized deal that includes a trade-in, arrange for financing, complete their purchase, and take delivery all from the convenience of their home.

We're in pilot with TrueCar Plus in one market with a select group of dealer partners and have learned a great deal through continuous testing. We are using these learnings to improve the flow and connection point between consumers and dealers ahead of our planned formal launch of TrueCar Plus in the first quarter of 2022. While the macro environment remained challenging during Q3, we managed our business prudently. At the same time, we are investing in the future with TrueCar Plus and positioning ourselves to benefit as more and more of car buying and selling process moves online.

I'd like to thank the amazing TrueCar teams whose commitment and dedication has enabled us to make strong progress toward delivering TrueCar Plus, a modern automotive marketplace for new and used vehicles that will provide a true end-to-end digital retail experience. Before we open up the call for questions, we're going to address some questions that have been on the minds of some investors. Zaineb, what's the first question?

Zaineb Bokhari -- Vice President, Investor Relations

Thanks, Mike. I have two for you and one for Jantoon. The first question is, your vision for TrueCar Plus is interesting, but don't car buying marketplaces already exist? How is TrueCar Plus different from what is already available?

Mike Darrow -- President and Chief Executive Officer

Thanks, Zaineb. Many companies use the term marketplace to describe what they do. At TrueCar, we don't use the term as a buzzword. We use it as a guide for our investments and partnerships like DealerScience, Accu-Trade, and AutoFi to deliver a true modern-day shopping experience.

In the case of TrueCar Plus, we're planning to deliver a two-sided marketplace that enables consumers to connect with dealers to provide a true end-to-end car buying and selling experience for new and used vehicles, set in a native TrueCar Plus environment. A true end-to-end experience being the entire journey will be available online. That includes vehicle discovery across a selection of potentially hundreds of thousands of vehicles, transactable vehicle pricing, personalized deal building that includes a trade-in value, financing, and protection products, completed purchase, and in-store or at-home delivery. Consumers will be able to carry out each step from the convenience of their home without ever having to set foot in a dealership unless they choose to.

Other innovative companies have proven the model for digital sales of used vehicles. However, they're constrained by limited inventory. Additionally, there's not been as much progress on the new side because of the complexity. We've been laying the foundation for true digital end-to-end purchases for the past three years through acquisition and product development.

We think the marketplace approach that we've taken with TrueCar Plus will allow us to provide a unique offering for new and used vehicles that will have benefits for both consumers and dealers.

Zaineb Bokhari -- Vice President, Investor Relations

Thanks, Mike. The next question is for Jantoon. Can you speak to the financials at a high level and give us a sense of how the third quarter played out? Additionally, you're not providing guidance, but what can you comment on?

Jantoon Reigersman -- Chief Financial Officer

Absolutely. Thanks for the questions, Zaineb. So three parts to the question, and I'll answer all three. So one, regarding the Q3 financials.

So our third quarter revenue was 55 million, which is down 28.8% year over year and 16.4% sequentially. And this is primarily due to limited new vehicle inventories across all our dealers, right? This was really driven by the macro, ongoing semiconductor shortage, and overall supply chain issues. So it's very much out of our control at this stage. We continued our prudent cost management.

So we achieved an adjusted EBITDA of 1.5 million, as compared to 20.5 last year and 4.7 in the second quarter of this year. But I think it was really important for us to just keep on being very prudent, especially as we start thinking about the ramp-up of TrueCar Plus going forward. Our balance sheet remains strong with 251 million in cash and zero debt on the balance. So it's also something really important to note in these more challenging macro environments.

If you think about year to date, 2021 has really been a tale of two halves. During the first half of the year, the industry saw SAAR numbers effectively raising through April and super strong retail demand. Since the peak, SAAR has declined, inventory levels have gone progressively worse, and this has effectively continued through the third quarter. And we don't expect this necessarily to return before the end of the year, at least.

So if you think back of what happened during the 2020 overall over the year is that there was a recovery after COVID. If you look back of last year, COVID really seemed to have been hit only in a single quarter. Whereas this seems to be much more pronounced, and will also take longer to resolve and probably will extend into next year. And so it's something we're just preparing for and ready for.

Obviously, at these inventory levels, what happens in our business models, that there is a strong correlation between the level of inventory and our close rates and therefore, directly affects our financials, in particular, our pay per sale. The close rates are impacted not only by purely inventory levels but obviously at lower inventory levels, also market pricing adjustments happen on a per-vehicle basis at the dealerships. So -- which makes obviously our business model slightly more susceptible at the pay per sale level. Regarding your question on guidance.

So given the continued uncertainty in the market, we're not providing any guidance for the fourth quarter. Although we believe these headwinds are temporary, we expect little change in the macro for the balance of 2021 and possibly into 2022 until at least the inventory starts rebuilding. And many of the metrics throughout our product flow are holding up really well. It's really isolated toward the close rate at the end of the day of people walking into the dealership and then effectively buying the car or not.

And so we'll continue managing our business super prudently like the way we have and we've proven over the last couple of quarters. And one really good example is how we've obviously scaled back our performance marketing spend as we saw the inventories decrease pretty dramatically. And so we were very responsive toward the business overall. Over the long term, however, we expect conditions and inventories to improve and the pendulum of the inventory will swing back.

And so to prepare for that, we continue to lean in. We invest in both our core business as well as the TrueCar Plus business, and we see huge potential for the business long term. And obviously, TrueCar Plus gives us a really nice opportunity to focus on the car buying and car buying and selling experience really as it shifts more online. So we will continue to manage our business prudently, invest in strategic initiatives that will position us for growth, and increase monetization once we see a more meaningful recovery in inventories overall.

So thank you for your question.

Zaineb Bokhari -- Vice President, Investor Relations

Thanks, Jantoon. Mike, the next question is for you. It seems that inventory shortages have been more prevalent on the new side versus the used vehicle side. How has the used side of your business been trending?

Mike Darrow -- President and Chief Executive Officer

Great question, Zaineb. We're pleased with the progress we've been making on the used car side of the business. I think many investors think of TrueCar is mainly focused on new. So we're happy to highlight the used vehicle side of our business.

During Q3, used vehicles as a percent of total units accounted for 45%, up from 38% in Q2 and 41% a year ago. Our independent dealer count also increased year over year when compared to Q2. We are strengthening our used car business by fast-tracking solutions. In our stockholder letter, we discussed the Q3 launch of our prequalification experience.

In Q4, we expect to launch our home delivery pilot, which we believe will help level the playing field for traditional dealers competing with digital dealers. And finally, we expect to launch a new cellular car experience in Q4 to help dealers source vehicles directly from consumers.

Zaineb Bokhari -- Vice President, Investor Relations

Thanks, Mike. Now operator, let's open up the call for questions from the audience.

Questions & Answers:


Operator

[Operator instructions] The first question comes from Rajat Gupta from J.P. Morgan. Please go ahead.

Rajat Gupta -- JPMorgan Chase and Company -- Analyst

Hi. Good morning. Thanks for taking the question. Just had a couple here.

So on TrueCar Plus, can you give us a sense just the cost to dealers on a per transaction basis, what's the margin trade-off for the dealer by using the TrueCar Plus platform? And how have you seen the traction in the Florida group, given like the tight inventory environment in terms of adoption of that platform? And I have a couple of follow-ups. Thanks.

Jantoon Reigersman -- Chief Financial Officer

So Rajat, thank you for the question. So we have not disclosed anything around the economics yet. We will do so at the right time. But we'll -- at the moment, we have not -- we've not done anything around that.

This is really focused on the pilot program. So this is really making sure we do all the right testing, really product focus, etc. We have really good traction on the top end of the funnel. We have really good visibility on the flow-through of the funnels, etc.

So we're learning a lot, and we're adjusting a lot, and those are really interesting pilots for us to run in anticipation of the bigger launch, obviously, in Q1. So things are going really, really well. We identified a series of tests, and we're all on track of doing these tests. And so overall, we're in a really good place.

What we really wanted to do with the purpose of this letter was lean forward and articulate to the market all the things we're working on. At the right time, we'll come forward with much more clarity around unit economics potentials and scalability around TrueCar Plus over the course of 2022.

Rajat Gupta -- JPMorgan Chase and Company -- Analyst

Understood. Is there an opportunity for higher monetization here just anecdotally?

Jantoon Reigersman -- Chief Financial Officer

Absolutely. And I would say -- I would argue significantly higher monetizations is probably the right word to use. Yeah.

Rajat Gupta -- JPMorgan Chase and Company -- Analyst

Is that coming from like maybe getting more share of the F&I? Or is there any other part of the transaction that allows you to get that apart from just overall experience? Just curious as to where -- what buckets you should be thinking of --

Jantoon Reigersman -- Chief Financial Officer

Yeah, I think you allow through online -- by helping dealers lean into your online sales, I think you're allowing them to think through the reshaping of the buy-in its entirety. And we want to help them really be able to compete with a lot of the other online platforms out there that do obviously -- do direct sales. And so as a result, I think there's a lot of opportunity for all of us to reshape some of those economics, which obviously would be beneficial to us as well.

Rajat Gupta -- JPMorgan Chase and Company -- Analyst

Understood. And you mentioned that TrueCar Plus expands the dealers' reach beyond like a certain ZIP code, and providing more national audience. How do you tackle that for new vehicles? Are you seeing removing of restrictions there in terms of supplying new vehicles to different ZIP codes, different states? Or how do you manage that just as TrueCar Plus gains more traction?

Jantoon Reigersman -- Chief Financial Officer

Sure. So this will be very much ZIP code based at the end of the day. This is obviously, as you start thinking about it for the longer-term rollout. So we will obviously be in compliance that goes without saying.

And at the end of the day, the great thing that we have currently is obviously a very vast network of dealers that are across the country. So we can then really think through both national and localized offering and depending on the different states and the different locations and ZIP codes, there are more or less restrictions. But we are able to adapt to that accordingly, given the vast amount of dealers we obviously have on our network as well as obviously the large amount of inventory we would have available on the side.

Mike Darrow -- President and Chief Executive Officer

Hey, Rajat. This is Mike. I'd just add to Jantoon's comments that we're really focusing in Q4 on getting the consumer product dialed in and really lined up the right way. We believe the winner in this space will be the ones who deliver the best consumer experience.

And we're working closely with our dealers in the market to make sure we're achieving that. We think the rest of these things will all fall in place as we show that we can deliver a really high-quality consumer experience and something that the dealers are excited to lean into. So we'll have more information on the aspects of what we'll be able to charge for this and what the value exchange will be as we learn more. But we're really dialed in now on making sure we get the product right.

Rajat Gupta -- JPMorgan Chase and Company -- Analyst

Understood. Great. Thanks for all the color and I'll jump back in the queue for any more follow-ups. Thanks.

Operator

The next question comes from Nick Jones from Citi. Please go ahead.

Nick Jones -- Citi -- Analyst

Great. Thanks for taking the question. I guess just a couple just on kind of traffic trends. In the shareholder letter, some of the channel partners are seeing kind of more, I guess, prospects, they're growing faster than the actual traffic volumes.

Can you speak to that? I mean is there enhancements to the partner channels where they're kind of highlighting the TrueCar offering a little bit more? Are there things you're doing that are kind of driving prospect growth faster than traffic growth?

Mike Darrow -- President and Chief Executive Officer

I think -- thanks for the question, Nick. And I think what we're seeing there is there's a lot of interest for folks to try to find the vehicles that are out there. So our upper funnel metrics around the business are extremely strong. Our traffic numbers are great.

Our conversion to prospects are good. The challenges are coming in the close rate. So our partner networks always are leaning into our buying channels, and we're continuing to see that happen and we expect it to continue. There's really strong signals from the demand side of the business across all of our aspects of our business.

Our partner business, our TCDC Plus channel, it's just with the limited supply out there, we're facing some challenges with closing rate.

Nick Jones -- Citi -- Analyst

Got it. And then when I look at kind of overall traffic, I think on like Page 2, traffic was down kind of sequentially. What do you think is underpinning that? Is it just a strained environment and consumers are struggling to kind of find cars and they're discouraged and not kind of as engaged? Is it an upper-funnel content challenge that you're kind of continuously working on? Any color on just how you're thinking about the top-level traffic to kind of true car level --

Jantoon Reigersman -- Chief Financial Officer

So I think you can -- so Nick, I think you can look at it at two different drivers. One is we've obviously pulled back on performance marketing as well. So that has one driver, obviously, on the marketing side, which is pretty much a direct consequence of our own pullback. The other one is also one of the things we see is that discretionary buyers are effectively more and more out of the market.

And so you'll have -- so then also, you're going to deploy less marketing dollars at the end. It's a little bit of a vicious circle, just to be mindful. But those are the two main drivers for the traffic.

Nick Jones -- Citi -- Analyst

Got it. Thanks for the question.

Operator

The next question comes from Marvin Fong of BTIG. Please go ahead.

Marvin Fong -- BTIG -- Analyst

Good morning. Thanks for taking my question. A couple of follow-ups on TrueCar Plus. Any additional color you could provide just sort of how many of your 13,000 dealers do you think TrueCar could be applicable to? Should we think about it as equally put -- equal potential between your franchise and independent dealers? Or is this mainly an independent offering? And then I have some more questions.

Jantoon Reigersman -- Chief Financial Officer

So I think long term, it should be very attractive to everybody, right? So near term, you can imagine that obviously used independents are very interested because it allows them to do something fast and obviously used is probably easier to transact with, less legal complexities. But like franchises equally are super interested to lean in, where these are all conversations we're having live, right? We're now piloting, as Mike said before, we're really focused on the product, so the consumer side of the product development. And so we've also obviously reconfirmed that the launch of it fully commercially by Q1 of the coming year. And so these are conversations we're having, but the short version is it's very -- it's broadly applicable for everybody.

And it also really allows dealers to have an opportunity to really lean in on this shift to online car buying without having to make a lot of infrastructure expenses. So it's a very attractive proposition to them.

Mike Darrow -- President and Chief Executive Officer

Marvin, this is Mike. I would just add to that. We're -- it's very important in the early phases of this product rollout that we get the right dealers working with us. There are some service level agreements that we ask the dealers to commit to in order to deliver the type of product that we want.

So I think early on, you'll see a selective process as we find the right dealers in the marketplace to support a high-level consumer experience like we're working toward. And then as we see success with that, I think you'll see a lot of dealers wanting to jump on board. And as Jantoon mentioned, it really gives them an opportunity to participate in a digital marketplace without having to make that huge investment on their own. So we'll see separation probably of used and new.

A lot of independents, a lot of franchise dealers looking to get their used cars out there in a digital kind of national sales basis. And then new cars, we're making sure we get the right dealers who will line up with the type of service we want to provide to the consumers as they enter into this product with us.

Operator

The next question comes from Chris Pierce of Needham. Please go ahead.

Chris Pierce -- Needham and Company -- Analyst

Hey. Good morning. When I think about TrueCar Plus, do you guys have the technology pieces in place to get this off the ground? Or should we be looking at thinking about this cash balance being used for some sort of add-on M&A spend as you kind of build it out? And then on that same vein, do you think you have, I guess, the dealer network, if I look at the dealer network over one year or two years, are there enough dealers out there that -- I guess at some point if you have -- you said -- mentioned 100,000 of cars, is that enough for consumers? Like do you need 200,000, 300,000 cars? Like what's -- like what do you think about historic inventory? Like 100,000 seems like plenty to me to get this thing started. So I'm just curious what you're thinking about dealer count going forward.

Jantoon Reigersman -- Chief Financial Officer

So let me start with the first question first. So the answer is yes. So I think we mentioned also on the previous couple of calls. And Mike has reiterated this many times that building out the ability to do this well requires a lot of work and has been effectively ongoing for the last several years.

And so -- and there are several components that are really critical as you build out such a marketplace. One of them is obviously the deal-building experience. So how does a consumer actually find the right car within a vast inventory of cars available? And how do you really make sure that you match the car that is present at the dealer with what the consumer requires? That in itself is a lot of complexity. And we've solved that already some time ago, and it took some time to do and the other ones are also as an example, elements like checkout flows, etc.

So that has all been built and all the pieces were built. So that was really tying out the last end-to-end pieces as it were in this process, and then we're now just testing those final flows. But things like DealerScience and the AutoFi partnerships, the DealerScience acquisition, the Accu-Trade partnerships, etc, are all pieces to this wider puzzle that help us enable this. On your second question, no, I mean I think the short answer is there's going to be a ramp-up associated to this product, and we will articulate that more in the future.

But over time, of course, we -- one of the things that I think is amazing on the TrueCar network is that we obviously have a very, very vast inventory level of both new and used. Remember that currently, we're working in a constrained macro environment that also makes it a little bit of an anomaly. But once that pendulum swings, also the ability for a consumer to go in and effectively look at both new and used offerings and to be able to acquire the car that they really want from the comfort of their home is something that's very unique, rare. And we feel we have both the technology, the brand, the top funnel, and the inventory through our dealers available to make that happen.

So we're very excited looking forward to 2022.

Operator

The next question comes from Naved Khan from Truist. Please go ahead.

Naved Khan -- Truist Securities -- Analyst

Yeah. Thank you, guys. Maybe a quick question on the dealer count and the decline you saw in Q3. Can you just maybe talk about the monthly trends, how you exited the quarter? Is that something that's continuing into Q4? Or how should we be thinking about that?

Jantoon Reigersman -- Chief Financial Officer

Yes. So the monthly trends for Q3 were very much like as I mentioned earlier, the year was effectively till to till. So until, call it, the end of June or call it mid-June the market is very much on the rise. And then call it mid-June, it started turning.

So the monthly trends have been effectively downwards. If you look into what has like the couple of weeks now into October, call it, five weeks into Q4. And some of these elements seem to be stabilizing across the board if you look at some of the macro days coming out there, right? So you look at announcements of Toyota, GM, etc. And then you'll see some light signs of improvement, but it's really hard to say.

And it's really -- like overall, inventory is obviously very, very fickle at the moment. And also consumer behaviors are shifting a little bit in anticipation of this market. The other thing also to remember is that even if you hit a pure bottom, which hopefully will hit soon, there's still some time -- it will take some time before inventory rebuilds. So there is going to be somewhat of a lagging effect, which is why we don't anticipate any improvements really before the end of the year from a macro perspective.

Mike Darrow -- President and Chief Executive Officer

Naved, this is Mike, too. I would add that we've shifted our sales focus a bit. And you saw that we've actually added to our independent dealer count in Q3. That's where the opportunity seems to be as the new car inventories remain challenged and the used car business remains extremely strong.

So we've changed our focus. Our churn is actually below pre-COVID levels. The challenge you face is adding new dealers to the program, particularly on the franchise side. So we changed that focus.

We're not looking to add independent dealers. We're working with our franchise dealer partners to accentuate their used car products and help them there. So there's been a bit of a shift in our focus that we saw a good result from on the used car side of the business in Q3.

Operator

The next question comes from Tom White of D.A. Davidson.

Tom White -- D.A. Davidson -- Analyst

Great. Good morning and thanks for taking my question. I got one on the balance sheet and one on dealer count. So the balance sheet is obviously in strong shape.

I think it's like over 50% of your market cap in cash, no debt, you're managing to kind of EBITDA breakeven. Can you maybe just share updated thoughts on how you're kind of weighing maybe using that cash in a more aggressive way maybe and when? And I guess, specifically, I'm curious about your view on maybe raising the buyback or M&A. Or maybe just like having kind of the big cash balance there given the uncertain kind of inventory backdrop. And then I have a follow-up.

Jantoon Reigersman -- Chief Financial Officer

Yeah, absolutely. So we're thinking strategically through the cash balance on an ongoing basis. So we are opportunistic when it comes to M&A. We have healthy deal flows of M&A, and we particularly look at where we could potentially accelerate some of our strategic initiatives that we have in the pipeline.

And so we continuously monitor that. One of the issues to date around M&A has just been overpricing -- overpriced assets at the end of the day. And so we're prudent acquirers. And so we're mindful of that, but it's something that we definitely continuously to monitor opportunistically.

We have done some buyback throughout Q3. It's something that we also identified in the letter and you'll see in our cash flow statement. So we utilize that somewhat around the edges. But overall, I think it's also important that we've now articulated in some more clarity, and we'll continue to do so, the opportunity that exists around TrueCar Plus.

And obviously, making sure that we really start leaning in into that product as the world is shifting more online, and that obviously will require investments over time as we start scaling that business or that side of the business. And so there will be investments that we'll be making in that area as well.

Operator

This concludes our question-and-answer session. I would like to turn the call back over to Mike Darrow for closing remarks.

Mike Darrow -- President and Chief Executive Officer

Thank you, operator. And I want to thank everybody for taking the time to participate in our call today. And once again, thanks to the entire team at TrueCar for all their hard work as we continue to optimize our core business while making strong progress on delivering TrueCar Plus, which we believe will be a true automotive marketplace that will make the car buying and selling journey available to consumers in a digital environment. Thanks again for your time.

Operator

[Operator signoff]

Duration: 34 minutes

Call participants:

Zaineb Bokhari -- Vice President, Investor Relations

Mike Darrow -- President and Chief Executive Officer

Jantoon Reigersman -- Chief Financial Officer

Rajat Gupta -- JPMorgan Chase and Company -- Analyst

Nick Jones -- Citi -- Analyst

Marvin Fong -- BTIG -- Analyst

Chris Pierce -- Needham and Company -- Analyst

Naved Khan -- Truist Securities -- Analyst

Tom White -- D.A. Davidson -- Analyst

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