TrueCar Inc (TRUE) 2014 Q3 法說會逐字稿

Greetings and welcome to the TrueCar third-quarter 2014 earnings conference call.

(Operator instructions)

As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Alison Sternberg, VP Investor Relations. Thank you, Ms. Sternberg, you may now begin.

Thank you, operator. Hello and welcome to TrueCar's third-quarter earnings conference call. Joining me are Scott Painter, TrueCar's Chief Executive Officer; John Krafcik, President; and Mike Guthrie, our Chief Financial Officer.

During the course of today's call our management team will make statements that may be considered forward-looking including statements regarding future results of our operations, revenues and adjusted EBITDA, growth and incentive monetization, improvement in core metrics and our products, as well as commentary regarding growth in the TrueCar certified-dealer network and overall automotive sales.

We caution you to consider the risks associated with forward-looking statements that generally relate to future events or our future financial or operating performance. Such risks and uncertainties are detailed in the risk factors section of the Company's registration statement on Form S-1 and quarterly report on Form 10-Q for the quarter ended September 30, 2014 to be filed with the SEC, and could cause actual results to differ materially from those projected.

Note that the date of this conference call is November 5, 2014 and the following discussion and responses to any questions and reflect management's views of today. Further, any and all forward-looking statements made today are based on information available to us as of the date hereof and we disclaim any obligation to update any forward-looking statements except as required by law.

In addition, we will discuss GAAP and certain non-GAAP financial measures. Reconciliations of all non-GAAP measures to 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 will turn the call over to Scott.

Thanks, Alison. Good afternoon. It is great to be speaking with all of you again.

Q3, our second as a public company, was another strong quarter for TrueCar. I'm going to divide my comments into three parts. The first part will cover the strength of our current execution and performance.

The second will highlight how we affect the new car buying experience for consumers, dealers and OEMs and how much more impact we can have.

The final part of my remarks will cover our unique positioning in the market and why we are extremely well situated to deliver on our promise of transforming the new car buying experience.

The management team that we have assembled at TrueCar is strong and we are executing extremely well across the Company. That is quite visible in the numbers, as it was another record quarter across all of the key metrics for TrueCar.

Users on our platform accounted for 172,000 units across the TrueCar certified-dealer network in the third quarter. That was 47% higher than the 117,000 units recorded this time last year. Our share of the new-car market grew to 3.7% in Q3, an annual growth rate of nearly 40%.

We recorded revenue of $57 million, an increase of 51% over Q3 of last year. We also saw significant operating leverage this quarter, delivering record positive adjusted EBITDA of $3.9 million or year-over-year growth of 60%.

Finally, there are now over 9,000 TrueCar certified dealers, of which over 8,100 our new car franchise dealers and nearly 1,000 our non-franchise dealers. We are working with 26% of the franchise dealers in the US. TrueCar consumers account for nearly 15% of their new vehicle unit sales on average.

As Mike will discuss later in the call, all of our five key growth and margin levers brand, product, dealer, creative messaging, and monetization are improving, thereby producing strong operating results. While each of these levers has improved substantially of the past year, as I will address in a minute, we believe the Company can deliver significant performance improvements in each category.

In addition, TrueCar is clearly benefiting from the shift away from third-party information and lead-generation websites and third-party marketing channels. More on that in just a minute.

With the leverage in our model beginning to manifest, we will continue to invest to drive growth and expansion of our business by building our nascent brand and developing ever better, mobile-centric products that dramatically improve the car buying process.

Our core experience has a lot of upside. While we are pleased with our recent results, we are still in the early stages of building the platform to deliver the ideal, new car buying experience for consumers, dealers, and manufactures. I believe that we can materially improve on the core metrics that we have been reporting to you while improving the experience and dramatically increasing our revenue potential.

Let me drill down on those points. Through our first two quarters as a public company, we have been talking to you about the unique TrueCar value proposition of our core experience. Put simply, we enable consumers to see what others have paid for the car that they want to buy. We provide of upfront pricing information with guaranteed savings from participating dealers. We, generally, enable our 8,100 dealer partners to pay only when a car is sold and not when a lead or an impression is delivered.

More and more consumers and dealers alike are acknowledging that there is a new way to buy a car. This involves a negotiation-free experience supported by a network of dealers engaging with modern consumers. We believe that as more dealers hold their marketing channels accountable real benefits to their bottom lines begin to surface. Dealers who adopt this mindset no longer consider to TrueCar an incremental cost and this creates a virtuous cycle.

When dealers began to consider TrueCar core to their operations, they staff and train differently. They price more competitively. They generate more sales, creating a better car buying experience for consumers while also enhancing internal operating efficiencies.

We continue to improve our experience in three very fundamental ways. TrueCar is now a mobile-first experience and about half of our users engage us on a mobile device. We are helping consumers move from a shop digitally, buy offline to an end-to-end digital solution. Users can now take TrueCar with them to the dealership and can fulfill more of the process on a mobile device thereby increasing price confidence, reducing friction and improving close rates.

As we have highlighted in our television commercials, the mobile tools we have developed make the process better for consumers and dealers. Next year, we will refresh our mobile platform with the goal of making the consumer experience simpler, increasingly engaging and more accessible.

TrueCar is increasing its focus on delivering great pricing to its users, not only in the form of upfront pricing information and guaranteed savings from dealers, but also by delivering targeted incentives for manufacturers.

Automotive manufacturers spend over $2,500 per new car on incentives, on average, to move cars after they have been delivered to the dealerships. Incentive spending, which takes the form of consumer cash, dealer cash, and financing subvention is one of the largest and most important spend categories for the OEM. And, it is also one of the most inefficient.

The TrueCar platform offers OEMs an intelligent, pay-for-performance platform that can materially improve the efficiency of the $40 billion that they spend on incentives each year. Although we are in the early stages of proving the power of our platform to the OEMs, this year we will work with 12 brands and deliver approximately $150 million of unique incentives on their behalf to TrueCar consumers. Those consumers will close with much greater frequency than consumers without incentives.

We intend to broaden these programs aggressively in 2015 and beyond. As we continue to prove its efficacy, we will grow incentive monetization as an important part of our revenue base. This opportunity is one of the key reasons we brought on our President, John Krafcik, the former CEO of Hyundai USA. John controlled a large incentives budget and understands the challenges of efficient spend firsthand.

We are solving more of the problem. As we discussed at the time of the IPO, consumers tend to come to TrueCar in one of three contexts. In the first, the consumers know what they want to buy and are looking for price confidence and an introduction to dealers. We do very well on that instance.

In the other two instances, however, if consumers are either uncertain about how to finance the car they are buying or if they need to trade in their car before they can buy the new car they want, we offer little help today. TrueTrade is our solution to the trade-in problem. Although we have consistently given to clear guidance that we would have no meaningful revenue prior to 2016, we are making progress.

We have dedicated technology, products, business and dealer teams focused on TrueTrade, and we have achieved some important milestones. First, we now have nearly 1,000 non-franchised dealers on the TrueCar dealer platform. These used car dealerships will be important buyers and will complement our franchise dealers, providing deep network of demand for trade-ins across the price spectrum.

Second, in June of this year, we launched the Sell My Car app. Sell My Car is a digital condition report and we have been allowing consumers to upload their cars and receive inbound bids from dealers. We know that the pipes work and we know that dealers will bid on cars sight unseen.

Finally, we will launch TrueTrade as a pilot that will include transactable daily values in early 2015. I'm not going to give specifics at this point except to say that after the pilot launches, we will roll the program out more broadly next summer.

We are you uniquely positioned in the market. TrueCar is the only data-driven, bottom-of-the-funnel, online automotive company. We do not provide editorial or serve up ads in our experience. We are not a listing service and we are not a guidebook.

There are tens of millions of monthly unique visitors moving around the top of the online funnel from search to OEM sites to portals. Those unique visitors move up, down, and around the funnel as they go through the car research and shopping process. But at the bottom, when they are ready to buy, TrueCar is there as the unique order-generation platform.

Each month, nearly 5 million unique visitors make their way to TrueCar. Remember, only about 1.2 million people buy a new car each month. We believe we are seeing a large swath of the car buying public each month. Our job is to improve our experience so that more of them visit TrueCar certified dealers equipped with unique incentives from the manufacturers via a great mobile experience and buy with confidence in a delightful interaction that we helped to shape.

Let me just briefly summarize my three key themes. One, we are executing well and are in a position to continue to drive our core business at high growth rates with improving core metrics. Two, our core experience has a lot of upside, and we will continue to improve TrueCar in three important ways.

Our mobile experience will continue to help migrate car buying towards a fully digital experience. We will provide a channel for TrueCar users to get great pricing by delivering manufacturer incentives in a more efficient way. We will begin to solve more of the problem for new car buyers by launching TrueTrade.

Three, we are uniquely positioned to execute our business plan. We are the data-driven, order-generation platform that provides consumers with the best experience while enabling dealers and OEMs to spend precious marketing dollars only when a sale occurs.

I will now turn it over to John, who will give you a sense of the health of the industry as well as talk a bit more about our growing focus on providing value to both dealers and manufacturers.

Thanks, Scott. I will begin my remarks with some comments on the overall health of the industry. Then, share a few insights about our TrueCar business. Lastly, provide more details into how we are working with dealers and OEMs to improve their business and deliver for consumers.

First, October was another good month for the industry delivering a 16.5 million new vehicle SAAR and providing confidence to our full-year forecast of 16.4 million units. We see an even better industry in 2015 with a potential for a 17 million SAAR.

As we shared last quarter, the used-car side of the industry is experiencing a much-needed expansion in supply, bringing used-car availability back to the industry normal trend line. We expect 38.6 million used cars to be sold this year with new car dealers, independent used car dealers and direct consumer-to-consumer private market sales sharing roughly equally in this marketplace.

The supply of 3- to 5-year-old and newer vehicles is increasing from recent industry lows, providing new car dealers with more opportunities to grow this important aspect of their business while maintaining per unit margins.

We've not yet seen the impact of increasing used-car availability on new-car transaction pricing. That's good news. So far this year, industry wide transaction prices are up $776 per vehicle, while incentive spending has grown just $221. That's great for automakers with broad product ranges who are seeing improving margins and higher volumes this year.

We attribute this growth, primarily, to continued consumer-driven mix shift away from compact and midsize sedans toward vehicles that provide more consumer functionality, such as car-based crossovers like Honda CRV, truck-based utilities like Chevrolet Tahoe and full-sized pickup trucks like the Ford F series.

Why does this matter to TrueCar? Well, we work with most every major automaker and finance company through our ALG subsidiary, providing residual value forecasting and consulting services on new vehicle product planning and pricing.

Doing our job well for them requires a keen understanding of consumer preferences and market segment dynamics. Our mastery of all aspects of automotive retail data fuels these insights, delivering great value to our OEM and finance partners and fueling new growth prospects for the core TrueCar business.

Now, on the dealer side, we've continued to see strong growth in the number of dealers seeking to join the TrueCar network. Inbound contacts from perspective dealers continue at a strong pace, while our churn level remains extremely low. The most recent 1,000 net dealer additions occurred in the shortest time period in Company history. We now work with 80% of the top-50 dealer groups.

Our network has recently surpassed 8,000 franchise new-car dealers and nearly 1,000 independent used car dealers. At our current pace, we should exceed 10,000 total TrueCar certified dealers in the first half of 2015.

TrueCar is an increasingly relevant source of sales for dealers on the platform. In the third quarter, we represented nearly 15% of new vehicle sales for the average TrueCar certified dealer. Our ability to simultaneously grow our dealer network and share of dealer sales reflects our disciplined dealer-network strategy.

We continue to communicate our expectations for high levels of customer service from our TrueCar certified dealers and they are delivering. Based on net promoter score data, TrueCar buyers can continue to rate their satisfaction with our service on a par with Amazon and Apple iPhone. JD Power recently identified TrueCar as the most useful third-party automotive site.

As another example, we recently announced our No Surprises initiative. TrueCar certified dealers are now required to provide upfront information for all their fees and standard dealer-added accessories when they present their pricing to consumers. This industry-first initiative reflects the mutual commitment of TrueCar and our certified dealers to transparency at every stage of the car buying process.

Now while it is clear we are adding value at the interaction between dealer and consumer, it is also clear that we have opportunity to serve the industry in a broader fashion. Let me give you a sense of how, and how important TrueCar can be to this enterprise.

OEM revenue flows to TrueCar via our ALG subsidiary. It also flows directly to TrueCar via our delivery of targeted OEMs incentive offers through our network and TrueCar powered affinity channels, such as USAA.

I spent a week last month in Europe meeting with executives at nine different OEMs, sharing aspects of the TrueCar business model with them and listening to their points of view on retailing trends, pricing, and brand strength both in Europe and the US.

The clear take away from these meetings was the enormous opportunity for TrueCar to help improve the efficiency of the $40 billion they spent on incentives to drive demand for conversion. As a former OEM CEO, I can tell you that incentive spending is very important, but incredibly inefficient.

At TrueCar, our historical focus has been with dealers on demand generation, helping them spend more efficiently than the current industry average of $616 per car. Over the past few years, we have implemented targeted incentive programs for large OEMs such as Mercedes-Benz, BMW and others.

Our most engaged, targeted incentive partnerships have delivered terrific results. For those brands, TrueCar now represents 7% to 8% of their total retail sales, two times higher than our 3.7% US retail market share. Those incremental sales come at very low costs vis-a-vis other incentive programs that OEMs employ.

Now, let me explain why the TrueCar platform can be so incredibly valuable to OEMs. Today, the new car retail is working to a price-volume elasticity of about minus 1.6. That means for an automaker to increase sales of a certain model 5%, all other things being equal, this would require a price reduction of about 3%. For a car with an industry average transaction price of a little over $30,000, that's a price cut of about $1,000.

The challenge for automakers is that level of elasticity drives a cost per incremental sale of approximately $20,000, because the $1,000 is offered to every buyer, even those who are going to buy anyway. It sounds crazy, but that is the economics of what is going on right now in the industry. Because we are talking of to consumers at the bottom of the funnel and because nearly one out of every three TrueCar prospects by a car, we enable OEMs to target incremental sales much more efficiently.

We found that price responsiveness of car shoppers on TrueCar and our affinity car buying sites to targeted OEM offers can be 2 to 5 times higher than general market offers. This year, our platform will enable OEMs to deliver about $150 million of incentives on about a dozen brands. That's a drop in the $40 billion incentive bucket. We are in the early stages of monetizing this capability.

Doing OEM incentives right and dialing in all the potential benefits will take time. The good news is that in addition to the 12 brands for which we are already serving incentives, we have pilot programs with several more.

Building out our incentive business is a key strategic product and business development focus for the Company in 2015 that I will be heading up. It's really exciting and I look forward to reporting more on this initiative next quarter and next year.

With that, I will hand the call over to Mike.

Thanks John. As Scott has already highlighted, we were pleased with our financial performance in Q3. All of our key performance indicators and financial metrics improved significantly over this time last year, and we're comfortably ahead of our prior guidance.

On our call last quarter, we stated that we expected revenues to be in the range $51 million to $54 million. We also gave guidance that we expected to achieve increased efficiency on our marketing spend and leverage on G&A spend, thereby generating adjusted EBITDA in the range of $2 million to $3 million, or approximately 4% to 5.5% adjusted EBITDA margins. We were able to exceed that guidance.

Total revenue for the quarter was $56.8 million, or about 8% ahead of the midpoint of our guidance. Adjusted EBITDA was $3.9 million, or 54% ahead of the midpoint of our guidance. Adjusted EBITDA margins were 6.8%, or 43% ahead of the guidance. The adjusted EBITDA improvements were driven partially by efficiency in our sales and marketing spend. We reduced sales and marketing as a percentage of sales by 170 basis points over Q2 of this year, largely by reducing cost per sale in the TrueCar branded channel.

On the last call we guided cost per sale down by about 13% from $260 per sale to $225 per sale. We actually lowered cost per sale by nearly 20% to $210 per sale. Said in another way, we increased acquisition spend in the TrueCar branded channel by less than 1% sequentially while increasing units by 25%.

In addition to generating strong growth in adjusted EBITDA, with nearly 7% margins, in the third quarter we also produced non-GAAP net income of $300,000.

I'm going to take you through the key metrics, and then we will go through the P&L in detail. Our average monthly unique visitors totaled 4.6 million in the quarter and represented 45% over Q3 of last year. As the bottom of the funnel experience, we have continued to prioritize quality of unique visitors over quantity.

In the third quarter, our monetization per unique visitor remained very high at $3.74, which compares favorably to the top of the funnel lead gen and impression-based monetization models that generate revenue per unique visitor typically between $0.30 to $0.40 per month.

Total units this quarter were 171,775, and represented 47% growth over Q3 of last year. TrueCar.com units continued to grow by over 100% year over year. For the first time in the last four quarters, total unit growth outstripped growth in traffic. That's because unit growth was driven not only by increased traffic but also growth in overall conversion and closed rates, or what we call net funnel efficiency.

The strength in NFE was primarily the result of product optimization, growth in our dealer network, increased brand awareness, more intelligent media buying, the quality of our creative and the mix of marketing modalities among television, radio, and digital.

For the third quarter, our share of new car unit sales grew to 3.7%, up from 2.6% a year ago. Because we had stronger than expected unit growth, we had slightly lower monetization in our subscription states. That drove overall monetization to $303, or just below our guidance of $305 to $310. We expect monetization to be strong in Q4, and actually to be above the high end of that range.

As Scott and John both referenced, we continue to add to our franchise-dealer network while increasing our level of penetration within those dealers. As of the end of the third quarter, we had 8,149 TrueCar certified franchise dealers across the US, representing 26% of all new car franchises and year-over-year growth of 29%. We also had 982 non-franchise dealers, bringing the total TrueCar certified-dealer network to over 9,000. In Q3, transaction revenue per franchise dealer continued to grow, reaching nearly $6,600, up 22% year over year.

Now, let's turn to the income statement. Transaction revenue, which consists primarily of fees paid by TrueCar certified dealers, was $52 million in the quarter. This represents 55% growth over the third quarter of FY13, and was driven by 47% growth in units and 5% growth in monetization.

Data and other revenue was $4.8 million, consisting primarily of residual value consulting services from our ALG subsidiaries. Total revenue was $56.8 million, or annual growth of 51%.

Turning to expenses and margins, all of the following financials are on a non-GAAP basis. Gross profit for the quarter was $52.2 million and gross margin was 92%. Technology and development costs were $8.8 million, or 15.6% of revenue, compared to $5.2 million, or 13.7% of revenue in Q3 last year.

During the quarter, we prioritized investments in platform improvements and our mobile experience as well as OEM incentive and TrueTrade. As both John and Scott indicated, given the enormous opportunity grow in the new areas of the market and to help both dealers and OEMs with their biggest challenges, we will invest some of the savings from our leverage in sales and marketing and G&A into technology and development over the next few quarters.

Sales and marketing expenses were $31.3 million, or 55.2% of revenue in Q3 of 2014 compared to $19.7 million, or 52.4% of revenue in Q3 of last year. We achieved sequential improvement in sales and marketing as a percent of sales of about 170 basis points versus Q2 of this year. The leverage came primarily from improved efficiency of customer acquisition and branding spend related to the TrueCar branded side of our business.

Specifically, we took cost per sale down from $260 last quarter to $210 this quarter and achieved 25% sequential growth in TrueCar units on less than a 1% increase in TV, radio and digital spend.

Partner revenue share and loan subvention dollars were roughly flat quarter over quarter and we invested in additional sales and marketing headcount as talented people were available. General and administrative expenses were $8.2 million, or 14.5% of revenue this past quarter, compared to $6.7 million, or 17.9% of revenue, in Q3 of last year.

As we guided last quarter, we saw meaningful reductions in legal compliance costs this past quarter because we brought Johnny Stephenson and the Alison Sternberg team in house. In addition, we scaled up the accounting organization this past quarter to support public company obligations and so we are able to reduce the cost of outsourced services and third-party consultants. We expect to see continued leverage in G&A in the ensuing quarters.

Adjusted EBITDA for the quarter was $3.9 million up from $2.4 million last year and up more than 118% sequentially from $1.8 million in Q2. Our adjusted EBITDA margin was 6.8%, well ahead of the 4% to 5.5% guidance we gave last quarter.

Non-GAAP net income was $300,000 in Q3 comparing favorably to non-GAAP net losses of $1 million last year and $1.4 million last quarter. Our GAAP net loss was $13.6 million down sequentially from a loss of $15 million in the second quarter. Just to remind everyone, we have three non-cash expenses that flow through our P&L, and those items account for most of the bridge between non-GAAP profit and GAAP loss.

Those are depreciation and amortization expenses, which came in at $3.4 million in Q3 of this year. That was roughly the same as $3.2 million in Q3 of last year. Stock-based compensation was $9.4 million in Q3, up from $7.4 million in the prior quarter, primarily related to the partial acceleration of vesting of some equity of an executive who left the Company.

Warrant expense, which is primarily related to our agreement with USAA, was $3.7 million for the quarter, up over Q2 primarily due to stock price appreciation. In addition, in the third quarter, we also added back approximately $864,000 of litigation expenses related to our dispute with a former customer.

Quickly turning to our balance sheet. We ended the quarter with $113 million in cash and cash equivalents and $5 million drawn on our line of credit. We took on the debt to fund $5 million of capital expenditures related to significantly expanding our partnership with Hortonworks. The investment in infrastructure will continue to allow us to ingest huge volumes of automotive data, inventory, pricing, vehicle data, vehicle images, etc. and power a real-time features in mobile environments. We are also using search algorithms and machine learning to find and optimize transactions for customers, dealers and OEMs.

Overall, our liquidity is excellent and the balance sheet is strong.

Now, I'd the like to turn to guidance and share our outlook regarding the fourth quarter and the remainder of the year. We are raising our Q4 and FY14 guidance as follows: As we have said in the past, the fourth calendar quarter, based on normal industry seasonality, is generally flat to down 5% versus Q3.

In addition, as we intend to make fixed-costs investments, primarily in headcount as we grow the business, we generally expect EBITDA to be down Q4 over Q3. As a result, we expect revenues in Q4 to be in the range of $54.5 million to $55.5 million.

Units will be slightly ahead of current consensus, but monetization should be $5 to $10 higher. We expect adjusted EBITDA $2.6 million to $2.9 million, or approximately 4.8% to 5.2% of revenue.

For the full-year 2014, we now expect revenues of approximately $205.7 million to $206.7 million, which represents approximately 54% growth over 2013. And we expect adjusted EBITDA to be in the range of $9.2 million to $9.5 million.

In the fourth quarter, as we said, we plan to continue to invest meaningfully in long-term value creation through building our brand, improving our platform in mobile experience and investing in new product development.

Now, I'll open it up to questions.

(Operator instructions)

Mark Mahaney, RBC Capital Markets.

Great. Thanks. Two clarification questions. First, Mike, you talked about, I think, half a dozen factors you reeled off that have been driving that improvement in net funnel efficiency. Could you maybe single out which of those may have had the greatest impact? And/or talk about the sustainability up of those factors in continuing to improve the net funnel efficiency going forwards?

Secondly, you talk about now representing or working with 26% of all new car franchises. Can you just remind us of what you think is the right level of what you need to get to? Is there a critical mass number or a number that you don't really need to get beyond because you'll have enough liquidity? Thank you.

Thanks Mark. On the second question, we have always guided that at about 1/3 of all dealers, 30% to 1/3 of all dealers would be a fully-baked dealer network with adequate coverage. We are at 26% of our dealers today, so we're getting pretty close.

On the franchise side we're at about 8,150 dealers, and I think ultimately that number will be about 10,500 when we are fully baked.

In terms of things that are driving the financial performance, product is clearly a big one. Our conversion rates continue to be very strong. Close rate is another one, as we continue to grow dealers and they become more important to individual dealers. Our close rates are going up.

There is also just no doubt that the marketing and branding and creative is working well. When you can growth units in the TrueCar channel 25% sequentially on a 1% increase in marketing spend, obviously that marketing spend is getting more efficient and we're building brands. That's probably the most powerful piece.

Thank you, Mike.

Doug Anmuth, JPMorgan Chase.

Great, thanks for taking the question. I just wanted to go back to the OEM conversation. I may have missed it in John's comments, but could you talk about what OEM is contributing now in terms of the percentage of revenue for you guys?

Also, a little bit more on the timing, when you think that can become more material? Then, just switching over to TrueTrade, can you help us understand the tasks and the timing of the rollout into 2015? Also how to think about the economics there? Thanks.

Sure. Right now, Doug, the OEM incentive piece is about 7% of our transaction revenue, so that's a good way to think about it. We're serving up incentives for about a dozen brands, and that is generating about 7% of our transaction revenue today.

Doug, this is John Krafcik. Just a little bit more color and how we're going about it. As Mike said, we're working with 12 brants right now. We have had pilots. One recently completed with that Asian brand that was very successful. We are working to grow that.

Working with other OEMs directly is one of the reasons why I was in Europe a month or so ago, meeting with nine of the OEMs individually.

We are also working directly with some of the insurance companies on total loss programs. Those are ideal situations for us to serve OEM targeted incentives, working with our insurance partners to folks who have experienced a total loss.

Hey, Doug, Scott Painter. Let me just add a couple of comments. I think, first of all, as it relates to OEMs incentives, it really goes to an issue of focus in terms of how we are looking at 2015 and beyond and how we run the business. I think it relates to your question, Mark, about really where are we going to see continued scale in the Company.

We really believe that there is multiples of improvement in terms of the customer experience. Today, if you keep it in mind, we've got about 5 million unique visitors flowing through all of the TrueCar and TrueCar related websites.

About 1.5 million actual new car customers occur in the US every month, so it could be argued that virtually everybody is coming to TrueCar at some point in their experience, and so there just is a significant opportunity to convert and service those customers better. We believe that there's really two ways of expressing that.

One is to make the auto buying experience more simple, fair and fun in terms of the technology you interact with. Inherently, that means that we're going to be focusing on mobile. That means that we are going to be focusing on the user experience.

But the second dimension is price. Making sure that the customer gets the best possible price that they are entitled to, we think is important. Given the level of OEM incentive spend, getting that number right is becoming increasingly important to the bottom line.

So, really, as we look at 2015, one of the double-bottom-line benefits for us in driving incentive revenue is not just seeing new revenue come into the pipeline, but also it makes our offering much stronger for the consumer. We will see it in higher close rates, which ultimately results in better net funnel efficiencies. There's a dual benefit there on the incentive front.

On the TrueTrade front, let me answer your question about our progress there. Again, along with our focus, we do believe that the near-term benefit of just making the experience better and improving NFE is going to be where we get our next gear in terms of performance over the next year. We haven't given any guidance in terms of revenue on TrueTrade for 2015, pushing it off to 2016.

That said, we are launching a pilot in Q1 and we are rolling out a broader program during the summer. The teams are working very hard on TrueTrade. We do have a Sell My Car app that's available app store, which is really an online condition report. We are starting to see all of the mechanics of TrueTrade and what would provide the scaffolding for that program going up now in anticipation of that program becoming live, like I said, towards the middle of summer.

Great. Thanks, guys.

Debra Schwartz, Goldman Sachs.

Great, thanks. I have two questions. First, on monetization. Mike, I think you mentioned that the sequential decline in monetization was due to your subscription states. I'm curious if there was any change in the write-downs or mix of new and used cars? Then, if you could also give us a little bit more of an understanding as to why you are expecting it to ramp back up in Q4?

Second, as it relates to net funnel efficiency, particularly as you expand the dealer network at the pace you are, can you help us understand some of the initiatives that you have for improving close rates and conversion at the dealers?

Sure. The pricing this quarter came down, generally, because we just had a larger than expected number of units. We are always out setting our subscription rate in our subscription states based on our forecast of units.

We just had a very, very good units quarter. It was strong late in the quarter. When you have more units in the fixed-subscription pricing, your monetization comes down a little bit. Generally, I think, with $2 off of the low end of the range, I am very comfortable given how strong the units were. That's what happened.

There was no material mix shift, Deb, between you new and used that would change. It was really just this issue.

In terms of next quarter, one is, we think we'll set the pricing better. Normally, in quarters where -- October and November are usually pretty flat to slightly up from September. So it is very easy for us to set subscription pricing in those types of months. We will tend to hit those very well and our monetization will trickle back up again.

We also get a little bit of benefit on our OEM incentives and from our independent dealers. The non-franchise dealers that we have been adding do pay a subscription. They do add incrementally to monetization, as we have been growing that network, which both helps us sell more used cars today. And obviously, will act as the network through which TrueTrade will take some of the price spectrum. That revenue does in fact bump up monetization by a few dollars. So a combination of those things we think will show strong growth in monetization in Q4.

Hey, Deb. This is Scott. Let me take on your question about how to improve net funnel efficiency at the dealership level. Obviously, we already have a very high close rate, simply because price discovery and price confidence happen to correlate to [in-marketness].

We tend to be unique in that we are an order-generation platform, so psychologically, the customer has not only been educated as to what others have paid for the car, but by the time they get introduced to the dealer they have already seen the dealer's price and they have decided to proceed. Psychologically, they are much further down the process and tend to buy a higher percentage of the time.

I think that definitely what we're learning is that as we begin to get to the optimal or efficient frontier of the dealer network size, the total size of the growth of the network will begin to decelerate and the real metric underneath will be what's our share of wallet at that dealer? What percentage of their sales are originating?

What we are learning is that the longer a dealer is on our program, the more that they are able to hold other marketing channels accountable. There's definitely a lot of evidence today, in certainly the automotive industry trades, about third-party marketing channels being cut back.

We are really separating from the pack in this way, where as a pay-for-performance and fully-accountable marketing channel, dealers are starting to make very pragmatic decisions, which ultimately turned the TrueCar expense into a cost of goods sold and allows them to remove some of those high variable marketing expenses.

The benefit to the dealers that have been on the program for a while tends to cascade a little bit more deeply into their cost structure where they are able to cut back on commission expense, SG&A and overhead expense and depreciation and carry cost on the car.

We've introduced new tools like Sales Analyzer that really give dealers the ability to use the science of pricing as a way of not only pricing their cars but closing transactions. Then finally, we are starting to see the real effect of brand equity in the marketplace.

The unaided brand awareness of TrueCar is definitely growing, but TrueCar being presented into the transaction is now beginning to have a really strong effect in terms of consumer close rates. We are seeing dealers almost demand from us badging and certification opportunities where they can really align closely with their brand.

There has been a lot of noise lately about others in our space that have run ad campaigns that really do poke fun at the industry and make fun of the dealer and the relationship between dealers and consumers. We have seen that was a nice way to separate ourselves.

We are really in a lot of ways, a dealer co-op, re-instituting or re-implementing trust between consumers and dealers. That message seems to be resonating, especially at the point of purchase. A TrueCar dealer can turn the screen around and immediately gain the trust of a TrueCar user or even a user off the street. That brand equity, I think, is only building momentum.

All of those things combined are starting to have a very virtuous effect. There is no doubt, once a dealer has been on the program for longer than a year, they start to lean in. They start to hire and staff around the program. They train around the program. They tend to be much more competitive and use the tools that we are now giving them.

I think the product development rollout plan for the next 12 months is really robust as it relates to dealer tools to help them retain margin, sell cars, and really close customers in a confident and satisfied way.

Deb, it's John Krafcik. A couple more points on how we are improving NFE and dealer conversion. One is mobile. We're to the point now where about half of our traffic is mobile. We are seeing a higher close rate, higher NFE attached to mobile. That makes a lot sense. A lot of what Mike talked about in terms of our future investments are going to come down with our mobile platforms.

The second point, in the network, is we've still got significant opportunities and upside with some brands. If you look at our penetration on a brand-by-brand basis, we are about 3.7% for the industry as a whole at retail. With some of the domestic brands we're around 2%, significant upside.

We know that with some of our other brands on the Asian side and German side, we can be as high as 6%, 7%, even 8% of their total retail sales. So, it's another way we're looking at our ability to grow out the network is to target those brands in those metro areas where we are not necessarily well represented yet. The good news is there is still some upside for us.

Great, thanks. Congrats on the quarter.

Thank you.

John Blackledge, Cowen and Company.

Great, thanks. Just a couple of questions. I think Scott mentioned early in the call a mobile platform refresh in 2015. I'm just wondering if you can provide further details there?

Two other questions. TrueCar accounted for 15% of dealer volume in 3Q, just wondering -- to remind us that was in 3Q 2013 and what the long-term bogey is?

Then, you're obviously ramping up the non-franchise dealer base. Just remind us the total number of non-franchise dealers in the US? How a higher number of non-franchise dealers fits into the longer-term growth prospects for the Company? Thank you.

Hey, John, thanks. It's Mike. There are a lot of non-franchise dealers in the country there. We think there's about 10,000 of them that fit into our target market. For us, right now, we're at 900 and change. Our goal, over the next couple of years, is to get to 3,500. That will give us what we think is the ideal coverage on the non-franchise dealer side.

You had asked the question about share of wallet. We are at about 15% right now. The long-term model, where we hit our long-term margin, our 35% EBITDA margin, is at about 30%. The shorthand for us is 1/3 of all franchise dealers and 1/3 of their business, or account for 1/3 of their business. That gets you to about 10%, roughly, overall market share, if you do the math.

Right now, we're at 15%. We're 26% of all the dealers. As Scott mentioned, as dealer growth slows down a little bit and our units continue to grow, obviously, the units per dealer are going to go up and our share of individual dealer's businesses are going to start to go up. We'll start to move from that 15% today out towards our long-term target of 30%.

Great. This is Scott. I'll talk a little bit about the product side. Today we operate predominately as a web-based business with a applications-based API format. We are in the process of essentially burning the boats.

Our belief is that over the coming year to 18 months, the majority of our customers will engage us through a mobile or tablet device and that the process of shopping will really move to your phone and being in your hand at the point of transaction.

There are a number of initiatives that are, I think, enabled by the move to a mobile-platform orientation, but it really does begin with database architecture and data and content and technology stacks all being aligned around mobile first and then making the web experiences more of an API.

It also introduces a level of additional sophistication to the business and accountability that we don't see today. It should have very positive effects on sales matching, for example. The ability to engage customers throughout their lifecycle.

We deal with really to existential questions at TrueCar. One is, what is a car worth; new, used now or in the future? The second is, who is going to buy a car, and what are they going to buy and when are they going to buy it? The ability to actually engage a customer through an app-type frequency allows us to see their activity, their engagement, and also to control, through proxy, a lot of the experience in a way that we do not today.

We are excited about taking a much bigger leap into mobile. Rather than just having a great mobile app, which we do today, what we will have is really a mobile platform that enables us to be much more deeply integrated into the transaction.

Our initiative around No Surprises, by the way, is really a precursor to enabling that mobile app. The No Surprises position is entirely unique in the industry. If you are shopping for a car using the web, I would challenge you to find any place that lists tax, title, registration and dealer-installed accessories. These are the things that usually fall out and are listed in either the small print or not at all.

Our position is that if we are an order-generation platform, we want to get to the point where you can actually have a negotiation-free transaction and have no surprises. The initial impact of that is that our pricing and our numbers will look potentially a little bit higher, but they won't be apples to apples with what else is out there in the industry.

We do believe that the additional transparency will drive consumers closer to a transaction. All of that is necessary if you're going to be in the customer's hand at the point of sale, because you've got to drive to the exact dollar amount.

Again, there are a number of building blocks that we are putting in place. The No Surprises initiative is a very big one. It's technologically, and from an information completeness point of view, very challenging to do. And, nobody else has even attempted it.

Again, I think that the mobile app will probably debut sometime around Q2, but we were already in testing and have made quite a bit of progress in that regard.

Thank you so much.

Ron Josey, JMP Securities.

Great. Thanks for taking the question, guys. I'm wondering, Mike, you talked about the cost for a TrueCar car sold through the TrueCar branded channel, $210 down from the prior number. Do you think that number can continue to come down? I think in the prior quarters you talked about where that could go.

If you could provide some additional insights on the efficiencies you saw in marketing that would be helpful. Thank you.

Sure. What we did in the last quarter, taking it from $260 down to $210 is nearly 20% improvement. That was one quarter. Our target over the next 3 to 5 years is to take that from $210 down to $175, which means effectively the same level of cut that we did in one quarter, we have to do over the next 3 to 5 years to hit the long-term model. So it feels like a lot of runway for us.

Can we continue to see improvement? Absolutely, we can and we will. I think Scott mentioned earlier, we are definitely seeing the value of building a brand, but it is also, clearly, pretty early.

As I said earlier, we spent 1% more on acquisition and branding in the quarter sequentially, but generated 25% more unit sales. It is by no means, seasonally, a 25% better quarter. The efficiency got a lot better and there's no reason why that shouldn't bleed into Q4 and into next year.

We're really optimistic. We think the combination of creative, intelligent buying, brand building and then, of course, again product, dealer count. All of those things make your marketing dollars more efficient.

The NFE this quarter was really at a very impressive level. To be at this level of growth and still be at 1.24% NFE and to have this much of our business come from the TrueCar branded channel and have NFE this high, really speaks to the quality of the product, the quality of the marketing brand, dealer network, the close rates we're achieving. We can keep and will keep moving that.

I don't know that the decline in cost per sale will sort of be monotonic. You'll have seasonal issues and it might bounce around up and down, quarter to quarter, but generally it's going to be on a downward trajectory.

For modeling purposes, I would assume Q4, it stays about flat to that $210. But we certainly see improvements on our way down to $175.

Ron. This is Scott. Let me just add a thought. We acquire unique visitors for about $1.65. We monetize them at $3.74. There is just a lot of operating leverage in the model. I think that, to Mike's point, it is not going to be as linear as just a constant drum beat downward.

I think what we heard in the last quarter of earnings, [non-deal] road show, is that there was a lot of questions about whether or not we could drive that number down. Obviously, we have shown that we can, but with so much leverage in the business and so much investment going on, I don't think that we would want to overset expectations too much on this particular thing.

There is also a number of external factors that drive this, whether it is seasonal quarterly costs of media or other costs in the business where we are just seeing seasonal expense that we wouldn't be able to account for in our normal day to day. Again, this was a nice surprise for this quarter, but our guidance is going to be flat.

That's great. Thank you very much.

Thank you. This does conclude our Q&A portion and our conference call for today. Thank you for your participation. You may now disconnect your line and have a wonderful day.