TrueCar Inc (TRUE) 2015 Q3 法說會逐字稿

Greetings and welcome to the TrueCar third-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I will now turn the conference over to your host, Ms. Alison Sternberg, Vice President, Investor Relations. Thank you, Ms. Sternberg, you may now begin.

Thank you, operator. Hello and welcome to TrueCar's third-quarter 2015 earnings conference call. Joining me today is Mike Guthrie, Chief Financial Officer and Interim Chief Operating Officer.

As a reminder, we will be making forward-looking statements on this call, included but not looking to statements regarding our outlook for the four-quarter and full-year 2015, Management's beliefs and expectations as to future events, our future growth, the status of our dealer network, future incentive programs, dealer tools, consumer experience, and [close] rate improvement, and our financial and operational metrics, plans, and strategies.

Forward-looking statements are not and should not be relied upon as guarantees 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 for 2014 and our subsequent quarterly report on Form 10-Q filed with the Securities and Exchange Commission and our quarterly report for the quarter ended September 30, 2015 to be filed for a discussion of the factors that could cause our results to differ materially. The forward-looking statements 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 statement, except as required by law.

In addition, we will also discuss GAAP and certain non-GAAP financial measures. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measures are set forth in the Investor Relation 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. Please note that these preliminary results are based on current expectations and are subject to quarter-end closing adjustments. Actual results may differ. Now I will turn the call over to Mike.

Thanks, Allison, and good afternoon, everyone. This was a productive quarter for TrueCar. Following a disappointing Q2, we needed to execute better and we did. While the quarter was not without its challenges, overall I am pleased with our financial performance. First, I want to review some of the highlights from the third quarter.

TrueCar recorded all-time records on unique visitors, prospects, and units across all three channels: USAA, TrueCar-branded, and Other Partners. Total unique visitors reached 6.6 million in Q3, with year-over-year growth of 43%, in line with Q1 and Q2 of this year, when traffic growth was 40% and 42%, respectively.

Traffic in the TrueCar branded channel was 4.6 million, up 55% over last year, and traffic in our USAA channel grew by 32% year-over-year versus just 3% growth last quarter. We are working better than ever with our partners at USAA and the co-branded marketing, which started over the Memorial Day weekend, has continued to be productive.

Traffic in our Other Partner channel also exhibited strong improvement in growth, with UVs of 1.4 million for the quarter, up 18% year-over-year versus 8% traffic growth in Q2. Our prospect levels crested 1 million for the first time in Q3 and grew year-over-year by 29%, an acceleration in growth over Q1 and Q2 of this year when prospect growth rates were 21% and 20%, respectively.

Prospects are the deep end funnel customers who receive upfront pricing information from our dealer partners. These are the in-market consumers who are engaging with our TrueCar certified dealerships. Units hit a record 208,034, up 21% from Q3 of last year. USAA units grew by 19% year-over-year and that's an acceleration of growth over the past few quarters when unit growth was 10% and 14%, respectively.

Cost per sale in the TrueCar channel declined by 11% sequentially to a near-record low of $193, while units grew to just under 90,000 units, up 28% year-over-year. Monetization grew to $324 per unit, buoyed by a mix shift toward used car sales, an increase in revenue across our non-franchise dealers, and strong growth in OEM targeted incentives.

We completed the very successful targeted incentive trial with the major brand during the quarter. During the trial, an average incentive of $625 across the vast majority of this OEM's product line within our USAA and employee benefits channels, drove impressive results.

This OEM grew its share of searches on the TrueCar platform by 47%, and its share of sales by 38% against its competitive set of brands. The trial, which started in mid-July and ended at the end of September, helped to drive incentive revenue growth of nearly 100% over Q3 of last year. We are in discussions with this OEM and others to run similar programs in 2016.

And finally, as a result of healthy revenue growth and more disciplined expense management, we grew adjusted EBITDA from $0.5 million, or 0.7% of revenue in Q2 of 2015, to $2.7 million, or 3.7% of revenue. We did, however, have some challenges during the quarter. After 13 quarters of consistent growth in our franchise dealer network, we had a net dealer decline in Q3.

AutoNation, the largest automotive retailer and formerly our largest customer, pulled all of its 279 stores from our program starting in July. For the overall quarter, we had a net dealer loss of 600 franchises, or about 6.4% of the network. We believe these challenges represent learning opportunities, however, and we are determined to work harder and to better serve our dealer partners as we move forward, and so while we are pleased with the quarter we reported, we miss the opportunity to have an even better quarter.

As a 10-year-old Company built to serve car-buying consumers and dealers, we need to continue to execute better. Having said that, we have reached an interesting inflection point in our business. Through our branded channel and our partner channels, we are approaching seven million unique visitors every month, and we have over one million prospects per quarter.

This is an enormous number of automotive consumers, which we believe represents enough traffic and prospects to meaningfully grow units and revenue. In certain situations, some of our dealers are actually receiving more introductions than they can handle efficiently, and that's a loss for our dealer partners, our consumers, and for TrueCar, so we now need to be more intelligent and focused on helping our dealer partners close more effectively.

This focus on improving our dealers close rates will require us to do several things better. First, we will soon roll out a suite of mobile dealers tools that enables dealers to work directly with consumers to better ensure that consumers' expectations are met once they walk onto the lot. This project started in early 2015 and has received substantial dealer input.

Second, within our current product flow, we are working with manufacturers to help them feature of brands more effectively to TrueCar consumers through our model showcase. We are now also working on ways to help dealers better present their brands in our environment, as well.

Third, we are working more collaboratively with our Dealer Council, and they have become a critical source of feedback to the team. They are particularly focused on how we can serve dealers well, while giving consumers a better experience. And finally, we are redoubling our efforts on dealer outreach and retention. Our sales organization is in the field listening to our dealer partners and working hard to improve the level of service we provide.

We have also added some key executives to our team. David [Green] joined us in August as the Vice President of Major Accounts. David has a nearly 20-year track record in automotive retail, having worked with leading groups such as Sonic Automotive, and Berkshire Hathaway Automotive. In his new role, he will bring his unique experience and focus to the needs of the 20 largest consolidated dealer groups.

Kerri Wise joined as VP of Dealer Engagement and Communication. Kerri has been in the industry for 17 years and formerly worked at both Edmunds and JD Power. Among other things, Kerri is responsible for outreach and coordination with our Dealer Council.

These efforts are paying off. We have begun to turn the tide and the dealer network is growing again and coverage has improved. I want to take just a brief moment to thank the dealer sales and operations teams for their tireless work. And now let's go through the financial performance before opening it up to questions.

TrueCar delivered record revenue of $72.4 million in Q3 of 2015. Transaction revenue was $67.4 million, representing 30% growth over Q3 of FY14. TrueCar certified dealers transacted 208,034 units on our platform in the third quarter, up 21% year-over-year against the backdrop of industry retail unit sales growth of 7%.

The units sold by our dealer partners represented 4.1% retail new car market share for Q3 of 2015. Breaking down unit sales in a little more detail. The TrueCar-branded channel accounted for just under 90,000 unit sales, or 43% of total units. This represented 28% year-over-year growth.

Cost per sale improved by 11% from last quarter to $193. USAA members accounted for 65,000 unit sales, up 19% over last year. Again, the co-branding campaign that we launched with USAA over Memorial Day continues to bear fruit and we are pleased that more USAA members are having great car buying experiences at TrueCar certified dealers.

We were also pleased with the performance of our Other Partner channels, where units totaled approximately 54,000 in the quarter, up 14% year-over-year. With new partners such as Sam's Club coming online, and the accelerating growth of USAA, we believe our dealer partners will see significant demand from affinity channels in Q4 and into 2016.

Monetization came in at $324 per unit, up from $317 in Q2 and $303 in Q3 of last year. About 24% of units sold were used cars in Q3 versus 21% in Q2, and we also grew our independent dealer revenue on a sequential basis.

Turning to the expenses, all of the following financial metrics are on a non-GAAP basis unless I state otherwise. Our gross margin increased by 90 basis points this quarter to 92.1%. Technology and product expenses were $11.5 million, or 15.8% of revenue in Q3. That compares to Q3 of 2014, when tech and product expenses were $8.8 million, or 15.6% of sales.

Sales and marketing expenses were $43 million, or 59.3% of revenue, in Q3 of 2015. That compares to Q3 of last year when sales and marketing expenses were $31.3 million, or 55.2% of sales, and to Q2 of this year, when we spent $39.6 million, or 60.6% of sales.

To break down the $43 million of sales and marketing expenses in more detail, we spent $17.3 million across television, radio, and digital, focused on consumer acquisitions for our TrueCar-branded channel. That's a 17% increase from last year, driving a 28% increase in unit. Additionally, we spent $13.2 million towards revenue share, loan subvention, and other partner marketing expenses.

Lastly, headcount and other cost were $12.5 million for the quarter. General and administrative expenses totaled $9.6 million, or 13.3% of sales and Q3 of 2015. That compares to Q3 of 2014 when G&A expenses were $8.2 million, or 14.5% of sales. Adjusted EBITDA for the quarter was $2.7 million, or 3.7% of revenue.

GAAP net loss for the quarter was $11.1 million, or a loss of $0.13 per share. That compares to the second quarter when GAAP net loss was $14.7 million, or a loss of $0.18 per share. Our non-GAAP net loss for the quarter was $2.1 million, or a loss of $0.03 per share and that compares to Q2 of this year, when non-GAAP net loss was $3.8 million, or a loss of $0.05 per share.

The primary non-cash expense items for the quarter were depreciation and amortization of $4.5 million, and stock-based compensation of $7.5 million. Also, in our adjusted EBITDA calculation, we added back $1.2 million of litigation costs and $0.6 million of severance. Cash flow from operating activities in the third quarter was $2.7 million compared to $1.5 million in the third quarter of 2014.

And now we will walk you through some key metrics. Franchise dealer count totaled 8,702 as of September 30, while our non-franchise dealer count was 2,007. Transaction revenues per franchise dealer was a record $7,493, up 14% year-over-year, as revenue grew significantly faster than we added dealers. This metric will typically decline in Q4 due to seasonality.

Net [total] efficiency was 1.05% in the third quarter, roughly flat versus the first two quarters of this year. Quickly turning to our balance sheet, as of September 30, 2015 our cash balances totaled $124 million, and we have no debt, so we remain very liquid.

Now I'd like to summarize our outlook regarding the fourth quarter of 2015 and the year as a whole. A few notes about Q4 versus the quarter we just reported. First, remember that this is a seasonally slower quarter in the industry, and so we generally expect about a 5% decline in units and revenue over Q3.

Second, we will not have the benefit in Q4 of the targeted incentive trials that we mentioned earlier. That trial contributed approximately $2 million of revenue to the third-quarter results. And finally, we are taking a conservative approach to dealer count, and even though dealer count has begun to grow again and many dealers may want to join to lean into the holiday selling season and to benefit from the improved growth in our partner channels, we assume flat dealer count from the end of Q3 throughout Q4.

For the quarter, we anticipate revenue to be in the range of $64 million to $65.5 million, with units in the range of 185,000 to 190,000. Adjusted EBITDA for the quarter will be approximately $0.5 million to $1 million. For the full year 2015, we're guiding to $260.2 million to $261.7 million of revenue on units of 752,000 to 757,000. Adjusted EBITDA for the year is expected to be in the range of $8 million to $8.5 million.

Before I take questions, I will make a brief statement about the status of our CEO search. As you all know, approximately three months ago, our Board of Directors formed a search committee to find TrueCar's next Chief Executive Officer. They retained competent and experienced advisors to assist in the search process. That process has identified some very qualified candidates with broad backgrounds and experiences in automotive, both OEM and retail, consumer, Internet software, and other parts of the technology landscape.

The members of the search committee have interviewed several of the candidates. We believe the process is going well, but it is still ongoing, and so we won't comment on the search process until it is complete and we are prepared to announce the new CEO of TrueCar. And with that, I'd like to open it up to questions.

(Operator Instructions)

Douglas Anmuth, JPMorgan.

This is Diana Kluger on for Doug. Maybe if you could give us a little bit more color on the assumptions and guidance. You talked a little bit at the end, but maybe more so on the expense side, we saw some improvement in traffic and what are you assuming going forward in terms of spend and the efficiency of that spend? Thanks.

Hey, Diana. It's Mike. Next quarter, we're actually assuming that cost per sale will go up seasonally by about $10 from where it is right now. Holiday, it's [fell] in the first few weeks coming out of the quarter and really picks up again toward Thanksgiving, so a little less efficient on the marketing spend in the direct channel.

Pretty consistent in terms of other marketing expenses and certainly as it relates to the partner channel. So I don't see any major changes there. We'll probably see a little bit a little bump up in spend in G&A. We've added some heads and so we will see a little bit of expense increase there.

Flat to slightly up in tech and development, and then again, sales and marketing will probably come down because we just won't spend as much at the beginning of the quarter and then we hit it again hard as we go into the holiday season. But net/net, we will take spending down by, I would say, $3 million to $5 million on sales and marketing.

Great. Just one quick follow-up, if I can. On the dealer count, it looks like there's more of an impact than just the AutoNation. Is there any way you can comment there?

We were net down 600 dealers, so it roughly one-half of the impact was AutoNation. The real -- probably, the obvious comment, and I said this a little bit in the prepared remarks is -- when you make that much noise in the industry, it tends to have a ripple effect. Having said that, the units came in, and so the nice thing about having a network that is fairly well built and established is that dealer scoring algorithm is working and we were able to pull in the units.

So on average, the individual dealer on the program for the quarter had an all-time record in terms of units and revenue. We are already seeing in Q4 that the dealer network is coming back. July was certainly time that caused a lot of angst in the industry overall, and so were happy that, that's calmed and we're starting to see dealers come back, in particular, with the strength of the partner channel, that's very attractive and the overall level of traffic and prospects has gotten pretty significant, so we're optimistic there.

Thank you.

Deb Schwartz, Goldman Sachs.

Great. Thanks. Two questions. Along the lines of dealer count, can you give us an update on the litigation with the California Trade Association? And then second, as it relates to monetization, which was up pretty significantly in the quarter, how should we think about that going into Q4?

Hey Deb, it's Johnny. I'll take the first part of that and give Mike the second part. As most people know, there were a total of five lawsuits that were filed against the Company between March and September of this year. Two of those five lawsuits have already been dismissed, so there are now three pending.

One of the three that is pending is this CNCDA, California New Car Dealer Association lawsuit. We have, as we've mentioned previously, filed a motion to dismiss in that case. Those issues are fully briefed and we have an oral argument scheduled on December 4, so we may have news after the 4th about whether that lawsuit will also be dismissed or whether it moves forward, but that's the status of that litigation.

Hey Deb, it's Mike. On the monetization, everything was very healthy and status quo as it relates to core car buying. We did well on the independent dealer side, but really, the majority of the sequential bump in monetization was a result of the increase in targeted incentive. Obviously, you guys have heard us talk about target incentives for a while.

We ran a fairly major campaign in the third quarter. It went really well. It contributed a good chunk of revenue, and that ultimately bumped up the monetization. It was an early sign of what we have been talking about and what we expect to see which is things like incentives and trading becoming a bigger part of our business as we roll into 2016, and that rolling monetization up a little bit so that revenue will grow faster than just the unit count.

That's really the majority of it. The incentive program overall, and I talked about it in the prepared notes, really did produce really healthy results. So we were quite pleased with it and we know the manufacturer is also happy with the results and we are in constant discussion now with what to do going into next year.

Great. Thank you.

Thanks.

Dean Prissman, Morgan Stanley.

Hi. This is Jon Lanterman on for Dean. Just two questions, one about the prospect levels you guys were talking about, over 1 million for the first time in the quarter, and grew 29% year-over-year versus UVs which were growing 42% and units sold, which grew 21%. Can you just talk about how these three, the growth in UVs, prospects, and units sold relate to each other and some of the things are doing to improve net funnel efficiency?

Then the second question I have is on the UVs by channel. Just looking at it, it looks like there was strong growth in all three channels. Can you just dig a little deeper into the partner channel, break it out if you can by adding new partners versus growth within existing partnerships? Thanks.

We'll take the second question first. The traffic numbers were healthy, and as it relates to the partner side, it's really -- this is really about penetration of existing partners, really good results continuing with USAA and the Other Partner channel, which had lagged in the last few quarters. We had some disappointing performance there, really picked up. Our team did a great job and I should also call out our partner organization who did a great job getting the Other Partner channel back to the growth that we would like to see there.

So it really isn't about new partners yet. The obvious question that people are going to ask is how much of that was Sam's Club, and the answer is very little. We're just getting them online and so we see that really as a growth trigger, really into 2016 for that channel. We just didn't see that much of it from them in the third quarter, though we're working really closely with them and are planning to launch and grow that partner in a much bigger way. Obviously it's a big number base.

In terms of the growth across UVs and prospects and units, a lot of it has to do with mix shift and how we spent money this quarter. We reduced acquisition spend sequentially, so we took traffic in the TrueCar channel down a little bit, but still mix shift is moving slightly in the direction of TrueCar, so that tends to take [NSE] or leave it fairly consistent from the first two quarters.

Our conversion rates have been healthy, so from traffic to prospects, those numbers have been healthy. What we really have found that is we could be doing a better job on close rate. You will hear us talking a lot about that because we are, in fact, we have so many prospects right now, traffic that converts down to prospects, that in certain cases, we are actually a little bit overwhelming some of the dealers with the volume of the introductions. So we need to have a little more intelligence around that and matching the right consumers to the right dealers with the right inventory at the right time to improve close rates. We talked a lot with the Dealer Council about this idea about really getting close rate up and being more efficient.

In a sense, we have been a little bit of a victim of our own success in terms of driving lots of traffic and a lot of prospects. Now we've got to do a better job on close rates. But overall, I'd say, given how much traffic grew by channel, we're pretty pleased with the funnel metrics this quarter. So conversion and close rate, overall, we're fairly happy with.

Thanks.

Mark Mahaney, RBC.

Thank you. This is Andrew on for Mark. In the past, I know you've invested heavily in the mobile side with your mobile app. Wondering if you can give an update on where that investment has gone and how mobile converts as opposed to desktop and how many consumers are going just in a pure mobile channel? Thanks.

Our traffic is still about 50% mobile and 50% desktop. There's really been no meaningful change in the conversion rates over the last couple of quarters. So anything you're seeing in the funnel has nothing to do with the shift from desktop to mobile, or -- obviously, it wouldn't go the other direction. Quite honestly, nothing that exciting has happened this quarter in terms of that shift.

We still have plenty of users that come to us via desktop and there's nothing about the conversion rate that really has changed meaningfully. We are making a lot of investments in product and in experience and we do think some of that will have a pretty big impact on conversion, but where we really expect to see it is on close rates.

Again, we feel like we have an awful lot of traffic. We certainly a lot of prospects. What we need to do is help dealers close better and get the close rates up and some of that will happen in product and some will happen in experience and training and other things. So you will see some changes in the product in Q4 and into 2016 that really will be focused on, primarily on close rate.

Thank you.

Ron Josey, JMP Securities.

Thanks for taking the question. Just curious, Mike, if you could talk a little bit more about advertising and if anything changed in the quarter or your approach? In 2Q, you said there were some issues around placing sufficient ad spend on radio? And then internally, from a culture perspective, with Scott and John moving on, can you tell us a little bit more about just how the culture is internally, how you're handling it as CFO and COO, and maybe talk about attrition rates, that would be helpful? Thank you.

In terms of advertising and marketing, I couldn't be much happier with the quarter. We reduced spend sequentially in what is normally a stronger unit quarter, cost per sale went down by about 11% sequentially, so again, feel great about that. In addition, I would say the team is certainly spending some money experimentally to try to learn and push it a little bit more, but they've done a great job.

Quite honestly, we have a lot of traffic. I don't think acquisition is really that big of an issue right now. We've done a really great job and there is some new creative that is coming out Q4 and into next year, some new messaging that we will be testing, we've tested with our dealer partners. I'm very excited about it. It's going to be great. So overall, I would say, I view that as really a core strength and the team, the guys just had a great quarter in terms of that.

What -- I'm sorry, the other question was about culture. It's been a really interesting 90 days. One thing I will tell you is I feel like the senior Executive team has really pulled together and are working really well. There's a tight-knit group of folks here, that we all know each other well, we've worked together for quite a while, and we are actually really well integrated.

So any time you go through something like last quarter, it's an interesting challenge, but overall, I'm pretty happy with it. We have not had any meaningful attrition in the business. We are holding on to folks and actually we're hiring. So overall -- it's always hard to speak without the culture when you're one out of 550, but it's quite positive. I will say people were really happy with this [print]. The team did a great job. Q2 was very disappointing. There's no getting around that, there's no hiding that, and quite honestly, in Q3, we really did a great job almost across the Company, so this does wonders for the culture, quite frankly.

And if I could ask a follow-up, just on the -- it was good to hear the news about the incentives business. On TrueTrade, this past August you rebranded Sell My Car to TrueCar Sell. Wondering if that program is now out of beta and live or any updates there? And that's it. Thank you.

TrueCar Sell is just about the sell side rather than just the trade-in side. So it's people that are just trying to sell a car and increase the condition report. There's nothing to be read into the changing of the brand. Quite honestly, as I said over the last few quarters, we're very much on schedule with trade and sell only.

Again, we already talked about it's a 2016 business, we've already said it is, we did have revenue this quarter mostly from sell-only from people selling cars on the platform. Everything there remains on schedule. Incentives this quarter was great because we had the trial that went very well and it gives us real comfort that we can build that business going into 2016 in even a bigger way.

So all in all, as it relates to the ancillary revenue streams, I feel we're right on target. This quarter was really more than anything about very much focusing hard on the core business and getting it right, especially focusing on partner, Other Partners and we're happy with what we saw there, and then expense control, because obviously last quarter was -- you still have a lot of growth and [we connect it just didn't have] in EBITDA, so it's good to get our EBITDA back up and we will be focusing on generating a lot more EBITDA as we roll out our 2016 plan.

Great. Thank you.

Thanks, Ron.

Steve Dyer, Craig-Hallum.

Thanks, good afternoon. Couple quick ones. One, the auto OEMs are getting obviously very promotional into the end of the year. I was just wondering how things like Ford's Friends and Neighbors, which is basically one low price no haggle, how does that either help you or hurt you going into the end of the year? Then secondly, with some of the dealer shuffling this quarter, is there any change to what you feel like the optimal number of dealers is?

In terms of the dealers promoting, it's a fairly normal seasonal activity. We had a great year. You go into the holiday selling season and manufacturers are promoting. We think it's going to be a good holiday selling season and there's nothing out of the ordinary. I don't think we perceive any of the plans as having any more or less impact going into this holiday season as we did last year. I'm sorry what was the second question?

Second question was--

Oh, dealer count. Dealer shuffling. I've not -- no, have we changed our idea what the optimal number of dealers is? I don't think so. It's all about -- what we look very hard at is efficiency and coverage. Right now, obviously we would rather have 600 more than 600 fewer, but we're happy that the overall volume of sales -- units was productive in the quarter and the units per and revenue per dealer went up significantly because that's certainly what we would have projected.

Again, we just said, the number is starting to come back and our team is doing a great job. We're certainly investing a lot into that team. We've hired some really important executives at the senior level who focus on outreach with dealers and Dealer Council. We leaned more heavily into our Dealer Council than we ever have before and we're getting great feedback from the Dealer Council, so we really appreciate the time they spend with us.

On the product side, we continue to invest in dealer tools. These are things, again, that also come from not just what we think dealers are going to want, but the Dealer Council. What we're hearing from our dealer partners in terms of what would be productive tools for them. So I would say the engagement from the Council is as high as it's ever been before, and that's probably a positive outgrowth of what happened in July.

My question around the dealer count was more, as you've seen the monetization per dealer going up, I'm wondering if it's the chicken or the egg. In other words, are you getting better monetization because some of your geographies aren't maybe necessarily so well-covered? Or are you still aggressively trying to add dealers as you go forward with 12,000, 13,000 being that optimal number eventually?

I don't know if we were ever as high as 12,000 or 13,000. It's a really good question. We still look at it as a geography brand exercise. There's no doubt, Steve, in some markets we are still underpenetrated. You bring up a pretty good point and we certainly heard it from dealers in the Dealer Council, which is, it is probably beneficial in some markets that we reduce the number of dealers, so the dealers that we have are more engaged in the program because they don't feel as though we've overpopulated.

We definitely got some feedback from the Dealer Council, that quite honestly, some of our geographies were overpopulated. So we take that to heart, we listen to that, and it's funny, the only way you can really test something like that is to go through what we went through this quarter. We didn't obviously intentionally do it, but it does give us some data and some feedback. So you are right. In some markets, the dealers that were remaining on the program clearly picked up some of that volume and they probably feel better about the program overall as a result.

That's helpful. Then lastly for me, is 2016 -- obviously you are not giving guidance, but are we getting a point where we can leverage OpEx as a percentage of revenue or are we still based on the market share, et cetera. Are we still in full-fledged investment mode there?

It's somewhere in between. It's definitely a year where we will show operating leverage and we need to, but it is also a year where we will continue to invest for growth. But I would suspect that when we roll out 2016, you will definitely see operating leverage in our model. That's certainly a fairly clear directive that we get from our Board of Directors and that we hear from investors when we're on the road.

We're not going to starve growth and starve investment, but nor are we going to ignore the fact that we need to show some operating leverage in the business across all functional areas, quite honestly. Even seeing G&A leverage, which is expected, and that's easy one to do. What we really need to see is obviously marketing leverage, which we saw a little bit of this quarter over last quarter, and then some leverage in the tech and product side because we've made some fairly significant investments in great resources in tech and product.

They are busy on a lot of things, but those things need to get out the door and starting to show some revenue growth and that will obviously immediately show that operating leverage that you're talking about. So yes, you're going to see some leverage going into 2016, for sure.

Okay, thanks.

Kyle Evans, Stephens.

Thanks for taking my questions. Start off with used cars. If I heard you correctly, that's at 24%. Is that an all-time high as a percent of units and where do you think that goes, going forward?

Hey, Kyle. I believe it is tied for all-time high. We were 24% two quarters ago. I can't give you a point estimate, but it definitely goes up without a doubt. That is an untapped and somewhat under-appreciated business by TrueCar over time, sometimes for very logical reasons.

But we like what we see on the used car side over the last few quarters and we will continue to make some investments in that area. So ultimately, while currently a tie for the record, we will certainly see growth in used as a percent of overall units.

Does your creative that's launching later this quarter and into next year, does it reflect more emphasis on used? I'm always surprised that you guys do 24% of your units used because that's not the creative messaging to the consumer that I see.

That's right. You won't see that for a while. That's not really what we're rolling out in the near term. But stay tuned. There's some things on the product side that you will find interesting and we see the opportunity. The truth of the matter is while our creative and most of our marketing is around the new experience, it's not as though we don't advertise to people that in the market for used cars.

Our USAA channel has always skewed more heavily towards used in our overall flow so it's not like we're just getting into the used business. But you're right in pointing out that we really have not had as big a focus on it. I do think you'll see more of that over time, but for right now, the things that I'm talking about in terms of advertising, are still focused on the new car experience and some other messaging that we're trying to get out.

Okay. You mentioned that you had a successful trial that generated $2 million in incentives in the quarter. What was incentive as a percent of transaction. If you gave it, I missed it?

I did not give that number. The average incentive was $675. $675. So I don't have the transaction value in front of me, but I can get back to you with that. I know we have the data.

Fair enough. Lastly, this is not scientific--

Sorry, it's $625 per car. I apologize. I said $675. It was $625. The average incentive was $625 and it was most of the OEM's product line.

Okay. But you use to give incentive rev as percent, roughly, as a percent of transaction. I feel like it was 7%, 8% in prior quarters. I was just wondering if that spiked up on the trial?

Let me look and back to you. It's gone down to about 5%, but this quarter it was actually just shy of 9%.

Okay.

But again, it was a Q3 trial and so I would not expect in Q4 to see us in the high 8%s, which is where we were in Q3.

Okay. And then lastly this is not scientific, this is just a general sense. It seemed to us like AutoTrader and Kelley Blue Book were getting a little more aggressive about --with direct competitive offers. Can you make some general statements on the competitive landscape? Thanks.

I don't really have any. We look at the numbers that we produced this quarter in terms of growth and market share, both in terms of our branded business and our affinity business and feel like we competed well. We don't feel like we were losing share to those guys. Overall, I still think that our brand is building -- the amount of traffic that we had, the amount of prospect growth that we had, we're very pleased with it.

We don't feel like there's anyone making a dent in that. The biggest concern that we had coming out of the quarter was just close rate and that's somewhat tied to dealer count, and also tied to the notion that I mentioned before of we've grown prospects so quickly, and in some cases become very popular with consumers and with our partners, that we have a little bit overwhelmed some of the dealers and we've got to be able to be smarter about that, so they can be efficient and we can be efficient.

Okay. Thank you.

John Blackledge, Cowen.

Great, thanks. For the non-AutoNation dealer churn, were there common reasons for getting of the program, Mike? And then when you say you're adding dealers back, are they the dealers that churned off or are they new dealers that haven't been on the program before? And I have one follow-up after that.

Some are dealers coming back and some are new dealers that have not been on the program before. We obviously, even before AutoNation, we have a calling effort and we're always in the market talking to dealers that are both on and not on the program. Some of those were dealers that are brand new and others of those were dealers coming back on to the program. I'm sorry, the first part of your question?

Common reasons for getting off the programs?

Oh, common reasons. All over the place. A situation like that, when you get into the auto [track], it has a negative effect to the community and to the customer base. So some of that is just probably a reaction to that. Honestly, you would have to ask the dealers themselves to find out exactly why they left. Sometimes they will tell us and sometimes they won't.

But I would just argue, given what we saw, it seemed to be very much connected to what happened in July for some of them, and then again some of them come right back on for a whole variety of reasons. Some miss the volume and others just wanted to be back on the program. Anyway, I don't think there's anything that we could draw that was absolutely consistent across the other 300.

Okay, understood. And then lastly, as we think about franchise dealer accounts for 2016 and even longer term, how should we even model it out? Should we model out flat, maybe up a little bit, any sense there? Thank you.

Right now, we're modeling it for flat for Q4, even though we've already started to add back dealers. As a relates to 2016, I'm going to give you guys 2016 guidance here after the next quarter. So we're very much in the middle of modeling all of this out and looking at the impact. I would say what I am, again, most pleased about is that the algorithms that we have had in place around the dealers and moving prospects around, we clearly picked up units and that was good.

We had a good unit quarter, even on a declining dealer base. Having said that, we still are not done in terms of coverage, and I talked to the dealer sales team more frequently than ever before, and we're going to think hard about this before giving any guidance about how the dealer network grows again. And so in the next 90 days, obviously you will see what we have for 2016 and we can talk more about how you should think about it.

But again the volume per dealer this quarter was good. Next quarter, because you're going to have a sequential decline, expect that number to go back down again. We had the same discussion last year about Q3 to Q4 because you are going to have some dealer growth, and you're clearly going to have a sequential decline in units because of seasonality.

Right. Okay. Thank you.

Thanks, John.

We have no further questions. At this time, I would like to turn the conference back to Management for any closing comments.

Thanks, everybody. Good to get back in front of everybody and talk about Q3. We will be out at a few conferences and see a few of you over the next week or so. If there are any other questions or follow-ups, Alison and I are around, and we're happy to take calls. Again, we will be in New York next week and San Francisco, so we will catch up with a bunch of you. Thanks a lot.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.