TrueCar Inc (TRUE) 2015 Q4 法說會逐字稿

Greetings and welcome to the TrueCar, Inc. fourth quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alison Sternberg, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Operator. Hello and welcome to TrueCar's fourth quarter and full-year 2015 earnings conference call. Joining me today are Chip Perry, Chief Executive Officer, and Mike Guthrie, Chief Financial Officer.

As a reminder, we will be making forward-looking statements on this call, including, but not limited to, statements regarding our outlook for the first quarter and full-year 2016, management's beliefs and expectations as to future events, our future growth, planned investments, our financial and operational metrics, plans and strategies, and the effects of operational initiatives, including investments intended to improve close rates, our technology infrastructure, internal research, the productivity of our dealer network, our dealer training and service, and the core experience for consumers and dealers.

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 reports on Form 10-Q filed with the Securities and Exchange Commission and our annual report for the year ended December 31, 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 statements, except as required by law.

In addition, we will also discuss GAAP and certain non-GAAP financial measures. Reconciliations of all non-GAAP measure to the most directly comparable GAAP measures are set forth in the Investor Relations section of our website, at true.com. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Now I'll turn the call over to Chip.

Thank you, Alison, and good afternoon, everyone. As you all know, I joined TrueCar on December 14 and I cannot tell you are excited I am to be here and to have this opportunity to lead the Company forward and take it to what I believe will be a whole new level of success. I took this job because I believe TrueCar can become the clear category winner in the online automotive space over the next few years. We will do this by refining how our marketplace works, so that it can provide the best overall value proposition for car buyers, dealers, and OEMs. Sitting here today, I'm totally confident we can do this. And while doing so, I believe we will create significant value for our shareholders.

Let me tell you a bit about myself. Rarely does a person get the opportunity of a lifetime more than once. Here at TrueCar, I'm pleased to say that I have it.

Roughly 20 years ago, I moved from Los Angeles to Atlanta, where I had the chance to start AutoTrader.com from scratch. Beginning in 1997, a team of us led the company from a start-up of one person, myself, to a company that, when I left in 2013, generated approximately $1.5 billion in revenue and nearly $500 million in EBITDA. It employed 3,500 talented people. It served over 20,000 dealer customers in every OEM. It attracted 16 million monthly visitors to our site, and it earned an equity valuation of $7 billion.

There was a chance at that moment in 1997 to build what I called the MLS of the car business, which had never been done before. Over the 16 years I led AutoTrader.com, we successfully scaled the company through several stages of evolution. Very importantly, we did this in a way that successfully navigated the transparency wars, which are the inevitable conflict caused by the desire on the part of consumers for more pricing transparency while buying a car and the reluctance of some dealers to provide this transparency.

I believe that the key to navigating these tensions is to build a well-balanced value proposition for both sides the marketplace, namely a win-win for both consumers and dealers. This is something I've done before.

Here at TrueCar, we have a different opportunity at a different time and I believe it's even more exciting than the one I had back in 1997. Based on all my experience, I'm convinced there's a huge opening and unmet need in the market for a company like TrueCar to ultimately bring a new and unprecedented dimension of value to consumers, dealers and OEMs.

Achieving that vision will take some time, so our focus this year will be on making our existing business model work better and improving our relationships with our dealer and OEM customers. Fortunately, we have a great starting point on this journey, because TrueCar is a company that's generated $260 million in revenue in 2015, it has 600 talented and passionate employees, it serves 11,000 dealer customers, it attracts over 6 million monthly unique visitors, and last year, it introduced nearly 4 million consumers to our dealer customers, 750,000 of which of whom transacted at these dealerships.

In addition to this kind of significant scale, we start this process with four important strengths and leveragable assets that give us some clear sources of differentiation in the market. Our biggest strength is our new car pricing transparency model. For consumers, we put two things in context. Number one, highly relevant market information about what other people have paid for their new cars; and two, inventory and pricing information for new cars from our dealers in a way that encourages these buyers to use our marketplace to initiate their purchasing process with our dealers.

Our second big strength is that we have a powerful value proposition for dealers that enables us to be paid by these clients on an accountable basis when the TrueCar consumer buys a car from them. Generally, we do this while charging dealers a per sale transaction fee that is well below their average marketing cost per car sold. As a result, I think TrueCar has the best commercial platform for monetizing consumer dealer introductions in the entire online auto industry.

Our third strength is our relationship with affinity partners, such as USAA, AAA, Sam's Club and many others. These partnerships are viewed by our dealers as unique and valuable, largely because the very closely relationships that our partners have with their members enable them to generate strong interest in the partner branded TrueCar buying service that is prominently featured within our partner's online portal.

Our fourth major strength is that we have a brand that is growing very rapidly and has a positive image with consumers. According to the latest new auto shopper study just released by JD Power, the TrueCar network, including our affinity partners, was the industry's largest and fastest-growing online resource in 2015 in terms of engagement by actual new car buyers. The study also found that consumers rated TrueCar as the number one overall most useful new car shopping site in the industry, well ahead of Edmunds.com,Cars.com, Kelly Blue Book and AutoTrader.com.

The study also ranked TrueCar number one for its mobile experience. As further evidence of our strong audience growth, the latest Comscore data shows that TrueCar's unique visitors grew by 38% during 2015, while in contrast, the audiences of Edmunds and Kelly Blue Book actually declined by more than 10% last year.

So the consumer has spoken. It is clear that despite the challenges we face, new car buyers view TrueCar as the marketplace of choice all across America. These strengths are noteworthy and are the main reason we have come this far in our industry. They are also the main reasons I took this job and why I am so enthusiastic about our future.

That being said, TrueCar's growth has clearly slowed, and it is apparent to me after two months on the job that we have some important opportunities for improvement that we need to address to enable this Company to reaccelerate its growth and achieve its full potential. In my view, these challenges are the result of some shortcomings in the ways in which the Company has executed is business model in the past, not the fundamentals of the model itself.

This is a very important point. All of the issues I will discuss now are readily addressable. In 2016, we will focus on these opportunities for improvement so we can get this Company back on a path to high revenue growth and healthy margins.

Let me now explain what I believe are the three main areas we need to address. Our first and highest priority will be to turn around the negative sentiment that some dealers feel today towards TrueCar. Immediately after I took the helm, I began an active outreach to hear directly from our dealer customers what they like and don't like about our Company. They have given me an earful of very helpful input, which I really appreciated.

I don't believe any company in our category can build a sustainably great business that serves car dealers unless those dealers believe that company is supporting their success, not undermining them or marginalizing their place in the industry. It is just as clear that by taking a new and fresh approach, we can make TrueCar work in a much more positive way for our dealer customers, while also maintaining a strong value proposition for consumers.

Our second priority is to improve the perception of the major OEMs. We have made nice progress in this area with a number of them, including those who are making good use of our targeted incentives product. But we still have a lot of work to do in this area. It is important to us that the OEMs see TrueCar as a useful marketing channel, because they are influential with their dealers and they have some excellent products that can help them improve the efficiency of their more than $50 billion in annual spending on sales incentives. This process will take some time, and the most important thing we can do in this respect is to win over more of their dealers.

Now before I discuss our third key priority, let me tell you why I'm convinced we can address the first two. Going back to the recent JD Power study, they found that 46% of actual new car buyers visit the TrueCar network within 90 days of purchasing. Let's do some math. There was 17.4 million new car sales in 2015, of which 14.7 million were at the retail level, that is, not freetail. Approximately 75% of buyers go online during their shopping process. So that's 11 million Internet new car buyers. Because 46% of these buyers engage the TrueCar network within 90 days of purchase, that's 5.1 million new car buyers on our network every year. That is more than one out of every three new car buyers in America. And this is why we have 9,000 franchise dealer customers and why OEMs are increasingly interested in reaching our new car audience.

Last year, of these 5.1 million new car buyers, we monetized only 574,000 of them, which means that we captured only about 11% of the real monetization opportunity readily available to us and the dealers in our network. We can definitely do better. Clearly, we are not giving our new car buyer audience sufficient reason to proceed through our experience, connect with our dealer network, and purchase a car from a TrueCar certified dealer. These numbers suggest our traffic quality is incredibly high.

So our third priority is to improve the overall yield through our user funnel. In 2016, we will be investing in product and technology in order to evolve our user experience in a way that enables us over time to dramatically improve our yield. To move our user experience forward more rapidly, we need to rebuild several key parts of our technology infrastructure. The good news is that this work was well along when I arrived in December and the solutions are well understood by our technology team. But this will continue to be a major area of investment in 2016.

Stepping back from this assessment of our situation, the management team of TrueCar and I are setting a new strategic direction for the Company that will build on the strong fundamentals of our business model while making major improvements in the ways in which this model is executed. As the first and most important part of this process, everyone at TrueCar, beginning now, is embracing a new philosophical rudder and a new set of core business principles.

To start, we define our business as a specialized two-sided digital marketplace that aspires to reduce the inherent friction in automotive transactions, deliver the best car buying experience for consumers, and provide dealers and OEMs an excellent ROI on their marketing dollars.

Second, we will manage our marketplace to produce a win-win for both consumers and dealers. TrueCar recognizes that dealers and OEMs are our revenue generating customers and we are passionate about helping them succeed in our marketplace, while also enabling consumers to obtain pricing transparency leading to a high level of confidence in the purchasing decision.

Finally, we will explain our value proposition to consumers in a way that does not reflect negatively on car dealers, while continuing to provide actionable information that improves their overall purchasing experience. This new philosophical rudder and new set of core business principles will guide our decision-making in 2016 and beyond.

In addition to the time I've spent out in the field meeting with our dealer customers, I've also been working closely with our financing business operations team to understand our operating metrics and the key drivers of our financial performance. We analyzed the key performance metrics of our sales funnel in order to understand the performance of our business.

Traffic, or unique visitors, are at the top of our funnel, while prospects, the end market buyers who decide to connect with TrueCar certified dealers, are in the middle of the funnel. Unit sales happen at the bottom of the funnel. Since most of our business flows through a pay-per-action model, our revenue is driven by the unit sales at the bottom.

It is clear to me right now we don't have an upper funnel issue. Our high-quality traffic continues to grow at high rates, well above all our competitors. The middle of our funnel, where people become prospects, is also growing substantially, but not as fast as our traffic. And as I said earlier, many real car buyers are not proceeding past the very top of our funnel. So there's a lot of work to be done to encourage them to become prospects.

In addition, our close rates declined in the back half of last year, due to a shift in the mix of dealers in our network. Mike will explain this further in a few minutes. So we will focus our attention and direct the majority of our investments this year to addressing these issues.

Put simply, this year we will divert some top of funnel marketing dollars to areas lower in the funnel to improve conversion and close rates, increase yield, and grow units and revenue. While this reallocation of resources may slow down our top line growth in the near term, it will position us for much more rapid growth in 2017 and beyond.

To execute this strategy, we will have three major areas of investment. First, we'll be significantly bolstering our dealer sales and service team. During my visits with dealers, I heard from many of them they do not see a TrueCar representative in their stores as frequently as they would like and they say in-store training should be stronger so they can better capitalize on the introductions we provide and increase their close rates. To address this issue, TrueCar will invest in creating a best-in-class high-touch dealer sales and service team. By year end, we plan to build the capability to have a high-quality, consultative, in-person service business with nearly every TrueCar certified franchise dealer at least once a month.

The second major investment area will be growing our product and technology team. We run a complex technology infrastructure, and it will be important this year to invest significantly in order to manage our data better and improve product quality and product velocity. Very importantly, we believe these investments will ultimately enable us to lower our operating costs.

Finally, we are building a world-class internal research team that will sit in our marketing group but will be tightly linked to our product and dealer team, so that insights can be quickly implemented for the benefit of our dealers and consumers.

This plan is going to unfold over the course of the year and we have significant work to do. I appreciate your patience while we do that.

Fortunately, we have the resources we need to achieve our plan. We are well capitalized and have a strong and liquid balance sheet, and we have a talented team, great customers and a growing brand. Our business model is sound and extensible, and we are well positioned to be the category winner in this market over the long term.

In closing, I would like to say again just how excited I am to be here at TrueCar. As we move forward in 2016, TrueCar has an excellent foundation for future growth. All of us here believe there is a huge market opening and unmet need for the kind of digital marketplace that we are building and we are laser focused on being the first one to create it. I will now turn the call over to Mike to walk you through our numbers.

Thanks, Chip, and good afternoon, everyone. Financially, Q4 was a sobering quarter for the Company, representing the close of a challenging year. We have made, however, a number of important changes at the senior level of the company, most notably with Chip joining us as Chief Executive Officer in December. We start from a good base and we have a plan in place to make the investments necessary in order to excel over the long term.

As you recall, we experienced a net loss of 600 franchise dealers between July and September of 2015. We ended the fourth quarter with 9,094 franchise dealers, up from 8,702 at the end of Q3. Some automotive brands, however, consistently achieve higher than average unit sales volume per dealer. And so while dealer count has improved, a disproportionate number of those dealer additions represented relatively lower unit volume stores. As a result, our close rates fell in Q4 as compared to the first three quarters of 2015, and we were unable to generate unit growth commensurate with our growth in traffic and prospects. That decline in close rates drove the miss in our fourth quarter versus our guidance.

Recognizing that issue, we are redoubling our efforts to win back these higher unit volume stores. The trend is obvious when you break down our funnel in detail in Q4 of FY15. Our upper funnel UVs grew at 33% year-over-year, prospects grew at 28% year-over-year, but because our close rates declined by over 10%, unit growth was a more muted 12% versus the same quarter in FY14.

As we navigated the quarter, we pulled back on branded acquisition spend, as declining close rates led to increasingly inefficient unit economics on the marginal dollars spent. As a result, though units were below our forecast, we ended the quarter with a sequential decline in cost per sale coming in at $183 per car.

As Chip discussed, while the fundamentals of the business remain solid and we have healthy overall unit economics across our partner and branded channels, we have issues with the middle and bottom of our funnel which need attention. In order to restore our business to acceptable growth rates, produce healthy and growing margins, and build brand, we will improve the dealer network and invest in delivering a better experience to consumers and dealers.

TrueCar delivered revenue of $63.6 million in Q4 of 2015, up 15% over the fourth quarter of 2014. Transaction revenue was $59.3 million, representing year-over-year growth of 16%. For FY15, total revenue was $259.8 million, up 26% year-over-year, and transaction revenue was $241.4 million for the year, up 27% from 2014.

TrueCar certified dealers transacted 183,157 units on our platform in the fourth quarter of 2015, up 12% year-over-year. Fourth quarter units in the TrueCar branded channel grew by 18% year-over-year, to 75,490. USAA members accounted for 59,040 fourth quarter unit sales, up 12% over 2014, while units from our other partner channel totaled approximately 48,627 units in the quarter, up 4% year-over-year.

For FY15, total units were 750,108, an annual increase of 23%. The TrueCar branded channel accounted for 316,865 units, representing year-over-year growth of 35%. USAA represented 234,233 units, up 14%, and the other partner channel grew to 199,010 units, or year-over-year growth of 17%.

Total monthly unique visitors reached 5.9 million in Q4 2015, or year-over-year growth of 33%. Traffic in the TrueCar branded channel was 4.1 million, up 45% over last year, and traffic in our USAA channel grew by 46% year-over-year. Monthly traffic in our other partner channel was 1.1 million for the quarter, flat year-over-year. For FY15, total average monthly unique visitors were 6 million, representing year-over-year growth of 40%.

As Chip said, TrueCar is the fastest growing new car marketplace in America. In the branded channel, average monthly unique visitors were 4.2 million, an annual increase of 55%. USAA came in at 600,000 average monthly UVs, representing 16 % growth year-over-year, and other partner registered 1.2 million unique visitors, up 13% over FY14.

In the middle of our funnel, our prospects in Q4 were 936,000, representing year-over-year growth of 28%. Prospects in the branded channel were 469,000, up 40% annually, with USAA prospects at 189,000, up 32%, and all other prospects at 278,000, or 9% year-over-year growth. For FY15, prospects totaled 3.7 million, or 25% growth year-over-year. In the branded channel, prospects totaled 1.8 million, representing 39% growth. USAA prospects came in at 700,000, or12% annual growth, and the other partner channel had 1.1 million prospects, or 13% growth year-over-year.

Monetization was $324 per unit, flat sequentially. About 27% of our units sold were used cars in Q4 versus 24% in Q3, which was a new record for used volume and used share.

Franchise dealer count totaled 9,094 as of December 31, up 4.5% sequentially and 7% year-over-year, while our nonfranchise dealer count was 2,082, up 4% sequentially and 55% year-over-year. Transaction revenue per franchise dealer in the fourth quarter of 2015 was $6,662, up 8% from $6,156 in Q4 of 2014. Net funnel efficiency was 1.04% in the fourth quarter of 2015, roughly flat versus the prior quarter and down year-over-year compared to 1.23% in Q4 of 2014.

Turning to expenses and margins, all of the following metrics are on a non-GAAP basis, unless I state otherwise. Gross profit for the quarter was $57.8 million and gross margin was 90.9%. Technology and product expenses were $13.3 million, or 21% of revenue in Q4 of 2015. That compares to Q4 of 2014 when tech and product expenses were $8.7 million, or 15.7% of sales. Sales and marketing expenses were $34 million, or 53.4% of revenue in Q4 of 2015. That compares to Q4 of 2014, when sales and marketing expenses were $28.6 million, or 51.6% of sales, and to Q3 of 2015, when we spent $43 million, or 59.3% of sales.

Within sales and marketing spend, customer acquisition cost for the TrueCar branded channel in the fourth quarter totaled $13.8 million, with a resultant cost to acquire of $183. Additionally, we spent $10.9 million on partner revenue share, loan [subvention], and other partner marketing expenses. Lastly, sales and marketing headcount and other costs were $9.2 million for the quarter.

General and administrative expenses were $10.4 million for the quarter, or 16.3% of revenue, compared to $9.1 million, or 16.3% of revenue in Q4 of 2014.

For the quarter, adjusted EBITDA was $0.2 million, or 0.3% of revenue. For FY15, adjusted EBITDA was $7.6 million or 2.9% of revenue. The primary non-cash expense items for the quarter were depreciation and amortization of $5.1 million and stock-based compensation of $16.4 million, of which $10.7 million related to the departure of certain executives who left the Company late last year.

In addition, in our adjusted EBITDA calculation, we added back $400,000 of litigation costs, $3.2 million of cash severance related to executive departures, and $2.2 million of real estate exit costs, comprising estimated rental shortfalls from sub leased properties, broker fees, and exit penalties for a terminated lease. These all related to our consolidation of our Santa Monica operations from five buildings down to two.

GAAP net loss for the quarter was $27.4 million, or a net loss of $0.33 per share. Our non-GAAP net loss for the quarter was $5.2 million, or a net loss of $0.06 per share, and that compares to Q3 of this year when non-GAAP net loss was $2.1 million, or a net loss of $0.03 per share.

Quickly turning to our balance sheet, as of December 31, 2015, our cash balances totaled $112 million and we have no debt. So we remain very liquid.

Now I would like to turn to guidance and share our outlook regarding the first quarter of 2016 and the year as a whole. During Chip's comments, he highlighted three areas of operational emphasis, number one, bolstering our dealer sales and support team; number two, enhancing our product and technology organization; and number three, building a world-class internal research team. These will be the areas of primary investment in 2016.

In order to increase our close rates, we need to improve overall dealer network productivity, so that will be the major focus. We are going to add field sales professionals, including those focused on major accounts. We will make an even bigger investment in a field services and support organization so that our dealers are better trained and supported. At the same time, we will continue to drill down into our product performance to understand key opportunities for improving net funnel efficiency.

Within our tech and product organization, that will require more developers. We also need to make upgrades to our technology to enable greater product velocity, as we seek to improve our overall product experience.

With that as a backdrop, our financial guidance for the year is as follows. We are targeting 4% to 6% annual revenue growth for FY16. We are going to modulate the necessary investments in the Company, while making surgical efforts to lower our fixed costs in order to minimize negative adjusted EBITDA early in the year.

For the year, we are targeting breakeven adjusted EBITDA, but expect there will be volatility early as we make these key investments, especially in our dealer organization, that are so critical for long-term value creation. For the first quarter of FY16, we are guiding to units of 170,000 to 175,000 and total revenue of between $60 million and $62 million, which are approximately 2% and 4% above last year, respectively. We are targeting breakeven at the adjusted EBITDA line for Q1. And now it will open it up for questions.

(Operator Instructions)

Douglas Anmuth, JPMorgan.

Hello. This is Anna [Klure] on for Doug. I'd just like to first talk about the investment in the field sales force and maybe what the potential impact to long-term margin is, how impactful and how the size of the magnitude of this type of long-term investment. And then would also like to quickly touch on the used car growth that picked up pretty nicely in the quarter, if this was an intentional push to get more non franchise dealers on and if this is something, how we should project that going forward. Thanks so much.

The field sales team is an important part of our strategy to improve our relationship with dealers and the quality of the service we provide in the field. This new service and support group of people will be ramping up during the course of the year. We believe that we will do this in a methodical way, so that by the end of the year, like I said, we will have the capacity in place to do an in-person, in-depth visit with each of our dealers at least once a month. This is the kind of quality service that our dealers expect from a provider like us, that they are investing as much money as they are with us, to the tune of more than $2,000 a month on average.

We're very excited about how this will be received. We've gotten good feedback from dealers that they are hoping for it and expecting it. And it will be one of the major ways in which we signal to the dealer body of America that TrueCar sees them as an important customer, and it's all part of our strategy of turning around the negative perception that many of them have toward us today, as I said a few minutes ago.

Regarding the shift toward used that you see, what you see happening at TrueCar is we serve mainly a new car shopping audience, but because we attract such a large audience, many of these folks are straddling the new and used car purchase decision. So what we've done here in the past few years is mount what I call fairly traditional internet classified search product that is attracting the interest of a fair number of our users. And so at the present time, we are enabling consumers to find cars within the TrueCar dealer network, and then they're proceeding to go ahead and buy those cars from our dealer customers. So we are happy to be able to serve the needs of used car shoppers as well as new, although our primary emphasis will remain on the new car side of the industry.

And Diana, your question about investment in margin, as we invest in the dealer organization, we honestly think that we will see improvements in close rates that will very much pay for the investments that we are making in. And also, I think you'll see the savings in the need for more marketing dollars to feed the top of the funnel. So at the end of the day, we don't see this as a change overall to margin structure. It's just really one of the areas, as we said, where you'll see a reinvestment of dollars from one area to other areas in order to improve the efficiency and serve all of the car buyer traffic that we actually have

Got it. That makes sense. Thanks so much.

Deb Schwartz, Goldman Sachs

Great. Thanks. I have two questions. First, Chip, at a high level, you talked about how you're looking to refine the marketplace, how the marketplace works, and you described your strategy to fix it. Have you evaluated transitioning business models similar to AutoTrader, and it seems like you're not going in that direction, but what gives you confidence in this new strategy? And then I have another question after that

Sure, Deborah. Thank you. So when I came here after having spent nearly 20 years in the online automotive industry, and during that time I was able to become quite familiar with all the existing models. And I had admired the TrueCar model from afar for many years, but I also saw it as one in which there were many flaws in its execution. So essentially, I saw a company that was a diamond in the rough, that had unnecessarily broken a lot of china with car dealers, and had dramatically underperformed financially compared to what a company of this size should expect to produce in terms of profits and value to shareholders. So I jumped at the chance to come here for those reasons.

And so when I look at our strategy going forward, it's all based upon this belief that the core fundamentals of our model are very strong. We have the ability to provide a unique form of transparency to consumers. We have a unique ability to be compensated on an accountable basis when cars are sold. We have a unique set of our ability partnerships that provide a strong flow of consumers into our marketplace. And we've got this really wonderful brand name and audience that has been a massive result of all the hard work that's been done here.

So when I look at the Company, I see huge potential. And when it comes to the improvements in our model, every one of them will affect, at the end of the day, that funnel efficiency. So what I see is a company that, when I came in the door and had a chance to look under the hood and work closely with the team and go out and visited with dealers and listen to them about their perceptions of the company and our role in the industry and what's working and what isn't, there's a lot of things down in the detailed inner workings of this business that can be adjusted and improved upon in a way that will enable it to be seen much more positively by dealers and also help consumers along their purchasing journey as strongly as it has historically.

But the improvements will be touching NFD more than the top of the funnel of this business. We'll continue to grow traffic at the top of the funnel. We have a strong marketing budget planned for 2016, so we're going to continue to grow. But the emphasis will be around NFD. So when you look at the indicators that we will be examining internally, and that will be able to sharing with you, are as a result of improving the service we provide to dealers and making a number of other changes in how our consumer experience and dealer tools work, we will see a shift in our dealer mix that will enable us to better match supply and demand. That will immediately affect the close rates through the website.

Another one will be when we put our field support people in front of dealers more often, we'll enable them to understand what are the best practices necessary to improve their ability to connect with the TrueCar shopper, the TrueCar buyer who's coming into the store and to close them more effectively.

And then thirdly, you heard Mike and I described how the way our funnel works today, there are a very large number of real car buyers who do not register to become prospects in our site. More than 90% of real car buyers do not do that. So what they're doing essentially is receiving the really great information they desire about what other people are paying for cars and they get a sense for what the possible purchasing price of a car might be through what's called the TrueCar Estimate. They get a sense for that, but they don't really have the ability to activate that opportunity to work with a TrueCar dealer unless they register. So there's a 90% fall out in our funnel. And I believe that's the result, honestly, of a lack of obsession around conversion of people through the funnel that (Indiscernible) with this company.

Most companies that produce outsized financial performance and are winners in their category end up focusing on and obsessing on certain operational activities that produce great value for customers and they beat the competition by doing it better. So that kind of operational obsession around the way the funnel works has been a bit lacking here. So we're going to institute that. The research effort that Mike and I mentioned will become part of that.

So I'm really confident that the changes we're talking about making here in this Company will enable us to significantly improve performance. At the same time, we don't have visibility of the impact yet of the improvements that we will be making. I've been in situations where I've been able to stand up in front of investors in the past and talk about much faster, higher growth rates on top and bottom line and be very confident about projecting those and delivering them. In those situations, I always had in our rear view mirror a whole set of operational metrics that we could be confident about projecting in the future on. Here we don't have that in some of the areas that we're talking about make improvements on. Why? Because they just haven't been focused on as much as they could be.

So those are the areas that we are working on. And I'm very confident we will re-energize the top line of this Company. And because we've got really great operating leverage, that improved revenue growth will transfer and translate into nice bottom line growth over time. Does that help answer your question?

Yes, that was really helpful. If I may follow up on one area of that, you talked about the challenges that you're having with yield and with close rates, and you're clearly not seeing it as strongly in uniques from the top of the funnel. Is it an issue of leakage, where consumers are getting the value or the benefit of TrueCar and you're just not able to get paid for it? And I think you addressed several areas to address that, but can you go into more specifically what you're doing on the technology side such that you'll be able to properly get paid for the benefit that consumers get from TrueCar?

Yes, Deborah. You put your finger on it. There are many car buyers, real car buyers, who use us for informational purposes, but don't proceed through our funnel experience to register and then be able to activate the information they receive from dealers in a way that would enable them to lock in the savings guarantee and have a good purchasing experience at a TrueCar dealer. They just don't proceed through, because the way our site works is today, it doesn't message strongly enough the benefits of proceeding and it enables folks to get a tremendous amount of information which they think can activate, which they think is actionable. It is not as actionable nearly as it could be as if they registered.

So we will be working on testing a variety of new pathways through this funnel, and messaging approaches that will, I believe, enable us to pull more real car buyers through the system. It remains to be seen how many yet. That's why we're not projecting improvement/ We don't have historically experience in doing this. The reason why we're making the technology investments is that the way we're set up today, we have a number of systems that were engineered a number of years ago, and we need to rebuild them in fundamental ways in order to enable some of the testing and funnel adaptation to occur. I'd love to say that it's all modular and plug-and-play and testable today. It isn't. So that's the work we're doing to enable us to more rapidly make changes in the way the user experience flows on the website.

And so you'll see those investments happen this year. You'll start to see some important improvements in the way the funnel works and that will flow through to NFE. This is a Company that over the course of this year, you're going to see a large number of incremental improvements in many aspects that will have, I believe, a significant cumulative effect on how consumers see this site as an experience that aids their car buying process, and how dealers and OEMs view it as a viable, attractive, high ROI marketing environment for them to do business in. So it's not any one big thing. It's a whole series of incremental improvements that when you put them all together, they end up having a really significantly positive impact on the business.

That's helpful. Thank you.

Mark Mahaney, RBC.

Thanks. Let me throw out three questions, please. Chip, your thoughts on the franchise dealer count from here. Do you think you're close to the right level or do you think it's the right idea to keep growing that for the next several years?

Secondly, any updated thoughts on TrueTrade? How does that factor into your strategy going forwards?

And then finally third, any new thoughts on the affiliate strategy? It sounds like you're pretty happy with what you found when you got there, but can you just comment on that? Thank you.

Yes. So the franchise dealer count today represents about 33% of the franchise dealers in America. We are able to enable consumers to get matched up with a good franchise dealer in most brands in most markets. That being said, the mix of the dealers that we have in the network today, as you can tell from our performance in the second half of the year, following the loss of our relationship with AutoNation, the mix shifted in such a way that will we weren't able to match the supply and demand as well as we did in the first half of the year.

So I see ongoing evolution of our dealer body, our dealer network, but not the need for a significantly larger number of dealers, honestly. Providing better service to our existing dealer body and bringing on the dealers that are important to enable us to do good matching of supply and demand will be the focus in 2016.

Regarding TrueTrade, that is a product that's been in development here for a long time. It's been spoken of as a high-potential revenue channel for the Company. I believe it still represents a very interesting opportunity for the future; however, it, in my view, is not the highest priority to focus on at this moment in time. So when I came into the Company, I said there were going to be some things we would speed up, there were going to be some things we slow down, some things we would emphasize more and some things we would emphasize less, as we evolved to the future. TrueTrade is one of those very interesting products that enables consumers to -- would enable consumers to have a little more transparency and confidence around that part of an automotive transaction.

I have significant experience touching this segment, this product, in my work. In my prior life, we launched a product called Trading Marketplace that enabled consumers to get a liquid offer for a used car sight unseen, redeemable at a participating dealer. So there's some critical ingredients to do this right. I believe that they're in our grasp, but we don't have them readily incremental today. So we'll be working on this. It will be done in a way that our dealers find it very comfortable and exciting to work with, as well as consumers being able to, in a way that consumers can get very helpful transparency on what their used car is worth. But it's not something that we're going to be pushing the accelerator on this year. We will be preparing the way for it, and I believe it will be a strong future opportunity for TrueCar, probably beginning next year, not this year.

Your third question about the affiliate network, yes, I am very pleased and excited about the quality of the partnerships that TrueCar has built historically. I've been very impressed with the amount of work that these partners do to build solid relationships with their members and then bring them into a car building experience that TrueCar helps fulfill in a co branded way. And so the access to those car buyers is a very important part of the audience flow that we receive. And our dealer body really appreciates it and respects that part of the business that we bring them.

So I think we have good opportunity to continue to grow that segment, because there's always optimization that can be pursued with our partners. And again, our technology team will be making some investments that will enable us to become more flexible and to do more different things with different partners. So today, we live in a world where we have to tend to be fairly standardized across the partnerships. We will be more flexible in the future. That will enable us to over time differentiate the offering we provide through partners a bit more strongly, which I think will activate even some better revenue growth with those partners in the future. And again, that won't happen this year, but it will start to come into the picture next year, as our technology investments start to bear fruit. Does that help, Mark?

Thank you, Chip. That helps, Chip. Thank you.

Dean Prissman, Morgan Stanley

Afternoon. Thanks for taking my question. So Chip, along the lines of some of the previous questions, when you look at your consumer experience today, what are some of the gaps that exist at dealer stores which are holding conversion back?

What are the gaps that are in our consumer experience that are holding back our ability to convert them into prospects that actually do business with our partner dealers?

Yes, and specifically when consumers are in the store. You have your account teams that are going to be focused on your dealer relationships. I'm curious if you see any drop off in conversion based on the interaction between your dealers and the consumers today?

Well, today, like I said earlier, the user experience could be improved in the sense of providing more compelling reasons to register and proceed through the experience. When it comes to when people actually register and become a lead at a dealership, there's a lot we can do to help dealers successfully convert those leads better than we do today. There's a lot of nuances in how the TrueCar system works and in the ways in which we enable dealers to interact with prospects after they've registered with us, since we have some special office tools and communications tools that enable the dealer to touch consumers and work those leads and convert them into sales. And so we haven't done enough, I believe, to educate the dealer body on the best practices associated with a high conversion rate.

Got it. Thanks.

Ron Josey, JMP Securities.

Great. Thanks for taking the question. Just one on dealer tools and then, Mike, a quick follow-up on your guidance. On dealer tools, I think there was an emphasis coming out of 3Q to build out dealer tools to improve those prospect close rates, as we spent a lot of the call talking about. And now with the view to be more high touch with dealers, which makes sense, I'm just wondering if you can provide an update on where those self-service tools are, have they been implemented, where are we in that, and how that parlays with the build out of the sales force?

And then secondly, Mike, I think you said -- I'd like some more detail -- I think you said there might be volatility early, especially in the dealer organization. So any insights to what that meant would be helpful. Thank you.

Ron, what we said is there could be volatility in EBITDA earlier in the year, more so than later in the year. And the reason for that is we have a lot of investments that we've targeted, in terms of investment in the dealer organizations, and in the tech and product organization. Those are long-term investments that we believe we need to make and we should make, and they're the best thing for the Company to drive value.

And so the improvements that we're going to see over the course of the year obviously are more likely to happen as the year goes on. To the extent that we make more of the investments early on and they're not matched by some cost cutting, we could have more volatility at the EBITDA line at the front half of the year versus the back half of the year. So that's all I was saying is you tend to front load your investment over the course of the year, and so if you're overall and your targeting breakeven, you might see a little more volatility early on as you decide to make some of these calls. Does that make sense?

Yes, it definitely does.

And then in terms of tools, we continue to invest in dealer tools. I don't think there's a substitution effect that says if you're training more, you don't want to give dealers tools and technology to improve the overall experience and help them close consumers. It is all part and parcel of arming our dealer customers with the capabilities to close the consumers that come from TrueCar and land on their dealer lots. And so those investments will continue, as will the training that Chip's been talking about. And I think this is an area, in terms of training and service, that we just really under invested in, so now we need to do a better job there.

As an example, also, of how the tools are evolving, yes, we did have some improvements last year, but they're ongoing and now we're moving toward enabling dealers to do a better job of sending VIN-based offers, for example, to consumers who have registered an interest in buying a car at their dealership. And so what we've seen is when dealers activate those tools and provide an offer at a specific vehicle level, it's a message, personal message to the consumer about the car, that's an example of a best practice that used to be more embedded in our dealer body, better trained in our dealer body so that they can improve close rates.

But those tools are continuing to evolve. We're always looking for ways to provide more and better information as part of those offers to enable the dealer to present and attract the interest of a car buyer and make sure it meets the car buyer's need. So we will continue to evolve in that area, as well.

Got it. Thank you.

Sumit Sinha, B. Riley.

Yes. Thank you very much. Chip, my first question was, it was interesting that you said that your focus is going to be on new vehicle sales, considering your past experience with used vehicles. Can you talk about why such specificity there?

Secondly, as you speak to dealers and as you try to get feedback from them on operations and execution at TrueCar, could you talk about any sort of concessions that they have asked for, be it in terms of attribution windows or data sharing?

Sure. So why new, why our focus on new? The historical strength of this Company is as a marketplace that provides fantastic transparency for new car buyers in a way that enables them to be confident about the purchase when they walk in the dealership. That's the USP of the Company, unique selling proposition. It will continue to be so. But because we have a very large automotive audience that comes to TrueCar, 6 million a month, grew 38% last year, we're the fastest growing player in our space by far, we will naturally attract a good number of used car shoppers and buyers and people who are straddling the decision, like I said. So we look at used as an ancillary revenue stream today and product that will meet the needs of car buyers, also meet the needs of our dealer customers, as well. But it's not the centerpiece of our strategy. So we think that used is a nice part of our business, will continue to grow very nicely.

And regarding the second part of your question, no, I haven't heard from dealers the desire for concessions or anything like that. What they've told me is that they believe that TrueCar's approach to providing transparency could be improved upon so that it reduces what they call the race to the bottom effect in the industry. That's been a well discussed aspect of our business. And so they've talked about that. They've also talked about how some of the information on our website is sometimes confusing to car buyers. They'd like to see that improved. They've also raised issues with the way in which we bill them sometimes. Not all the time, but sometimes.

They've also asked for better service in the field, where we're clearly responding to that. So the perceptions of the dealer body, I believe, are all what they are. We have many dealers that are very happy with us. There's a large segment of the dealer body out there who sees us as providing a strong good leads into the dealership from whom they can sell cars and make money. There's also a segment of our dealers that look at us and say, well, we don't like the way you've approached this business as a third party philosophically. And that's why we're making a major change in the philosophical orientation of the business so that we can provide a better, stronger, more positive win-win for both sides in a very obvious, clear and present way.

So what I've learned from our dealers is that many of them had these concerns. But even the ones that have the strongest negative perceptions that told me, we won't forget, but we will forgive. In other words, they'll give us a chance. And that's what I'm seeing out there in the market. The dealers who have felt like TrueCar hasn't been the kind of positive player they'd like to see among the third-party world that they work with, they're saying, okay, we won't suspend judgment while you make these improvements.

So I'm very confident that, like I said, if a large number of incremental changes are made in the way we do business this year, many, many dealers will pick up their heads and say, yes, we can do business with these guys, they can help us sell cars in a profitable way. At the same time, we're going to continue to help consumers get a fantastic level of transparency that will drive confidence in their purchasing decision. So I'm very confident that we will be able to move the dealer body forward in a positive way this year

Appreciate that. Mike, one final question. Have you specified the level of ad spend in 2016?

No, I haven't. But we are basically targeting pretty modest growth over -- we're talking just about in the TrueCar branded channel -- we're talking about pretty modest growth over last year. So 2015, the total number was $62.5 million, and I think we'll be in the $65 million range in 2016.

Excellent. Thank you very much.

Kyle Evans, Stephens.

Hello. It's Tommy in for Kyle. Thanks for taking our questions. One just to follow up on consumer ad spend for the year, should we think about that in roughly equal amounts across the quarters or do you anticipate any different strategy around the election season in the back half of the year? And then my second question, could you give us a quick update on the CNCDA lawsuit? Thanks.

Sure. I'll take the ad spend. And then Johnny Stephenson is here, and he will talk about CNCDA and any other legal questions that you have.

So spend is not equal across the quarters. We tend to spend more in Q2 and Q3, just due to the seasonality of car buying. And we have a fairly similar pattern as we had last year. So it will run very much in parallel with the way we did it last year. So last year, just as a reminder, we spent $13.5 million on branded spend in the first quarter, $17.7 million in the second quarter, $17.5 million in the third quarter, and $13.8 million in the fourth quarter. That was $62.5 million. Right now, we've got models at about $65 million of spend, and the way that is spread across the quarters will be very, very similar to what you saw in FY15.

Okay. And on the CNCDA litigation, in early January, the trial judge dismissed that case in its entirety. That would then be the second time that case was dismissed since it was originally filed back in earlier 2015. The judge did, however, grant the CNCDA leave to file an amended complaint, which is not unusual, and they refiled their amended complaint in the early part of this year.

We have moved to dismiss that complaint, and we now have a hearing on our motion to dismiss that is set for March 23. So there will be a hearing. It'll be the second time we've had a hearing on a motion to dismiss before this judge on those claims. The last time we had a hearing, the judge dismissed them, allowed them to amend. And so we will be back before her in March and we will seek dismissal fully and finally of the claims. We continue to believe those claims are meritless, and we remain optimistic about the outcome. But that's where we are procedurally.

Great. Thank you.

John Blackledge, Cowen.

Great. Thanks for the questions. Can you just remind us again the function of the internal research team? Second question is how many field sales people do you expect to add over the course of the year? And then the third question is how do you revive growth in the other affinity channel? I think it grew plus 4%, units grew plus 4% year-over-year in 4Q. Thank you.

You bet, John. As far as our research is concerned, we're going to be a selling team that will enable us to have the capability to deeply understand how consumers perceive TrueCar and the competition at all aspects and all phases of their shopping and purchasing process. And that team will work through a variety of tools and mechanisms, including online surveys, focus groups, quantitative online surveys, phone surveys, talking to people who use TrueCar, people who don't use TrueCar, people who use the competition.

We'll also be using the team to help us research, on an ongoing basis, the important pain points and unmet needs the consumers are experiencing in the car buying process. And I very much believe that we are in a space that there are a lot of large companies operating today, including TrueCar, called the third-party space, and they've evolved over the last 20 years or so. Most of those companies are rooted in value propositions and basic business models that were pioneered in the late 1990s, have been evolved only incrementally since then. So there's a lot of room to still improve for consumers how they shop for cars and purchase cars, a lot of room to improve manufacturers' and dealers' efficiency of their marketing efforts as a catalyst in our industry.

So in order to prioritize the best opportunity, it's important that we reach outside our four walls and talk to a lot of people and get a lot of objective information and insight. So that's not been a core strength of this Company historically. We're going to build that muscle here. I'm very excited about that.

Regarding number of sales reps, I don't want to think about a specific number yet. Like I did say, we will, by the end of the year, have the capability to have an in-person, consultative, high-quality conversation service call with each of our franchise dealer customers in person once a month. So you can kind of do the math on what that will take/ We are still planning the details of how that will work, but we've got the money budgeted in our plan. And over the course of the year, we can advise you later on exactly the number of people we'll be putting in the market. I don't think it's advisable for me to state the exact number right now.

Okay. Understood.

And John, on the other partner channel, as we talked about before, over the last quarter or so, we have new leadership, which is old leadership, back on the partner side, with Bernie Brenner, who is one of the founders of the Company. And he has been doing a good job reigniting growth throughout the partner channel, better calling and coverage. And I think a certain number of partners that maybe had lost a little bit of altitude with us over the last couple of quarters and months -- sorry, last couple of quarters and years -- he's doing a good job with the team reinvigorating the engagement around those. So I think that's actually the primary way that we will reignite growth in the other partner channel.

The second one is obviously, when we add new partners. And the biggest new ad last year was Sam's Club. So for most of the quarters in 2016, for all the quarters in 2016, you'll have pretty favorable compares for Sam's Club, in particular. So that should drive some incremental growth in that channel overall in 2016.

Thank you.

Thank you. Ladies and gentlemen, there are no further questions in queue at this time, and this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.