TrueCar Inc (TRUE) 2016 Q3 法說會逐字稿

Greetings, and welcome to the TrueCar, Incorporated third-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn conference over to your host, Ms. Alison Sternberg, Vice President, Investor Relations. Thank you, Ms. Sternberg. You may begin.

Thank you, Operator. Hello, and welcome to TrueCar's third-quarter 2016 earnings conference call. Joining me today are Chip Perry, President and 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 fourth quarter and full year 2016; Management's beliefs and expectations as to 2017; future events, plans and strategies; our ability to accelerate revenue growth and improve margins; our ability to improve our relationships with and perception among dealers and OEMs; improvements to our product offerings, including our user experience; the outcome of outstanding litigation; growth in our affinity partnership; the anticipated seasonality of our business; and the effects of operational initiatives, including investments intended to improve conversion and close rates, our technology infrastructure, internal research, the productivity and coverage of our dealer network 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 2015, 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, 2016, to be filed with the SEC, 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 measures to the most directly comparable GAAP measures are set forth in the Investor Relations section of our website at true.com. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

Now I'll turn the call over to Chip.

Thank you, Alison, and good afternoon, everyone. It's great to be here and I'm pleased to report that the turnaround at TrueCar continues to gain traction.

In the third quarter, we achieved record results on virtually every metric across the Company. Although there are still many areas where we can improve, it's also becoming even more clear that there are many opportunities to grow and expand our business significantly by enhancing the value we provide our consumers, dealers, and OEMs. I'm really excited about where we can take this company.

But first, let me touch on several key highlights in the third quarter. On the financial and operating metric side, TrueCar dealers generated nearly 221,000 unit sales across our platform. Our total revenue was $75.1 million and we generated $5.8 million in adjusted EBITDA. Each is a record for the Company and each is comfortably ahead of consensus.

Moving to dealer, during the quarter we added 55 talented people to our dealer sales, service, support, and operations teams. Now 75% of our franchise rooftops are assigned a dedicated client success manager, up from 25% last quarter. We believe this level of attention will enableize our dealers to improve their close rate and generate better results with TrueCar going forward.

Our dealer network continues to grow, finishing September at a record 10,759 franchise dealers, which is up 624 since the end of last quarter, making it the second most productive quarter for net dealer adds in our history. Our dealer coverage is getting better, resulting in more consumers receiving relevant offers from conveniently located TrueCar dealers.

As a big contributor to our dealer growth, I'm very happy to report that nearly all of AutoNation's dealerships, 349 franchises, are now back on the TrueCar program. This is a huge milestone for us and it happened much sooner than we would have anticipated. AutoNation has told us that the Dealer Pledge which we announced and rolled out at the end of March is the main reason they decided to put TrueCar back into their marketing mix.

During the third quarter we published an update to our Dealer Pledge in which we highlighted the successful execution of our original Dealer Pledge promises and introduced new changes and promises such as increased VIN-based pricing coverage, the inclusion of fees and accessories in dealer pricing, enhanced dealer branding opportunities on TrueCar, and the start of regional TrueCar dealer summits.

Thus far, all of these operational improvements have been very favorably received by our dealer customers.

Transitioning to product, perhaps the biggest story of the quarter was the research-driven product changes to our price report page and our registration flow that more clearly call out enhanced consumer benefit messaging, thereby pulling more real car buyers to our online experience.

As you'll recall, I've highlighted that many consumers don't understand the benefits of proceeding all the way through our experience. These product changes make those benefits more clear and drove significant increases in our conversion rate, which we define as the percentage of unique visitors who register online to fully participate in our marketplace.

One of our big goals this year has been to start moving this metric upward, while not compromising lead quality. Specifically, on the TrueCar direct-to-consumer channel we grew the new car conversion rate by nearly 20% sequentially over Q2 of this year, just by making these changes on our desktop experience.

We will continue to roll out these improvements across our TrueCar branded mobile site as well as our affinity partner sites in Q4 and into next year. And we believe these enhancements will enable us to show ongoing conversion lift for quite a few quarters.

On the technology side of the business, I'm incredibly proud of the progress our tech team has made all year long. Recently our team launched our used car service on our new Capsella technology platform and migrated the used car service out of our own datacenter into Amazon Web Services.

This was a huge undertaking and a big step forward for us in terms of future resource flexibility, technology simplicity, capital efficiency, and product velocity. This will enable us to focus on making product improvements to our used car experience over time, taking the same research-driven approach that has worked so well with our new car experience.

Stepping back and looking at our Capsella program overall, we are not just rebuilding existing functionality, but also laying the groundwork to innovate all of our consumer and dealer products and data analytics much more quickly and efficiently in the future.

Turning to our affinity partner business, our partner team also had its share of big wins this quarter, with the launch of two very large new relationships, Chase Bank and Hearst Automotive's well known website, caranddriver.com. We expect both partnerships, along with Sam's Club, to account for a large portion of the growth in our other partner channel next year.

And speaking of Sam's Club, the car buying program that we launched with them about a year ago had another great quarter. From a standing start four quarters ago, units from Sam's Club members were just shy of 2,500 for the quarter. In addition, Sam's Club members have a high attach rate with OEM targeted incentives contributing to its strong quarter of incentives revenue. We believe that these kinds of OEM incentive programs are particularly effective within our unique partner channel.

On the marketing front, our consumer acquisitions team also exceeded expectations this quarter. As we discussed on our last call, we ramped sequential spend by over 20% while maintaining cost per sale at approximately $180 per car. This contributed to our strong adjusted EBITDA performance for Q3 and we expect to see this kind of marketing efficiency to continue.

And the last highlight I'd like to mention is that J. D. Power just released its 2016 New Autoshopper Study, which ranked TrueCar, including our affinity partners, as the largest and fastest growing online resource in terms of engagement by actual new car buyers.

According to the study, the TrueCar network is now used by 57% of new car buyers (inaudible) to purchase a new car. And this usage metric ticked upwards by a very significant 11 percentage points over the past year. Comparatively, all of our major competitors were flat or down year over year in the study. The J.D. Power study also ranked TrueCar as the most useful new car shopping site and the most useful mobile app.

So on the consumer side of our business we continue to show very strong momentum.

As I said on my first earnings call at TrueCar, I took this job because I believed TrueCar could become the clear category winner in the online automotive space over the next few years. Now, as I look back on three quarters of progress, I'm pleased to report that we are well on our way. And while we still have many challenges to overcome, I can't imagine a more exciting place to work in the entire online automotive industry.

When I first addressed investors back in February, I told you that we had four major areas of operational focus for the year.

First, we are reinventing the way we do business in order to repair and improve our relationships with dealers and OEMs.

Considering where we started, I'm extremely pleased with the headway that we've made in this area. More dealers than ever have heard our Dealer Pledge and more are willing to hear about the new TrueCar. And empirically, more dealers are on the platform than ever before.

Our investments in people and in a better overall approach to customer service have enabled us to grow the franchise dealer network by over 18% this year, and the return of AutoNation is a great signal that dealers in the market get real value from TrueCar.

Second, we are working hard to reaccelerate revenue growth.

As we have guided, we bottomed out on our growth in Q2 and we began to reaccelerate in Q3. As Mike will cover in more detail, we expect to return to double-digit top-line growth in Q4 and in 2017. I'm particularly pleased that we have been able to do this while investing in key areas across the Company, and still generating significant sequential growth in our adjusted EBITDA margin throughout the year.

Third, we are strengthening on affinity partnership. One of the key differentiators that I always admired about TrueCar before I joined was the Company's powerful affinity network. USAA is simply the perfect partner for our business, because of the scale and the loyalty of their members. We're very fortunate to work with such a great company that built its brand on uncompromising service to its members.

I've had the good fortune of working with some of USAA's most senior executives and the team assigned to the day to day management of their car buying service. I'm excited about where we could take this partnership. There is so much more value that we can deliver to an even greater percentage of the USAA member base over the next few years.

In addition, we have a long list of other amazing partners, many of which have done business with us for years. And with the recent addition of Sam's Club, Chase Bank, and caranddriver.com, I'm confident that we have healthy growth opportunities across our affinity partner business.

And fourth, we are laying the groundwork for becoming the clear category leader based on new and significantly more robust value propositions for consumers, dealers and OEMs.

Inside the Company we call this new value proposition The Leap. I haven't spoken much about The Leap publicly, but this is already an area of focus, an R&D investment for us. And it will be a key contributor to our growth for the next few years.

We'll talk more specifically about The Leap when we lay out our plans for 2017 early next year. But in the meantime, here is a quick, high level preview.

As I've said on prior calls, TrueCar's accountable revenue attribution model is a massive competitive advantage, one not replicated by any other player in the industry. As we look strategically at the online automotive category, we believe our unique, closed-loop business model provides the foundation for disruption among the third-party players as the market increasingly shifts away from an old-style, unaccountable publishing model and toward a more modern and accountable transaction-based economic model that is fueled by powerful data analytics.

We believe we can, in collaboration with dealers and manufacturers, help them expand transparency more deeply into the upper-funnel car shopping process and into lower-funnel digital retailing. Over time, we believe we have the ability to broaden our experience and go more end to end, helping consumers in every step along the way, not only by reducing the need to visit other information sources, but also by creating meaningful efficiencies for all parties to the transaction.

Financially and operationally, TrueCar is now at a place where we can again start delivering healthy growth and scaling margins based on practical and achievable improvements in our core business. That being said, we believe there are substantial long-term returns to be realized by investing in and delivering on the vision I've outlined above.

And so, as we move into 2017, we expect to simultaneously increase top-line growth and improve our margins. But we will also continue to invest in R&D, and we will keep this long-term vision in mind as we build experiences that we believe will drive significant enterprise value.

Before I turn it over to Mike, I just want to thank all of the hardworking people at TrueCar. When I joined nearly a year ago, I asked the team to help me preserve what is great about the Company, while undertaking a really significant turnaround of the business to fix things that were clearly broken.

While we still have much work to do, the team has exceeded my expectations. It's only through the hard work of a bunch of really smart, committed people that we can deliver the kind of financial results that we have here in Q3. And it's only through more hard work from those people that we can execute on the longer-term vision of what this company can become.

And now Mike will walk you through our numbers.

Thanks, Chip, and good afternoon, everyone.

We are really pleased with the financial results in the third quarter. Since the beginning of the year we've been making significant investments in three focus areas: dealer sales and service, product and technology, and consumer and dealer research.

Each of these investments is yielding excellent returns and, as a result, we not only exceeded guidance on units, revenue, and adjusted EBITDA in Q3, but we also set ourselves up to build on these improvements as we finish 2016 and head into 2017.

In the third quarter of fiscal 2016, revenue totaled $75.1 million, comfortably above our revenue guidance of $70 million to $72 million. Units were at 220,633, about 8% above the high end of our 200,000 to 205,000 unit guidance. Adjusted EBITDA for the quarter was $5.8 million, or 7.7% of revenue, well ahead of our guidance and more than double our adjusted EBITDA of $2.7 million in Q3 of 2015.

As Chip referenced, in Q3 we continued to invest in our dealer network, and the investments are paying off. At the end of fiscal year 2015, we had 146 people in our dealer group, and at the end of Q3 2016 we had 227 people on the team. Of those 81 net hires, 55 of them joined in Q3. And so you can see that our hiring has gained momentum.

With the support of the Dealer Pledge, the dealer team has been highly effective this year. Our record annual net franchise dealer add was 1,850 back in 2014. This year, through just three quarters, we have already grown our franchise dealer base by 1,665. This is setting up to be our best year for dealer additions. In Q3 alone our franchise dealer count grew by 624, the second highest quarter for sequential dealer net adds.

Our non-franchise dealer count was 2,537 at the end of Q3, up 26% year over year, but flat sequentially.

Transaction revenue per franchise dealer was $6,730, the highest level over the past two years, with the exception of Q3 last year, when revenue per dealer was a less meaningful metric, given the significant dealer in count between July and September.

Because we are recruiting dealers much more effectively and compensating our sales organization more intelligently, our dealer coverage and network quality are also improving. Back in January, 63% of search visitors had the opportunity to receive offers from dealers that were very conveniently located.

That number improved significantly by September. And now nearly three out of every four search visitors can interact with a dealer that is very conveniently located to them. As a result of having so many more people in the field, our dealer satisfaction scores have increased by 15% over the past two quarters.

In summary, we end Q3 with a dealer network that is larger, more conveniently located, better trained, and more stable than ever.

Turning to our key operating metrics, monthly unique visitors were 7.6 million in Q3 of 2016, up 15% overall compared to Q3 of last year, and up 14% sequentially over Q2.

Given the conversion improvements that we started to see early in the quarter and the strength in our dealer network, we increased our acquisition spend in our branded channel by $3.3 million sequentially, and that spend drove 22% year-over-year and 15% sequential traffic growth in the TrueCar channel.

Conversion rates across the Company grew sequentially to 5.2% from 5.1%, driven by the improvements in the new car experience in the TrueCar channel. However, overall conversion improvement just on TrueCar were 12% sequentially and, being even more granular, new car conversion rates on TrueCar alone grew by nearly 20% and are now at all-time highs.

And we achieved those results primarily by changing just our desktop experience. As we roll out these product changes on our mobile experience and across our partner platform we expect to see continued conversion improvement across the Company in Q4 and into 2017.

The combination of traffic growth and conversion improvement drove up prospects to a record 1.2 million, up 14% year over year, and up 17% sequentially. Because the marketing spend and product improvements were concentrated on the TrueCar channel, the year-over-year and sequential prospect growth numbers in the TrueCar channel were much higher, at 26% and 28%, respectively.

Given the significant growth of prospects, our close rates are about 130 basis points behind where they were this time last year. However, just looking at the new car close rates, the spread is about 88 basis points. And given all the improvements we've made within our dealer network, we expect to see improvement in our dealers' ability to close on the growing amount of prospects coming from TrueCar.

Units were 220,633 in Q3 of this year, a 6% year-over-year increase and a 15% sequential increase. The breakout in units was 97,147 for TrueCar; 68,288 for USAA; and 55,198 for the other partner channels. Each is a record for the Company.

The new/used breakdown was 150,936 new, 69,697 used, or 68% new and 32% used. That's the highest-ever ratio of used car sales for us and at 38% year-over-year growth represents the seventh quarter in the last eight where our used car year-over-year growth was basically at or over 40%.

Monetization in the third quarter was $319 per unit, which was down 1.5% year over year and down 0.6% sequentially. Net funnel efficiency was 0.97% in the third quarter of 2016, flat sequentially on significantly more traffic, driven mostly by used.

Bear in mind, the shift in the new/used mix has driven overall NFE modestly downward as the used car funnel has a significantly lower NFE than the new car funnel. To the extent that new/used mix continues to move toward used, we would expect NFE to remain flat or even decline, even in periods of healthy unit and margin growth. This means that overall blended average NFE of TrueCar is in the process of becoming a less meaningful indicator of the health of our business.

TrueCar acquisition spend was $17.5 million for the quarter, flat with our spend a year ago. [Cost] per sale was 8% lower, at $180 per unit, reflecting more units and very efficient marketing acquisition spend.

We expect to modestly reduce TrueCar acquisition spend to about $16.6 million in Q4, driven by seasonality. This is consistent with our practices in years past. There is in fact seasonality in Q4, but we are hoping that conversion lifts that we have seen will mitigate the typical seasonal effects on units.

Turning to the expenses and margins, all of the following financial metrics are on a non-GAAP basis. In general on the cost side, even though we have made substantial investments we are spending more efficiently and we are starting to see sources of operating leverage across the Company.

[Total costs] for the quarter were $69.1 million and gross margin was 91.9%

Technology and product expenses were $12 million, or 15.9% of revenue in Q3 of 2016. That compares to Q3 of 2015, when tech and product expenses were $11.5 million, or 15.8% of sales. The growth in spend on technology and product has slowed significantly, and as revenues grow next year we expect operating leverage in this area.

The big area of spend efficiency in Q3 was in sales and marketing, where costs went down year over year both in dollars and as a percent of revenue. In Q3 of 2016 the sales and marketing costs were $40.9 million, or 54.4% of revenue, compared to Q3 of 2015 when those costs totaled $43 million, or 59.3% of sales.

Breaking down these costs in more detail, during the quarter we spent $17.5 million on customer acquisition and brand, incurred $10 million of partner revenue share and marketing cost, and recognized $13.4 million in headcount and other costs.

General and administrative expenses totaled $10.4 million for the quarter, or 13.9% of revenue, compared to $9.6 million, or 13.3% of revenue in Q3 of 2015. The growth in spend in G&A has also slowed, and as revenue grows we expect operating leverage in this area as well.

Adjusted EBITDA was $5.8 million, or 7.7% of revenue, in Q3 in 2016, which compares favorably with $2.7 million, or 3.7% of revenue in Q3 of last year.

The noncash items in adjusted EBITDA were depreciation and amortization of $6 million and stock-based compensation of $6.2 million, which was down from $7.5 million of stock-based compensation in this quarter last year. Stock-based compensation as a percentage of revenue has therefore declined from 10.4% in Q3 of last year to 8.3% in Q3 of this year.

GAAP net loss for the quarter was $7.4 million, or a net loss of $0.09 per share, as compared to a GAAP net loss of $11.1 million, or a net loss of $0.13 per share, in Q3 of last year.

Our non-GAAP net loss for the quarter was $1 million, or a non-GAAP net loss of $0.01 per share. And that compares to Q3 of last year where our non-GAAP net loss was $2.1 million, or a non-GAAP net loss per share of $0.03.

As of September 30, 2016, our cash balances totaled $103 million, flat from last quarter. We have no outstanding borrowings on our $30 million line of credit.

Before I give guidance, let me put our adjusted EBITDA margins in perspective. The normal historical pattern for us is sequentially increasing EBITDA margins in Q1, Q2, and Q3 as we benefit from improving seasonality throughout the year. Then in Q4 seasonality turns, though we continue to make investments in the Company, and so Q4 margins are generally down from Q3.

That is exactly the pattern we are seeing this year and what we expect next year. So in each quarter we expect to produce year-over-year improvements in our adjusted EBITDA margins in 2017 over 2016.

Now I will share our outlook regarding the fourth quarter of 2016 and the resulting year as a whole.

We believe that we have put in place the necessary fundamentals to hit our goal of returning to double-digit year-over-year revenue growth starting in Q4. Given the positive trends in our conversion rate, healthy growth in our used car business, and a rapidly expanding dealer network, we expect to generate units of 205,000 to 210,000 in Q4, or year-over-year growth of 12% to 15%, producing revenue of $70 million to $72 million, or year-over-year growth of 10% to 13%, and adjusted EBITDA of $2 million to $3 million, 3.5% adjusted EBITDA margin at the midpoint. This compares to essentially breakeven adjusted EBITDA in Q4 of last year.

As a result, for the year we are increasing our guidance from 780,000 units to a range of 793,000 to 798,000 units, revenue from $270 million to a range of $273.4 million to $275.4 million, and adjusted EBITDA from $5 million to $6 million to a range of $11.3 million to $12.3 million.

And now I'll turn it back to Chip.

Before we take questions, I want to talk about some changes to our Board of Directors. Tom Gibson and Todd Bradley will be leaving the TrueCar Board and I want to thank Tom and Todd for their valuable service to the Company.

Tom is a real industry pro, having worked at Ford Motor Company and Chrysler before becoming the President and COO of Subaru of America. He is also the founder and CEO of Asbury Automotive Group, one of the leading automotive retailers in the United States. Tom joined the TrueCar Board back in 2012, and his experience and counsel have been invaluable in helping the Company navigate through many challenges.

Todd is a Silicon Valley veteran, who joined our Board in 2013 and was instrumental in helping us get ready to go public. He was the President of TIBCO Software and for many years was an Executive Vice President with Hewlett-Packard. Todd is now the CEO of mobile payment company Mozido, and we wish him well in building that company.

Today we are fortunate to say we have two new Board members joining us. The first is Erin Lantz, who is a Vice President and General Manager of Mortgages at Zillow Group. Since joining the company in 2010, Erin has built one of Zillow Group's fastest growing and most profitable businesses, despite operating in a highly regulated environment and in an industry slow to adopt innovative consumer technology. Her experience at Zillow is highly relevant to what we are doing at TrueCar.

Prior to Zillow Group, Erin was a Senior Vice President at Bank of America in the home loan business, and before that worked at Boston Consulting Group.

Our second new Board member is Wes Nichols, who is the Senior Vice President of Strategy at Neustar, and co-founder and former Co-CEO of marketing analytics company MarketShare, recently acquired by Neustar. Throughout his career Wes has helped marketers successfully marry art and science to drive business results. His experience is also highly relevant to TrueCar.

Prior to starting MarketShare, Wes was with the Omnicom Group, and was President and CEO of TEQUILA, one of the world's largest digital agencies.

I want to welcome Erin and Wes to our Board, and I look forward to working with each of them to drive continued growth at TrueCar.

Now I will open it up to questions.

Thank you. (Operator Instructions) Steve Dyer; Craig-Hallum.

Nice results, everybody. With respect to the dealer amount, first, I missed the total number of dealers, not franchise, but total. Do you have that in front of you, Mike?

Yes, franchise is 10,759 and non-franchise -- just give me a second. I think it was 2,537.

Great. And then, how do you think about the overall number? Are you at or approaching a fairly comfortable number, or are there still holes, whether it be geography or quality or what have you in terms of growing the dealer count going forward?

Hi, Steve; Chip here. Thanks for the question. Like I mentioned on the last call, we're not yet focused on defining what the ceiling or the maximum number of dealers we want in our network is. At this stage of the game we've been able to improve our ability to match supply and demand in the marketplace by adding significant numbers of dealers this year. But we still have areas where the coverage isn't what we hope it to be, or where we would like it to be.

So we're continuing to fuel that effort with a very strong sales effort backed up by our recently established client service manager team. And so we expect to see continued growth in our dealer network in the coming quarters, although probably not quite as fast as we've seen in the last two quarters.

Okay, great. That's helpful. Could you give us an update maybe, Chip, on the optional subscription pricing and how that's going and where you think that's headed?

Yes. The optional subscription plan that we rolled out after testing it in Georgia earlier this year has been met with very favorable response by dealers all across America. Many dealers like to have the option of being able to budget their expenses and to not also focus on the details of every transaction in our monthly statements.

So we've seen roughly about -- run me the numbers, Mike.

Yes. About 30% of the new dealers that are joining the program will opt into subscription. And about 10% of the installed base will turn from paper sale to subscription; 90% of the installed base stays with their paper sale billing model.

So it's working well and we continue to have the attribution model underpinning with our subscription dealers, because they're continuing to provide, like all our other dealers do, sales matching data, which enables our closed-loop business model to show them the transactions that we helped influence at their dealership.

Great. Do you have a target mix down the road, be it two, three, five years, of paper transactions versus subscription? Or are you really kind of leaving it up to the individual dealer?

Yes. It's Mike. I think we're leaving it up to the dealer. We're actually pretty happy that the dealer chooses the model that is most appropriate for them. The fact that 30% of the new dealers joining in Georgia are opting into subscription leads us to believe that quite a few of them are dealers that wouldn't have come on to the program if they hadn't had the option of subscription. So at the end of the day, given that we monetize pretty similarly between the two, we're just happy to provide an option where dealers can choose the billing model that works better for them.

Okay, great. One more then I'll pass it along. You talked about double-digit revenue growth next year. Do you have sort of an underlying SAAR assumption on that? I know you aren't super sensitive to the SAAR ticks up and down, given your market share, et cetera. But do you have a general thought as to what you expect?

Yes, I think our forecasts are pretty similar to what everybody else out there is looking at, SAAR is basically flat to down next year, but not any real major movement. That's the basic assumption underlying our overall revenue forecast for next year.

Okay. Very good. Thank you.

Douglas Anmouth; JPMorgan.

Hi, this is Lina Rudashevski on for Doug. Congratulations on a great quarter. We are wondering -- so can you just provide a little bit more color on what exactly you changed based on the research that you did on desktop? And then when do you think you'll roll those changes out to mobile?

Well, thank you, Lina. The major changes were created as the result of the search that we did in which we discovered that many consumers don't fully understand the benefit of really [thoroughly] registering at TrueCar to fully participate in the benefits of our marketplace. And those benefits include being able to receive upfront pricing from dealers on the new car they want to buy, as well as when a person, a car buyer, visits a dealership being able to have that upfront pricing available on other cars that the consumer may be interested in purchasing.

So those benefit messages weren't really well communicated up until recently. And so what we've basically been telling consumers in our experience is you can get access to real pricing -- actual pricing on real cars. And that is a very important consumer need that isn't met that well by most other third-party sites.

Most other third-party consumer sites have access to MSRP mainly, or they have the chance to see an information page on a new car and fill out a lead form. So TrueCar's value prop does stand out in the market. And now we're starting to explain it better and we're starting to see some significant improvement in conversion rates, like I said.

We'll be rolling out the changes in our mobile experiences this quarter and in our affinity partner experiences this quarter and next year. So it will roll out over the next several months. But we're expecting to see some ongoing nice improvements in conversion rates as a result.

Okay. Great. Thank you.

Mark Mahaney; RBC Capital Markets.

If I could throw out a couple of questions. An update on that California new car dealers lawsuit.

And then, bigger picture, Chip, when you think about the mix of new versus used cars for TrueCar over the next three to five years, any thoughts on where you think there's more interesting opportunity is? If there's an ideal business mix, and maybe just more of both is the right answer, but any thoughts on that.

And then, finally, in terms of the rebuilding of the business or the recovery in the business -- one, congratulations on that. I know those things aren't easy to do. I know you're still well in the process, got a lot of stuff to do ahead. But in terms of brand awareness with consumers, where do you think TrueCar is now? Do you think that's always been a going-up-and-to-the-right kind of ramp? Or do you think that there are major new initiatives you need to do to change the brand awareness? Thank you.

Thank you, Mark. It has been exciting being here these last 10 months, and we are very pleased with the progress we're making. But you're right, we know we have a lot to do. We're nowhere close to being done.

And one example of that is the fact that we are still dealing with the lawsuit from the CNCDA, the California New Car Dealers Association. And you might have heard that recently we had made an appeal that the case be thrown out in District Court here in Santa Monica. We heard just recently that our request for an early appeal at the Trial Court was denied. So this case is going to proceed to the next step.

The fact that it's proceeding, though, is completely unremarkable, because the denial rate of the kind of petition we made is extremely high, in the mid-90%. So the Court of Appeals, they do, obviously, deny the vast majority of these requests without explanation, as they did here. But it's important to note that the ruling that just came out is in no way a decision on the merit of the CNCDA's claim.

So from our perspective, we remain confident that our business model is in full compliance with California laws. And we look forward to being vindicated over time in this case. But it's something that we're continuing to work hard on. That's where that stands.

Regarding the mix of new and used cars on our site, we're seeing a nice shift in growth on used. And it came as a result of the fact that, by virtue of being a very large, one of the market-leading car shopping destinations in America, we attract a large percentage of used car buyers naturally. In our business, our audience leans more toward new than used, but used is still substantial. Other sites tend to be more used than new. Ours is the reverse; new versus used.

We also made some improvements in the accessibility of used car listings in our site over the past year by placing a prominent access point on our home page, as well as making some improvements in user experience.

So we see used continuing to grow quite rapidly, much faster than new for a few more quarters at least. And at this point, I wouldn't want to call an ideal mix. We think that the TrueCar marketplace has a lot of upside potential, both on used and new cars. And used car buyers are attracted to us really I think because of the halo of the overall TrueCar brand -- you asked about brand; I'll get to that -- as well as there's a presence in our site of a nice local inventory both in franchise and independent dealers. And we've seen some nice growth in independent dealers over the past year, which has helped us fill in the marketplace in the lower price point cars.

And regarding your third question about brand awareness, yes, we do believe our brand is very strong and growing at a nice pace. The fact that in the recent J.D. Power study we came out on top as the used -- when you take into account all of our affinity partners on a deduplicated basis -- we're now being used by the most new car shoppers in America.

And our brand (inaudible) has been strong and our awareness is good. So we're very pleased about how the brand is progressing and we continue to invest significantly and we have plans to do more of that in 2017.

Thank you, Chip.

Ron Josey; JMP Securities.

Congrats on a great quarter. It's so good to see. I wanted to ask a few questions. Let's see, first, on ARPU. I understand the tougher comp year over year, but it's been consistently coming down since 1Q [19]. Yet the mix shift to higher paying years is increasing. So I wanted to understand sort of how we can think about ARPU going forward.

Chip, you also mentioned something on incentives I think improving this quarter, particularly as it relates to Sam's Club and the affinity partners. Wanted to get your updated thoughts on incentives as a new business potentially in 2017 and beyond.

Then just the last one, just clarification on the conversion rates. Can you remind us on the mix between desktop and mobile users? Thanks again.

Ron, it's Mike. Let's take them in order. On monetization or ARPU, we are still primarily generating transaction revenues, new and used car transaction revenues. And so it's not as though we have a lot of incremental products that are taking that number up. We'll talk about affinity in just a minute.

Generally, though, what happens is it's really the mix between subscription and paper sale that really probably is having the biggest impact, although you're talking about pretty small numbers here as it relates to monetization.

So the subscription renewals tend to trail unit growth. And so especially in times when you've got very large step-ups in units, like on a sequential basis, it's just always going to be difficult to keep subscription pricing up as fast as your units are growing. So in a sense, when you've got very high unit growth you'll just trail the subscription side a little bit and that will take your monetization down a little bit.

We look at this quarter, we're much happier with the units. And I'll take a tradeoff of a percent on pricing to get the kind of unit growth that we had this quarter.

On the incentive side of the business, we did have a really good quarter on targeted incentives. The Sam's Club channel and our partner channels in general really provided a great baseline for incentives. We had a really solid incentive quarter this time last year, so we were always nervous about the comparison. That was a trial and has not been replicated.

If you strip that trial out, the incentive business grew by over 40% year over year. We did a run rate this quarter of north of $20 million of annual revenue, just on the targeted incentive side. So I think we were quite happy with the output on incentives this quarter and look forward to building that business in 2017.

And what was your last question, Ron?

Just the mix between mobile and desktop.

It's still about 50/50. And so what you see in terms of the conversion improvements on TrueCar in Q3 is almost entirely related to rolling out the experience on the desktop and then testing it and rolling it out more broadly. In Q4 we'll have the benefit of an entire quarter of desktop and our mobile web experience will for most of the quarter be turned on to the new experience.

So as we said, we still have some conversion improvements in front of us. And we have seen a little bit of -- we've rolled out a little bit on USAA, not completely and not at all in the other partner channels. So Q4, Q1, Q2 of next year we'll still have these new product rollouts, the new conversion experience. We'll still be adding to our conversion rates as we go into the middle of next year at least.

And as we look at our conversion rates, Ron -- Chip here -- and we think about where they could go in the future, we've really entered a new era of innovation and testing around how to pull more real car buyers through the TrueCar marketplace so they can experience all the benefits of participating in our marketplace.

The first set of changes we made are visible on our website. But we're continuing to do research to refine those messages to help our benefits resonate with even more car buyers. I would say we're early days here in achieving these improvements. And we still have a very high falloff rate within our marketplace compared to the large number of real car shoppers who come to TrueCar every month. So we see this as a big opportunity going forward.

Thank you.

Kyle Evans; Stephens.

Congrats on getting AutoNation back on the platform. I guess when we last heard you had mid-50s in a trial and now you're talking about almost all of the 350 on the platform. When did they hit in the quarter, so we can kind of guess at the revenue contribution?

Kyle, honestly I don't think I have a good answer for you. I'll have to come back. I'm not sure it was even the mid-50s the last time we talked to you. That was probably the public number. But it's steadily been higher than we've talked about. So it was certainly a nice chunk or contribution to the quarter, without a doubt. But the growth in the business and the growth (inaudible) even revenue per dealer across the entire network has gone up this quarter in a healthy way. So it was certainly a part of the quarter, and a big part of the quarter. We're excited about it. But it's really broad-based.

Okay. So it wasn't like some gigantic chunk of AutoNation dealers hit in the quarter. Sounds like something more incremental over time. Right?

Yes. But it would have been within several dates that we worked with with the AutoNation team to put dealers onto the program. So the rollout has been really measured week by week, month by month, starting back in I guess April when we started. So it's been a lot more straight line than it probably looks. That's the best way to think about it.

Okay. It sounded like you were reducing our focus on net funnel efficiency. And it sounded to me like that was the result of kind of a continued mix shift towards used, which has just naturally lower conversion. What should we -- I guess when I stand back and look at what Chip is trying to accomplish at the bottom of the funnel and where registration has been kind of inserted into the process, how should we grade your success if we're not going to do it on that funnel efficiency? Help me think through that.

Units. I think units is the best judge of the business right now, how fast can we grow units. Returning to growth on the new side this coming quarter, and the healthy growth that we've had on the used car side. So I think it's really a units driven business right now. And that's the way we should be thinking about it.

Yes. Our NFE, blended average NFE, is a function of a lot of different NFEs. We've got our affinity partner NFEs. We've got the TrueCar NFEs. We've got used car, new car, the different mobile and desktop. So it's hard now to just use one number as an indicator of health. But we're working on figuring out how to communicate better these intermediate metrics that will help you understand and model our business.

We don't have it completely figured out yet in terms of how to communicate it. We monitor it all. We see it. But we have to figure out how to communicate it still.

What was branded traffic in the quarter?

TrueCar traffic was 5.6 million monthly uniques, of the 7.6 million.

Okay. Lastly, a bump in sequential customer acquisition spend -- is the ratio of that spend in terms of traditional broadcast to digital still kind of where it was when we last talked?

Yes, it is.

Okay.

There's no -- Kyle, digital is -- we've done very well on TV and radio and we've increasingly over the last few quarters grown our digital spend. And so the one change we've made would be towards slightly more of the mix to digital. But we're still heavily reliant on television.

Okay, thanks. Nice quarter.

Heath Terry; Goldman Sachs.

Actually, just to follow up on that, can you give us a sense of what direct-to-site traffic contributed from a revenue or a lead standpoint, and then also what you're seeing in terms of the cost of driving that traffic through television? And to the extent that you're increasing online as a percentage of the mix, what that says about the ROI that you're seeing on that online spend? Thanks.

Well, in the brand channel, Heath, our costs to acquire has stayed at about $180 million this quarter. We're down close to the most efficient that we've been in the history of the Company. So I think our direct-to-consumer business is as efficient as it's ever been. And I think our overall levels of organic traffic are growing, our cost per new unit is coming down. I'm trying to make sure I get specifically to your question. Is that what you were looking for?

Yes, that's what I was looking for. And so, given that high ROI that you're seeing in online, should we expect that that's going to continue to be an increasing share the next --?

Yes, you should. Anytime we can add on the partners side obviously, that's -- we do that. That's a very, very -- it's all organic traffic, effectively, on the partners side, very efficient. But at these levels, with the kind of conversion rate improvements that we're seeing, it frees us up to do more consumer brand spend and drive the business faster and with increasingly healthy returns and margins.

And so as we continue to see our conversion improvement -- and there are also a number -- we have better dealer coverage, a bigger dealer network. We also have a clear sense and an understanding that when consumers [see] multiple [vendors], offers from multiple dealers, the close rates are also improving. And all of those things that lead to, again, a healthy funnel enable us to spend more aggressively and drive more consumer traffic and more units in the business, while preserving and growing our margin.

Got it. Thank you.

John Blackledge; Cowen.

Great quarter. The fourth-quarter unit guide, I think it implies like 13% growth year over year at the midpoint after kind of low- to mid-single digit year-over-year growth the past couple quarters and only really a modest Q-over-Q step-down despite the seasonality. So can you just remind us the Q drivers? Is it the higher conversion and the return of AutoNation? If there's anything else maybe you'd let us know.

And then, what was the free cash flow in the third quarter? Thanks.

Oh, darn. So, yes, in terms of units it is sort of at the normal seasonal decline. It models into the numbers. We do believe that with this kind of conversion rate improvement we have a chance to mitigate those seasonal effects. It is primarily driven by the early improvements and the early rollout of the conversion changes that would drive us beating the normal seasonal decline. And speaking of which, we can roll that out across all of our channels. So that would be the primary issue, the primary driver.

The second driver, not to be understating again, is that the dealer network is growing. It's getting bigger. You've got better coverage, better training. And, as I said before, [when we] drive more VIN-based pricing, more of a VIN-based pricing experience in front of the consumer we tend to see close rate improvement.

So those things can combine this quarter to drive the units, to have a better than what we have normally forecast as a seasonal decline, both of those issues.

Right. And the free cash flow in 3Q, if you have it?

Yes. So basically it's a breakeven. Our cash balances are I think within $200,000 of where they were last quarter. And we didn't finance the Company. So it's basically free cash flow of I think negative $150,000 basically.

Okay, great. Thank you so much.

Sameet Sinha; B. Riley.

Couple of questions here. In terms of advertising you speak about TV and radio. And if you can help us think about what -- is it mostly national advertising? Or is there a level of local advertising? And where I'm coming from is, especially as your number of dealers increase, there will be areas where dealer density is very high. And in those areas can you focus your efforts on local advertising so you can generate more leads, more traffic, bring [out] those dealers so it doesn't -- the dealer business doesn't become cannibalistic, the other dealers start getting unhappy with the platform as business basically spreads out?

Second question is, you mentioned that there's an opportunity for TrueCar to become a one-stop destination for all car buyers, implying pretty much that you might have a high level of upper-level, upper-funnel content to your site, not just pricing. So that's a significant change from the origin of the Company. Can you elaborate on that, the thinking behind it, and how would you go about adding that content?

The third question is, if I can just throw in one more, in terms of used car advertising, if I remember correctly you were going to start it in October. Can you talk about if that has started and any sort of initial experience?

Sure. Thanks, Sameet. Let me talk first on the advertising side. We do national television, but to your point, there are benefits to local advertising. It's because of the density of the network. And we do that through radio and through digital. So our local advertising is really radio and digital focused. TV is very expensive when you do national versus local. So that's to your first question.

To your second question, overall experience, I'll let Chip handle that. And then the used car advertising actually started I think in August. And it's having an impact. We had a very good quarter on the used car side.

But I'll let Chip talk about -- address your second question, which is, as you described it, a one-stop shop.

Yes, Sameet. When I joined the Company, we launched some research that helped us understand that a significant portion of the TrueCar audience doesn't really yet know what kind of car they want to buy -- significant portion. And that's true for almost all of the major third-party sites, actually. In our case, the site was configured and built for people who knew exactly the car they wanted to buy, because we take you straight into a configuration that enables you to see a pricing report and then get connected to local dealers.

But we don't provide consumers very much information about vehicle comparisons, reviews, specifications, and the like, the kind of information that people need to determine what car they want to buy at a basic level. So today we have a lot of traffic that comes to us with that need, but we don't meet it very well.

So our thought process is that rather than let those consumers go elsewhere and encounter other experiences where they might get distracted and not come back to TrueCar, we're better off retaining that audience. And when we're ready to, as we call, go lower funnel or (inaudible) strike their interest quickly and getting connected to a dealer after seeing up-front pricing, we want to do that. So we have on our drawing boards now some work that will help us address that very important need.

Also, when we look at the competitive landscape, we see companies that mainly are focused on revenue generation through display advertising. So the experiences that these sites provide consumers are significantly chopped up and expanded as a result of the display ad orientation of their sites.

So we see a big unmet need within our own audience, as well as a big opportunity to bring to the market a much more consumer-appealing approach to upper funnel car shopping. That's why we're taking a look at it. That's why as we talk about our vision, I really think that's an important component of it.

Okay. If I can throw in one final question, can you talk about the relationship with Chase? How do you see that progressing? I mean, obviously big giant financial services company with a big auto loan business and car dealer network. Makes me think about something like USAA. How do you see this relationship grow? Should we think near-term benefits or it will take time to build out?

We think it's going to take some time to build out, because it just really has been growing out geographically this year. And it's a nice experience in which consumers who are members of the Chase -- have a banking relationship with Chase, they're able to shop for a new car, and obtain pricing information from Chase auto dealers, and then also begin the loan application process right in the middle of the experience. And then also have that loan fulfilled by the local Chase dealer.

So it's a good experience and one that starts to touch this whole new burgeoning area called digital retailing. But at this point we're still, honestly, rolling it out. We haven't really seen the full reaches of the potential of it.

Yes. Obviously it's going to scale up over time. But it is already generating real units and real revenue. So it'll be small contributions in Q3, or it was in Q3, growing in Q4. They're not really even yet promoting internally. So they find -- people find it on the website and that's what we're seeing today. So obviously this is a big [bank] with a lot of members and a lot of marketing muscle behind it attached to financing. So I think we're pretty excited about the overall dynamics of the relationship.

And as we look into 2017, we really, if you think about our business, is at least three channels -- we have TrueCar branded channel, USAA, and then all of the other partners combined. The all-other-partner growth is really going to be driven I think by three partners -- Sam's Club, Car and Driver, and Chase. And those are all exciting relationships with strong brands and loyal members. So we're looking forward to ramping those up in 2017.

Thank you.

Blake Harper; Topeka Capital.

Chip, when you talked in your remarks about the updates to the Dealer Pledge including enhanced branding, just wanted to see are you monetizing that at all or would you think about possibly doing that in the future?

No. We're not going to be monetizing those features that enable dealers to better promote themselves in the TrueCar environment. We see a very important unmet need is enabling dealers to differentiate themselves more strongly and tell their very positive why-buy-from-me messages. Often involve special services and the like that are available at local stores, including their sales process which offers important benefits to consumers. And we see it as an obligation, actually, to help them do that more strongly.

Other sites in our space, advertising driven websites, tend to think about merchandising tools as an add-on, add-product upsell to customers, dealers. We don't think of it that way here. Our marketplace monetizes when cars get sold. And we're really excited about helping dealers sell more cars. And whatever we can do to help them promote themselves effectively, to tell their story in a positive way, we're all for that. And we're not -- we have no intensions to try to upsell viewers with any new add products in that respect.

Got it. That's helpful. And then more, Chip. If you could speak on a broader industry level, some of your competitors haven't done as well this year. And would you say that you're taking share from some of your competition? Or is more of the industry shifting online? Or both? And maybe you could think about where we are right now as far as the penetration online being for (inaudible) auto sales.

Yes. When you look at the online automotive industry and the relative relationships of the competitors in it, you can look at it both from an audience and revenue perspective. So over the last couple of years there's been a significant shift in audience share and penetration toward TrueCar. Just this year we've seen our penetration among new car buyers rise 11 percentage points according to the J. D. Power study I cited during the call.

So we're seeing movement of consumer eyeballs across the internet toward the experiences that meet their needs the best. Any many car buyers in America want to see real pricing, up front, on actual cars available for sale. And I say real, I mean transactable prices, not MSRP list prices. And we provide the best view of that important information in America. And that's why I think that we have the wonderful audience momentum we've got.

Now, how does that translate into revenues? It translates into revenues over time. And when audiences move, advertising and marketing dollars tend to shift, too. But it's not an immediate effect. So we're looking good growth here now as we -- this was the first quarter we started to reaccelerate the growth of TrueCar after seeing declining growth rates for the past several quarters. That was one of our major goals when we started the year, begin turning around that decline. We're seeing it happen now. We're very excited about that.

And we're seeing acceleration again in the fourth quarter and, like we said, we believe we'll be a double-digit top-line revenue growth company next year. And where is that money coming from? The competition. Which one? I can't really specify. But we're not growing the market. We're pretty confident of that. But the deals migrate to where they're getting the most value, just like consumers do. But we're pleased to see the momentum shifting towards TrueCar over the last couple of quarters.

Thanks. That's really helpful, Chip.

Kyle Evans; Stephens.

Mike, you highlighted R&D and G&A as lever points next year on that double-digit growth. But I noticed you did not mention sales and marketing. How should we think about that one as we look at the model for next year? Thanks.

Yes. It's funny. I said that because we had really good leverage in Q3 on sales and marketing, so I didn't intend to leave it out. I think we'll have operating leverage throughout all our cost structure next year. So when we roll out guidance for next year after the next earnings call, I think you'll see leverage across all three -- tech and development, sales and marketing, and G&A.

So this quarter in particular if you look at the sales and marketing -- what I like about this quarter is we did invest across the board, but we saw leverage in the cost structure, and in particular in the sales and marketing side. Our investments in our dealer sales organization are embedded in that. So to be able to make the kinds of investments that we've made, which we clearly think are improving the business and our relationship with our customer base and still have a pretty substantial 3% to 4% improvement as a percentage of revenue is good. We won't have that kind of high level of investment forever. And so there should be quite a bit of leverage there. The efficiency in terms of -- if you look at the other parts of the cost structure, it's consumer marketing and our partner marketing. And I think both of those areas are showing leverage as well.

So no doubt in 2017, I think all parts of our cost structure will be coming down as a percentage of revenue.

Great. Thank you.

There are no further questions at this time. I will turn the call back over to Management for any closing remarks.

Thanks, everybody, for calling in. We're excited about the progress we're making, but very much aware that we have a lot of work to do. And we're happy to spend more time with you later one on one.

Thanks, everyone.

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. We thank you for your time and participation and you may disconnect your lines at this time. Have a wonderful rest of the day.