TrueCar Inc (TRUE) 2016 Q4 法說會逐字稿

Greetings, and welcome to the TrueCar Incorporated fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Ms. Alison Sternberg, Vice President of Investor Relations. Thank you, Ms. Sternberg, you may begin.

Thank you, operator. Hello, and welcome to TrueCar's fourth-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 first quarter and full year of 2017; management's beliefs and expectations as to future events, plans and strategies; our ability to increase units, revenue and adjusted EBITDA, improve margins and accelerate innovation; the outcome of outstanding litigation; and our multi-year operational initiatives and investments, including the expansion of our marketplace to include upper funnel shopping, research, and digital retailing and the resulting benefit; the development of new dealer and consumer tools, and product launches and improvement. 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 factor sections 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 annual report on Form 10-K for 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 statement, except as required by law.

In addition, we will also discuss GAAP and certain non-GAAP financial measures. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measures are set forth in the Investor 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. Today is the first anniversary of my initial earnings call as the CEO of TrueCar. We've come a long way, and we're now at an exciting inflection point, as we move from 2016 to 2017.

When I joined the Company, we were facing three major challenges. First, we had negative sentiment with the broader dealer community in general, and specifically with many of our important dealer customers. Second, we were not innovating our product quickly enough, against unmet consumer and dealer need, and thus were not generating conversion improvement. And finally, we had some internal operational challenges that limited our ability to scale the business.

As a result, year-over-year revenue growth was decelerating, bottoming out in Q2 of 2016, at only 2%. We focused on four key levers to address these issues, and to get the business growing again.

First, we launched our dealer pledge, which included significant changes to our product, advertising messages, and business practices. As a result, we were able to win back AutoNation, and attract over 2,000 other high-quality dealers to the TrueCar platform.

Second, we overhauled our dealer organization, in order to improve the level of service, and training that we provide to our dealer customers. Over the course of 2016, we added over 100 people to our field team.

Third, we shifted our new car product focus, to focus on vehicle-specific pricing offers known as VIN-based pricing, where consumers get real prices on actual cars. And we improved the messaging on our site, to make the benefits of registration more clear to consumers.

And finally, we improved the internal operations of the Company, especially in our technology group, as we embarked on a major re-platforming project, and in our planning and internal reporting function, to functional alignment and coordination across the business. In short, we began to put in place the technologies, people, and processes that will enable us to scale TrueCar.

The net effect of this work is clearly improving operational metrics and financial performance, and we are experiencing a new-found momentum in the marketplace. We are nowhere close to declaring victory, but we exited 2016 with significant velocity.

Allow me to share some highlights. From Q4 2015 to Q4 2016, these things happened. First, our certified dealer count grew 23% to a record 13,748 franchise and independent dealers. Second, our backyard coverage grew from 38% to 51%, which means that over half the time, the closest dealer to a search visitor is a TrueCar certified dealer.

Third, the research-driven product changes that we implemented on our new car experience drove our new car conversion rate up by 15%, which means that more consumers are seeing the benefits of registering on TrueCar, in order to view transparent upfront pricing offers from our dealers. We're still rolling out research-driven product changes across all of our partners and experiences.

Fourth, our new car retail market share grew 13%, from 3.7% to 4.2%. And finally, we continued to execute on our replatforming initiative, and launched our used car experience on the new platform late in the year. This will enable us to innovate more quickly on our used car experience in 2017.

As a result of these improvements, in the fourth-quarter, we generated excellent results on key operating and financial metrics. TrueCar dealers transacted nearly 219,000 unit sales across our platform, up 19% over Q4 2015. Revenue was $74.1 million, up 17% over Q4 2015, and we generated $5.8 million of adjusted EBITDA, versus $0.2 million of adjusted EBITDA during the fourth quarter of 2015.

As you can see, in 2016 we successfully reaccelerated top line growth in our business, and saw a significant improvement in our dealer relationships. At this point, I can say that I am very confident that we now clearly understand, and have our hands placed securely on the practical levers that will enable us to continue to drive double-digit rates of unit and revenue growth for some time.

Now I'd like to shift your attention to, where we are taking the business, not just in 2017, but over the next two or three years. On prior calls, I've indicated that beyond just re-energizing the Company in the short-term, I believe TrueCar has a much larger opportunity to become the clear market leader in the online auto space. To do this, we need to broaden our experience to help consumers at every step, along the car-buying journey, thereby reducing the need for them to visit other information sources, and creating meaningful efficiencies for consumer, dealers, and manufacturers.

Our mission is to be the most transparent brand in automotive, and to serve as a catalyst that dramatically improves the way people discover, buy, and sell cars. Today, our marketplace delivers on only a part of the promise embedded in that mission.

First for consumers, we now offer market pricing context, VIN-based pricing, and exclusive OEM incentives, and a dealer network that stands behind competitive pricing offers. For dealers, we now provide a large exclusive [in]-market audience from TrueCar and it's affinity partners, an efficient, accountable and profitable marketing channel, and customer service training and tools designed to help them leverage the platform. The progress we have made in 2016 is just a start toward the realization of our larger ambition.

Starting this year, and for the next couple of years, we will be focusing on expanding our offering to deliver a best-in-class, modern, online automotive marketplace, that provide significantly more value to consumers, dealers and OEM, as the consumer goes on a car-buying journey. That consumer buying journey starts with shopping and research, often called the upper funnel. It then moves into inventory and dealer selection and pricing, which is where we focus today.

Finally the journey ends, with an in-store purchase that needs to be more convenient, more transparent, and more online-enabled than ever before. After doing extensive research, which included considerable collaboration with dealers, we believe there are four important benefits that TrueCar, working with dealers has to deliver, in order to build this kind of marketplace that exists in some other verticals, but not yet in our category.

The first is end-to-end engagement, so the consumer can rely on TrueCar during the entire process, from shopping to showroom. The second is an intelligent outcome, so the consumer gets the right vehicle, from the right dealer, at the right price.

The third is transparency from VIN-based pricing, in the context of market pricing, as well as the total deal with an out-the-door-price, that includes trade-in, incentives, and financing, whether leasing or buying. And finally, full accountability, with the consumer providing robust reviews all along the process, and the dealers operating on an accountable economic model built on their success.

We believe that TrueCar is uniquely positioned to deliver these four critical benefits to the market, end-to-end engagement, intelligent outcome, transparency and full accountability. Today, we're the clear market leader, and we focus exclusively on the middle part of the car-buying journey. This is where the consumer finds inventory, selects a dealer, and does price discovery.

According to the latest J.D. Power new auto shopper study, nearly 60% of auto internet shoppers visit TrueCar, or a TrueCar affinity site. And for the third consecutive year in 2016, TrueCar and its affinity sites had the highest proportion of site visitors, making it the most useful site.

This year we'll build on that leadership position, and start a major effort to build out our upper funnel shopping experience, the start of the car buying journey. We will also begin to help our dealers better market their high quality in-store purchase experience, which is the end of the car buying journey. We'll do this, while continuing to improve upon our core business.

Let me walk through these specific initiatives. First, the upper funnel shopping experience. This year, we have already begun building new and exciting shopping tools for consumers.

The current third-party shopping and content sites have not innovated, and have some significant shortcomings. Because those sites monetize traffic with intrusive display advertising, we believe that the consumer experience suffers significantly. Consumers have to click through too many pages to see content, they have a difficult time comparing vehicles, and there are limited consumer reviews.

On these shopping sites, there's no easy way to connect to a local trusted dealer, who has the inventory the consumer wants, at a price that make sense in the context of market pricing. So in this environment, the consumer has to stop researching, and go somewhere else, in order to proceed along the path to purchase. We are going to take a different approach.

TrueCar will lean into the vehicle transparency, by providing consumers with what they want, fully searchable robust, verified owner ratings and reviews, with no advertising clutter, and a clear connection from research to a great buying experience. Based on my 20 years of experience in this industry, I strongly believe that this new approach will be welcomed by millions of car buyers, who have been frustrated for many years, by the clunky display advertising-driven shopping experiences they get from the old-style first-generation automotive shopping sites, which essentially just took that traditional media ad impression model, and put it online.

We are already investing in the key technologies and content to enable our new vision, and we are working with one of our major affinity partners to launch the first version of this experience later this year. From the dealer standpoint, this experience should significantly increase traffic in our funnel, and bring more qualified buyers into their dealership, at the right time in the process, when they are ready to buy. This added traffic will feed our transaction engine, and generally TrueCar will get paid only when consumers and dealers successfully transact, and when OEM incentives are successfully redeemed.

After upper funnel shopping, the second extension to our business will be the in-store purchase experience and digital retailing. Like many other players in our industry, with the speed of market moving towards true digital retailing, where consumers cannot only select cars, and receive pricing, and get a value for their trade-in, but also do much of the work online that has been, up until now done in the dealership, such as check their credit, apply for financing, consider and compare lease and purchase alternatives, and pencil a deal that includes trade-ins and incentives, down to the monthly payment.

We want to facilitate the adoption of digital retail and technology, in a manner in which our dealer customers can operate profitably, while offering a better consumer experience. We will take the first steps into digital retailing in 2017, but this is clearly a multi-year effort, that will involve significant collaboration with dealers. And there is an extensive ecosystem of companies that we will be working with to deliver on the experience.

And finally, we will continue to invest to improve upon our core business, in the middle part of this consumer journey, focused on inventory and dealer selection, and pricing. This is where we focus today, and we have identified many improvement opportunities, against which to innovate.

In 2017, we intend to build on our success last year. Specifically, we intend to first, launch improved used car search tools, and enable dealers to provide more transparency about their used cars, in order to further fuel this rapidly growing part of our business.

Second, continue to improve benefit messaging, in order to encourage more consumers to register, in order to fully participate in our marketplace. Third, enhance our dealer selection algorithm to optimize the matching of consumers with dealers, leading to better consumer experiences, and higher close rates for dealers. Fourth, develop new analytic tools to enable our dealers to make smarter pricing decisions.

Fifth, improve our consumer engagement platform, so the dealers can better inform consumers after they register on TrueCar, about changes in inventory availability, pricing, incentives and financing offers. Sixth, help dealers improve the ways they price, merchandise, and present their inventory to consumers. Finally, enable dealers to showcase their unique experiences, trained personnel, and the benefit that make them a TrueCar certified dealer.

As you can tell, this is going to be an important year at TrueCar. When I joined the Company, we needed to fix key issues around our dealer relationships, our product and our operations, and prove that we can grow again. Having made significant progress on all these fronts, we are excited to embark on an ambitious plan to create a best-in-class, modern marketplace for all of our constituents, that uniquely leverages our transparency-based business model, our closed loop accountable system, our unique affinity partner relationships, and our growing TrueCar brand.

I joined TrueCar because I believe we had the ability to build a $1 billion-plus revenue business, with high margins, that will be the leader in the category. We did much in 2016 to position ourselves to begin seriously reaching for that goal. And this year, we are going to make the investments to enable us to continue to innovate on most important unmet consumer and dealer needs.

Before I turn it over to Mike, I'd like want to comment on our recent participation at the annual NADA Convention in New Orleans. I had the opportunity there to meet with nearly 100 dealers over four days. It was a dramatically different, and much more positive experience than NADA 2016, when I had just joined the Company.

Last year, the negative sentiment from dealers was palpable. This year, many dealers complemented us on the changes we have been making.

I want the dealer community to know, that I continue to appreciate their valuable feedback and insight, and that we hear them loud and clear about the work we still need to do. This is why our team will continue to work tirelessly to innovate in ways, that can enable us to be a stronger catalyst, that helps our dealers grow their businesses in a very competitive market.

Lastly, I want to thank again all of the hard-working people at TrueCar, who make these strong results possible, and to let all of you know how excited I am about the work we are doing, and our vision for the future. And now Mike will explain in more detail, our financial performance and present our 2017 outlook for the current quarter and the full year.

Thanks, Chip, and good afternoon, everyone. We're pleased with the financial results in the fourth quarter of FY16, and believe we have set the stage for strong growth and margin expansion over the next few years. Let's start by reviewing the financial and operating high points for the fourth quarter of FY16, and then for the year as a whole.

Revenue in Q4 of 2016 totaled $74.1 million, up 17% over Q4 of 2015, and above our revenue guidance of $70 million to $72 million. Units in Q4 were 218,807, up 19% year-over-year and above the high end of our 205,000 to 210,000 unit guidance. By channel, TrueCar brand has accounted for 94,459 units, up 25% year-over-year.

USAA members accounted for 68,645 units, an annual growth rate of 16%. In the month of December alone, USAA sales were approximately 26,000 units, an all-time high. As we enter our 11th year as partners with USAA, there is still much to do, and we are excited to continue supporting USAA's outstanding auto experience program.

In our other partner channels, powered by strong growth at Sam's Club, JPMorgan Chase, and caranddriver.com, units for the quarter were 55,703, up 15% year-over-year. New car units were 152,082, up 14% year-over-year, and accounted for 70% of total units. Used car units totaled 66,725, up 33% year-over-year, and accounted for 30% of total units.

Adjusted EBITDA for the fourth quarter of 2016 was $5.8 million or 7.8% of revenue, significantly above adjusted EBITDA of $0.2 million in Q4 of 2015, and ahead of our guidance of $2 million to $3 million. For FY16, revenue totaled $277.5 million, an annual increase of approximately 7%. Units for 2016 totaled 806,953, up nearly 8% over FY15.

By channel, TrueCar accounted for 343,151 units, up 8% year-over-year. USAA members accounted for 254,241 units, up 9% from 2015, and our other partner channel totaled 209,561 units, or year-over-year growth of 5%. The new/used mix was 69% new, and 31% used in 2016, compared to 76% new, and 24% used in 2015.

Adjusted EBITDA for the year was $15 million or 5.4% of revenue, up from $7.6 million or 2.9% of revenue in 2015. So we added $7.4 million of adjusted EBITDA, and increased our adjusted EBITDA margin by 250 basis points year-over-year.

Our franchise dealer count was 11,151 at the end of FY16, up 23% over the end of FY15. Our independent dealer count was 2,597 at the end of Q4, up 25% year-over-year.

Turning to our key funnel metric, monthly unique visitors were 7 million in Q4 of 2016, up 19% compared to Q4 of 2015. Conversion rates across the Company grew sequentially to 5.4% in Q4, from 5.2% in Q3. Within the TrueCar new channel alone, conversion rates grew from 5.7% in Q3, to 6.1% in Q4, an all-time high.

Given the improvements in our dealer network, we grew our close rate 59 basis points sequentially to 19.2%. As a result of the conversion and close rate improvement, net funnel efficiency was 1.04% in the fourth quarter of 2016, up 7% sequentially.

Monetization in the fourth quarter was $320 per unit, essentially flat with the third quarter. TrueCar acquisition spend was $16.2 million for the quarter, up 17% year-over-year, while cost per sale was approximately 7% lower at $171 per unit. These are the best results we have achieved in our branded business during the last three years. For the full-year, our cost per sale was $177, versus FY15 when cost per sale was $197, a 10% improvement.

Turning to the expenses and margin. All of the following financial metrics are on a non-GAAP basis, unless I state otherwise. Gross profits for the quarter was $68.1 million, and gross margin was 91.9%. For FY16, gross profit was $253.3 million, and gross margin was 91.3%.

Technology and product expenses were $11.9 million or 16.1% of revenue in Q4 of 2016. That compares to Q4 of 2015 when tech and product expenses were $13.3 million or 21% of revenue. For FY16, technology and product expenses were $47.9 million or 17.3% of revenue, compared to $43.4 million and 16.7% of revenue for FY15.

Sales and marketing expenses were $39.9 million or 53.8% of revenue in Q4 of 2016, as compared to $34 million or 53.4% of revenue in Q4 of 2015. Breaking down the Q4 marketing costs in more detail, during the quarter we spent $16.2 million on TrueCar channel customer acquisition, incurred $9.4 million of partner revenue share and marketing costs, and recognized $14.3 million in headcount and other costs. In 2017, we plan to invest approximately $5 million on new creative, reflecting feedback from our market research, and providing more insight into the benefit of using our service, and educating consumers about the expansion in the TrueCar product, per Chip's earlier comment.

For FY16, sales and marketing expenses were $148 million or 53.3% of revenue, as compared to $147 million or 56.6% of revenue for FY15. General and administrative expenses totaled $10.5 million for the quarter or 14.2% of revenue, compared to $10.4 million or 16.3% of revenue in Q4 of 2015. For FY16 general and administrative expenses totaled $42.4 million or 15.3% of revenue, compared to $39.1 million or 15% of revenue for FY15.

Adjusted EBITDA was $5.8 million or 7.8% of revenue in Q4 of 2016, compared to adjusted EBITDA of $0.2 million or 0.3% of revenue in Q4 of last year. And as mentioned before, for FY16 adjusted EBITDA was $15 million or 5.4% of revenue, up from $7.6 million or 2.9% of revenue in 2015.

The non-cash items excluded from adjusted EBITDA for Q4 of 2016 were depreciation and amortization of $5.5 million, and stock-based compensation of $6.7 million. Adjusted EBITDA for Q4 of 2016 also excluded $0.3 million of litigation costs, and $0.4 million of additional real estate exit costs related to the consolidation of our Santa Monica operation in the fourth quarter of 2015.

GAAP net loss for the quarter was $8 million or a net loss of $0.09 per share, as compared to a GAAP net loss of $27.4 million, or a net loss of $0.33 per share in Q4 of last year. Our GAAP net loss for the year was $41.7 million, or a net loss of $0.49 per share, as compared to a GAAP net loss of $64.9 million or a loss of $0.79 per share for FY15.

Our non-GAAP net loss for the quarter was $0.5 million or a non-GAAP net loss of $0.01 per share and that compares to Q4 of last year, when our non-GAAP net loss was $5.2 million, or a non-GAAP net loss per share of $0.06 per share. For the year, our non-GAAP net loss was $11.1 million or a loss of $0.13 per share, compared to FY15 when our non-GAAP net loss was $11 million or net loss of $0.13 per share.

As of December 31, 2016, our cash balances totaled $108 million, an increase of almost $5 million from last quarter, reflecting Q4 operating cash flows of $5.4 million. We have no outstanding borrowings on our $30 million line of credit.

Now I will share our outlook for 2017, and for the first quarter of the year. We're proud of what we achieved in 2016, and are building on it. In 2016, we grew units by 8%, and revenue by 7%, and we scaled our adjusted EBITDA margin by 250 basis points.

In 2017, we believe we can approximately double the annual growth rate on revenue and unit. We also believe that we can scale operating margins by as much as another 250 basis points in 2017, meaning we expect to increase adjusted EBITDA dollars by as much as 60% this year over 2016. Our goal is that adjusted EBITDA will grow each quarter in 2017, versus the same quarter in 2016.

We continued to focus on expanding adjusted EBITDA margin for the full-year, while making the investments required to build out the strategic initiatives that Chip discussed earlier, that will set us up for continued revenue acceleration, and even greater margin expansion in 2018, and beyond.

For FY17, we estimate a range of 920,000 to 930,000 units, which represents year-over-year growth of 14% to 15% over FY16. We expect to generate $315 million to $320 million of revenue, or year-over-year top line growth of 13.5% to 15% over FY16. Finally, we estimate producing adjusted EBITDA of $20 million to $24 million, or adjusted EBITDA margins of between 6% and 8%.

In addition, for the year, we estimate non-cash stock-based compensation to be in the range of $28 million to $32 million, compared to stock-based compensation expense of $24.7 million in FY16. For FY17, we estimate depreciation and amortization expense will be approximately $23 million to $28 million, compared to $23.3 million in FY16.

For the first quarter of FY17, we estimate a range of 205,000 to 210,000 units, representing year-over-year growth of approximately 17% to 20%, and revenue of $71 million to $73 million or year-over-year growth of 15% to 18%. We estimate adjusted EBITDA of $4 million to $5 million, up from $1.1 million in Q1 of 2016.

And now, we will open it up for questions.

(Operator Instructions)

Steve Dyer, Craig-Hallum.

Thanks. Good afternoon, and nice quarter, guys.

Thank you.

Your guidance for 2017 sort of implies, accelerating revenue growth in a year, when I think SAR probably be flat at best. Can you help us think about the sources of that? In other words, how are you thinking about increase in NFV, how are you thinking about number of new dealers, et cetera?

Thank you, Steve, Chip here. So over the past year, we've been focused heavily on improving the yield, through the user experience funnel. You saw us begin to make some changes in the third quarter, which produced a beginning of a sequential acceleration, Q3 over Q2. We continued those changes in the fourth-quarter, and that's what's producing the acceleration of our revenues, along with the improvement in our dealer network, and the good work that our client success team is doing with our dealers in helping them close more sales, from the leads that we send to them.

So a combination of those three factors, improved conversion, more better dealers, better training of dealers, so they could improve close rates, that's what's really driving revenue growth of the Company at the present time and we believe that we can continue this growth, even though the industry overall, in terms of new car sales is likely to be flat in 2017. Our audience continues to grow nicely, and as our yield improves through our funnel, our revenues will grow accordingly. So we're very confident that we'll be able to continue growing, in the face of a flattish sort of industry environment.

Hey, Steve, it's Mike Guthrie, I just want to comment. So you saw the market share gains in the back half of the year for us. We talked about it in our prepared remarks on the new car side. So that, we obviously see that continuing, for many of the reasons that Chip mentioned, in terms of the improvement in our funnel.

The second one, is obviously on the used car side. Chip talked about an even greater emphasis on used and we've continued over the last, say 10 quarters to grow that business somewhere between 30% and 40% on a year-over-year basis. And so, continuing to grow in the used car side of the business, where we saw a fairly low share overall, will help us grow faster than the market.

And then, finally we did -- we've done well on 2016 over 2015, we did well with the independent dealers, which is mostly reflected on our used car side of our business, and we had pretty healthy growth on OEM incentives year-over-year. So those are things that can also augment the growth rate of our revenues, versus where the overall new car retail business is going.

Got it. Yes, that's very helpful. As you think about the dealer count, you keep adding pretty significantly, while at the same time, clearly not sacrificing the quality. Do you have sort of a number in the back of your head -- are there still opportunities, whether it be geographically, brand-wise et cetera?

As I said on earlier calls, we don't have a specific target, or a feeling, or optimum dealer count in our models at this point. We do know that there are still at least a couple thousand dealers in America that would be very helpful to have in our network.

And we have a dealer sales and service team that's laser-focused on serving our current customers well, and also attracting the dealers that we don't have, that we think would be -- would provide for productive additions to our network. So we expect to continue growing the dealer count, although we don't have a specific target for the year.

Got it. Okay. And then, one last one from me, and I will hop back in the queue. The operating margin and EBITDA margin guidance is good, it's expanding again this year. And yet, you're still obviously spending heavily on new initiatives.

As you look out sort of past this year, does it feel like EBITDA margin improvement will be sort of linear to that target model, or are you kind of take it year-by-year, or will there be an inflection point? I guess, I'm trying to get at, is this there outsized amount of spend, here on the front end?

Steve, it's Mike, there is more -- there will be more investment spend in 2017, with a more clear benefit against the spend, coming in 2018 and 2019. So I think it's probably safe to say, as we think about the model, as going out a couple years, the acceleration in margin, 2018 and 2019 in terms of just basis points of margin, should be higher in those years than what you'll see this year. So this year we want to expand margins, while making a lot of really critical investments, I think the rate of investment, while it won't stop, it'll certainly slow down in 2018 and 2019 versus this year and then, I think you'll see the margin expanding at an even greater rate.

Great. Thanks very much.

Thanks.

Mark Mahaney, RBC Capital Markets.

Thanks, Three questions, please. First, I think you added something like 100 employees, as part of your dealer outreach effort. Where is that total count now? And how do you think about whether you've got the right number in place now, or is that something you will need to continue to build up?

And then, Chip you had mentioned these two adjacent market opportunities, in terms of the upper funnel shopping experience, and the in-store digital retailing experience, can you help us think through what the TAMs associated with those two are? We've all thought about what the TAM is with your core business, but how do you think about the revenue opportunity, with those two adjacencies that you're talking about? Thank you.

Sure. So the dealer team has approximately 200 -- I'm looking for the number -- 259 people in it right now, that includes our Austin office support team, as well as our field team, and we'll be adding another 30 or 40 people there this year, to get to close to 300 people, as we fill in more holes in our sales team, as well as we're still working towards the full level of client success manager coverage that we aspire to. So we'll be adding more of those people too.

We've very happy with the results, and the returns we've already got on the investment, and the people we have put in place, in terms of ability to attract more better dealers to our network, service them better, help them improve their close rate. And also we're seeing a significant reduction in the churn rate, among the dealers who have received client success manager coverage in the last quarter or so.

Regarding your questions on the TAM, I think the way to think about this is, that as we expand in the upper funnel, we're going to be attracting a larger share, and more engagement of car buyers in America, because it will be shifting attention away from these display ad-driven sites that I described, that have these chopped-up user experiences, and don't have the clear connection between your search, and vehicle purchase, and pricing that we have. So as they do that, we're going to be able to, really do three things.

We are going to serve a need that exists, due to the competition not doing nearly as good of job as the consumers want. Second, we're going to be addressing the need of audiences in our marketplace today. Well over half of the people who come to TrueCar now, have not yet made a final decision about the car they want to buy, so they're still in research mode.

So we're going to be able to -- we'll have engagement tools that will enable them to want stay with us longer, visit fewer sites. And as a result, our transaction machine, transaction engine will process these people, enable them to get connected to the dealer they want to buy the car from, and the transaction will flow through our platform, where otherwise it might go elsewhere.

And the third big benefit to doing this is that, it will increase our organic traffic, because without display advertising, and with a heavy emphasis on what package the consumer use of vehicles, we believe that the search engines will find our content to be very attractive.

And another advantage is, as you go end-to-end in this experience, it grows our overall brand. So monetization really, will continue to flow through our existing business model mechanism, which is transaction-related revenues, both subscription and pay-for-sale, as that flows from the upper funnel.

And as it relates to digital retailing, like I said we're going to be collaborating with dealers, and we're going to be working with a number of different providers, software players and others in the ecosystem that will be rapidly developing in this segment of industry called digital retailing. Which enables essentially consumers to get estimates and monthly payments based upon their own situation, their down payment, their credit quality, the value of their trade, their preferences on loan or lease, and terms related to that.

So there's a big move in our industry. We believe we can pull these features into our experience, by working with our dealers, our funnel team will have those features on their site, and we will point to them through TrueCar. But again, our main path of revenue growth will be through expanding market share, of the number of sales we contract through our platform, rather than monetizing software per se, in the digital retailing environment. So that's how we think that -- the TAM is huge, we have a 4.2% market share, 4.3%? 4.2%? So that's the biggest TAM, really, the opportunity that sits right front of TrueCar, and we're excited about that.

Thank you very much, Chip.

Ron Josey, JMP Securities.

Great. Thanks for taking the question. So Chip, lots of things to talk about, and think about on this call. But I wanted to ask specifically on your commentary around the dealer selection algorithm. I think you talked about improvements there. Can you expand a little bit more, in terms of how you think this could improve, ultimately do you get to one dealer that's super-targeted with the right car that someone is looking for?

And then Mike, you talked about cost per sale coming in at $171 a unit. What's interesting is, I think advertising costs appear to be in line with expectations, as users grew 19%, which really highlights the improvement in conversion rates, I believe. So could you just talk about potential leverage in sales and marketing going forward, and then ideally, if you can help us understand where cost per sale might get to longer term? Thank you.

So Chip here first. So we had a lot of opportunities this year to improve conversion and close, by making specific improvements in the way in which our site enables consumers to configure cars, to be introduced to dealers, and the way in which dealers are enabled to communicate with consumers, after they've become registered prospects at TrueCar, lots of them.

The dealer selection algorithm was one of them I mentioned in the call obviously, and that algorithm enables us to introduce one consumer to three dealers. And today, we use a variety of factors for that, and we're the process of rebuilding the underlying code behind the algorithm. It's part of this transition through our Capsela project to modernize TrueCar. That code base is pretty old.

And so, we can clearly see some ways to introduce new factors into that algorithm, and to make it smarter. And as we do that, dealers will get more high quality leads that they can close better, and consumers will get matched to a better local dealer. So and we're happy, we're excited about the improvements we can make down in the bowels of that algorithm.

Hey, Ron, it's Mike. On the cost per sale comment, you're absolutely right. It's same spend, more units is definitely focused on the conversion improvement, but that's why that happened. And so, it's nice to have some improvement in the product, because obviously makes those marketing dollars more efficient. We talked about that for a long time.

I think the number can continue to go down, I think it will continue to go down. This year, we are not forecasting very much incremental marketing spend in our numbers and not only -- this year, it's mostly been about the conversion improvement, but with all the dealers that we're adding, the improvement in the network, the coverage, the training. I think we also see and expect there to be leverage on the close rate side as well. So that really does help us continue to make those marketing dollars very efficient.

Way back, when we went public three years ago, we said we're targeting $150 cost per sale. And I think that number is still very much within reach, and probably gets here faster, than we might have otherwise expected. So I still think it's a pretty good target for us. But it is, as you suggested, it's about -- it's getting there, because of the conversion rate improvements, and close rate improvements.

Great. Thank you.

Brian Nowak, Morgan Stanley.

Hi, guys, this is [John Lanterman] on for Brian. Just a question on your mix, as it stands today, and then maybe looking forward three to five years. You guys kind of break it down with the TrueCar brand name versus USAA and other partner.

And then also new versus used. As you guys grow going forward, what do you think the bigger drivers of growth here? And it looks like all three TrueCar, USAA, other partner are going pretty well in 4Q. Do you think the runway is pretty strong over the next three to five years?

Yes, John, we do. I think, we look at by channel and new versus used, as we want to keep growth going in all of our channels, TrueCar, USAA and the branded channel, and we see a lot of opportunities to continue growing there. And then, on the new and used car side, I think the same thing. We're, as we mentioned earlier on this call, we're fairly underpenetrated on the used car side. We've been really pleased with the growth over the last say, 10 quarters. And then this fourth quarter, we really re-accelerated growth in the new car side, up to about 14%.

So yes, we do want to keep growing on both sides. I think it's probably pretty safe to say, that we're likely to see the new/used mix continue to move a little bit more towards used. But we have every intention of trying to grow the new car side at high rates of growth as well.

And then on by channel, TrueCar, every channel grew well this quarter, this past quarter. I think we're optimistic about all of them going into 2017, really for different reasons. On the branded channel, I think we're optimistic because we have seen some great product improvements. We believe there ar close rate improvements in front of us. It has made marketing spend more efficient, it does allow us to be a little more aggressive there to drive growth, so we feel good about where TrueCar branded channel is.

As we look at the USAA channel, we had great growth in the fourth-quarter. We had a record in the month of December. And as I said on the call, we're 11 years into the partnership, and still think there is quite a bit that we can do together with our partners at USAA, to continued to make car buying better and better for their members. And so, even though that's a very large channel, we still look at the penetration rates there, and we know that they are reasonably low. So it's on new car and used car, so there is much more work to do there.

And then on the other partner channel, which had been a bit of a challenge for us in 2014 and 2015, our team has done a great job of bringing on some exciting new partners, that are producing really great growth. And so, JPMorgan Chase, Car and Driver, and then Sam's Club. Sam's Club has been on the program a little longer, but those three partners have really produced an awful lot of growth for us, and we're optimistic going into 2017.

If I had to handicap it, I would say that part of our business will be the fastest growing on units in 2017. But all the other channels do seem to be set up to have a good growth characteristics. And remember, that the product changes in the dealer, network changes that we make, and the improvements we make there, benefit all of our channels. So in all the cases, we should be able to do better, as a result of better conversion and better close.

Got it. Thanks, that's helpful. And then for used, do you think that could ever overtake new, or do you think it will be primarily a new car company?

Well, I mean, we are 70/30 today, and it was 80/20 about a year ago, so we've obviously moved fairly dramatically in the last four to six quarters towards used car. Given the size and scale of the used car market, it's almost impossible to answer that question, any other way than, yes, at some point it could be bigger, just because the market itself is so much larger.

We really like those businesses. We see clear differentiation in the way we approach the market. And as we expand the business in the ways that Chip described earlier, and our upper funnel strategy, and then at the dealer, those are beneficial to both the new car business and the used car business. So at the end of the day, yes, we -- the mix shift will be what it will be. Our goal is to deliver the best experience to the consumer that we can, and produce the most revenue growth or unit growth on both sides of the business and it will be fun to watch the mix shift move over time.

Thanks.

Kyle Evans, Stephens.

Hi, thanks. Two high levels, and then a model question. Chip, could you give us an update on the competitive landscape in your core business? There was a time when some of your competitors were throwing words around like pricing promise?

And then, maybe talk a little bit about what you're competitive landscape could look like, as you move into the top of the funnel in the dealership in digital buying experience? And then, a few more after you're done. Thanks.

Sure, thank you very much. I would say that in our core business, we feel really good about the competitive answers we bring, relative to the existing players. Most of whom, are what I call, old-style first-generation automotive internet companies, that have thrived on transporting the old traditional media model of ad impressions, and putting it online, that either are charging for it through lead fees or [scale ad] impressions or subscription related to ad impressions. We really like our closed loop success based model, that is supported with our strong transparency we provide consumers, and the affiliate partners which gives us exclusive flow of consumer car shoppers, coming to our platform.

So the competitive advantages we have, I believe are strong. And the growth in our site, the ranking once we get through J.D. Power's survey as, the largest new car shopping site in America, I think is good evidence of the progress the Company has made, although obviously we're not standing on our laurels here. So we feel good about our ability to capture share, by evolving the business as it exists today. However, there's a much bigger opportunity out there that we can attack I believe, and that is the development of the first true end-to-end experience that has the attributes of the marketplace that I explained, transparency accountability, our consumer-focused reviews and information.

And so, as we look at the top of the funnel, we're going after, and targeting competitors who have these display ad-driven business models. And our approach will be to avoid that style of business, because it's not consumer friendly and it enabled us to hold on to, have a stickier relationship and engagement with to many car buyers that come to TrueCar, who haven't yet decided on the car they want to buy. So we think there's a real good opportunity to disrupt how the upper funnel works in America today, for the betterment of car buyers, dealers, and manufacturers.

And as it relates to digital retailing, and the in-store experience, like I said, that's a big trend in our industry anyway. We're going to embrace it in a way that's positive for consumers, and supportive of how dealers choose to provide those services. It's very much depends upon -- for a consumer to get a view of what the deal on a car might be, before visiting a dealership very much depends upon how the dealer chooses to play that, in that realm.

There are many players now, who are helping dealers on their own website, and many large dealers like AutoNation have a terrific experience called AutoNation Express, where they're enabling people to essentially configure and buy a car online. And so, we see a big opportunity to play there, in a variety of ways, that we will become much more specific about, as the year goes on.

Would you -- what a great segue. My next question was an update on AutoNation. They were in, they were out, they were back on a trial basis with 50 or so dealerships. It seems like they're all the way back in now, could you just give us your take on where you are with that important partner?

Yes, AutoNation is a terrific customer of ours now. We're delighted to be able to serve them, and call them a valued customer in our network. Nearly all of their stores are live and active today, and we're working closely with them, through a dedicated client service team that supports them both in their Fort Lauderdale, Florida headquarters, as well as through all the regions.

So today their relationship is much better than it was. We are working with them on a number of initiatives that will enable them to maximize, capitalize on the volume of leads we're sending to them, convert them better in their local stores, as well as provide information that will be useful to them in their own online services for consumers. So we're very pleased where the relationship is now, and are thankful that they were willing to give us a chance to show what we can do, which is what they did last year.

Lastly, you guys, the Company got quiet about the OEM incentive opportunity last year, when you were trying to put the dealership network back together. I think I heard you mention, no less than three times on the call today. Can you talk about where you are on that, and maybe be as specific as give the contribution in the quarter, and then maybe give an outlook on that? Thanks.

Yes, hey, Kyle it's Mike. The only incentive business in the fourth quarter was about $5.8 million revenue stream, still concentrated pretty heavily on programs for USAA and for Sam's Club. The business, it grew very nicely for the year as a whole and certainly in the back half of the year on a year-over-year basis, it grew very nicely.

So it's still an important part of broadening our business and our revenue stream and like I said, we've done well with some of our big partners like USAA and Sam's. And there are few other smaller programs, but the lion's share of that revenue is with those two partners.

We believe there's still a large opportunity with OEM targeted incentives in our business. We had to prepare the way though this past year, with the dealers to improve the relationship, that would enable the manufacturers to be comfortable about working with us, more of them. We are still running those railroad tracks.

So I believe over the next few years, we'll continue to attract manufacturers into this marketplace, due to its inherent capability of providing a targeted incentive in a private environment that's measurable. And given the huge funds that are expended in this category, over $40 billion of incentives are applied every year now. There's a big opportunity for TrueCar to help these clients invest that money in a significantly more efficient way than they do today. But that is a case that, beyond our current clients still remains to be proven, and that's why you're not hearing us talking about it now. But we will -- we're going continue to work diligently in that area, and we have high hopes for it in the future.

Thanks.

Douglas Anmuth, JPMorgan.

Hi, this is Lina Rudashevski on for Doug. So you all have an exciting vision of an online auto market place, that doesn't exist today really. And so, just to help conceptualize, what that would look like a bit better? If I go to TrueCar now, how will it look different, once you implemented everything that you want to, and how would my experience be different, if I were to buy a car now, versus in a more marketplace kind of -- I don't know environment?

Sure, Lina. Thank you for the question, a really good question. Because you're right, the marketplace that I've described doesn't exist in America today.

Today we play an important role, in what I call the middle of the car shopper journey, when folks -- when people are getting close to scoping out an inventory, selecting a dealer, and doing price discovery on a vehicle they want to buy. That's where we live, that's where we're strong, that's where we've made a name for ourselves. But the consumer car shopping journey today is a multi-faceted thing.

People today are navigating many, many sites to try to figure out which cars they should buy. They try to piece together the information that they need, in order to determine what vehicle is right for them and then, when they get close to buying a car, then they're often needing to visit other sites that show inventory, or present information about dealers, and many of those are lead forms. So -- or they have a chance to visit dealer websites, which helps them get close to the inventory that the local dealers offer.

But there is not true end-to-end experience today in the automotive online world, and it's clear that consumers want that. There's a big connection -- disconnection between the online experience at different levels, and from online to offline. And those of us in the industry have been studying this for a while, have seen this disconnection and you can see why, you understand why the industry has struggled with it.

We believe as a player that does a good job in the middle of the journey, we have the opportunity to move upstream and downstream. I think we are in the best position, third party, to do that in an effective way. The upper funnel like I said, is ripe for innovation. It's operating today, the same way it did in the late 1990s, when first generation big sites, that usually have proved business legacy, went online. And they did it with information pages and display ads.

And as a result, the experiences those sites provide are all chopped up. They require more steps than are necessary, for the consumer to get to the information, and the answer they need, because the business model is based upon, more display ads means more revenue. We believe that needs to be fixed and it's interesting, this one of the last big categories in America where truly consumer-centric car shopping and decision assistance doesn't exist.

So we have a plan, and we've got the tools, we've got the content. We've had --put the talent in the Company to build a much better consumer upper funnel experience, that will address the real use cases that people have, in very practical tangible ways, such as how do other considerations, based on things that are important to me? How do I side-by-side compare cars on the criteria that are important to me?

How do I understand what other real car buyers think about the car that they own, what they like and don't like, and how might that on a specific criterion that's easily found and searchable, help me make my decision on the car I want to buy? Today, consumer reviews are reverse chronological typically, and they're basically a data dump that consumers have to wade into. So it's just such a huge opportunity in the upper funnel, and that's why we're moving in that direction.

So I think over time you'll see a marketplace evolve that has the attributes I mentioned earlier, truly end-to-end engagement, intelligent outcome that help people get to the -- make quickly the decision they want to make, full transparency, from -- about the vehicle, about market pricing, about dealer experiences, full transparency. And then lastly full accountability, where the consumer is able to understand the benefits of different vehicles, based on what other people believe about the car, and where dealers experience accountability by only having to pay based on the success they receive from the marketplace.

So those marketplace attributes do not exist. And I believe that the market is crying out for that kind of a major leap forward. And I think if you look at all the third-parties in America, TrueCar is in the best position to innovate against this unmet need quickly, and bring it to market over the next two or three years, in a way that will dramatically improve car buying and selling, all across America.

Thank you so much for the color. That's really, really helpful. Thanks.

Sameet Sinha, B Riley.

Yes, thank you. A couple of questions. First, the -- your guidance assumes about 16.5% growth in the first-quarter, and for the full year you were talking about 14.5%. But if I remember correctly, you spoke about accelerating growth even in 2018. So can you help us, are there any new initiatives which are planned for the second half of the year, which will drive that acceleration in 2018? Because obviously, it implies some sort of a slow down in growth, and maybe it's the development of this marketplace?

Second, kind of on this marketplace topic, is talking about reviews. Wouldn't that put you in kind of conflict with some of your dealer partners, and even your OEM customers, if consumers come, and give negative reviews?

And my last question is, the technology and development cost, on a cap basis, saw that stayed kind of flat over the last couple quarters, despite the fact that this was a major investment period for you. Is that something we can expect should go up in the next couple of quarters, while you finish up on Capsela and other initiatives, and then kind of dip down, or stay flat after that?

Hey, Sameet, it's Mike. So on, let's take them in reverse order. On tech and invest spend, it has been flat generally through 2016, on a quarterly basis, up on a year-over-year basis. In the 2017 model, you should expect that it will go up a little bit. We're obviously, what we're really doing is moving people out of re-platforming, and into some of the new initiatives, and then back selling people against the platform work.

So we'll make investments in technology, personnel in the first couple of quarters. So I do expect that number to go up a little bit, although as you point out correctly, it's been basically flat across all the four quarters in 2016.

As it relates to the growth rates, and then I'll turn it over to Chip, to talk about the marketplace model and reviews, and things like that. Yes, right now, what we're obviously dealing with, is we're -- growth rates are comparing a year in 2016, where Q1 and Q2 were fairly weak quarters for us. So in a sense, we are competing against weaker quarters in Q1 and Q2, and then we're really competing against much better improvement, a much better performance rather in Q3, and the quarter we just reported, Q4.

So just logically, as we are modeling the business, it's quite a bit easier to model high growth rates in Q1 and Q2, versus the back half of the year. Having said all that, of course, what we're doing in the first couple of quarters is making these investments. And it continues to give us time to generate the improvements that we talked about, make some progress on some of the initiatives that Chip talked about.

Not all of them are new products, right? A lot of that, what he talked about, was things like new car, and substantial improvement to our core experience. And so, we anticipate that we'll start to get some benefit from those things in the third and fourth quarters.

But for modeling purposes, given the discontinuity of the quarters in 2016, it's not surprising, you would show slightly higher growth rates at the front half of the year, than in the back half of the year. But we'll, obviously do our best to catch up, as the year goes on. Is that make sense, is that what you were asking?

Yes, thank you.

And Sameet, thanks for the question about consumer reviews, and whether it's a conflict with our paying customers, dealers and manufacturers. Today in the automotive industry, like in many new verticals, the consumer reviews are quite prevalent in many different places. And so, it's become accepted on the part of the sell side of our industry, that consumers review cars, and they review purchase experiences at local dealerships.

And so, we don't see it as a conflict actually, and we'll be able to navigate, and create a review platform for cars, that consumers will very much enjoy, and that the dealers and manufacturers will say, yes it's credible. And so, they'll work with us on it, actually, they'll won't stand in the way of it, and we believe that we can continue to have positive relationships with both dealers and manufacturers, while we do this.

So the big thing is the opportunity, to improve how the reviews work for consumers, how usable they are, and how quick you can get to the information you want. And that's what we're all about. And so, we've got a team working on that right now, and we're excited about the early insights from that team, that will enable us to produce a really great product later this year.

And just quickly to follow up, Sameet, on your earlier question about investment in tech and development. As I look at 2017 as a whole, there really -- it's pretty simple in our business. The things we're adding, or that we'll be investing in terms of headcount, will really be in two areas. We will continue to invest in the dealer organization, and we will be investing more, as I mentioned on tech and development.

Our dealer investments, really accelerated across the course of last year. So we are pulling into 2017, some back-end loaded hiring from 2016. And then Brian and the team are continuing to invest, to ensure that we've got the right dealer organization, and sales operations organization, in the whole team. So this year, the investments will be split fairly evenly between technology and dealer, I would say, with slightly more dollars going into the dealer organization year-over-year, meaning 2017 over 2016, than in technology.

Great. Thank you.

Blake Harper, Loop Capital.

Yes, thanks. Chip, in your prepared remarks, you talked about trade-in, financing. Just wanted to understand, will you be monetizing those financing leads to financial institutions? And just wanted to understand, maybe the model, of exactly how you monetize some of those -- more of those touch points, including the trade-in and financing in your new model?

Thank you, Blake. Like I said, we're going to be -- we're in the process now of researching and building those tools. We're collaborating with the number of players in this ecosystem called, digital retailing as we speak.

As it relates to financing, I said in the past that we believe in facilitating only, indirect financing where the dealer arranges financing in the dealership, and we're not in the business on TrueCar.com of providing direct to consumer finance that could potentially be monetized. And we honestly, don't see monetizing, the dealer's ability, or the likely -- the usual practice of facilitating a loan. It just comes with the transaction, it's their business. They make money there. It's important to them and I don't see us being involved in that part of the business financially, in any way.

And as it relates to trade-ins, we have some ideas on our drawing boards right now, but we're not really prepared to talk about them yet. That will be coming in the next quarter or so.

Okay. Thanks for clarifying.

John Blackledge, Cowen and Company.

Great. Thanks for the questions. From 2013 through 2015, 1Q revenue was up versus 4Q. High end of revenue guide is $1 million below the 4Q revenue. So just wondering if there was some conservatism baked in there? Then from a monetization perspective, should we considered $299 for used -- or $299 for new and $399 for used? Because the unit mix in the monetization rates, there's a bit of a difference between the reported transaction revenue number, and looking at the mix? So just wondering if there's something going on there? Thank you.

Thanks, John. In terms of the monetization, I think we have been -- overall monetization has been hanging in pretty tightly in the $320, $323 range. And I think it's been reasonably flat for about 8 or 10 quarters. So I think that's the right way to think about overall monetization. Your other question was around the, I'm sorry --what was the first part of it?

Yes, there's a lot of questions tonight. The sequential revenue guide is -- at the high end is a touch below, and you were above the -- you -- it grew sequentially 2013, 2014, 2015.

Yes, in Q1. Yes, the, historically, from the industry standpoint, the quarters are fairly similar. Q4 and Q1 are fairly similar. They're the lower end of the year, Q2 and Q3 are the -- simply the strongest periods, and Q1 and Q4 are seasonally a little bit weaker.

So we have a fairly healthy compare, positive compare versus Q1 of last year. And we're kicking off the year, and quite honestly, the models were kind of all over the place, so it was a good time for us to get everybody into same place, and this kind of growth rate in Q1 that we're forecasting is still pretty healthy and we'll -- I guess, it remains to be seen whether or not that's conservative guidance, but the quarters tend to be fairly similar.

Thank you.

There are no further questions. At this time, I will turn the call back to management for any closing remarks.

Thank you everybody for sharing your time with us. We're excited about the future here at TrueCar. Appreciate you logging in, and happy to take any questions from you at any time. You can call us here in Santa Monica. Take care.

Thank you, ladies and gentleman, this does conclude the call for today, and we thank for your time and participation. You may disconnect your lines at this time. Have a wonderful rest of the day.