TrueCar Inc (TRUE) 2017 Q4 法說會逐字稿

Greetings. Welcome to the TrueCar Fourth Quarter 2017 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, Alison Sternberg. Thank you. You may begin.

Thank you, operator. Hello, and welcome to TrueCar's Fourth Quarter 2017 Earnings Conference Call. Joining me today are Chip Perry, President and Chief Executive Officer; and John Pierantoni, Interim 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 2018 and longer term; management's beliefs and expectations as to future strategies, events and planned product offerings; completion of our technology replatforming initiative; its impact on conversion and close rates; and our ability to innovate the expansion of TrueCar trade, its dealer network and customer base; our ability to grow our OEM offerings, including incentive revenue and redemptions; the impact on our future results of plans to grow USAA channel revenue; our ability to build an end-to-end experience; increase revenue in our core dealer business and grow dealer count and the outcome of outstanding litigation. These 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 2016 and our subsequent quarterly reports on Form 10-Q filed with the Securities and Exchange Commission and our annual report on Form 10-K for 2017 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. TrueCar closed fiscal year 2017 by exceeding the revenue and margin guidance we gave in our last call.

For the fourth quarter of fiscal 2017, revenue was $83.1 million, above our guidance of $81 million to $83 million, and adjusted EBITDA was $7.5 million, above our guidance of $6 million to $7 million. For the year as a whole, revenue totaled $323.1 million, up 16% year-over-year, and adjusted EBITDA was $28.9 million or 8.9% of revenue, up 92% year-over-year. We also closed out the year growing our new car retail market share to a record 4.7%, up 12% year-over-year.

Now let's review our progress since our last call. First, USAA. One of our primary areas of focus coming out of Q3 2017 was the level of business with our largest affinity partner, USAA. I'm pleased to report that, as we expected, USAA business started to show improvement at the end of the fourth quarter. The changes USAA made enabled members to move more equally into the car buying service, and as a result, units in USAA channel came in better than expected. More importantly, through our detailed planning sessions with USAA, we have developed initially agreed-upon business plan that we believe will return this channel to high single-digit unit growth in fiscal 2018. We look forward to continuing to partner with USAA in support of their mission to serve members and their families.

Second, dealer pricing and monetization. Another key area we focus significant energy and attention on is the growth of our core franchise dealer business, as measured by both monetization and revenue per dealer. I'm pleased to report that we made progress in this regard in Q4 2017 as well. During third and fourth quarters, we continued to better align pricing to be more commensurate with the value we've been delivering for the segment of dealers who are underperforming versus target. Our disciplined efforts in Q4 2017 contributed to franchise revenue of $64.2 million or 12% growth year-over-year. That said, we did experience some churn associated with these efforts, but we've seen healthy reactivation rates in recent months, following the cancellations, and we anticipate dealer count growth to return in 2018 accompanied by good rate integrity.

Third, OEM. Turning to our OEM business. In Q4 2017, TrueCar ran OEM incentive programs for more manufacturers than ever, with Ford and Hyundai testing our platform and joining our established programs with FCA, Mercedes and Volvo. Over the course of the fiscal year 2017, TrueCar drove nearly 87,000 OEM targeted incentive redemptions, generating over $23 million of revenue, up 22% over the prior year.

Fourth, trade pilot. In Q4 2017, we continue to pilot our trade product in the northeast and in Florida. And given its success, we have set a target of having a nationwide network of dealers in place by the end of 2018, with initial ramp-up process set to begin in late Q2 of 2018.

Fifth, Capsella. We have made significant progress towards completing our Capsella technology replatforming project. The progress we've made to date has enabled us to add new features to our consumer site, including more priced new car inventory and vehicle ratings and reviews in addition to new features for our dealer tools, including an updated sales analyzer product and a soon-to-be-released VIN-based pricing management system. Finishing Capsella will provide the foundation to unlock powerful new growth levers that we believe will drive very significant increases in both conversion rate and close rate and further stimulate our OEM and trade-in products beginning in 2019. It will enable us to further build out the major components of our end-to-end experience, particularly our new upper funnel research and discovery product, in addition to incorporating new, leading-edge digital retailing tools in our post-prospect experience. While we are finishing the Capsella replatforming in 2018, we will be testing and validating our end-to-end experience concepts, and we anticipate rolling these out beginning in 2019.

As you can see, we've made significant progress throughout 2017. However, there is still much to be done. In 2018, we'll be focusing on 4 key areas: first, completing Capsella; second, launching new OEM incentive programs; third, rolling out our trade-in product nationally; and fourth, executing on strategies to grow our core dealer business.

Let me provide more detail around each of these focus areas, as they are key components of our plan for 2018, and we believe they will set us up for 20%-plus top line growth and healthy margin expansion in 2019.

I just noted that finishing Capsella will help us fuel growth in our OEM business. This year, we are expecting to see over 30% growth with new and existing OEM clients who are leveraging our current private targeted offer and live prospect office products. As the Capsella project is completed, it will enable us to scale these products even more rapidly and will allow us to apply data science, machine learning and behavioral targeting to help our OEM customers spend their marketing and incentive dollars even more efficiently. This will provide significant value to our clients, leading to even more rapid revenue growth in 2019.

Trade-in is another high potential growth product. Our pilot in the northeast and in Florida last year confirmed that there is strong demand from both consumers and dealers for our TrueCar trade-in tool because our product, developed in conjunction with Galves Accu-Trade, provides market-leading transparency, competitively differentiated valuation insights and third-party credibility that strongly aligns with our core pricing value proposition. We are now building up our launch team and targeting a network of approximately 1,000 dealers by year-end, enabling us to turn on national promotion of the product across all of our media channels and affinity partners by early next year. We expect to generate small single-digit million dollar revenues from this product this year, and this will lay the foundation for a much larger customer base and significantly more revenue in 2019.

While we're building out these new products, our dealer team will be focused on 3 key go-to-market strategies to increase the growth in our core dealer business. First, we will continue our efforts toward aligning pricing with the value we've been delivering based upon our fully accountable business model. Second, we will further enhance our acquisition strategy to strategically fill coverage gaps across the network, resulting in a better match of supply and demand at the micro level. And third, we will be rolling out a new strategy around independent dealers designed to grow our independent dealer base and increase new car inventory. These are the key components for our plan for the year, and I'm very excited about the foundation we are continuing to build. We believe our work this year will set us up for a strong 2019, with top line growth back over 20%, along with significant margin expansion.

Now John will walk you through our financial results and guidance in more detail.

Thank you, Chip, and good afternoon, everyone. Revenue in Q4 '17 totaled $83.1 million, up 12% over Q4 in '16 and just above our revenue guidance of $81 million to $83 million.

For all of fiscal '17, revenue was $323.1 million, up 16% over fiscal year 2016.

Revenue from franchise dealers totaled $64.2 million in Q4 '17, up 12% over Q4 of last year. Franchise dealer count grew 9% year-over-year to 12,142, and monthly revenue from franchise dealer was $1,751 in the quarter, which was flat year-over-year.

For all of fiscal '17, revenue from franchise dealers totaled $248.5 million, up 15% over fiscal year 2016, and monthly revenue per franchise dealer was $1,778, which was also flat year-over-year.

Revenue from independent dealers, almost all of whom are on a subscription billing plan, was $8.5 million in the quarter, up 23% over Q4 of last year. Independent dealer count was up 15% year-over-year to 2,979, while monthly revenue per independent dealer grew 6% year-over-year to $954.

For fiscal year 2017, revenue from independent dealers was $32.1 million, up 34% over 2016, while fiscal year 2017 monthly revenue per independent dealer was up 12% year-over-year to $960.

OEM incentive revenue was $6 million in Q4 of '17, up 46% sequentially over Q3 of '17, given the addition of new programs with Ford and Hyundai during the quarter.

For fiscal year '17, OEM incentive revenue was $23.3 million, up 22% from $19.1 million for fiscal year 2016.

And finally, forecasts, consulting and other revenue was $4.5 million in Q4 of '17, up 8% year-over-year.

For fiscal year '17, forecasts, consulting and other revenue was $19.3 million, up 7% year-over-year.

Units in the quarter totaled 239,521, up 9% year-over-year and just below our guide of 240,000 to 245,000. For all of fiscal '17, units were 952,834, up 18% year-over-year.

In our branded channel, we generated 103,926 units in Q4 of '17, up 10%, and 403,299 units for all of fiscal year '17, up 18% year-over-year.

Other partner, driven by strong growth at Chase, Sam's Club and U.S. News, contributed 76,620 units in Q4 of '17, up 38% year-over-year, and for all of fiscal year '17, our other partner units were 288,228, up 38% over fiscal year '16.

USAA produced 58,975 units in Q4 of '17, down 14% from last year.

For the year, USAA members bought 261,307 vehicles via the car buying service, up 3% over fiscal year '16.

The new/used mix was 68.6% new and 31.4% used in fiscal year '17 as compared to 69.4% new and 30.6% used in fiscal year '16.

Monetization in Q4 of '17 was $328 per unit, up from $306 per unit in the third quarter and up from $320 per unit in Q4 of last year. The sequential increase was primarily due to the increased incentive revenue from the Ford and Hyundai programs previously mentioned.

Monetization for the year was $319 per unit versus monetization of $322 per unit in 2016.

Turning to the expenses and margins. All of the following metrics are on a non-GAAP basis, unless otherwise stated.

Gross profit in Q4 of '17 was $75.8 million, up 11% from Q4 of '16, while gross margin was 91.2% in Q4 of '17 versus 91.9% in Q4 of last year.

For all of fiscal year '17, gross profit was $296 million, up 17% from the prior year, and gross margin was 91.6%, up from 91.3% in fiscal '16.

Technology and product expenses totaled $13.4 million or 16.1% of revenue in Q4 of '17 versus $11.9 million or 16.1% of revenue last year. For fiscal year 2017, technology and product expenses were $51 million or 15.8% of revenue as compared to $47.9 million or 17.3% of revenue in '16.

During 2018, we expect a slight uptick in technology and product expense as a percentage of revenue, as we continue to invest in our Capsella technology replatforming project.

Sales and marketing expenses were $44.8 million or 53.9% of revenue in Q4 of '17 as compared to $39.9 million or 53.9% of revenue in Q4 of last year. Within our sales and marketing expenses, we spent $15.1 million on television, radio and digital to drive TrueCar channel customer acquisition versus $16.2 million this time last year. Cost per sale for Q4 declined by 15% from $171 per unit last year to $145 per unit this year.

For fiscal year '17, sales and marketing expenses totaled $175 million or 54.2% of revenue as compared to $148 million or 53.3% of revenue.

During 2018, we're targeting a similar level of acquisition spend as '17, and we plan to shift a portion of our spend from TV and radio to digital marketing campaigns.

Partner revenue share and other expenses were $12.9 million in Q4 of '17 versus $9.4 million in Q4 of last year, with increased cost driven by the large increase in units from our other partner channel.

For fiscal year '17, partner revenue share and other expenses totaled $48.7 million, up 25% from $39 million in the prior year.

Finally, headcount and other costs were $16.8 million, up from $14.3 million this time last year. These increases were primarily driven by headcount-related costs on our dealer team.

For fiscal year '17, headcount and other costs totaled $65.2 million, up from $48.4 million in 2016.

General and administrative expenses in Q4 were $10.2 million or 12.3% of revenue compared to $10.5 million or 14.2% of revenue in Q4 of '16.

For fiscal year '17, G&A expenses totaled $41.1 million or 12.7% of revenue, down from $42.4 million or 15.3% of revenue in fiscal year 2016.

Adjusted EBITDA for the fourth quarter of 2017 was $7.5 million or 9% of revenue, up from $5.8 million or 7.8% of revenue in Q4 of 2016. The items excluded from adjusted EBITDA for Q4 2017 included depreciation and amortization of $5 million, stock-based compensation of $9.6 million and the add-back of $3.8 million of certain litigation costs, which include the cost of resolving our lawsuit with the CNCDA in December.

GAAP net loss for the quarter was $8.5 million or a net loss of $0.08 per share as compared to a GAAP net loss of $8 million or a net loss of $0.09 per share in Q4 of last year.

Our fourth quarter 2017 GAAP net loss includes a $2.6 million nonrecurring tax benefit related to the recently enacted tax reform. This benefit was due to the combined impacts of the reduction in corporate tax rate and the reduction of the valuation allowance on our deferred tax assets.

Our net loss in fiscal year 2017 totaled $32.8 million or a net loss of $0.35 per share as compared to a net loss of $41.7 million in 2016 or a net loss of $0.49 per share.

Our non-GAAP net income for the quarter was $4.9 million or $0.05 per share as compared to a net loss of $0.5 million or a loss of $0.01 per share in Q4 '16.

For the year, our non-GAAP net income was $7.2 million or $0.08 per basic share and $0.07 per diluted share as compared to a loss of $11.1 million or a loss of $0.13 per share in 2016.

We continue to maintain a strong balance sheet with cash balances totaling $198 million at the end of the year.

Now, I will share our outlook for 2018 and the first quarter of the year.

For fiscal year 2018, we estimate a range of 1,030,000 to 1,050,000 units, which represents unit growth of 8% to 10% over fiscal year '17. We expect to generate revenue of $360 million to $365 million, which represents year-over-year top line growth of 11% to 13%. Here is the breakdown of key components of revenue.

We expect 2018 dealer revenue to be $309 million to $312 million or 10% to 11% growth over fiscal year '17.

In 2018, we expect OEM incentive revenue to be between $30 million and $32 million or growth of 29% to 37% over fiscal year '17. With tougher comps in the first half of '18, we expect much of this growth to come in the back half of the year.

And with national rollout of trade-ins, we expect to generate $3 million of revenue, and we're targeting approximately 1,000 dealer customers by the end of the year.

Looking back over the past 2 fiscal years, we've nearly doubled adjusted EBITDA each year and grown margins from 3% to 9%. This reflects the significant operating leverage in our business model.

As Chip noted earlier, this year, we'll focus our efforts in 4 key areas: one, investing in our technology team to ensure that we complete Capsella; two, launching new OEM incentive programs with current and new OEM clients; three, rolling out our trade-in product nationally; and four, executing on key strategies to grow our core dealer business.

As we invest in these areas in 2018, we expect to grow our adjusted EBITDA margins by 100 to 200 basis points over fiscal year 2017. We estimate producing adjusted EBITDA of $36 million to $40 million or adjusted EBITDA margins of between 10% and 11%.

In addition, for the year, we estimate noncash stock-based compensation expense to be in the range of $44 million to $48 million compared to stock-based compensation expense of $32.2 million in fiscal year 2017.

For fiscal year 2018, we estimate depreciation and amortization expense will be approximately $21 million to $25 million compared to $22.5 million in fiscal year '17.

For the first quarter of fiscal 2018, we expect units to be in the range of 230,000 to 235,000, representing year-over-year growth of approximately 6% to 8%. We expect revenue to be in the range of $80 million to $82 million or a year-over-year growth of 6% to 8%. And we expect adjusted EBITDA to be in the range of $6 million to $7 million, producing adjusted EBITDA margins of 7.5% to 8.5%.

And now, we will open it up for questions.

(Operator Instructions) Our first question is from Doug Anmuth from JPMorgan.

This is Ashwin on behalf of Doug. I want to go back to the discussion on pricing for dealers. Thank you for the color on the independent dealers. I guess, most of them are on subscription plans now, but any more color on what's the mix -- overall mix between subscription versus, let's say, pay-per-sale? And how are you thinking about that in '18? And my next question is on incentive revenue. If I got the numbers right, you're thinking OEM revenue to be $30 million to $32 million. Was that -- is that in line with something in your plans a few months ago, anything that has changed in the last few months? Any more color on how you got to that number would be really helpful.

Sure. Thank you, Ashley (sic) [Ashwin]. Chip Perry here. As we drive for dealer growth in our business, we continue to work hard to enable the dealers who are on what we call performance plan to receive strong value from our service, and the revenue growth we realize from that category flows from our prospects growth, flowing to the unit growth at the individual store level. We have a mix of what we call performance-based versus pure subscription of about 50-50 in our business today. So what you're seeing is an ongoing effort on our part to realize the benefit of the increased number of prospects ascending to dealers. We worked hard on it last year. We'll continue to do that this year, and that's why we're expecting to show continued good revenue growth from our franchise dealer body. With respect to our OEM incentives, we're showing really nice growth this year. It's a buildup coming from the great work of our leader in that segment, Mike Darrow, as well as his team. And we're very bullish about that effort this year, because we were able to land 2 important new clients in the fourth quarter, Ford and Hyundai, who tested TrueCar for the first time. And we expect after they absorb the results of that work, to have participation, strong participation from at least one of those OEMs, in addition to our current base of OEMs, FCA, Mercedes and Volvo. So this is a very strong potential growth channel for the company. I don't think we've really changed our outlook in a fundamental way, but we've seen that we are building a momentum. Last year, we signaled that we had high hopes for it, and we're starting to see that hard work pay off.

Our next question is from Mark Mahaney from RBC Capital Markets.

If I could throw in 3 questions, please. First, I don't know if you mentioned used cars as a -- the used car marketplace as an opportunity in 2018. If you could just go over that. Is that a bigger or a lesser growth priority for you? Second, I know you talked earlier on about the issue (technical difficulty). But could you just go through that again, what the -- the dealer count seemed to be pretty sluggish in the quarter, and how fixable those problems are? And then, finally, third, on the OEM incentives business going forward. Are there other major OEMs that you can realistically add this year? Or do you think that you've got the majority of the ones that you'll have? Just help us think through how much bigger that business can be long term.

Sure. Thank you, Mark. So used cars are a big part of our plan for 2018. We continue to show really good growth in that category. Our used/new car mix is roughly 2/3, 1/3 now. Used is still growing faster than new, will continue to grow faster than new. We're making a priority in a couple of ways in 2018. One is, we're rolling out a new independent dealer strategy, which will involve us targeting more smaller independent dealers. We do very well with the larger ones. And we'll be incorporating some software solutions, which we tested this past year, into our mix of offerings with these dealers. They've been very well received, so we're quite optimistic there. We saw good growth in the fourth quarter [there] independent dealer team on a gross basis by increasing the number of salespeople in that category. We saw a nice payoff for that, so we're going to keep pouring fuel to the fire there. And when it comes to the used car business overall, we have improvements in our product that we believe will produce some nice incremental growth for us in used car. These improvements include changes in how we filter used cars for consumers in the search process. We're creating improvements in the way the consumers can contact dealers when they're interested in buying a new -- a used car. Historically, we've required everybody to fill out a form, a lead form before they can contact the dealer. We're going to start opening it up, so folks can just pick up the phone and call the dealer and enter -- express their interest to the dealer in that way. As well as some other improvements in our used car curve, price curve and other aspects of the experience, which we think we'll continue to grow that part of our business. So used is -- will continue to be an important thrust at TrueCar. With respect to dealer count, we did see a slowdown in the fourth quarter. Like I said on the call, that reflects rate adjustments that we made in the fourth quarter that caused some churn, but in retrospect and looking back, I believe it's quite healthy churn, because in the cohort of dealers who accepted the subscription rate increases that we asked them to pay based upon the volume increases that they've seen in their business, driven by our countable closed-loop model, for the folks that receive those increases, they accepted, on average, about a 28% increase. So even though we experienced some churn, we were able to show our value to the dealer. And we're starting to see a nice, healthy reactivation rate among the dealers that left us. So overall, I feel like we're doing very well with monetizing our -- the strong value of providing our dealer body. On your third question, Mark, about major OEMs, as I mentioned, we have had good success with Ford and Hyundai. They both liked the results. They're in a natural mode now of evaluating, absorbing those results. And this is a category in which when we work with our clients, it's a longer sales cycle than with our dealers. We go through a stage when we discuss our business and their needs and reach strategic alignment on how we can work with them. Second, we do pilots, like we did with Hyundai and Ford. Third, we then roll out programs after they absorbed the results of those pilots. So we're quite encouraged by the positive feedback we received from the pilots last year. So this year, we're expecting at least one of them to come back. And hopefully, we'll have more join the fold. We actually have a very strong pipeline of interest by OEMs in working with our 2 very efficient incentive products, one is called private target offering, the other is called life prospect offer. So we're excited about this area very much. And like I said, 30% growth this year, we expect, and even faster growth in 2019.

And our next question comes from Steve Dyer from Craig-Hallum.

A couple of quick ones. As it relates to units, a lot of the strength in the industry in Q4 came really from an outsized strength in Florida and Texas based on hurricane replacement. How did your, I guess, dealer exposure in those areas either help or hurt you?

Well, I would say, Steve, that we did well in those areas. I don't think we experienced anything abnormal in either of those areas as those geographies recovered from the major catastrophes of last year. Obviously, there was a replenishment of inventory in both those areas, essentially a surge in growth. We matched what was happening in the industry. We didn't see anything abnormal in TrueCar as a result of those storms.

Okay. And then as it relates to monetization, really strong quarter, and guidance has implied really strong 2018. I'm wondering if you can bucket that, just generally speaking, between some of the changes you're making in rates as well and then versus the OEM incentives.

Okay, Steve. So if you look at our monetization, you can look at it both on an overall basis, including OEM revenue, or excluding OEM revenue. When you exclude OEM revenue, it was up about 1% in 2017. We expect to be about the same this coming year. And then when you include OEM revenues, obviously, monetization grows much faster in the middle single digit. Monetization is a function of both how our marketplace performs in terms of producing prospects that turn into sales as well as our ability through our field efforts to work with the dealers who are on subscription plans to compensate TrueCar commensurately with the volume growth that we're generating for their stores. So I'm quite confident that we've got the right set of strategies, go-to-market strategies in place and the right kind of focus on our dealer team in training and consulting with our dealers, helping them understand how efficient TrueCar is, helping them make the most of our service through improving their close rate. We're the only third party in America that actually works with the dealers to improve their close rate, to help them sell more cars. Our client success team doesn't try to upsell them to some new ad product or the like. So they're there to help client win. And that whole process is really working great. And as a result, we continue to be quite bullish in our ability to -- in an environment where many dealers are looking to become more efficient and cutting back on some [vendors] that we're seen as more efficient, and we're able to hold our solid monetization rates.

Great. And then lastly from me. I'm wondering if you're able or willing to give USAA cadence sort of by quarter and then any commentary as to how it's gone so far this year.

Well, as you know, USAA experienced a dip with TrueCar last year when they made a change in the user experience in the third and fourth quarters. It came back nicely, as I indicated, toward the end of the fourth quarter. We're seeing some continued improvements. They're making ongoing changes both in the new and used car parts of their portal, which are enabling us to project this kind of very positive trend back towards single digit. I think I should wait until after this quarter to explain what happened in this quarter and what we -- how we see that cadence rolling out over the course of the year.

Our next question is from Ron Josey from JMP Securities.

So I wanted to ask, Chip, I believe you said, our work this year will set up -- set us up for a strong 2019, and also, you gave some guidance around 20% top line growth and margin expansion. But can you help us understand the bridge to get there? Meaning, what products should we focus on, the timing around that? I think we've been talking about top of funnel, for example. And so what can we expect around there? And maybe, as we get closer to '19, should we start to see traffic growth ramp here, I think you grew 3%, as incentives ramp, to your point, the back of the year? So any insight on the bridge to 2019 will be helpful. And then just lastly on TrueCar Trade with the rollout plan nationally, can you talk about the monetization model here? That would be helpful.

Sounds good, Ron. Yes. We're very bullish about 2019 because we can see clearly the potential in 3 major areas to significantly increase our revenue growth. One is, obviously, in the trade program you just mentioned, we're doing national rollout over the course of the year with an expected 1,000 dealers or so monetizing at a rate of between $500 and $1,500 per store and transaction fees of [$2.99] whenever there's a sell-only transaction. We believe that, that product will strongly increase in 2019 once it's fully rolled out over basically a launch here this year. That product has been very well received in the test markets. Consumers like it, dealers like it. Dealers have told me it's a hot product. They can't wait to get their hands on it. So I'm very bullish about that. Second piece is OEM. Like I said, our OEM team is building up a strong pipeline. Our goal is to have more OEMs working with TrueCar more deeply. So some OEMs work with us only with our affinity partners, some work with us with our affinity partners and then also leverage TrueCar itself. We're seeing increasing interest in OEMs, and that's why I'm confident guiding to better than 30% growth in that category. And the third key to bridging to 2019 is the growth in our core business. As you know, TrueCar is essentially a units-based business where we drive volume into dealerships, and we get compensated for that volume. We are not dependent upon here significant audience growth to drive strong unit and revenue growth. We have today a market share in our industry of 5% roughly of new car sales passing through the TrueCar marketplace. External research from folks like J.D. Power indicates that more than 50% of new car buyers in America are using TrueCar. So the difference between 5% and 50% is huge. It represents the best opportunity to grow our top line is to enable more consumers to see the value of registering, taking full advantage of all of the content and services in TrueCar and then being introduced to a TrueCar dealer and purchasing their car in a way in which we can receive credit at the dealer level. We have clear line of sight today as a result of the research that we've done to have significant improvement well beyond anything we saw last year or the year before and our ability to enable consumers to see the value of registering in TrueCar in a way that they will want to [fair] use our service. So growing the core business, the core buying service, which is not dependent, not dependent on new ad products or up-sells of existing ad products, which are generally the growth strategies of our competitors. We have no dependency on that. It's a purely volume-based opportunity. And because we represent an efficient form of marketing to the dealers well underneath their average marketing costs, the TrueCar cost is, I'm confident that as we increase volume, we'll be able to help the dealers see the wisdom of investing a larger share of their marketing budget in TrueCar than they do today. So that's where our growth is going to come from in 2019. Very excited about it.

And, Chip, real quick, just quickly on your line of sight. Do you think maybe the consumers can see the value of registering for TRUE that should happen at some point in '18?

We'll be doing some testing of these ideas over the course of this year, but we don't expect to drill them out significantly until our replatforming project is completed later this year. Much depend upon the completion of Capsella. We pursue the Capsella replatforming in a modular fashion. About 75% of all of the features and functions of TrueCar have now been rebuilt into the new environment. What remains are important pieces, including pre-prospect. Pre-prospect is the area that consumers experience before they register. That needs to be rebuilt in order for us to put our hands on this opportunity. It's going well. The progress of that work is going well. And I'm excited and the whole team is excited here about when we finish that, the fantastic ability to encourage more consumers to actually have a fuller TrueCar experience compared to what they do today when 95% roughly of the folks who use TrueCar configure a car, see a price curve, they don't register to -- go all the way through to view dealer inventory and have a chance to be introduced to a trusted, certified TrueCar dealer.

Our next question is from Kyle Evans from Stephens.

Chip, how should we be thinking about dealership growth this year after the down sequential quarter in 4Q?

Sure, Kyle. Like I said, the fourth quarter was really the result of a disciplined set of rate actions that we took in the marketplace, and we came out of it very strong. The dealers who accepted the rate increase are paying us significantly more money, and we've had nice activations. I believe that we will continue to see -- I'm sorry, dealer growth this year, particularly in the second half of the year. We have to go through a couple of cycles of conditioning our clients to when they're in subscription mode and they've seen an increased volume flow through their business to compare the efficiency of TrueCar with other marketing providers and agree to take the higher subscription fee that those volume numbers are commensurate with. So we have one more -- after another cycle of those changes in the first half of the year, I think we're going to see some nice growth in the second half. We have a number of key targeted holes in our network, modest holes that our sales team is focused on, and we're increasing the size of our sales team in selected geographies where we think there is opportunity. So I expect to see about 500 more dealers on our network at the end of this year compared to what we have now. And then over time, I believe we'll end up having about 60% of the dealers in America, which represents about a 15% increase over where -- penetration of where we are now, which should be another couple thousand dealers. So they're out there. And as our products improve and as the demand side of this marketplace continues to energize and the efficiency of TrueCar's solutions to dealers becomes more and more recognized, I believe that more dealers will want to work with us. It's definitely not a diminishing phenomenon, it's an increasing phenomenon. More and more dealers are taking interest. Our dealer pledge has taken root. The reputation and perception of the company by dealers is much stronger. We have positive NPS now compared to negative NPS 1 year, 1.5 years ago, Net Promoter Score. So all of the indicators on the dealer side of this business are very strong and positive.

Great. Are you seeing any change in behavior in California post the CNCDA agreement?

As you know, we had about 50% of all the franchise dealers in California before the lawsuit and during the lawsuit, which kind of indicates from the perspective of the average typical California new car dealer that the CNCDA lawsuit was a nonevent historically. What we've seen is a modest uptick from dealers. We have signed several. We have a nice pipeline of more dealers who are interested. But overall, the California dealers were quite happy with TrueCar in terms of what we're doing with them before, as indicated by, I think, one of the strongest penetrations of any state in the country.

Great. One more and then I'll hop back in queue. How many times a year do you get to reprice the average subscription dealership?

Around the country, we've repriced typically every 6 months. And in California, we're not making any changes this year. We're moving from what we call a performance-based sales guarantee model this year to a flat rate subscription model in 2019, which we expect to have very -- a tiny effect on our business in California.

Our next question is from Chris Merwin from Goldman Sachs.

I just wanted to follow up a bit on Ron's question from before about traffic. And can you just talk a bit about your top of funnel initiatives, how those are progressing? I think you still have a goal of doubling your traffic in the next couple of years, and traffic growth is lower single this quarter. So just curious how you're thinking about the steps you need to take to get there over time. And then -- and secondly, I guess, is a related question. Also in 2019, you talked about significant margin expansion in addition to the 20% growth. And as you think about the size of this category and the opportunity, how do you think about the trade-off of delivering that type of margin expansion not only in '18 but in '19 as well, as opposed to investing in marketing to try to capture more top of funnel?

Sure. Thank you, Chris. So I've said that I believe we can double our traffic over a couple of year period. I believe that's true strongly. It's very much dependent upon our completion of our Capsella project, which will happen later this year. That will enable us to rebuild in Capsella and expand our offerings in the upper funnel part of the shopping journey. So far, we've launched just a small first step. We call it verified owner ratings and reviews of cars, where we have on our drawing board plans to significantly improve how those research pages are presented to consumers, how they're connected to our price report, how they're coded to facilitate strong search engine optimization. And so a good chunk of our growth will come from that. And then also, when we have the full experience, that I just described earlier, ready to go, you can anticipate significantly more marketing by TrueCar to let consumers know what the benefits of using our site are and then how the new changes will benefit them. So I'm quite optimistic that, that kind of traffic growth is in the cards. Like I said though earlier, we can grow our revenues nicely with the existing traffic we have. To have more than 50% of actual new car buyers using TrueCar, it says we don't have an audience issue here, no problem. We have a conversion rate opportunity, meaning only 5% roughly, now 6%, of our consumers actually convert to being a prospect in our system. So that's where the big opportunity lies. We will grow traffic, we will grow conversion, we'll grow top line significantly, well north of 20%, like I said, in 2019. As it relates to margin expansion, when you put that kind of revenue growth on the top of this kind of company, there's clearly an opportunity to both grow marketing, to lean into expansion in a very important, vibrant category called online car shopping and purchasing while also improving margins. So we're dedicated to doing both. We want to -- we believe we'll become the clear leading online automotive destination for consumers over the next 3, 4, 5 years. You have to lock down new car. And the way we're doing it to do that, you have to make used car improvements, which are in our gun sites. We will do those things. And we have unique assets between the transparency model that we provide consumers, which is unsurpassed in our industry, with the large collection of one-way exclusive partnerships, affinity partnerships, pointing their members towards TrueCar. And thirdly, our unique closed-loop attribution model with approvable, efficient marketing ROI for our dealers. All 3 of those things enable us to move toward becoming a category killer, as I said. But one step at a time. 2018 is the year which -- in which we finish Capsella, get this foundation locked in, in a way that will allow us to catapult into 2019 very strongly.

Our next question is from Sameet Sinha from B. Riley & Company.

A couple of questions. So, Chip, can you talk about the used car product? Obviously, that's a highly competitive industry, a number of players there. What will differentiate your product from theirs? Secondly, if you can talk about the marketing spend. As John indicated, that it's going to be flat year-over-year in '18 while you're investing more in digital. So can you talk about the rationale for that? And while unit growth is high single digits, how do you keep marketing spend flat? If you can give us some insight into any sort of new campaigns that you're getting into, that will be appreciated.

Sure. So our used car product is a good, strong product. We were the first in the category to provide a used car price curve with a classified listing. We're going to be doing more of that in 2018. We're going to improve how that curve works. Like I said, we've got -- use our experience improvements that enable us to essentially convert more of the large number of used car consumers who come to TrueCar today. Important one, like I said, is you're moving the registration requirement for used car buyers to fill out a form before they can learn about a dealer's inventory and a dealer's location. That gets us at parity with the other major classified sites. With the ongoing growth of the TrueCar brand, with the ongoing flow of consumers coming from our affinity partners who have strong used car needs, we see good prospects in used car. With respect to marketing spend, how do we grow the top line and units in the face of flat marketing spend? That's your question. The answer is, the same thing we had been doing the last 2 years, which is improving conversion and close rates, that's the biggest opportunity facing -- in front of this company. With 5% of market share and more than 50% of usage by actual new car buyers, we have the buyers. We need to improve our user experience and enable them to see the light on making full use of our service. Like I said, we have a clear line of sight on how we're going to do that in a way that will create a big step function beyond anything we've seen before in 2019. And then your third question was about, I wrote it down, but I can't read my own handwriting.

It's about digital campaigns, why you're shifting dollars from TV to more online campaigns.

Oh, okay. Yes. So we rigorously test all channels, and what we've learned is, is that, in a time which we're focusing our investments in our product as opposed to growing our marketing budget, it's really important to become more efficient with your marketing. And on the margin, we discovered that we have digital channels that can produce better traffic flow more economically than some of the off-line campaigns we've been running. So it's really just a matter of rigorous testing that's moving us in this direction. Like I say though, we expect to turn the corner on this starting in 2019 when our product experience will be much stronger than it is today and we'll have much more significant top line growth, which will enable a much larger investing in marketing to come. So this is a hotly competed category and we know that more marketing we'll be needing over time, and we're excited about [leaning] into that as our business evolves.

Our next question is from John Blackledge from Cowen and Company.

I'm completing the tech replatforming. Will we get any color or see any evidence of it working prior to 2019? And then on a trade-in national rollout, how many dealers would you expect to be participating in the program kind of starting next year?

Okay. So with our tech rebuild called Capsella, we will be able to share with you, as the year evolves, the components that we have been able to successfully rebuild. There's 3 or 4 of them remaining. And we'll be testing pieces of this new experience that I've explained. And as we have visibility of those tests, we'll share some of those results with you. So I think you have to count on us to report back every quarter to let you know how we're progressing there. What I can say is that we have fully dedicated our products and technology teams to this effort. They've organized completely around this project. In the past, we organized in a way and prioritized their work to enable more short-term revenue-producing projects into the mix. This year, we're prioritizing those less in order to ensure that we complete Capsella. It's the prime directive. It's really the most important goal in the company. And we're very excited about getting it done. Our team is excited about it, and we can see the fruits of what that will produce for us when it is complete later this year. With respect to trade-in, we expect to have about 1,000 dealers toward the end of this year, and it will ramp further in 2019. This is a product that depends upon a local team of our -- from our dealer organization touching -- reaching out and touching dealers, explaining to them how this form of transparency and the interactivity of this tool for consumers and for dealers is a strong benefit compared to a legacy products that are in the market. The feedback we received is very strong. Like I said, dealers consider it to be a hot offering. They're willing for it to come to their part of the country. We're staffing up our team today. So it's just a matter of time to be at least 1,000 dealers at this time next year. And it will ramp again strongly in 2019. I don't have a target for year-end '19 yet, but there will be more dealers and significantly more revenue. In order of magnitude, more revenue in 2019 than '18.

Our next question comes from Jon Lanterman from Morgan Stanley.

I have 2. TrueCar branded ad spend was about $145 a unit this quarter, continues to go down. I guess, how are you thinking about this? And maybe why not stay at $150 and drive more units? Is it important to kind of get leverage here? Or kind of what are the puts and takes now and then over the next 3 to 5 years? And then OEM incentive program, you guys currently have 5, recognizing it's early in the opportunity. What's the right number of partners? Is it all of them? Is it a select few? How are you thinking about this?

Sure. With respect to our branded media spend and the resulting cost of customer acquisition, you're right, it is a little bit under $150. That's a result of, over time, us discovering very effective marketing channels as well as improvements in our core product that had enabled us to pull more car buyers through. This is the year, like I said, we're investing more in product than we are in marketing. We will lean into more marketing in the future. Our cost of continued acquisition will rise until the positive effects of SEO start to flow into our business. And then it will likely fall further. So it's a metric that we watch closely. We're happy to see where it is. But it's not one we're trying to either drive down or expect it to rise much more this year. With respect to the OEMs, we have a few more in our pipeline. I think you're going to see a growing participation by the OEMs in TrueCar because we're getting strategic alignment, like I said earlier, with them and their understanding of how efficient we can be in helping them place their offers in front of consumers privately, outside of the public advertising environment, that will enable them to incent volume without having negative effects on their digital values. Publicly advertised incentive offers tend to have a negative effect on residuals. Our OEMs are understanding that, hey, they can do it behind a partnership wall. They can do it behind a registration wall with TrueCar. We can help them incent car buyers who have already expressed interest in their brand but haven't purchased yet, nudge them across the finish line. So I believe we'll see at least a couple more OEMs join the fold this year and several more in 2019.

Thank you. This concludes the question-and-answer session. I'd like to turn the floor back over to management for any closing comments.

We appreciate your time and attention today, folks. I look forward to a solid 2018 and building for a fabulous 2019. Take care. Happy to talk to you individually later.

This concludes today's teleconference. Thank you again for your participation. You may disconnect your lines at this time.