TrueCar Inc (TRUE) 2018 Q4 法說會逐字稿

Greetings. Welcome to the TrueCar, Inc. Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I'll now turn the conference over to your host, Alison Sternberg, SVP, Investor Relations. Ms. Sternberg, you may begin.

Thank you, operator. Hello, and welcome to TrueCar's Fourth Quarter 2018 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 guidance and outlook for the first quarter and full year 2019, and our outlook in the longer term, management's beliefs and expectations as to future strategies, events and planned product offerings, the effect of the completion of our replatforming initiatives, our acquisition of DealerScience and our ability to develop the best-in-class digital retailing experience, our investment in Accu-Trade, the expansion of the TrueCar Trade dealer network and associated revenue growth, our ability to forecast and grow our OEM revenues and address volatility in those avenues in the aggregate and in revenues from individual OEMs, our ability to improve our user experience and innovate our products and the time frame within which we do so, the effect of our making such improvements in innovations on our financial performance, audience monetization, search ranking and deployment of incremental marketing spending, our efforts to boost our search rankings in organic traffic, our ability to lead the industry by creating an end-to-end car buying experience that benefits all market participants 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 2017 filed with the Securities and Exchange Commission, our quarterly reports on Form 10-Q for the first, second and third quarters of 2018 filed with the SEC, and our annual report on Form 10-K for 2018 when 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. While I'm pleased to say that our business is in a fundamentally much stronger place than it was when we started 2018, we are disappointed by our fourth quarter results. Despite achieving solid dealer network and OEM revenue growth, launching Trade and hitting our most important goal for the year, the completion on November 11 of [Capsella], our technology rebuild, we encountered some challenges, which led us to miss the midpoint of our revenue guidance by $5 million or 6% and our adjusted EBITDA, which came in at $2.4 million under the midpoint of our guidance range. This means that during the quarter, we grew revenue by 10% instead of our 16% guidance and our adjusted EBITDA was $8.1 million instead of $10.5 million.

Before highlighting our key accomplishments in the quarter and setting expectations for 2019, I want to review the challenges we faced this quarter that contributed to our shortfall relative to guidance. First, our OEM revenues grew 36% year-over-year instead of the expected 72% due to less-than-expected revenues from our existing OEM clients driven by operational issues during our peak seasonal period. In addition, we had expected a modest contribution from new business during the back half of the quarter that did not materialize.

Second, our core franchise and independent dealer revenue grew 5% instead of 9% as planned, primarily due to these factors: stronger-than-expected headwinds in organic traffic on our branded channel; several of our affinity partners did not migrate off our legacy system to our new technology stack until late in the fourth quarter; and we experienced operational challenges on our legacy system before that transition.

And finally, we added fewer independent dealers during the quarter than we had expected.

We expect the difficulties with our organic traffic and the volatility in our quarterly OEM revenues will continue to be challenges for us as we begin 2019. As John will outline later, these factors are contributing to our cautious revenue growth guidance for the year.

To help organic traffic grow again, we have a holistic multifaceted approach and multiple teams of people working on ways to improve how Google indexes our site. Post-Capsella, we're thinking SEO first as we design new product experiences. For example, we are working on new Capsella-enabled make/model pages, new car listings pages and other features that will increase user engagement. And we believe these improvements will boost our search rankings over time.

In our OEM business, which grew 29% in 2018, we expect some clients will continue to participate on our platform intermittently as they pilot expanded programs and as we navigate their internal budgeting processes. As our OEM business continues to scale, our ability to pinpoint quarterly revenue contributions will be less precise than we'd like it to be. However, we remain confident in our ability to deliver solid OEM revenue growth on an annual basis, and we continue to have productive dialogues with a robust pipeline of potential OEM clients.

Another reason for our cautious guidance in 2019 is that the benefits we expect to achieve from upcoming Capsella-enabled improvements to our user experience will not be realized until they're fully implemented, and so they are not sufficiently visible at this time. As a reminder, the completion of Capsella was a necessary foundational step that now allows us to evolve our product suite much more rapidly toward the fulfillment of our long-term vision. You heard me say that product innovation at TrueCar has been limited for the past 3 years by the limitation of our legacy platform, and over the last year, we dedicated most of our engineering resources to completing Capsella. Now we can focus our efforts on product innovation aimed at improving our fundamental consumer experience.

I would also emphasize that our goal of Capsella was to replace our legacy data center-based platform with a modern cloud-based platform. And that while doing this, we were only able to replicate our legacy product experience because it was not feasible to rebuild the tech stack while simultaneously innovating a new experience. This means that while our technology platform now allows us to make much more rapid product improvements, we are starting off this year with an experience that is largely the same as it was before Capsella launched.

Importantly, we've also observed some meaningful improvements to certain segments of our user experience simply as a result of the transition itself. As an example, we've seen some encouraging improvements in our used car engagement highlighted by increased site speed and higher used vehicle conversion rates. In fact, we've launched more new product features in our used car experience in the past quarter than we were able to launch in the previous 2 years combined. This performance was achieved with only one small dedicated cross-functional team. Post Capsella, we've now deployed the vast majority of our product and engineering team to innovate across our product suite.

I would now like to preview our broader product road map for the year and some of the exciting product improvements we plan to introduce. First, in 2019, we plan to make improvements in our consumer experience designed to give users more control of their interactions with dealers and unlock new ways of monetizing a higher percentage of our audience. We're calling this our new consumer-centric interaction model. In the second half of 2018, we tested some key elements of this model that yielded significant growth in attributed sales. Our focus this year is to test and refine this model and develop our go-to-market approach in order to monetize these incremental unit volumes.

Second, we believe there is an opportunity to refresh and expand upon our core pricing value proposition. We are already working to improve the way our pricing is presented and explained, and to ensure that we help consumers more clearly identify vehicles that are competitively priced.

Third, in 2018, we improved our used car experience and plan to make further strides in 2019 to improve it, while delivering more value for our dealer customers. We anticipate these improvements will move our used car offering closer to competitive parity and leverage our unique capabilities, including member discounts for used cars, market-based pricing context and value attribution for dealers.

Fourth, today we are announcing our minority investment in Accu-Trade, our partner for the TrueCar Trade product. Through this investment, we are securing our role as the exclusive third-party provider of Accu-Trade's product suite and we are participating in the growth of its leading-edge wholesale marketplace tools for dealers. Based on the success of our TrueCar Trade pilot with Accu-Trade last year, we expect that trade dealer count and revenues will continue to accelerate as we focus on growing consumer awareness of this new product, which is also a key puzzle piece of our future end-to-end consumer experience.

Also during Q4, we acquired DealerScience, which we believe will allow us to develop the best-in-class digital retailing experience for both consumers and dealers.

As you can see, this product road map represents the opening of a new chapter at TrueCar. Now that we're on the other side of our replatforming initiative, we are focused on innovating our products as we continue on our mission 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. Over the course of my tenure here, we have worked to build the foundation for this moment, and we're excited about the growth that our new platform will enable. While this past quarter was a disappointing end to a challenging year, it is also a reminder that the complexity of what we're trying to build and the reward that we believe will come when we build it.

Even though Capsella is now complete, USAA's unit performance is back to where it was in mid 2017, and we have 1,200 more dealers than we did the year before. We are forecasting only 5% to 7% revenue growth instead of the acceleration I signaled last year for 3 principal reasons. First, we do not yet have adequate visibility into the many benefits that we believe will be activated by the raft of Capsella-enabled product improvements that are now in the works. Some of these improvements will launch in Q1 and Q2, and our new consumer-centric interaction model will be tested in Q2, with a national rollout expected in Q4. We believe that these product enhancements will enable meaningful positive step functions in our financial performance. And until we understand them better, we're not building them into our guidance.

Second, one of our major OEM clients is taking a pause from our marketplace in Q1. Third, we continue to experience headwinds in our organic traffic. Due to these factors, we now believe our return to healthy double-digit revenue growth will begin a year later than I signaled last year. That said, I am no less confident about the potential for our business and the positive impact we can have in our category.

Please remember, we are in a large, highly competitive and fragmented industry that has been entrenched in a singular way of doing business for decades. Here at TrueCar, we are not focused on bringing only incremental improvements to the existing way business is done. Rather, our ambitions are larger. We're trying to fulfill the industry's largest unmet need, which is the creation of a seamless, transparent end-to-end car buying experience, benefiting all market participants.

Key players in our industry talk about the need to move car buying into the 21st century. I still believe we're the only player in the space that has all the components necessary to get this done. And while the past has proven rocky at times, we remain undeterred and confident in our ability to lead the industry to this solution. That is why I joined TrueCar in the first place, and why we continue to be excited to stay on course to achieve our objectives.

I will now turn it over to John to walk you through our results for the fourth quarter and full year 2018 and our guidance for 2019.

Thank you, Chip, and good afternoon everyone. As Chip highlighted earlier, we were disappointed with our fourth quarter financial results where we grew top line revenue 10% as compared to our guidance of 16%.

Now I'll walk you through the details of our fourth quarter performance and our expectations for 2019. Revenue in Q4 of '18 totaled $91.1 million, up 10% over Q4 of '17 and below our revenue guidance of $95.5 million to $97.5 million. For all of 2018, revenue was $353.6 million, up 9% over the prior year.

Revenue from our franchise dealers totaled $67.4 million in Q4 of '18, up 5% over Q4 of last year. Franchise dealer count grew 4% year-over-year to 12,674 and average monthly revenue from franchise dealers was $1,780 in the quarter, which was up 2% year-over-year. For more context, we had expected 9% growth in revenue from our franchise dealers, with the lower growth rate driven by lower unit volumes, which I'll further describe in a few moments.

In all of 2018, revenue from franchise dealers totaled $266.1 million, up 7% over 2017 as we were up 532 franchise dealers over last year and average monthly revenue per franchise dealer was $1,787, which is roughly flat year-over-year.

Moving to our indy business. Revenue from our independents was $8.8 million in the quarter, up 4% over Q4 of last year as compared to 10% expected growth. The lower growth in the fourth quarter was driven by fewer independent dealer additions than expected. Our independent dealer count was up 23% year-over-year to 3,655, while average monthly revenue per independent dealer decreased 13% year-over-year to $826. The lower average revenue per dealer is due to the continued shift in our strategy towards more small-to-midsize independents. For all of 2018, revenue from independent dealers was $35.5 million, up 11% over 2017, while 2018 average monthly revenue per independent dealer was down 7% year-over-year to $892.

Moving to Trade. During the fourth quarter of '18, we generated $1.2 million of Trade revenue from approximately 640 rooftops. We launched our national Trade advertising campaign in the fourth quarter and are now active in 65 markets. Although our fourth quarter results for Trade did not match our expectations, we are very pleased that we built a large national network during the pilot phase of this program to serve as a launch pad to grow in '19. We believe that our recent investment in Accu-Trade will enable us to further accelerate growth and innovation of our Trade offering.

And now for our OEM business. During the fourth quarter of 2018, incentive revenue totaled $8.2 million, up 36% over Q4 of '17. The increased year-over-year revenue was due to strong performance of an incentive program with one of our newer OEM customers. As Chip highlighted earlier, we had expected over 70% year-over-year growth in our OEM business in the fourth quarter. This miss was due to less-than-expected revenues from our existing OEM clients, driven by operational issues during the peak seasonal period. In addition, we had expected a modest contribution from new business during the back half of the quarter that did not materialize. For all of 2018, our OEM incentive revenue was $30 million, up 29% from $23.3 million in 2017.

And finally, forecast, consulting and other revenue was $5.1 million in Q4 of '18, which was up 15% year-over-year.

This increase was due to our ALG business where they completed a number of consulting projects as they closed out the year. For the full year of '18, our forecast, consulting and other revenue was down 2% year-over-year to $19 million.

And now for some insights into unit volumes. Units in the quarter totaled 257,017, up 7% year-over-year, but below our guide of 262,000 to 267,000. The unit miss was driven by our branded channel, where ongoing headwinds and organic traffic were greater than expected. Additionally, we experienced some operational issues associated with our legacy platform during the migration to Capsella, which created modest unit softness for a few of our affinity partners during the quarter. For all of 2018, units totaled 1,005,029, up 5% year-over-year.

In our branded channel, we generated 97,174 units in Q4 of '18, which was down 6% year-over-year and we generated 393,987 units for all of 2018, which was down 2% year-over-year. Despite the miss in our guidance, we understand the key levers for growing our branded channel going forward. A strong post-Capsella focus on our site experience and architecture that will benefit our organic search rankings and enable a productive deployment of incremental marketing dollars.

And during extended partner channel, we generated 90,583 units in Q4 of '18, which was up 18% year-over-year. This growth reflects strong performance in our membership and finance segments. And for all of 2018, our extended partner units totaled 339,212, also up 18% year-over-year.

And finally, our USAA channel generated 69,260 units in Q4 of '18, up 17% from last year. Similar to last quarter, our USAA business rebounded from user experience improvements, which offset 2017 site changes that caused temporary dip in performance of this channel. And for the full year, USAA members purchased 271,830 vehicles via the car buying service, which is up 4% over 2017.

The new-used unit mix was stable year-over-year with 68.8% new and 31.2% used in 2018 as compared to 68.6% new and 31.4% used in 2017. Monetization in Q4 of '18 was $334 per unit, up from $328 per unit in Q4 of last year. And monetization for the year was $333 per unit versus monetization of $319 per unit in 2017. The increases in quarterly and annual year-over-year monetization were primarily due to increased incentive revenue from our OEM business.

Turning to expenses and margins, where all of the following metrics are on a non-GAAP basis, unless otherwise stated. Gross profit in Q4 of '18 was $83.4 million, up 10% from Q4 of '17, while gross margin was 91.5% in Q4 of '18 versus 91.2% in Q4 of last year. And for all of 2018, gross profit was $324.1 million, up 9% from the prior year and gross margin was 91.7%, roughly flat from 2017.

We demonstrated operational efficiencies in our technology and product spend where expenses totaled $12 million or 13.2% of revenue in Q4 of '18 as compared to $13.4 million or 16.1% of revenue last year. For all of 2018, technology and product expenses were $50.8 million or 14.4% of revenue as compared to $51 million or 15.8% of revenue in 2017.

Sales and marketing expenses were $52.5 million or 57.7% of revenue in Q4 of '18 as compared to $44.8 million or 53.9% of revenue in Q4 last year. Within sales and marketing, we spent $16.1 million on TV, radio and digital to drive TrueCar channel customer acquisition. This compares to $15.1 million in spend this time last year. And cost per sale for Q4 increased by 14% from $145 per unit last year to $160 per unit this year, primarily driven by the $1.6 million investment in our Trade marketing as we launched our national advertising campaign.

Excluding the Trade marketing spend, cost per sale for Q4 increased by 3% year-over-year to $150 per unit.

Partner revenue share and other expenses totaled $17.8 million in Q4 of '18 as compared to $12.9 million in Q4 of last year. The increase in expenses was driven by the mix shift in units towards USAA and other extended partner channels and increased revenue share from our growing OEM business. And our affinity partner cost per sale increased 17% year-over-year to $112 in Q4 of '18.

Finally, our sales, headcount and other costs were $18.6 million in Q4 of '18, up 11% from $16.8 million this time last year. The increase in cost reflects the expansion of our dealer sales and service teams to support our larger dealer network and our plans for new product offerings. For all of 2018, sales and marketing expenses totaled $199.5 million or 56.4% of revenue as compared to $175 million or 54.2% of revenue in 2017.

Moving to G&A. We continue to demonstrate operational efficiencies, where Q4 2018 expenses totaled $10.7 million or 11.8% of revenue as compared to $10.2 million or 12.3% of revenue in Q4 of '17. And for the full year of 2018, G&A spend totaled $41 million or 11.6% of revenue as compared to $41.1 million or 12.7% of revenue in 2017.

Our adjusted EBITDA totaled $8.1 million or 9% of revenue in Q4 of '18 as compared to $7.5 million or 9% of revenue in Q4 of '17. The items excluded from adjusted EBITDA for Q4 of '18 included depreciation and amortization of $5.9 million and stock-based compensation of $8.9 million.

Our GAAP net loss for the quarter was $6.4 million or a net loss of $0.06 per share as compared to a GAAP net loss of $8.5 million or a net loss of $0.08 per share in Q4 of last year. Our net loss in all of 2018 totaled $28.3 million or a net loss of $0.28 per share as compared to a net loss of $32.8 million in 2017 or a net loss of $0.35 per share.

Our non-GAAP net income for the quarter was $2.7 million or $0.03 per share as compared to a non-GAAP net income of $4.9 million or $0.05 per share in Q4 of '17. And for the year, our non-GAAP net income was $11.1 million or $0.11 per share as compared to $7.2 million or $0.08 per share in 2017.

We continue to maintain a strong balance sheet with cash balances totaling $196 million at the end of the year. I'd like to highlight that our cash balance reflects a reduction of $27 million related to our acquisition of DealerScience in December, but doesn't yet reflect the $22.9 million investment we just made in Accu-Trade.

And now turning to guidance. I'll share our outlook for 2019 and the first quarter of the year. As Chip highlighted earlier, we're opening a new chapter here at TrueCar. Having completed Capsella, we are now capable of rapidly innovating our product experience. We believe that our product road map will enable us to make meaningful improvements to our consumer experience and ultimately drive more consumers to purchase vehicles at one of our TrueCar certified dealerships.

In spite of the opportunity ahead of us, we are setting our annual guidance at a modest 5% to 7% top line revenue growth. This plan does not include the potential benefits from post-Capsella product improvements as we don't yet have line of sight into the specific revenue growth we can realize from these improvements.

As we test and launch product changes throughout 2019, we'll be in a better position to estimate the related revenue opportunities. In addition, we are entering this year with headwinds in our branded channel and have some volatility in our OEM business with one of our newer OEM customers pausing their program in Q1 of 2019.

While we have plans in place to work through these challenges, we believe it is prudent to put forth a more cautious plan in 2019. For the year, we expect to generate revenue of $371 million to $378 million. Here is the breakdown of the key components of revenue. We expect 2019 dealer revenue to be $320 million to $325 million representing year-over-year growth of 5% to 7%. Given some of the headwinds in the branded channel, we expect roughly flat unit volumes in 2019 as compared to '18. We believe growth in dealer revenue will be driven by the expansion and rollout of our Trade offering, revenue from our new DealerScience business and modest growth in our core business. We expect our dealer count to grow by about 1,000 dealers in 2019 with the majority in the independent category, similar to 2018.

In 2019, we expect OEM incentive revenue to be between $32 million and $34 million, representing 7% to 13% growth over 2018. As I described earlier, one of our larger new OEM partners is pausing their program in the first quarter of '19. And because of this pause and potential volatility as we grow and scale our OEM business, we are putting forth a more cautious guidance plan in '19. However, we're still very encouraged by growth opportunities in this business and our pipeline opportunities remain quite strong.

As far as annual adjusted EBITDA, in 2019, we expect to modestly grow our adjusted EBITDA margins. We are guiding to adjusted EBITDA of $35 million to $40 million, which represents an adjusted EBITDA margin range of 9.5% to 10.5%. To help generate this margin, in January, we reduced our staff by 65 people or approximately 9% of our workforce, reducing our compensation expense by about $10 million in 2019. We are also reducing other operating spend by $6 million year-over-year, yielding a total savings of approximately $16 million.

In addition, for the year, we estimate noncash stock-based compensation expense to be in the range of $37 million to $39 million compared to stock-based compensation expense of $37.2 million in 2018.

For 2019, we estimate depreciation and amortization expense will be approximately $23 million to $25 million compared to $22.7 million in 2018. For the first quarter of 2019, we expect revenue to be in the range of $84 million to $86 million or year-over-year growth of 4% to 6%. And we expect adjusted EBITDA to be in the range of $3 million to $5 million producing adjusted EBITDA margins of 3.5% to 5.5%. The drop in our adjusted EBITDA margins in the first quarter is due to lower anticipated OEM revenues as previously mentioned. We expect our adjusted EBITDA margins to improve in subsequent quarters.

And now I'll turn it over to questions.

(Operator Instructions) Our first question comes from the line of Steve Dyer from Craig-Hallum.

You've talked a bit about a challenge in organic traffic. And I was wondering if you could be a little bit more specific as to what your perception is that's causing that? If it's an algorithm-based change or what's driving that in your view.

The challenge to our organic traffic flowed from changes that were made in the search algorithm last year. And we felt the effects of them more strongly than expected in the second half of the quarter. What's happening is that our search ranks have fallen from where they used to be as a result of changes in the algorithm. Today, when consumers come to TrueCar through search engine, they encounter our price support page. And right on the price support we ask the consumer to quickly register without any warm up. So that experience is suboptimal. We've known it for quite a while. Compared to when folks come to our homepage, they get a chance to understand our value proposition go through multiple steps configuring a car before they're asked to register, much more of a warm up, and they have good engagements there.

However, for the Google search traffic and Bing search traffic, we don't have an optimized experience. We've known that we need to improve the landing page essentially, the make/model landing page that consumers -- they see when they come at TrueCar through a search engine. Pre-Capsella, we weren't able to build those pages because all of our resources were focused on rebuilding our infrastructure. Now that we are on the other side of Capsella, we've got a bunch of things we're working on that over time, we believe, will have a nice positive effect on our search ranks.

They include much better make/model information pages that are rich in content, user owner reviews, model information, side-by-side comparison tools, also new car list pages that will have a number of new car listings that consumers can consume, which will keep them on our pages longer, create more engagement as well as other tools that will produce stronger engagement, including our new consumer-centric interaction model.

All those things, we think, will lead to higher search ranks. And we believe that organic weakness will be with us for a while, but something that we'll be able to power through over time. I can't predict exactly when, but we've got a lot of work-in-progress to make that happen, and we understand the gaps in our experience that are needed to be filled in order to produce a much stronger search link.

All right. That's helpful. And then sort of related, what was -- and I may have missed it, what was your net funnel efficiency in the quarter?

So NFE for the fourth quarter, just give me one second, it was about 1.32%.

So Steve, it's basically up sequentially. And up over the course of the year, but we think that NFE by itself is not a really great holistic metric as much as it used to be in judging the performance of our marketplace, our platform. That's because we have traffic coming at us through so many pathways now, including search, that affect the ultimate NFE. We're looking at conversion and close rate economics across all of the audience channels and pathways into our marketplace. We're managing them closely. NFE is a number that we think isn't as meaningful as it used to be. Even though it's improved, but I'm not kind of standing on high ground to your saying, it's a tremendously positive indicator given the other things that are happening in the business right now.

Okay. Got you. And then, I guess lastly for me and I'll hop back in queue. The independent revenue per dealer seemed to get hit sort of at an outsized rate. Is there any reason it would be different for the independents versus the bigger franchises or sort of what's driving that?

You bet, Steve. And on your point about organic, when we see less organic traffic, our NFE actually improves, because organic has less conversion close rate propensity than some of our other audience channels do. So that's part of the reason why you're seeing NFE rise. But with respect to independents, we have a different strategy there than we do at franchise dealers. Overall, in the second half of the year we added about 800 dealers like we said we would. And within the independents category, we did quite well in terms of total dealer count.

What's going on here is that we are bringing more smaller dealers into our marketplace. There is a long tail of independents out there, and they offer a rich array of inventory in local markets. And we wanted to make sure that our consumers, particularly those among our affinity partners, who often have a strong need for used cars and a diverse selection, we want to broaden the array of vehicles, including those offered by smaller independent dealers.

So smaller independent dealers have smaller inventories, they would see fewer leads, and therefore, the average monthly subscription fee at our independents is lower than our franchise dealers. So it's basically a mix question around the size of the independent dealer. Now overall, the revenue was flat, given that, but -- and we believe we can produce some growth there by going forward, but in the last quarter we did see a modest degradation in rate per dealer.

Our next question comes from the line of Mark Mahaney from RBC Capital Markets.

This is Shweta for Mark. Could you talk about the OEM partner that paused in Q1? Any more details around why and how long do you think that may be? Is it a Q1 issue? Is it a onetime issue? And then could you also talk about just generally how you see the traffic growth post the SEO challenge through the year?

Okay. Our OEM business, as I've said, is composed of some anchor clients like FCA and Mercedes. And over the past year, we've added others to our client roster including Nissan and Ford have come along as well as Volvo and a couple of others. We have one of those newer clients that's paused in the first quarter. They have given us very positive feedback over the course of the year that the program is working quite well. But the budget for that particular program got light, and so they had to take a pause. And really what this is an indication of is a more -- a bigger opportunity or another way of looking at a problem we have, which is that the budget we're accessing today is the budget pools or the spending pools tend not to be on the side of the OEM business that drives digital marketing through what's called an upfront purchasing process.

We don't participate in the upfronts today. And we need to get ourselves more embedded on that side of the OEM purchasing system, and we are. Our clients tend to have opportunistic budgets for their incentive programs, but they also market incentives much more broadly digitally. And so we haven't yet cracked into the upfronts. Our team is working hard to do that over the course of this year and next year. So over time, we believe that we'll be able to get stronger, more consistent, broader participation by OEMs. More of them and deeper and more consistently. But today, we're still subject to the intermittent use, even though, if you interviewed our clients, they would tell you they are very pleased with the programs they have been running with us. And even prospective clients, when they look at the benefits group we're proposing, they say, sounds good, we now need to find a budget. So we're working on accessing the larger digital marketing spending pools that our clients have. And there's plenty of it out there, we're just not accessing it today.

And in regards to your question regarding traffic as well. So for purposes of 2018 for the fourth quarter, traffic was down obviously in part driven by the organic problems -- the challenges that we've been having. We see that trend continuing, so we're down 10% in the fourth quarter. We see that being a little bit higher as we enter into 2019, with that maybe phasing off towards the back end of the year. That being said, we're anticipating units overall to be flat for the year. So we're seeing some incremental conversion going through, in particular, some of the changes that we've started to already see with Capsella on our used side where we had turned over to Capsella earlier. So overall, units flat and traffic down in regards to some of the things we're seeing with search organic.

Yes. And obviously what's happening here is that, coming out of a weak fourth quarter, we had anticipated increasing our marketing budget this year. So given the slow start on our revenue line, we're holding our fire on marketing, so that's part of it. We're also holding our fire until we see some improvements in our user experience and the higher engagement it results in. And so -- and we haven't built into this model the forecast as John mentioned, assumptions around improvements in conversion rate or close rate as a result of the -- and unit growth as a result of the upcoming improvements on our user experience, of which there are going to be many.

We're going to be improving how our pricing curve is presented on the new car side. We've got a bunch of improvements slated for used. And then we've got the testing of our consumer-centric interaction model, which will enable consumers to have much more control over when their name goes to a dealership, and that will help make them much more comfortable about registering, which will enable us to have a much higher level of unit sales that are matched inside dealerships. But we're not making any assumptions without -- about the effects of those positive improvements in this forecast. That's another reason why we're being cautious in our unit growth plan that underlies our financial forecast.

Our next question comes from the line of Heath Terry from Goldman Sachs.

This is Daniel Powell on for Heath. Just a couple of quick questions from us. On the advertising side of things, I know you guys saw a little bit more deleverage on your ad spend year-over-year then you had in the last couple of quarters and realize there are some challenges on the SEO side with traffic. But anything that you're seeing from a paid customer acquisition side, maybe outside some of the Trade-in products that you paid to promote during the quarter that you're seeing from a customer acquisition standpoint?

And then on the monetization side, excluding the incentives, it looked like it was down a bit year-over-year, primarily due to some softness on the independent dealer side. Was there any update that you can give us on sort of the mix of dealers paying on a subscription basis, either as a percent of revenue or percent of dealers?

Sure. I can get started on the customer acquisition question. So in regards to TC/DC, cost per sale, we were modestly up about 3% on a year-over-year basis. So cost per sale, excluding the trade investment, of the $1.6 million I referred to, was about $150. And so that's kind of in line with where we've seen before, so at a reasonable level. So I think we're comfortable with that level. We haven't invested incrementally into additional marketing, and we're holding off right now until we have better experience with the product. So as we make changes later on and at the right time, we'll invest more heavily on the acquisition side.

In regards to your second question, with respect to what part of the business is on subscription versus pay per sale. So a couple things to highlight. So one, in regards to the State of California, California is -- used to be on a sales guarantee basis. That transitioned off of sales guarantee onto a flat rate subscription effective January of this year.

So subsequent to that transition, you'll see that our pay per sale business is between 35% and 40% on a unit basis; a little bit higher, about 45% on a dealer basis. Did that answer your question, Daniel?

Yes. That's great.

Our next question comes from the line of Sameet Sinha from B. Riley & Co.

Yes, a couple of questions here. So John, if you can remind us of -- I think when you were giving guidance for 2019, you spoke about franchise dealer count. I think you said it's going to be flat. So can you talk about why that is the case? Has there been any change in the relationship there? Secondly, if you can shed some more light on the operational issues that you are seeing on the OEM side and what exactly happened. And it seems like it's not going to be fixed this year. Or at least can you give us the time line for when that gets fixed?

And my third question is, in terms of the SEO issues, Chip, you kind of laid out all the things that you need to do to fix your Google algorithm rankings. So when can we expect you to start layering that -- those changes in? How quickly can you get them out? And how quickly will it take for Google to kind of index and recognize those changes?

Sure. I'll start off with your dealer count question, Sameet. So for purposes of our franchise and our indy dealers, we are anticipating some growth this year. It will be a little bit less than last year. We're anticipating roughly 1,000 dealers. That being skewed a little bit more towards independent. So 800-or-so independent would be the delta coming from your franchise dealers. And so we are seeing some modest growth in that area as we're working through some of these challenges with respect to traffic and units staying roughly constant. We are a little bit more modest in our expectations around the franchise dealer business. But it's something that we're obviously working through. Chip, do you want to take the operational (multiple speakers)?

Sure, sure. There are 2 kinds of operational issues I mentioned in my part of the talk was that -- one was about OEM. And we did say -- and we did have problems delivering intensive quotes to consumers in the back half of the last quarter. Those are internal operational issues. And we've addressed them, and they're not affecting our system today.

The other kind of issue we had was with our -- in some of our affinity partners. They were not -- we're not able -- we weren't able for a few weeks in the second half of the quarter to get leads properly delivered to dealers. And that affected some of our units in the quarter. So -- and that one was more of an issue that happened post Capsella, though it was quickly addressed, and we don't have that affecting us anymore now either.

So the operational issues that we saw in the fourth quarter are not in play currently, and we don't expect them to rear their heads again, at least those issues, right now or anytime in the near future. And regarding the SEO improvements that I mentioned and you just asked about, Sameet, you're going to start to see some changes to our website in the next quarter or 2. You're going to see more listings show up that can be crawled by Google.

Today, our site -- our new car listings are not visible to Google at all. We're going to make them visible through a listings search. And we're going to start to be building out the make, model information pages, but that will happen more in the second half of the year. So I think, this is an issue we're going to be dealing with through 2019. But I do believe that the really positive user experience changes and Google-centric pages that we're building in the site will help us turn this problem around.

It's hard to forecast right know exactly when, but you'll start to see changes in the site, and we'll point them out on the next call, and you'll be able to see what we've done. And every quarter is going to accumulate over the course of the year.

Our next question comes from the line of Kyle Evans from Stephens.

Chip, you -- I think you mentioned 2Q test for the consumer-centric dealership interaction and a 4Q launch. I'm just trying to understand the priorities of everything that you're trying to get done this year, and I'm a little surprised that that's happening so late in the year. Can you give me your thoughts on where that stands versus Trade and SEO and some of the other operational issues you face today?

Sure, sure. So Trade is an important initiative growing rapidly out in the field. It's not very product-intensive here in Santa Monica. So that doesn't task our team very much. With respect to our new consumer experience, that is the top priority of the company actually. And I think the plan we have for rolling out is similar to what I discussed last year, where I said we would be testing it in the first half and rolling it out in the second half. So we will be taking a portion of our audience and we'll also be selecting some geographic markets. So we're going to launch this new experience. And we're going to do it in 3 -- at least 2 or 3 different versions in order to evaluate which variant on this experience performs the best.

And then once we understand the lift that we're getting in that sales -- because we're going to see a much higher rate of registration, we're going to see a much higher level of matched sales, and we did see that in the modest test we did this past year, and so we're going -- after we see those results in the test, which we're going to conduct in the second quarter, it will take us a quarter or so to determine what the best go-to-market strategy is with our dealers to help them understand the value of this new experience for them and work to what the best pricing model will be that will enable the dealers to benefit as well as TrueCar from this new experience.

So we expect to help the dealers become more efficient overall, get more matched sales from TrueCar and, at the same time, on the basis of higher matched sales, we'll be able to make a strong case for them sharing a higher share of their marketing wallet with us. So that needs to be tested and optimized during the course of the year and rolled out in the second half. That's why it takes some time. And I did signal that last year, it wouldn't be one big bang. And that's really a theme of -- post Capsella. Capsella, being completed, enables us to innovate our experience in a way we haven't been able to in the 3 years I've been here. That's why I went to pains to say or emphasized, this is a new chapter in our history. We can now actually make changes in this shopping experience. We aspire to help consumers really understand prices very well in the cars they want to buy, introduce them to an upfront transactable price that's better they can find elsewhere typically on the market. And we have a lot of improvements in just the core functionality of the site planned for the first and second quarter.

Those weren't possible before we built Capsella, finished Capsella. The new user experience testing wasn't possible. So all those things give us tremendous, strong and positive excitement for the future here. But because we don't have the metrics yet of the impact of those changes on our business, we're not building them into our plans yet. But I believe, like I said earlier, that this will enable us to have a strong acceleration beginning in 2020. I would have loved to have been able to say it's happening this year, but we're not able to do that given the softness that we see in our organic traffic and the slow start we're getting on OEM.

But there is an acceleration coming, and it will be principally product-led, along with our sales team engaging with dealers to realize the higher level of revenue growth based upon a higher level of matched sales at dealerships. That's our goal. We want to help dealers see the fruits of stronger volume through TrueCar, and we have a clear road map to getting there this year.

You mentioned that Trade was a little behind in 4Q. Can you update us on maybe what's happening there and then talk about your outlook for 2019 for that product?

Yes. Trade achieved its goal of having a national network at the end of the year. We didn't have as quite as high a network as we expected to by the end of the fourth quarter, but we had over 600 dealers, and we're ahead of that now. And in the first quarter, we can see we're on pace to accelerate the additions -- compared to the additions we had in the fourth quarter of last year. And we believe that we'll be able to add roughly 1,000 dealers to that network over the course of this year. As we continue with strong promotion and the awareness of that product growth among the dealer body, and now with our investment in Accu-Trade, I think we're going to see a bit stronger mind share with the dealers because they realize that this program is backed by the best used vehicle valuation system in America, one that produces very strong value in a highly transparent way and has an array of appraisal features that the dealers use when they bring cars in that can really help the used car side of their business. So we're very excited about this product, not only for it has its own individual revenue generator but also because it's a very strong puzzle piece as part of our road map to creating this theme of end-to-end experience very much toward the end of the experience based upon the consumer being able to get a transparent view of all of the economic elements of the transaction, meaning the monthly payment, which will be driven by Trade, the price of the car, their down payment and the lending loan term.

Trade is very key to enabling us -- to enable consumers to get that full transparency they desire. And our acquisition of DealerScience will complement our Trade product very nicely because with DealerScience, we have best-in-breed monthly payment calculation tool that dealers can place on their website as well as we'll be able to integrate over the course of this year in TrueCar that will enable consumers to get penny perfect view of what their monthly payment will be on the vehicle they want to buy before they go to the store, which generally isn't possible today in America.

So we're making big strides with Trade and with DealerScience toward our vision of helping car buyers get a much more transparent view of the entire car deal not just the price of the car.

But just to be clear, that $1.2 million in the quarter, was that below your expectation?

Well, we're also -- when we started the beginning of the year, yes. We wanted to get to $2.5 million. We finished at $1.2 million. We still believe that we'll have 3 to 4x growth off of that base in 2019.

Our next question comes from the line of Dan Kurnos from The Benchmark Company.

Just following up on that kind of line of questioning. I don't know -- John, I apologize if I missed this, did you give kind of full year new dealer product expectation? And did you give the same level of granularity for Q1 that you gave for the full year outside of traffic?

I could certainly provide you guys a little bit more detail in regards to just some of the new revenue streams that we're seeing. In regards to -- Chip was talking about Trade, we did do about $1.2 million in Trade revenue in the fourth quarter. We're seeing something that's more in the line of, say, an $8 million to $10 million number in 2019 on an annual basis. In regard to some of the newer projects, so DealerScience is a small revenue stream. We purchased that company in regards to the technology base, but we think there's an opportunity to grow that business, it did come with a nice base of initial dealers, and we do plan to integrate that into TrueCar to help continue to grow that business. And that's probably going to be in the tune of about half the size of your Trade business is what we're anticipating right now. There's also a couple of other products that we're that we are currently in test with that we'll anticipate launching in the back half of the year, which will be a modest amount of revenue that we think in the back half of the year. So those are some of the newer revenue streams. In regards to the first quarter, in regards to how that phases out, I'd say we'll see some modest growth in Trade in the first quarter. You'll also see some DealerScience come in as well. So you'll see a couple of these components with the new products that I mentioned more towards the back end of the year.

And just on the -- going down a little bit further just in terms of units and net franchise. I'm just trying to make sure we have this right in terms of getting to your guide. Is OEM going to be up in Q1 even with the pause because of the new other guys that you've added to the platform? And are units kind of flattish throughout the year? Or does that have maybe some more impact upfront and then eases, although comps are kind of somewhat varied across the year?

No problem. So in regards to the OEM business, year-over-year for Q1, we're anticipating OEM is going to be flat. So that's what we're expecting. And that's driven by the pause of a large OEM program that we had talked about in the prepared remarks. In regards to units throughout the year, looking at total units, we do see units being flat on a total basis throughout the year, modestly up in the first quarter and then really roughly flat for the rest of the year but very, very low single digits. And that's in part driven by some of the challenges that we've seen in regards to the organic traffic that we described.

Got it. That's super helpful. And then just going forward, I don't know if this is a question you guys can answer now with sort of the tech issues that are plaguing you, but now that your past Capsella and understanding that you still want to get more aggressive on marketing, how should we think about tech and dev leverage over time? Or is it more just a reallocation of resources into going after marketing once you get past some of these issues?

So I would say, Dan, that we had issues -- some issues -- modest issues when transitioning off of our old, legacy systems, not significant. We're delighted with the launch of Capsella. We have TrueCar and all of our affinity partners on that new cloud based platform. We're not plagued at the moment with tech issues. We had them last quarter but not now plagued. We believe that there's a lot of work to do here. We were -- we held our tech and dev expense kind of flat as a percentage of revenue last year, and we expect to -- John, help me, I think it's going to be relatively flat this year again.

We expect to have a comparable level of spend. And the resources that were focused on the pre-Capsella environment and transitioning over are now being deployed into product improvements and new opportunities. But we are seeing that, that -- we expect the spend to be roughly comparable and flat margins.

So we spent 3 years rebuilding our infrastructure, now we completely redeployed that entire team to focus on innovation for the first time in 3 years. So we're very excited about the fast-forward, which entail a raft of fairly rapid product improvements to our existing experience. I mentioned much better presentation of the pricing curve, preprospect and post-prospect improvements to our user experience, and then the beginning of testing of our new consumer-centric interaction model, which is -- with a major sort of change in the experience and the value we deliver to dealers. So all that's going to be executed this year. And we've got a very strong road map, a dedicated team, milestones. And we'll be reporting on our progress on those each quarter. You'll be able to see our -- how we advance this business. So we're in a much better place than we were a year ago, much better place. Tech stack is completely rebuilt. 100% of our effort now basically is on innovation. It wasn't that way before. We have more OEMs in our portfolio overall, and we believe that over the course of the year, we'll get back some of the ones that were intermittent last year and the one that paused. Our Trade product is accelerating in its growth, and we have the best-in-breed digital retailing tool now in our portfolio as well. So the company is in a much stronger place than it was a year ago. Obviously, we have some short-term headwinds we're working through this year, but I'm very pleased with the strategic progress we've made along with the milestones that we have set for ourselves in creating a platform that now can let us catapult forward with a much better car-buying experience for consumers. And because we have a value proposition with dealers where our fees to dealers on a per car basis are much less than the marketing average they pay as a result of all their other channels. As they grow volume into their businesses, we believe we'll have a strong foundation from which to grow the share of their wallet and grow our revenue line. So this company is poised to grow very nicely once these product improvements start to take hold as this year proceeds.

Last one for me, if I could. Just on USAA, it always comes up from investors and the like. And usually, on these calls, I figure I'll just ask it in light of some of the challenges you're facing. You did have a good quarter, but when is that negotiation up again? And does any of the headwinds you're facing now concern you over getting that done at favorable terms?

We expect to grow our USA channel this year by modest single digits year-over-year, consistent with historical performance. So USA will benefit from the user experience changes we make over the course of the year. But we're not building those into this forecast. So we grew modestly last year. We expect to see modest growth again this year. And with respect to our upcoming renewal, we will be -- our current agreement expires in February 2020. USAA has been and remains a very important partner to TrueCar. We continue to collaborate well with them, and we're looking forward to improving the performance of that channel this year based on the product evolution as it proceeds. At this point though, we're not going to be commenting about our current or forthcoming contract negotiations with them. And so we're going to quiet on that until we actually have a deal.

Our next question comes from the line of Nick Jones from Citi.

I just had 2 quick ones. One on the Trade product. Do you have any kind of -- any number you can give us on GPU uplift for the dealers using the product? I might understand the consumer side, but what kind of value are the dealers who are using it getting out of it? And then the second question is, on search, organic search, how do you feel TrueCar stacks up in light of kind of keywords against the competition? And is that somewhere that can be shored up quickly?

Okay. So you mentioned GPU uplift, industry term for gross profit per unit. The dealers, when they bring cars in on Trade, either they -- they either wholesale them or retail them. And in either case, so their acquisition price determines their wholesale or retail profit on the other end. And for the consumer, the higher price they get, the happier they are with the deal. So what our TrueCar Trade product does is produce a win-win for both sides of this transaction. The consumer comes away understanding better why their car is worth what it's worth because the tool gives them a dynamic real-time update of the value based upon all their input parameters. And they really like that. And also, that dynamic, real-time update capability, the dealers find useful to help them establish the correct value for their car after it's presented to them at the dealership. The way this product works is the consumer provides all the information about the car before they come to the store, and they get an offer that is guaranteed, assuming the car is represented correctly. If the car is represented correctly, the participating dealer will pay the full price of the car. And if there's any issues that are discovered at the dealership during the inspection that weren't revealed by the consumer in their earlier usage of the tool, then there will be some deductions. There also could be some increases in value of the vehicle if the consumer, for instance, didn't know there was an optional moon roof on the car, and there is, they'll get a credit for that through the tool. So the tool gives the dealer and the consumer complete transparency instantaneously on why the car has the value it has. And the value is pegged at a good, solid wholesale market number. And so it works for the consumer, works for the dealer. And the dealers we are working with tell us that the transparency and the specific way in which it helps them identify the effect on the deal -- of the vehicle's value, of specific issues that both the consumer and the dealer are viewing together during the collaborative walk-around. It helps the dealer establish a more correct value for their car on a more objective and rational basis. And for that reason, it takes a process that is murky and makes it more transparent and specific. And many dealers are telling us that they're able to have a better acquisition price as a result. At the same time, the consumer walks away understanding specifically why their car is worth what it's worth. So it truly is a win-win, and the dealers are telling -- are giving us good feedback from their perspective. And consumers are telling us that their satisfaction is much higher, and they rate the overall transaction that they had with the dealer much more positively when they're using TrueCar Trade compared to when they're not using our tool. In respect to your question on SEO, so the main battleground among our kind of company, a third-party company in the search world, is around make, model search terms; make, model search terms sometimes modified by geographies, sometimes modified by price or by feature but usually, make, model. So the make, model searching rewards companies that have a long legacy and tradition of serving a research upper funnel car shopper. TrueCar wasn't built that way. TrueCar was built at the lower funnel, closer to the transaction pricing engine that resulted in a consumer-dealer introduction. So the company wasn't built that way. And we built our traffic and our brand through largely direct advertising, both online and off-line. And so SEO was never built into this company from the beginning in contrast to other companies in our space there were built the exact opposite way, Google-centric right at the get-go. We're playing catch up here, obviously. Our plan is to serve upper funnel consumers with a strong research and discovery experience, with no display ads unlike our competitors who tend to have their pages ladened up and experiences chopped up as a result of the need to generate lots of clicks from page to page and lots of ads per page. So we're taking a completely different approach to our search and discovery experience. And we're building a make, model information pages comparison tool that will be highly search-friendly, we believe. And we're also going to be opening up a vast, large new car inventory to be able to -- for it to be discovered through search. And that will happen over the next couple of quarters. So we think we have a great road map for driving significantly higher organic traffic over the next year or so.

Our next question comes from the line of Naved Khan from SunTrust.

I got a couple of questions. So I don't know if you disclosed in the past, but can you remind us how big organic search was for the overall business just in terms of traffic as well as for the units? And then maybe a high-level question on the outlook. So the January numbers for new car sales are, I guess, down a little bit year-on-year. So what are you baking in, in terms of your outlook for the year? Are you just basing it off of -- on the January trend? Or does it affect you meaningfully or not?

So for organic, it's roughly about 30% of our traffic. And certainly, some of the headwinds that we've been seeing in the quarter, we're anticipating those headwinds throughout the year maybe backing off towards the back end. But we're anticipating that it's going to be sticking with us and, obviously, that impacts the TrueCar channel. The partners work a little bit differently, obviously. But that's what we're anticipating. That's what we've got built into our models.

Okay. So just to clarify, the 30% traffic is just traffic -- 30% of the traffic that comes directly to TrueCar and doesn't include the traffic you get through your partners, right?

That's correct.

Okay. And is it fair to say that the conversion rate on the organic traffic is less than paid?

Yes, yes. I mentioned that earlier when I said that organic traffic particularly make, model search kind of traffic, does have lower NFE than our other traffic does. But it's still sufficiently a large amount, and the headwind is sufficiently strong that it's causing us to have an outlook for the year, like John said, where our TrueCar units will be off and down single-digit year-over-year.

Okay. That's helpful. And then on the SAAR declining in January, how does it affect you in your outlook?

Our fundamental belief is that modest changes in the SAAR, up or down, don't affect TrueCar very much. Most of the third-party sites, TrueCar back in 2008 and '09 and others did pretty darn well through the recession because they were more efficient than what has been the largest share of dealers' marketing budget, which was traditional media, much more efficient. So when times are tough, dealers need to focus on the marketing channels that provide them the most efficient sales. We believe we are one of the most efficient marketing channels dealers have available to them today. And many dealers tell us that. And as the SAAR softens in the 1% or 2% down range, we don't expect for that to have a negative effect on our business. In fact, in this environment, dealers are emphasizing efficiency, which we think plays to our advantage. Only in the event of a major downturn in the economy, significantly macro -- significant macro dislocations would we think that we would experience a significant decline in our units through our marketplace, but only in that situation. But small changes in the SAAR, we think we can weather quite nicely.

Our next question comes from the line of Marvin Fong from BTIG.

Just one really, most of mine have been asked. I was just curious, so cutting expenses by $16 million total, it looks like you're guiding EBITDA up about $4 million at the midpoint, if I'm not mistaken. Could you just kind of give the bridge of how that -- what's kind of absorbing the cost savings from the cost cuts that you guys implemented?

Sure. So the savings are the in-periods, so in 2019 savings on a year-over-year basis. In addition to that there are, obviously, other costs that we'll incur as a business. In particular, some of the investments that we're making with Trade, with DealerScience, those types of things are going to be coming through. We also have some run rate hiring that we did in 2018. So we did hire throughout the year, so the full year of expense from our headcount does have an impact. We obviously shaved $10 million in the headcount area and about $6 million in other areas. So -- and it does open up the opportunity for additional investment. And obviously, we have a modest increase in margins year-over-year. And that's driven by the modest increase in revenue and having some modest improvement in the margins.

Okay, great. Just one more, if I could. Just on the Accu-Trade investment, I believe you guys already were using them as a partner for the Trade-in product. So why the rationale of making an actual investment in that company? What kind of benefits, additional benefits, can we expect from that?

Sure, sure. So Accu-Trade is a company that provides value through our system. It also -- it has the ability to provide value in the wholesale market separate from what we do to retailers. But very importantly, this investment will secure our ability to represent the Accu-Trade product suite on an exclusive basis in the third-party channel, meaning when consumers approach third parties to receive a guaranteed upfront trade-in value on their car, provided in a very interactive way through the Accu-Trade tool, we're the exclusive provider of that. And being an investor in this company also give us a window into the upside that Accu-Trade represents as a strong, young, new, very interesting provider of wholesale valuation and other tools in the wholesale market.

Our next question comes from the line of Brian Nowak from Morgan Stanley.

I have 2. Just the first one is sort of to talk through the guidance. So the expectation of traffic being down, is it kind of more severe than the 10% or 11% in the first half of units being flat? Talk to us about some of the examples of where you've been able to increase internal conversion like that in the past. What gives you confidence you'll be able to do that this year, with traffic seemingly being down for a little while? And then sort of bigger picture, is it a situation where you see the need to start to have to spend more on paid search and sort of grow the SEM channel long-term as opposed to trying to optimize for Google? How do you think about the need to spend more on paid search?

So I'll take a crack, and the John will support here. So sure, we are experiencing headwinds in the TrueCar channel, but we're seeing growth in USAA and our extended affinity partners, so they balance out overall. So we run a business here where we look at the different audience channels and pathways into TrueCar very closely. We model them all. And so we're able to see based upon historical trends and current experience that the plan we put forth is quite viable in terms of flat unit growth, even though the TrueCar channel will be down this year, so no problem there really. And when it comes to our mix of marketing, we have been leaning our marketing mix a bit more into paid search over the last couple of years. But we want to reverse that trend, and when we start to increase our marketing budget, you're going to see us go more off-line than we have up until now. So paid search is a nice complement to our off-line branding effort. We've been basically flat in our total marketing spend through the past 2 years. We're not happy with that. As our top line starts to grow, as we have a higher LTV related -- driven by a concern with consumer experience, which is converting more people through it, as well as the growth of revenues from our trade in OEMs and DealerScience products, our LTV will grow, which will enable us to invest higher levels of resources, financial resources, to the marketing. And we expect that they're going to lean back towards more -- higher mix of off-line advertising. So paid search has been a nice tool for us for the last couple of years to maintain our traffic, and we've been able to grow traffic overall on TrueCar with a flat marketing budget. So we've done pretty darn well. This year, given the headwind we're having on organic, we can't pull that off. But we're going to reverse that trend as both organic starts to improve and we have a growing top line, which will enable stronger investment in marketing overall and leaning more toward off-line.

We have reached the end of the question-and-answer session. And I will now turn the call over to management for closing remarks.

Thank you all for your attendance at our conference call today. There's a lot of positive things happening at TrueCar. We're in a much stronger place than we were a year ago. We're not -- we're disappointed with the first -- our guidance for the year and for our sluggish finish to last year. But we're very excited about what the future holds because now that we can actually innovate on product, we can open up a whole new chapter and put our -- put the company on a different growth trajectory as this year proceeds. So thank you for your attention. Look forward to talking to you at time goes on and definitely next quarter. Take care.

This concludes today's conference. And you may disconnect your lines at this time. Thank you for your participation.