TrueCar (TRUE) is trading sharply lower today (-33%) after reporting disappointing Q3 results. In case you're not familiar, TrueCar is a digital automotive marketplace that provides pricing transparency about what other people paid for their cars and enables consumers to engage with TrueCar Certified Dealers.
TrueCar operates its own branded site and its nationwide network of more than 15,000 Certified Dealers, and also powers car-buying programs for some of the largest US membership organizations, including USAA, AARP, American Express, AAA and Sam's Club. Over one-half of all new car buyers engage with the TrueCar network during their purchasing process.
Turning to the Q3 results, non-GAAP EPS came in at $0.02, which was in-line with market expectations. However, revenue grew just 9.7% YoY to $82.4 mln, which was below prior guidance of $85-87 mln. TRUE also guided Q4 revenue below expectations at $81-83 mln. On the positive side, on October 16, Sam's Club and TrueCar announced they are teaming up with Ford Motor to offer exclusive discounts on Ford vehicles to Sam's Club members through the Sam's Club Auto Buying Program powered by TrueCar.
It seems the main reason for the top line miss in Q3 was slowness in its USAA channel. USAA is the financial services giant for US military members. It also is TRUE's largest shareholder. It funnels military customers to TrueCar. USAA members accounted for 32% of TRUE's unit sales in 2016. USAA is clearly a huge past of TRUE's business, so any weakness there will have a big impact on results.
It appears that at least part of the reason for the USAA shortfall was them changing their sign-up process, making it more confusing and time-consuming. Specifically, USAA recently launched a significant website redesign. The new USAA Car Buying experience has introduced several new steps in the process and new content related to total cost of ownership before the member is linked to the Car Buying Service powered by TrueCar. For Q3, TRUE saw a decline in traffic prospects and units on USAA. However, TRUE believes it can work with USAA to improve its website.
OEM incentive revenue, which was a problem last quarter in terms of guidance for Q3, came in at $4.1 mln in Q3 on over 16,000 incentive redemptions, down from $5.5 mln in 3Q16 on nearly 20,000 redemptions and down from $7.8 mln in Q2 on 28,000 redemptions. However with the addition of Ford's program and the additional programs that are closing soon, TRUE expects that redemptions in Q4 will be between 24,000 and 28,000 redemption and produce revenue of $6-7 mln.
To understand the OEM revenue, TRUE enters into arrangements with automobile manufacturers (OEMs) to promote the sale of their vehicles by using consumer incentives directly from the OEM. During Q2, TRUE had a very strong performance in its OEM incentive business: $7.8 mln, up 75% YoY. In fact, one of its programs for an affinity partner saw significant YoY growth and accounted for roughly half of the total OEM revenue. Unfortunately, in early July, this OEM paused this program in order to test member verification. TRUE restarted the program on a more limited basis on August 1, so that's good. However, on its Q2 call in August, TRUE said it expected the ramp-up throughout Q3 to be more measured. And that was the case, although the final result was mostly in-line with prior guidance.
In sum, the stock is selling off aggressively today. Investors are clearly spooked by the USAA shortfall as this is TRUE's largest source for unit sales. And then there was the OEM weakness in Q3, but it sounds like that should improve in Q4. The stock made a turnaround once, going from around $5 in February 2016 to nearly $22 in July 2017. With the stock back down again to $11, the hope is that there can be a repeat performance.