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TrueCar (NASDAQ:TRUE) Q4 2018 Earnings Conference CallFeb. 14, 2019 4:30 p.m. ET
Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:
Operator
Greetings. Welcome to the TrueCar Incorporated fourth-quarter and full-year 2018 earnings conference call. [Operator instructions] A question-and-answer session will follow the formal presentation. [Operator instructions] Please note this conference is being recorded.
I would now like to turn the conference over to your host, Alison Sternberg, SVP, investor relations. Ms. Sternberg, you may begin.
Alison Sternberg -- Senior Vice President of Investor Relations
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 longer term, management's beliefs and expectations as to future strategies, events, and planned product offerings, the effect of the completion of our replatforming initiative, 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.
Chip Perry -- President and Chief Executive Officer
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 in 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 11th 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 6% to 8% 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 the -- 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 were less precise than we 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 dialogue 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 are 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 performance of our long-term vision.
You've heard me say that product innovation of TrueCar has been limited for the past three years by the limitations 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 and in improving a fundamental consumer experience. I would also emphasize that our goal with 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 products 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 than our used car experience in the past quarter than we were able to launch in the previous two years combined. This performance was achieved with only one small dedicated cross-functional team. Post Capsella, we've now deployed a vast majority of our product and engineering teams 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 volume.
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, while 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 values for our ideal 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're 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 roadmap represents the opening of a new chapter at TrueCar. Now that we are on the other side of our replatforming initiative, we are focused on innovating our products as we continue automation to be the most transparent branded 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 are 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 of the complexity of what we are 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 three principal reasons: first, we do not yet have adequate visibility to the many benefits that we believe will be activated by the ramp 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 it better, we are 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 single 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 are 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 are the only player in the space that has all the components necessary to get this done. And while the path 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.
John Pierantoni -- Interim Chief Financial Officer
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 of 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 Indi 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 toward 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. Through 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 [Inaudible] 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 in 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 ranking 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 revenues 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. Through 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 mixed shift in units toward 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. Through 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 are 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 roadmap 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 a 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 '19. 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 in 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.
Questions and Answers:
Operator
[Operator instructions] Our first question comes from the line of Steve Dyer from Craig-Hallum. Please proceed with your question.
Steve Dyer -- Craig-Hallum Capital Group -- Analyst
Thanks. Good afternoon. 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 year over year?
Chip Perry -- President and Chief Executive Officer
Yes. Thank you, Steve. 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 rank 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 have ask the consumers 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 home page, they get a chance to understand our value proposition, go through multiple steps [Inaudible] their car before they are asked register, much more of a warm-up, and they have good engagement there.
However, with 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 for consumers to see when they come at TrueCar through a search engine. Pre-Capsella, we weren't able to build those pages with all of our resources to focus on rebuilding our infrastructure. Now that we are on the other side of Capsella, we've got a bunch of things we are working on that over time, we believe, we 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 tool, 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 engagements, 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 witnessed for a while but something that we'll be able to power through over time, 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 much stronger search ranks.
Steve Dyer -- Craig-Hallum Capital Group -- Analyst
All right. That's helpful. And then, sort of related, what was -- and I may have missed this, what was your net funnel efficiency in the quarter?
John Pierantoni -- Interim Chief Financial Officer
So, NFE for the fourth quarter, just give me one second. It was about 1.32%.
Chip Perry -- President and Chief Executive Officer
So, Steve, well, [Inaudible] 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. And 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 are managing them closely, but NFE is a number that we think this business [Inaudible] as it used to be, even though it's improved, but I'm not trying to standing on high ground here, saying it's a tremendously positive indicator given the other things that are happening in the business right now.
Steve Dyer -- Craig-Hallum Capital Group -- Analyst
OK. Gotcha. And then, I guess, lastly from me and I'll hop back in queue. The independent revenue per dealer seems to get sort of at an outsized rate.
Is there any reason that would be different for the independents versus the bigger franchises or sort of what's driving that? Thanks.
Chip Perry -- President and Chief Executive Officer
You bet, Steve. And on your point about organic -- when we see less organic traffic, our NFE actually improves because organic has less conversion and close rates potentially when some of our other audience channels do. So that's part of the reason why you're seeing NFE rise. So with respect to independents, it's we have a different strategy there than we do a franchise dealer.
Overall, in the second half of the year, we added about 800 dealers like we said we would. And within the independent 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, the smaller dealers have smaller inventories that receive to a lead and therefore their average monthly subscription fees in our independents is smaller than our franchise area. So, it's basically a mix question around the size of the independent dealers. Overall, the revenue is flat, given that but -- and we believe we can produce some growth there going forward.
But in the last quarter at least, we did see a modest degradation in rate per dealer.
Steve Dyer -- Craig-Hallum Capital Group -- Analyst
Thank you.
Operator
Our next question comes from the line of Mark Mahaney from RBC Capital Markets. Please proceed with your question.
Shweta Khajuria -- RBC Capital Markets -- Analyst
Great. This is Shweta for Mark. Could you talk about the OEM partner that paused in Q1? Anymore details around why and how long do you think that may be? Is it a Q1 issue? Is it a one-time issue? And then, could you also talk about just generally, how you see the traffic growth post the SEO challenge through the year? Thank you.
Chip Perry -- President and Chief Executive Officer
OK. Our OEM business, as I've said is composed of some anchored clients like SPA 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 [Inaudible] and a couple of others. We have one of those newer clients that paused in the first quarter.
They've 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, is an indication of is a more bigger opportunity or another way of looking at a problem we have which is that the budget we are accessing today is the budget pool -- the spending pool tend not to be on the side of the OEM's business that drives digital marketing through what's called an upfront purchasing process. We don't participate in the upfront 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 intensive program, but they also market incentives much more broadly digitally, and so we haven't yet cracked into the upfront. 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 are still subject to the intermittent use, even though if you interview our clients, they would tell you they are very pleased with the programs they were running with us. And even prospective clients when they look at the benefits we are proposing they say, it sounds good. We now need to find a budget. So we are working on accessing the larger digital marketing spending tools that our clients have and there is plenty of it out there we just not accessing it today.
John Pierantoni -- Interim Chief Financial Officer
And in regard 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 that -- challenges that we've been having. We see that trend continuing, so we were down 10% in the fourth quarter. We see it being a little bit higher as we enter into 2019 without maybe phasing off toward the back-end of the year. That being said, we are 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 started to already see with Capsella on our used side where we turn it over to Capsella earlier. So, overall, units flat and traffic down in regards to some of the things we are seeing with search organic. 1
Chip Perry -- President and Chief Executive Officer
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, it's giving us a slow start on our revenue line, but holding our fire 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 that it's results in.
And so -- and we haven't built into this model the forecast, as John mentioned, assumptions around improvements and conversion rate or close rate as a result of the end unit growth as a result of the upcoming improvements in our user experience unless they are going to be many. We're going to be improving how our pricing service presents it. On the new car side, we got a bunch of improvement in play and then we've got the testing of our consumer-centric interaction model which enable consumers that 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 into our dealership, but we're not making any assumptions about the effect of those positive improvements in this forecast. That's another reason why we're being cautious in our unit growth plans that underlies our financial forecast.
Shweta Khajuria -- RBC Capital Markets -- Analyst
Thank you.
Operator
Our next question comes from the line of Heath Terry from Goldman Sachs. Please proceed with your question.
Daniel Powell -- Goldman Sachs -- Analyst
Hi, thanks. This is Daniel Powell actually on for Heath. Just a couple 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 than you had in the last couple of quarters.
I realize there's some challenges on the SEO side with traffic, but anything interesting from a paid customer acquisition side, maybe outside of some of these trade-in products that you paid to -- during the quarter that you are seeing from a customer acquisition standpoint? And then, on the monetization side, excluding the incentives, which looks like it was down a bit year over year primarily due to the softness on the independent dealer side. But is there any updates 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? Thanks.
John Pierantoni -- Interim Chief Financial Officer
Sure, I can get started on the customer acquisition question. So, in regards to TC GC cost per sale, we were modestly up about 3% on a year-over-year basis. The 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 what we've seen so at a reasonable level, but I think we are comfortable with that level.
We haven't invested incrementally into additional marketing and we are holding off right now. And so we have better experience with the product. So as we make changes later on and the right time we will 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 couple of things to highlight.
So, one, in regards to the State of California used to be on a sales guarantee basis and that transition offers sales guarantee on to a flat rate subscription effective January of this year. So subsequent to that transition, you will 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. [Inaudible] those are all your questions, Daniel?
Daniel Powell -- Goldman Sachs -- Analyst
Yes, that's great. Thanks guys. I'll hop back in the queue.
John Pierantoni -- Interim Chief Financial Officer
Great.
Operator
Our next question comes from the line of Sameet Sinha from B. Riley & Company. Please proceed with your question.
Sameet Sinha -- B. Riley and Company -- Analyst
Yes, couple questions. So, John, if you can remind us, I think when you are giving guidance for 2019, you spoke about franchise dealer count and 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 could 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 a timeline for when that gets fixed.
And my third question is, in terms of the SEO issues, Chip, you kind of laid out all the other things that need do to fix your Google algorithm rankings. So, when can we expect you to start layering that -- those changes? And how quickly can you get them out and how quickly will it take for Google to kind of index and recognize those changes? Thank you.
John Pierantoni -- Interim Chief Financial Officer
Sure. I'll start off with your dealer count question, Sameet. So for purposes of our franchise and our Indi dealers, we are anticipating some growth this year, it will be little bit less than last year. We are anticipating roughly 1,000 dealers, that being skewed a little bit more toward the independents.
So, 800 or so independent with the delta coming from your franchise dealers. 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, [Inaudible] the dealer question.?
Chip Perry -- President and Chief Executive Officer
Yes, sure. There are two kinds of operational issues I mentioned in my part of the talk was that, one was about OEM and we did say, we did have problems delivering incentive quotes to consumers in the back half of the last quarter. Also internal operational issues and we address them and they are not affecting our system today. The other kind of issue we had was with our -- with some of our affinity partners.
We were 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 is like more of an issue that happened post-Capsella, but it was quickly addressed and we don't have that catching us anymore now either. So, I think that 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 [Inaudible] issues right now anytime in the future. And regarding the SEO improvements that I mentioned, that you just ask about, Sameet, you are going to start to see some changes to our website in the next quarter or two.
You are going to see more listings show up that can be called by Google. Today our site, our new product listings are not visible to Google at all. We're going to make them visible through listing search and we are going to start to be building out these make model information pages. But that will happen during the second half of the year.
So, I think this is a issue we are going to be dealing with through 2019, but I do believe that the real 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 now exactly when but we will start to see changes in the site and we'll point them out on the next call. We'll be able to see what we've done in every quarter that's going to accumulate over the course of the year.
Sameet Sinha -- B. Riley and Company -- Analyst
Thank you.
Operator
And our next question comes from the line of Kyle Evans from Stephens. Please proceed with your question.
Kyle Evans -- Stephens -- Analyst
All right. Thanks for taking my question. Chip, do you -- I think you mentioned 2Q test for the consumer-centric dealership interactions and a 4Q launch. I'm just trying to understand the priorities of everything that you are trying to get done this year and I am a little surprised if that's happening so late in the year.
Could you give me your thoughts on where that stands versus trade and SEO and some of the operational issues you face today?
Chip Perry -- President and Chief Executive Officer
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 rolling out is similar to what I just said last year, where I said we will 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, where we're going to launch this new experience. And we are going to do it -- two or three different versions in order to evaluate, which variants on this experience performs the best and then once we understand the lift that we are getting in that sales because we are going to see a much higher rate of registration.
We are going to see a much higher level of mass sales and we did see that in the modest test we did it last year. And so, we are going to as we wouldn't see those results in the test, which we're going to conduct in the second quarter. It'll take us a quarter or so to turn in 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 through 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 net sales from TrueCar, and at the same time, on the basis of higher net 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 do single 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 to in the three years I've been here. That's why I went to [Inaudible] 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 pricing very well on the cars they want to buy, introduce them to an upfront transactional price that's better they can find elsewhere typically on the market and they have lot of improvements in just the core functionality of the site planned for the first and second quarter. Those weren't profitable before we bought Capsella. The new user experience testing wasn't possible.
So all those things give us tremendous strong 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 are 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 love to have been able to say it's happening in this year, but we're not able to do that given the softness that we see in our organic traffic and the stores that we are getting an OEM.
But there is an acceleration coming. And if the -- it'll be principal product-led, along with our sales teams engaging with dealers to realize the higher level of revenue growth based upon higher level of net sales of dealership. That's our goal. We want to help dealers see the fruits of stronger volume through TrueCar and we have a clear roadmap to getting that this year.
Kyle Evans -- Stephens -- Analyst
You mentioned that the 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? Thanks.
Chip Perry -- President and Chief Executive Officer
Yes, trade achieved its goal of having a national network at the end of the year. We didn't have as quite a higher 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 from the first quarter we can see we are on pace to accelerate, the additions -- the competitive additions we had in the fourth quarter of last year. And we believe that we will be able to add roughly a 1,000 dealers for that network over the course of this year as we continue the strong promotion, the awareness- 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 mindshare with the dealers because they realize that this program is backed by the best used vehicle valuation system in America, one that proves a 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 generator, but also because it's a very strong -- as part our roadmap to creating [Inaudible] 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 long-term. Trade is very key to enabling us to -- to enable consumers to get that full transparency they desire and our acquisition of DealerScience will complement our Trade product very nicely because the DealerScience we have best-in-breed monthly payment calculation tool that dealers can place on their website as well as we will be able to integrate over the course of dealer. And TrueCar that will enable consumers to get penny perfect deals 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. [Inaudible] drives with Trade and DealerScience toward our vision of helping care buyers get a much more transparent view of the entire car deal, not just the price of the car.
Kyle Evans -- Stephens -- Analyst
But just to be clear, that $1.2 million in the quarter, was that below your expectation?
Chip Perry -- President and Chief Executive Officer
Yes, relative to where we started at the beginning of the year, yes. We wanted to get to $2.5 million. We are seeing us do $1.2 million. We still believe that that will have 2 to 4 x growth off of that base in 2019.
Kyle Evans -- Stephens -- Analyst
OK. Thank you.
Operator
Our next question comes from the line of Dan Kurnos from The Benchmark Company. Please proceed with your question.
Dan Kurnos -- Benchmark Company
Great. Thanks. 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?
John Pierantoni -- Interim Chief Financial Officer
I can certainly provide you guys a little bit more details in regard to some of the new revenue streams that we're seeing. In regards to specifically talking about trade, it gives you about $1.2 million in trade revenue in the fourth quarter. We're seeing something that's more in the line of, say, $8 million to $10 million number in 2019 on an annual basis. In regards to some of the newer products, so DealerScience gives us a small revenue stream.
We purchased that company in regards to their 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 and 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 are anticipating right now. There is also a couple of other products that were 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 will also see some of DealerScience come in as well. So you see a couple of those components with the new product that I mentioned more toward the back-end of the year.
Dan Kurnos -- Benchmark Company
And just on the -- going down a little bit further, just in terms of the 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?
John Pierantoni -- Interim Chief Financial Officer
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 impart driven by some of the challenges that we've seen in regards to the organic traffic that we described.
Dan Kurnos -- Benchmark Company
Got it. That's super helpful. Thanks. 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 you are 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 and to going after marketing once you get past some of the issues?
Chip Perry -- President and Chief Executive Officer
So, I would say, we had issues, some issues, modest issues in transitioning off of our ol legacy system. It's not significant. We're delighted with the launch of Capsella. We have TrueCar and our all affinity partners on that new cloud-based platform.
We are not plagued at the moment with tech issues. We had them last quarter but not now plagued. We believe that there is a lot of work to do here. 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.
John Pierantoni -- Interim Chief Financial Officer
We expect to have a comparable level of stand and t he resources that were focused on the pre-Capsella environment and transitioning over are now being deployed into product improvement and new opportunities. But we are seeing that that's -- we expect the spend to be roughly comparable and flat margins.
Chip Perry -- President and Chief Executive Officer
So, we spent three rebuilding our infrastructure. Now we completely redeployed that entire team to focus on innovation for the first time in three years. So, we're very excited about the path forward, which will [Inaudible] of fairly rapid product improvement chart listing experience. I mentioned much better presentation of the pricing curve, pre-prospects and post-prospects, improvements to our user experience.
And then the beginning of testing of our new consumer-centric interaction model which is 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 roadmap, dedicated team, milestone, and we will be reporting on our progress on those each quarter. We'll be able to see how we are getting to segment. We are in a much better place than we were a year ago, much better place.
The 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 who were implemented 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 had some short-term headwinds we are working through this year. But I am very pleased with the strategic progress we've made along 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 of dealers where our fees to dealers on a per car basis are much less than their marketing average they pay as a result of all the other channels, as we grow volumes into their business, we believe we'll have a strong foundation from which grow the share of their wallet and grow our revenue line. So, this company is poised to grow very nicely. Once these product improvement starts to take hold as this year proceeds.
Dan Kurnos -- Benchmark Company
Last one for me, if I could. Just on USAA, it always comes up from investors and the like and usually on these calls, so I figure just this to ask in light of some of the challenges you are facing. You did have a good quarter, but when is that negotiation up again? And does any of that headwinds you are facing concern you over getting that done at favorable terms?
Chip Perry -- President and Chief Executive Officer
We expect to grow our USAA channel this year by modest single-digit year over year consistent with the historical performance. So, USAA will benefit from the user experience change we make over the course of the year. So we're not building those into this forecast. So, we grew modestly last year.
We expect to some 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 will 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 are going to be quiet on that until we actually have a deal.
Dan Kurnos -- Benchmark Company
Fair enough. Thank you, guys.
Operator
Our next question comes from the line of Nick Jones from Citi. Please proceed with your question.
Nick Jones -- Citi -- Analyst
Hi, thanks for taking the question. I just had two quick ones. One on the trade product, do you have any kind of -- any number you can give us GPU uplift for the dealers using the product. I 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 launch of keywords against the competition and is that somewhere they can be shot up quickly?
Chip Perry -- President and Chief Executive Officer
OK. 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, for their acquisition price determines the 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. Consumer comes away understanding better why their car is worth what is worth because the tool gives them a dynamic real-time update of the value based upon all of 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 the car after it's presented them with 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 is any issue that is 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 deduction. There also could be some increases in value of the vehicle. If the consumer, for instance, didn't know there is a optional moon roof on the car, and there is, they will get the 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 with the consumer, works with the dealer and the dealers who are working with tell us that the transparency and the specific way in which it helps them identify the effects on 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 the car on a more objective 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 are able to have a better acquisition prices as a result.
At the same time the consumer walks away understanding specifically why the car is worth what it's worth. So there truly is a win-win and the dealers are giving us good feedback in their perspective and consumers are telling us that their satisfaction is much higher and they rate the overall transaction that they have with the dealer much more positively when they're using TrueCar Trade compared to when they are not using our tool. And with respect to your question on SEO, so the main battleground among our kind of company -- third-party companies in the search world is make-model search terms. Make-model search terms sometimes modified by geography, sometimes modified by price, by features that usually make model.
So the make-model searching reward companies that have a long legacy and tradition of serving the research upper funnel car shopper. TrueCar wasn't built that way. TrueCar was built as a lower funnel closer to the transaction pricing engine that resulted in 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 offline.
And so, SEO is never built into this company from the beginning in contrast to other companies in our space, who 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 consume
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