TrueCar Inc. (NASDAQ: TRUE) Q1 2020 Earnings Call Transcript

TrueCar Inc. (TRUE) Q1 2020 earnings call dated May 08, 2020

Corporate Participants:

Danny Vivier — Vice President, Investor Relations And Strategic Finance

Mike Darrow — President And Chief Executive Officer

Noel Watson — Chief Financial Officer

Analysts:

Lee Krowl — B. Riley FBR — Analyst

Marvin Fong — BTIG — Analyst

Steve Dyer — Craig-Hallum — Analyst

Rajat Gupta — JPMorgan — Analyst

Presentation:

Operator

Greetings. Welcome to TrueCar’s First Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host, Danny Vivier, Vice President of Investor Relations. Thank you, sir. You may begin.

Danny Vivier — Vice President, Investor Relations And Strategic Finance

Thank you, operator. Hello, and welcome to TrueCar’s First Quarter 2020 Earnings Conference Call. Joining me today is Mike Darrow, our President and Chief Executive Officer; and Noel Watson, our Chief Financial Officer. As a reminder, we will be making forward-looking statements on this call. These forward-looking statements can be identified by the use of words such as believe, expect, plan, anticipate, becoming, toward, will, intend, confident and similar expressions and are not and should not be relied upon as a guarantee of future performance or results. Actual results could differ materially from those contemplated by forward-looking statements. We caution you to review the Risk Factors section of our annual report on our Form 10-K, our quarterly report on Form 10-Q and our other reports and filings with the Securities and Exchange Commission for a discussion of the factors that could cause our results to differ materially.

The forward-looking statements we make 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 discuss certain GAAP and 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 Mike.

Mike Darrow — President And Chief Executive Officer

Thank you, Danny. Good afternoon, everyone. We appreciate you taking time to join us today. I want to first take a moment to acknowledge those directly affected by COVID-19 pandemic and the disruption it has brought to our society and economy. Over the course of my 30-year career, no other event comes close to rivaling the magnitude and speed by which this disease has reshaped our daily lives. Entire industries have come to a sudden halt, while others are being forced to rapidly evolve to meet the needs of consumers from afar. During this unprecedented time, I am continually amazed by the response of my TrueCar colleagues to the needs of our community, whether it’s serving those most vulnerable by partnering with Meals on Wheels to deliver food to the elderly, writing cards for loved ones cooped up in nursing homes or sewing masks for health care workers, the compassion of our people is truly inspiring.

As we look to navigate what will most certainly be a volatile future, I and the entire TrueCar leadership team remain committed to the safety and well-being of our employees, retailers and their customers. I’d like to now touch on the actions we took here at TrueCar to rapidly respond to COVID-19 and its impact on our business. First and most importantly, in the middle of March, following the escalation of social distancing guidelines across the U.S., we made proactive decisions to transition our entire workforce, including our remote sales and service team members to mandatory work from home status. I’m extremely proud of the way our organization responded to this decision and was impressed by the seamlessness with which product development and business activity continued. Within a matter of days, all departments were functioning at a high level and innovation was full speed ahead.

In fact, the success of this transition has encouraged us to reconsider the way in which we leverage remote work going forward to reduce cost and sustain productivity. Second, recognizing the severe impact to automotive retail caused by government-mandated stay-at-home restrictions, we took quick action to financially support our dealer customers. For dealers in pay-per sale states, rates are automatically adjusted for the decline in unit volume. In states where pay-per-sale billing is not available, we extended a 50% discount on April and May subscription rates. Altogether, these actions saved our dealer community more than $15 million and demonstrated our superior commitment to helping our dealer partners navigate through these challenging circumstances. Another action we took in response to COVID-19 was to rapidly launch an all-new Buy From Home experience on our truecar.com and the majority of our affinity sites.

Launched in late March, this experience is designed to help consumers and dealers safely and remotely navigate buying amidst strict social distancing guideline. To be eligible for the program, dealers agree to provide remote paperwork processing, convenient test drives and home delivery and verified vehicle sanitation, all so customers can shop for a vehicle online and take delivery with little to no physical contact. TrueCar continues to introduce consumers to participating dealers who then guide the consumer through their online car buying process. We were first amongst our peers to launch a program in support of online retailing, and the response has been incredible. To date, more than 6,000 dealers, roughly 40% of our dealer network, have opted into the buy-from-home program. In April, those dealers completed more than 8,000 remote transactions supported by this program.

And most importantly, in our surveys of verified car buyers, 95% rate their buy-from-home experience as good or excellent, a clear signal of the demand for digital solutions. We are very excited by the success of our buy-from-home program, both in terms of dealership adoption and consumer engagement, and we will build on this experience as we accelerate towards becoming the first automotive marketplace with a complete online car-buying experience. More on that in a bit. Finally, anticipating a significant drop in automotive dominion, we completed a thorough assessment of our entire cost structure to identify savings across the business. Within sales and marketing, we suspended or deferred all noncommitted TV and radio spend and significantly reduced our digital acquisition budget.

In addition, we were able to successfully renegotiate pricing with a number of large vendors and benefited from significantly lower spend on employee travel costs. Collectively, our quick action helped us produce nearly $10 million of adjusted EBITDA in Q1 and added to our $180 million cash and cash equivalents balance. In summary, I am very proud of TrueCar’s immediate response to COVID-19, a response to carefully balance the needs of our employees, dealers, consumers and shareholders. Next, I’d like to comment on our expectations for the remainder of 2020 and highlight the opportunities ahead of us. In uncertain times, it is human nature to look to leaders for guidance and direction. For the past nine years, we’ve had the privilege of owning ALG, a highly regarded thought leader within the automotive industry that has stepped up in recent weeks to help guide our community through these uncharted waters.

For those of you familiar with ALG, simply put, ALG is the leader in automotive residual value forecasting, acting as the benchmark for future values of vehicles. ALG works with most every OEM and captive lender, bringing invaluable insight before, during and after the development of new model launches. Having proven itself as the benchmark for residual value, ALG’s forecast of the broader new car retail market is highly anticipated, especially during volatile times like these. At the start of the year, ALG predicted 16.9 million light vehicle sales in 2020, roughly flat to 2019 levels. Taking into account the direct and long-term impact of COVID-19, ALG has revised 2020 forecast to a range of 11.6 million to 13.6 million vehicle sales, down roughly 24% year-over-year at the midpoint. The upside of the range assumes that stay-at-home restrictions are lifted in May, and government stimulus measures support a generally smooth transition out of pandemic conditions.

The downside of the range takes some varied view and assumes a second less pronounced wave of movement restrictions in the fall, and a slower economic recovery, driven by sustained unemployment levels above historic norms. Regardless of the specific outcome, both cases point to a meaningful contraction of the automotive retail market. This contraction will certainly impact TrueCar and our dealer partners. However, for the best companies, on the other side of adversity comes opportunity. I’d like to spend the remainder of my time here highlighting the existing opportunities ahead of us. I think many of us would agree that COVID-19 will have a lasting impact on how consumers and retailers embrace digital shopping. In a recent April survey of 2,400 in-market car shoppers, two-three have responded that they would be more likely to transact with a dealership that offers components of TrueCar’s Buy From Home service, namely the ability to complete the entire purchase online and receive the vehicle in their driveway. And this change in sentiment is shared by retailer.

Dealers, in particular, no longer need to be convinced that offering remote buying experience is an absolute necessity. In a recent NADA survey, 91% of dealers said they would now incorporate digital retailing into their sales process. Having been around this industry for quite some time, I’ll be the first to acknowledge that change in our space can be slow. However, I believe what we’re seeing now is different. I can sense an inflection point in the adoption of digital retailing solutions within automotive, and I’m excited about what that means for TrueCar. Fortunately, for us, many of the changes we’ve made to our consumer experience over the past 12 months has positioned us well, given the changing landscape. As we announced in late January, the introduction of an entirely new personalized dealer connection experience, in which a consumers’ contact information is no longer automatically passed to three dealers, marked a key turning point in our commitment to empower consumers with more control over how and when they connect with our dealers.

In Q1, we lean further into this commitment by empowering consumers to connect with dealers when ready and on their terms through text messaging rather than receiving unwanted phone calls. We released this texting solution to 25% of truecar.com new car traffic in late March. And based on the positive initial response, ramped it up to 50% in early April, and are on track for planned 100% rollout in the coming weeks. As you might expect, the data we’re seeing is very compelling. 85% of shoppers are choosing texting over phone calls as their preferred method of communication with dealers. Consumer response rate to dealer text messaging is 45%, well above industry averages of both e-mails and phone calls at 20% and 9%, respectively. And for the 45% of consumers who respond to a dealer text, 65% do so within an hour, a clear signal of consumer engagement. Most importantly, we’re beginning to see signs of a positive impact on our core KPIs, including positive Net Promoter Scores and improved on-site conversion and close rates.

Looking forward, the rollout of text of a texting platform in our new car experience is just the beginning on how we plan to evolve to meet the needs of the modern consumer. In the months ahead, we plan to begin integrating additional text-driven interaction points throughout the car-buying journey, including throughout our used car experience to better facilitate consumer and dealer touch points. You can imagine in the not-too-distant future, being able to ask a dealer a question, negotiate payment options or schedule a test drive, all through a preferred communication method that is manageable and efficient for both the consumer and the dealer. Now taking a step back, while we’ve made significant improvements to better facilitate consumer and dealer interaction, we recognize the larger opportunity ahead of us. As I mentioned before, COVID-19 has fundamentally altered modern-day retail, forcing industries to adjust to new consumer demands in order to survive. The automotive industry is no exception.

Dealers are looking for marketplaces such as ourselves to be their digital retailing extension, seamlessly integrating with their existing systems and processes as they help consumers navigate the very complex process of buying a car online. Everything from vehicle discovery to deal configuration, to driveway delivery. Recognizing this growing need across our franchise network, we have reprioritized our digital retailing efforts as we look to quickly and aggressively innovate towards becoming the first online marketplace to support a fully remote car-buying process. We’ve broken this effort into three phases. Phase one is already complete, consumers can visit truecar.com, find the car they want, compare pricing across dealers, receive upfront guaranteed cash offers on their trade-in, and most importantly, connect with a dealer enrolled in our Buy From Home experience who can help them complete the rest of the process online or otherwise, without contact. I’d like to underscore, we believe we are now the only digital marketplace with fully integrated new car trade-in solution.

Phase two, set to launch in a couple of weeks, goes one step further by creating a dynamic self-serve experience that enables consumers to configure personalized lease and loan payments from participating dealers. Since previewing this experience in early April, reactions from our dealer community has been strong. Nearly 3,000 dealers have opted in to date, and we expect the majority of them to be live on the launch date later this month. And finally, before the end of the year, we plan to launch Phase three, a complete checkout experience where after receiving a guaranteed trade offer in customizing the deal, consumers can proceed through scheduling a test drive, learning about and selecting warranties and add-ons, completing any necessary credit applications or document transfer and ultimately, scheduling a pickup or home delivery of the vehicle. At every step in the process, TrueCar’s communication platforms will be there to seamlessly facilitate consumer and dealer conversation.

Beyond Phase three, we will look to expand our payments infrastructure further up into the shopping cycle, allowing consumers to evaluate accurate payments, customized to them across multiple vehicles as they narrow their consideration set and land on the vehicle that is right for them, a level of consistent apples-to-apples comparison shopping and short circuits much of the back and forth research across numerous sites required in today’s typical car-buying journey. Let me be clear, creating an end-to-end car-buying experience has always been the goal. We recognize the time to act quickly and aggressively is now. We have increasingly prioritized around this effort, and our product, engineering and sales teams are endeavoring to achieve this goal with a renewed sense of purpose. Finally, I’d like to provide a brief update on our initiative to recapture segments of the military community after the expiration of a transition services agreement with USAA later this year.

As a reminder, we are leveraging our 13 years of experience serving the military market through our USAA affinity partner channel to branch out and offer a unique car-buying service to an even larger audience of more than 40 million active and retired military professionals and their immediate family. Thanks to an incredible highly cross-functional effort by the entire TrueCar team, I am pleased to report that a couple of days ago, we officially launched a TrueCar-branded car-buying experience for the military. The experience, called TrueCar Military, provides service members and their families access through an appreciation package that includes exclusive OEM incentives, two years of piece of mind benefits offering up to $4,000 in value through auto repair and deductible reimbursements and exclusive access to a dedicated team of TrueCar support specialists committed to providing a differentiated level of service and care. While it’s in its infancy, we ultimately see TrueCar Military becoming the automotive buying experience for the military community.

And potentially even expanding to include other heroes in our community who dedicate their lives to helping others like first responders and teachers, to name just a few. We wanted to become a place where OEMs, affinity partners and dealers all lean in to provide our everyday hero with a differentiated value and a unique purchasing experience. We will continue to report on the progress of this initiative in the coming quarters as we prudently invest to grow awareness of this new experience. In the meantime, I would encourage everyone listening to visit truecar.com/military to check out the amazing work that’s well underway.

And with that, I’ll turn the call over to Noel.

Noel Watson — Chief Financial Officer

Thank you, Mike. It has been a very different quarter than we were expecting when we last talked to you in early February. What we’ve all seen transpire in the last two months has certainly been unprecedented. While we could not be more proud of our TrueCar colleagues who have shown incredible resilience during these challenging times, I’d like to complement Mike’s remarks with a particular focus on monthly trends in Q1 and what we’re seeing across our core KPIs in early Q2. I’ll start with Q1. The first quarter got off to a solid start in January and February results, trending in line with expectations. As a result, we entered the final month of the quarter with revenue up 2% year-over-year, tracking slightly above the midpoint of our Q1 guidance range. The trend lines held strong in early March. We’ll quickly reverse course as government officials began issuing mandatory stay-at-home restrictions and recommended social distancing guidelines midway through the month.

On the demand side of our marketplace, we ended March with monthly unique visitors down 10% year-over-year, well below the 20% year-over-year traffic growth we had experienced in January and February. As it relates to dealer count, we saw a drop-off in the second half of March. We ended the quarter with 15,549 total dealers, down 1,411 from last year-end. Franchise dealers accounted for the majority of the loss, with independent dealer count less impacted. It is important to note, however, that most of these dealers chose to suspend rather than cancel our services and we expect to see a number of them return to our business as the economy begins to reopen. Given COVID’s effect on the tail end of Q1, we ended the quarter with revenues of $83.5 million, down 2% year-over-year. Total units for the quarter ended at approximately 197,000, down 15% year-over-year, in line with general industry trends.

Franchise dealer revenues most directly tied to unit volumes were most impacted, down 11% year-over-year. Independent dealer revenues of $11 million remained a bright spot, up 24% in the quarter. And new dealer products contributed $4.2 million of revenue, up slightly compared to Q4 2019 levels. OEM revenue finished at $3.5 million for the quarter, down 16% year-over-year, in line with overall unit volume decline. And finally, we began to realize the benefit of our transition services agreement with USAA as forecast, consulting and other revenues came in at $6.2 million, up 36% year-over-year. Included in the $6.2 million is approximately $1.6 million of benefit from the USAA TSA. Now turning to Q1 non-GAAP operating expenses. As Mike mentioned, the organization quickly responded to prudently managed costs in response to the major drop off in automotive demand, while certain variable costs were naturally lower given the changed environment.

First, we saw a significant leverage from our sales and marketing line, which declined from 58.6% of revenue in Q1 of 2019 to 53.1% in Q1 of this year. We saw an improvement in our blended acquisition cost per sale, which fell to $124, down 6% year-over-year as a result of our rapid response in the back half of March to remove any noncommitted TV, podcast and radio spend and to significantly reduce traffic acquisition budget. A portion of this improvement was also driven by a benefit from our transition services agreement with USAA. And finally, as it relates to employee-related costs, we saw lower travel and entertainment and office expenses as a result of COVID-19, and we also reduced discretionary compensation to reflect the underperformance in our top line. While many of the benefits of our response will continue to impact future periods, our quick out efforts helped produce $9.5 million of Q1 adjusted EBITDA, more than twice the top end of our guidance range.

In summary, while COVID-19 certainly impacted our Q1 revenue, we’re pleased by our strong adjusted EBITDA performance and positive cash flows in the quarter, a clear demonstration of our commitment to stewarding shareholder capital. And quickly, looking at our GAAP expenses in the quarter. We determined that a triggering event occurred in Q1 due to the decline in our market capitalization as a result of the COVID-19 pandemic and the pending departure of USAA. This requires an interim quantitative impairment test as of March 31, 2020. As a result of that test, we recorded a noncash goodwill impairment charge of $10.2 million. We do not expect this noncash impairment charge to have any impact on our operations, liquidity or cash flows. However, given this onetime impairment charge, GAAP net loss in the first quarter of 2020 was $10.7 million or $0.10 a share compared to a loss of $14.4 million or $0.14 a share in Q1 of 2019.

Non-GAAP net income was $4.2 million or $0.04 a share in the quarter compared to a net loss of $0.4 million or $0.00 per share this time last year. I’d like to now provide some commentary on what we’re seeing in April and May and our expectations for the remainder of the second quarter. I’ll start with the demand side. Traffic to the site steadily recovered throughout April, returning to pre-COVID levels by early May. For April as a whole, monthly unique visitors were only down 5% year-over-year despite the significant reduction in branded media spend. When you cut this one layer deeper, a few important themes emerge. For one, all of the traffic growth was driven by our truecar.com branded channel. On the direct response marketing side, we managed to over 50% of our digital spend and still drove flat traffic year-over-year, a testament to the great work led by our growth marketing team. Second, we saw a rapid recovery of our organic traffic, with volumes exceeding pre-COVID levels by the end of April.

As we’ve discussed before, we are beginning to realize the returns from our multiyear investment in both the technical and experiential factors that drive Google’s ranking algorithm. For instance, our new brand experience launched in late January, continues to drive lower box rate and improved on-site engagement, sustainable drivers of Google page rank. In light of the traffic recovery, we are optimistic about unit volume trends for the remainder of Q2. However, with the significant loss of traffic in late March and the continuation of dealership closures throughout the month, April units were strongly impacted, down 45% year-over-year, in line with the broader retail market. As for dealer count, much of the suspension activity was concentrated toward the end of March.

Thanks to the dynamic nature of our pay-per-sale billing model and our proactive discounts to subscription rates, we have seen this trend flatten throughout April and believe the bulk of the suspension activity in Q2 is behind us. While it is difficult to give a revenue range for Q2, given many of the uncertainties outside of our control, I’d like to provide some additional insights to help guide expectations. As it relates to the impact of COVID-19 on unit volumes, we’ll continue to look to ALG’s industry forecast to inform our expectations. As Mike mentioned, the key inputs we’ll be focused on include the evolution of government-mandated today at home restrictions and economic stimulus, consumer confidence levels and unemployment rates and dealership closures. Regardless of unit performance, subscription rate discounts of 50% in both April and May will materially impact Q2 top line results. We have not yet determined whether or not any discounts will need to extend into June. On the expense side, many of the actions we took in late March to reduce our variable sales and marketing spend will carry forward into Q2.

We anticipate that branded media spend, for instance, will remain significantly below prior year levels. Additionally, we expect to see savings in partner marketing spend, which is directly tied to revenue from our auto buying program. Overall, we project nice leverage from our sales and marketing line in Q2 as we expect it to decline faster than revenue on a year-over-year basis. Outside of sales and marketing, we expect to realize a number of expense savings throughout our fixed cost structure as we continue to focus on operational efficiencies driven by process movement and reductions or improvements in vendor spend. We also have taken steps to manage our employee-related costs during this time. We have implemented a temporary hiring freeze, reduced discretionary compensation and our executive management team has voluntary taken reduction in base salaries effective April 1. We expect to reevaluate each of these areas as the effects of the pandemic begin to weigh. All things considered, given the expected pullback in Q2 revenues, we anticipate low single-digit negative adjusted EBITDA for the quarter.

Therefore, given our strength in Q1, we expect adjusted EBITDA in the first half of 2020 to be comfortably positive. For the full year, we will not be providing formal guidance at this time given the heightened level of uncertainty caused by COVID-19. However, there are a few items I’d highlight for your consideration. First, we remain committed to achieving positive adjusted EBITDA and preserving cash flow in 2020. We intend to continue to manage our variable spend and make the requisite adjustments to our fixed cost structure to uphold this commitment. Second, relative to Q2, we anticipated top line recovery in Q3 assuming stay-at-home restrictions are gradually lifted, government stimulus measures support consumer confidence and the broad discounting of dealer subscription rates. Third, we continue to expect a meaningful impact to unit volumes as well as headwinds to our dealer count in Q4 after the termination of our partnership with USAA. And finally, despite the volatility ahead, we entered Q2 with more than $180 million of cash and cash equivalents on our balance sheet and over $30 million available in an undrawn credit facility.

As Mike explained, we’re confident that we’ll exit this year with a differentiated value proposition for consumers and dealers alike as we look to accelerate towards becoming the first online marketplace to enable consumers to buy cars remotely by connecting them with dealers who leverage our tools and capabilities to provide that service. In doing so, we are positioning TrueCar for growth and profitability in 2021. We will now transition to the Q&A portion of the call. Please note, in compliance with our applicable government orders, Mike, Danny and I are taking this call from our respective homes. If there are any technical issues or delays, we do apologize in advance.

And with that, let’s go to questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Lee Krowl with B. Riley FBR. Please do with your question

Lee Krowl — B. Riley FBR — Analyst

Great, thanks for taking my question guys. And really helpful color provided on the product strategy and road map. Wanted to kind of dive in on Q2, specifically, your expectations for kind of the per unit monetization, just given the strength in Q1? And also just kind of the mix dynamic between new and used based on the momentum in used in Q1, but a baseline assumption that perhaps Q2 probably skews more to new?

Noel Watson — Chief Financial Officer

Thanks. Hey, Lee only saw maybe okay ahead, Mike.

Mike Darrow — President And Chief Executive Officer

I was just going to say, I’ll take the kind of jump in to take the second one firstly. We’ve been looking at some of the mix numbers that are coming in, and we’re certainly transitioning into a new car season of the year. We think the initial impact on COVID was a little heavier on the new car side. The OEMs quickly responded with aggressive incentives and got out there and supported their dealers with very aggressive new car incentives that we think will stimulate any discretionary buyers that are out there. In addition, our work with ALG tells us that there was about nearly 0.75 million leased units that were scheduled to come back to the marketplace over the past eight weeks and many of the OEMs did extension programs and deferrals for those units. So as those things kind of sort themselves out, those folks come back into the marketplace, we like the growth we’re seeing on used, but we expect the new car market to come back later in May and certainly in June.

Noel Watson — Chief Financial Officer

Yes. And Lee, this is Noel. Just on as it relates to monetization in Q2, obviously, we are still in very uncertain times, and there’s a lot that still needs to unfold as it relates to the extent and timing of the recovery. With that said, I think the higher monetization you’re seeing in Q1 is a bit of an anomaly given the activity that we saw with dealer suspensions and cancellations towards the end of Q1. That will actually we should see that actually come back down in the second quarter, especially given the lower unit volumes that we’re seeing thus far in the quarter.

Lee Krowl — B. Riley FBR — Analyst

Got it. Thanks for taking my questions guys

Operator

Our next question comes from the line of Marvin Fong with BTIG. Please do with your question

Marvin Fong — BTIG — Analyst

Great, thank you for taking my questions, guys and Glad to hear that everyone is safe. I had a question. I just wanted to know, Noel, did I hear correctly that April units were down 25%?

Noel Watson — Chief Financial Officer

No, units in April were down 45%.

Marvin Fong — BTIG — Analyst

45%. Okay. That makes more sense. Okay. And then if you could, so what’s the outlook? Has the outlook changed any OEM incentives, given that clearly the OEMs are going to they have put in some aggressive programs or how are those conversations trending as we look to reopen and hopefully, more new car sales coming down the road?

Mike Darrow — President And Chief Executive Officer

Yes. Thank you for the question, Marvin. And hopefully, you’re safe and well yourself. We’ve seen some success. We think our military channel that we just launched earlier this month is going to be a great area for our OEM partners to lean into. We transitioned some of our ongoing partners over from USAA, over to that military channel as they we continue to try to broaden our reach into that segment. So we’ll look forward to aggressively picking up those OEM conversations. We’ve had some good initial conversations.

A lot of the external discussions we had in the marketplace slowed down a bit as companies became very internally focused in making sure they were transitioning to a safe, stay-at-home process and making sure their own systems are under control. But we’re optimistic about our OEM opportunities going forward. We’ve gotten a real good initial response to our military channel and we think we’ll continue to see that grow.

Marvin Fong — BTIG — Analyst

Great. And hopefully, I could get an extra lens since that first one was just a housekeeping. So the churn, a little higher on the franchise side versus the independent side, above doubled by my math. And I think you said a lot of that is suspension activity. Could you just maybe just drill down into that and help us understand why the churn rates were different?

Mike Darrow — President And Chief Executive Officer

Yes, Marvin, what we’ve seen a very large portion of the numbers we talked about in the dealer numbers were suspensions. Over 90% of that was a suspension. Dealers were quickly reacting to state regulations and things that were affecting their operations. So we expect a lot of that business to come back. The height of that was the middle of March through about the middle of April. We saw that those numbers begin to plateau as we got deeper into April. And towards the end of April and the first part of May here, we’ve seen dealers start to come back to the system.

We’ve seen several hundred dealers returning to the platform that we’re in a suspension mode as some of the regulations lighten up. So we’re encouraged by the fact that we did not get a lot of cancellations. Most of the dealers were suspending services, I think, until they got a real good sense of what type of immediate impact they were going to be facing. So we’re encouraged, and we think we’ll see a number of those dealers come back to our system in May.

Noel Watson — Chief Financial Officer

Yes. And Marvin, just to mention or reiterate what we said in our comments, two things. One is our many of our dealers are on a pay-for-performance model. And so that automatically adjusts the cost of our program to them to the level of sales that they can actually achieve. And then secondly, we proactively, in support of our dealer network during this trying time, offered a significant discount to our subscription dealers, 50% on their products in April and then more recently extended that to May as well. So both of those factors helped to mitigate churn. And as Mike said, the large majority of the activity was suspensions. And so that’s a really strong signal that’s starting to play out in late April and early May with dealers coming back to the platform.

Marvin Fong — BTIG — Analyst

Fantastic. Thanks guys, I appreciate the color.

Operator

[Operator Instructions] Our next question comes from the line of Steve Dyer with Craig-Hallum. Please do with your question

Steve Dyer — Craig-Hallum — Analyst

Thanks, good afternoon guys. You’ve given some great color so far. The monetization in the quarter, was that just a function of the lower dealer count at the end? Or was there anything sort of specific pushing that number up?

Noel Watson — Chief Financial Officer

Yes. That’s really the brunt of it, Steve, is that late quarter had a surge in suspensions. And any of the suspensions or cancels that came in are reflected in our March end number. So that drove monetization abnormally high. With the discounting that we provided to our dealers in April and May, we obviously expect that monetization to come down pretty significantly. And then to assuming the recovery that we’re starting to see continues and we don’t have to do any broad discounting beyond Q2, we would see that modernization start to stabilize.

Steve Dyer — Craig-Hallum — Analyst

And just as it relates to those discounts, can you remind us what percentage of the business is subscription? And what is pay per transaction? And the subscription piece, does that true-up at the end of the month? In other words, do you have a soft month and that is sort of trued-up or trued-down in this case? Or is there a look back there?

Noel Watson — Chief Financial Officer

Yes. So on our core ABP business, subscription is around two-three of the business and pay per sale is around one-three. So it is the majority of our revenue. And we invoice for our subscriptions in advance for the month. And there’s a 30-day notice period required on our in terms of cancellation. We did work with our dealers during this time around that notification period. And so in many cases, waived it. But generally, there’s a 30-day tail on it. So we did see some impacts in March from those cancellations, but they were largely late in the month. So you’ll see a smaller impact in March, and it starts to take a heavier effect in the early part of Q2.

Steve Dyer — Craig-Hallum — Analyst

Okay. And then one more, if I could just jump in. Your military channel, I guess, how are you planning to sort of reach a lot of those folks? I think one of the benefits of USAA was its brand recognition comes with marketing collateral that they’re putting out and certainly a reputation amongst service members and former service members. So I guess, in the absence of that endorsement, how do you reach those folks on the same scale?

Mike Darrow — President And Chief Executive Officer

Yes, Steve, and thank you for the question. We’ve got an extensive history of servicing that military community that’s grounded in our was grounded in our business with USAA. We’ve got a lot of learning there. We’ve, over the years, developed a number of grassroots initiatives to get involved with the military community, we’re partners with the DAV, we’re partner with RWB. We have a DrivenToDrive program where over the past four years, we’ve awarded a wounded vet with a retrofit vehicle to enable them to get back into the community and become mobile again and experience that freedom. So we’ve been active in the military community outside of USAA. And the thing that encourages us is USAA membership was about 13 million. We think the total audience available there is about 40 million. So we’re excited about the opportunity to get at that expanded audience. We’re going to work hard to understand when we add value to these folks.

We’ve got a one 800 number set up for the military users of our site to dial in and ask questions, and we’re going to make sure that we’re delivering real value to that community. So we think over time, we could see material significant growth out of this channel. We haven’t put an early burden business burden on the channel because we want to make sure we’re doing the right thing for the members, make sure it’s authentic and continue to get out there and support the military community. So the connection with USAA did create an opportunity for us, but we think stepping outside of that, there’s a bigger opportunity that we can get at and really communicate with these folks and deliver a lot of service. So we’re excited. We’re just getting started. We’re going to learn a lot as the year goes on, but we’re really proud of what we were able to do.

Steve Dyer — Craig-Hallum — Analyst

Great, thank you

Operator

Our next question comes from the line of Rajat Gupta with JPMorgan. Please do with your question

Rajat Gupta — JPMorgan — Analyst

I just had a follow-up to one of the previous questions, just ask in a different way. A lot of a large franchisee leaders, they seem to be taking some aggressive cost-reduction actions in light of the lower volume, including on areas like advertising. And some of these expense reductions are clearly temporary, and you’re also supporting them. But once we are on the other side of the COVID crisis, I mean, did you expect the dealer count to be back to prior levels? And even if they do, could the monetization level be structurally lower once that happens? And then relatedly, how does the digital experience offering impact monetization as well?

Mike Darrow — President And Chief Executive Officer

Well, I’ll take a pass at that first, [Rajiv], in the beginning. And I think what we’ve seen with our dealer community is we’re mid- to lower funnel part of their marketing investment. We are highly attributable investment that they make in the marketing arena. And as Noel mentioned, about 40% of our dealers are on a pay-per-sale model. So those adjust and dealers are assured that they’re going to get value based on what we build them for. So we think dealers, when they come back to the system, we honestly believe that the largest portion of the suspensions was just uncertainty on the dealer’s part as to what type of operations they were going to be able to run around the sales part of their business. And if we had seen a heavier percent of cancels, it probably would have been more alarming to us, but the notifications we got from dealers were suspension of service, and we’re already seeing, like I say, a large percentage of those come back to the network.

So we’ll continue to monitor that closely. We want to make sure that we’re delivering value to our dealer partners, either in a pay-per-sale model or a subscription model. And if there’s future adjustments that have to be made going forward around subscription services and that, we’ll certainly be prepared to make those. But we fully believe the bulk of the dealers who went into a suspension mode will return.

Rajat Gupta — JPMorgan — Analyst

Understood. That’s helpful color. And just as a follow-up, in terms of the opex cuts, clearly, really good execution here in the first quarter. You gave us some color on the S&M side for second quarter. But going beyond to the third quarter, fourth quarter, with the work from home opportunity here, like can you give us a sense of what degree of some of these cost cuts could be permanent in nature, some kind of quantification around that? That will be all.

Noel Watson — Chief Financial Officer

Yes. Thanks for that. This is Noel. So thanks for putting out the outperformance on adjusted EBITDA in Q1. We have focused on a fair amount of cost cutting. Some of that has been organic with the stay at home, as you mentioned. We’re seeing lower travel and entertainment costs. We’re seeing office expenses that are down. And then there’s a fair amount of our fixed cost, where we looked at kind of scoured our budgets to ensure that anything that was noncritical or discretionary, we were either eliminating, renegotiating or discounting. And there’s a fair amount of variable spend that we also quickly adjusted given the impact of COVID around our sales and marketing to pull that back, and we’ve seen really significant efficiencies. It started towards the tail end of March. But well into April and now today, given the lower spend, I think that’s happening in the segment generally.

Also some efficiencies that our growth marketing team continue to make improvements and to find. We also cut back on our sort of brand spend pretty significantly. And so we’re really scouring all of our operations, looking for cost efficiencies. As we look out, I think our performance in Q1 is an indication of where our mindset is at. In our prepared remarks, we’ve made it really clear that we’re committed to being adjusted EBITDA positive. We will we believe we have the levers that are available to us to make that a reality, given a fairly wide range of revenue outcomes. And we will make the challenging decisions, should we need, in order to make sure we live up to that commitment.

Rajat Gupta — JPMorgan — Analyst

Great, thanks and good luck

Operator

Thank you, Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back over to Mr. Mike Darrow for any closing remarks.

Mike Darrow — President And Chief Executive Officer

Thanks, everyone, for taking the time to join us today. The path ahead certainly will be challenging. I’m confident that on the other side of this adversity will come opportunity. I hope what you heard today reflects the conviction I have that TrueCar will emerge from this period stronger than we were before, united in our pursuit of dramatically changing the way people discover, buy and sell cars. Please stay safe and healthy, and thank you for your time.

Operator

[Operator Closing Remarks]