Autoweb Inc (AUTO) 2002 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to Autobytel's, fourth quarter year end 2002 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Now I would like to turn the call over to Hoshi Printer, Executive Vice President and CFO of Autobytel, Inc. Mr. Printer, you may begin your conference.

Thank you, Matthew. Good afternoon and thank you for joining us today to discuss Autobytel's earnings for the fourth quarter and yearend 2002. With me is Jeffrey Schwartz, President and CEO of Autobytel. We will begin the call with an overview of the financials. Jeffrey will discuss the business and we will then open the call up for questions.

Today's conference call, including the question and answer period, projections or other forward-looking statements regarding future events and the future financial performance of the company, are covered by the Safe Harbor statement contained in today's press release. We would like to caution you that actual events or results may differ materially from those forward-looking statements. We refer you to documents the company has filed with the SEC, specifically the form 10-K for the year ended December 31st, 2002 and quarterly reports on form 10-Q. These documents identify the principal factors that could cause results to differ materially from those forward-looking statements. With that, I'd like to turn the call over to Jeffrey Schwartz. Jeffrey?

Thank you, Hoshi, and welcome to Autobytel's fourth quarter conference call. I am pleased to report yet another financial milestone in the company's history. Today, we report our first quarter of net income, delivering $0.5m or one cent per share. This is our second consecutive quarter of cash generation, which came in at $1.1m. This is also our first quarter of EBITDA without adjustments, which came in at $1.0m or three cents per share, after four consecutive quarters of pro forma EBITDA. For the full year we delivered eight cents per share of EBITDA.

During the call last January, I told you that 2002 for us was about rediscovering our DNA as an automotive marketing services company. I told you that we were going to simplify, focus and execute, and I asked you to measure our progress by a series of operating metrics that I have reported to you each quarter for the past year. Well, I believe that we have been successful in our 2002 mandate. We have improved the operating metrics of our core business, and delivered sustained EBITDA and cash flow. Now we have reached the net income milestone.

After Hoshi gives you the scorecard for the year, I will discuss the outlook, opportunities and mandate for 2003. Hoshi?

Thank you, Jeffrey. Let me begin by commenting on the financial achievements that Jeffrey briefly mentioned. We generated $1.1m in cash in Q4, which followed $3.1m of cash generation in Q3. The cash balance increased from $26.5m in Q3, to $27.6m in Q4. We have indicated to you last quarter that Q4 would be cash neutral to slightly positive, and that Q1 would be negative cash flow.

The Q4 cash generation of $1.1m is a result of three items. Revenues for enterprise sales and web site advertising were better than we anticipated. We continued to maintain our expense controls, and we had a major push in collections so that the DSO declined from 38 days to 31 days. For the same three reasons, we are revising guidance on Q1 cash generation, and we now believe that we could be cash neutral to positive from Q1. We also anticipate that we will be cash positive every quarter in FY 2003.

Overall revenue increased by 4% from $19.3m to $20m. This represents a reversal of the revenue trend from Q3 2002. Two of our four revenue streams showed vigorous growth. I will begin with program fees. Program fees declined from $14m in Q3 to $13.1m in Q4. While that decline is due to a reduction in the number of dealers, and a reduction in the monthly fees per dealer, I want to provide you context, which will indicate that we will be unrelenting in our pursuit of dropping unprofitable dealer relationships.

The program dealer count declined from 5621 at the end of Q3, to 5362 at the end of Q4, a net reduction of about 250 dealers. We lost about 750 dealers and added about 500. Of the 750 dealers, about a third of the dealers were not profitable for us. Seventy dealers were terminated due to our decision to discontinue operations in Canada. We acknowledge that we had a high dealer churn in 2002, and management expectation is to reduce that churn by a third in 2003. Inside the company we have dedicated significant resources to make that happen, and the current trends appear favorable.

The average monthly program dealer fee declined by 2%, from $805 per month, to $788 per month. The closing ratio continues in the 16% range, which has improved by a third since the beginning of 2002. The 16% closing ratio implies that a typical dealer sells one car for ever six purchase requests we send to the dealer. From an economic standpoint, at about $21 per purchase request, it costs the dealer about $128 in marketing costs per car sold through Autobytel, against the average of $475 per car through traditional marketing methods.

We sent 607,000 customers, or purchase requests to the program dealers in the fourth quarter, and another 200,000 to the enterprise dealers. For the same period in 2001, we sent 1.1m purchase requests. Paradoxically, this did not directly affect the revenue side, but we reaped enormous benefit on the cost side. The reasons for the financial benefit is a proprietary wireless technology developed in-house, that we have discussed in prior conference calls. This technology allows us to monetize every purchase request we buy. Revenue per purchase request increased by 5% sequentially to about $21 per purchase request. We believe that considering the quality of the customers that we send to the program dealers, that we can gradually increase the revenue per purchase request.

While these metrics are significant, the key metric that affect profitability is the growth margin per purchase request. As I have just mentioned, while the revenue per purchase request increased sequentially by 5%, the customer acquisitions costs remained flat. So we realized an 8% increase in gross margin per purchase request.

For the full year 2002, the same metric spotlights our effort towards profitability. The revenue per purchase request increased by 52%, those cost increase by 28%, and the gross margin per purchase request by 72%. In 2003 we expect for us to stabilize the program fee revenue stream, and secondly to grow it based on the actions we are taking internally for dealer retention.

Enterprise sales revenue increased by 56% sequentially, to $3.5m in Q4. The main reason is that we realized a full quarter of revenue from [GM Buy Power]. Our success with the enterprise sales can be measured by the fact that we have doubled the quarterly revenue rate, from $1.8m in Q4 2001, to $3.5m in Q4 2002. Going forward, we expect single digit sequential percentage increase in enterprise revenue.

Web site advertising revenues increase sequentially by 23% to $2.5m in Q4, because of increased [page view] sales. From a full year 2002 perspective, advertising revenue declined in the first half, and then increased in the second half as we had forecasted earlier in the year. Currently we are comfortable that this portion of the business will increase sequentially after the first quarter.

Finally, as we had expected, Other revenue declined this quarter. Other revenue had three components to it. The international and legacy products, two of the three components, declined as forecasted. However, this was offset by the third component, RPM, the service reminder product that has shown strong growth since we launched in April. Within nine months RPM has been adopted by 146 dealers paying us about $1,200 per month. We have about 55 additional dealers in the pipeline waiting to be activated. It is a testament to the strength of the product that we are experiencing very few cancellations by the dealers.

In the next 90 days we expect to increase the RPM sales force from 15 people to 23. We expect to add about a 100 dealers per quarter in 2003. As the RPM revenue increases, it will more than compensate for the decline in international and legacy products, which should results in double-digit sequential quarterly increased in 2003 in Other revenues.

Expenses, excluding depreciation and one-time charges in Q3 increased modestly from $18.7m in Q3 to $19m in Q4, primarily due to higher customer acquisition costs. In 2003, as we ramp up the revenues, we may selectively increase resources in certain areas commensurate with revenue increases. The headcount was essentially flat at 229 on December 31, versus 227 at the end of Q3.

With $27.6m cash balance, and no debt, the balance sheet is strong. As mentioned earlier, we had a major push on cash collections that resulted in the DSO declining from 38 days to 31 days, and the net receivables declining from $8m in Q3 to $6.8m in Q4. The [aging] of 60+ days has been reduced from 23% of the total receivables in Q3, to 11% in Q4.

From an operational standpoint, the dealer accommodations have been cut in half from a quarterly rate of $2.5m in the first half of 2002, to $1.2m in Q4. This is a result of improved quality of purchase requests, and a tightening of internal processes. Going forward, our objective is to maintain the DSO at less than 35 days.

For 2003, I have already given you a sense of the revenue and expense profile as each item was being discussed. We understand and acknowledge the uncertainty in the economy. We are comfortable that we will generate net income and cash in the first quarter. We expect positive net income and positive cash flow for the full year 2003. We forecast overall organic revenue growth of 5% to 10%, bearing in mind the decline in program fees during 2002.

With those comments on Q4 and full year 2002, and the financial year of 2003, Jeffrey will now discuss the business and strategy implications. Jeffrey?

Thank you, Hoshi. As you can see, Autobytel was making orderly progress towards its stated financial objectives. Our first objective was to generate EBITDA, which we have now done for five consecutive quarters. Our second objective was to generate positive cash flow, which we have now done for two consecutive quarters. Our third objective was to get net income, which has now been achieved. Now, the fourth objective is to deliver sustained net income and extending margins, which we expect to do this year.

But that is not the end of the story, in fact it's just the beginning. For Autobytel, 2002 was more about priming the pump, than it was about prime time. It was a foundational year when we rolled up our sleeves and got to work fixing our core business. We sharpened our focus, developed new tools and techniques for optimizing, and educated ourselves about what it takes to operate profitably. With this knowledge has come greater control of our business, and the ability to make quicker work of both opportunity and adversity.

The improvements we made in 2002 have created a stable base that is now more easily and powerfully leveraged. We improved the business of generating and selling purchase requests to dealers, developed and strengthened our automotive manufacturer relationships. We extended and improved our success of advertising, and successfully launched a new product in the service reminder area, that is now adding accounts and growing at a rapid rate. In this process, we've also gone a long way to improving our customer relationships, which further reinforces the stability of our business today. Case in point, dealer accommodations have been cut in half, and the DSO is way down.

The results of these efforts is that we now have a core business that is generating profits and cash, and will likely do so well into the future. So as we move into 2003, the opportunity before us is to consolidate, leverage and extend these gains. Let me give you some color on these points as they form the essence of our mandate for the coming year.

By consolidation, I simply mean that we will continue the rigorous focus on operational efficiency and execution that has got us to where we are today. Ours is a business of details, of high transaction volume, and high stakes relationships. As we broaden our scope in the coming year, we will not lose sight of this. In fact, we will redouble our efforts to extract additional margin out of our core business. As for leverage, we have already proven that this is a business that has considerable leverage. As a reminder, in the acquisition of Autoweb we were able to reduce cost and headcount by about 50%. Given that our current business mix allows for a gross margin in the 55% range, and given that we do not need to add significant resources to generate new revenues, apart from cost of goods, each dollar of incremental revenue drops to the bottom line at a high rate. So the focus in 2003 is on improving margin.

As for extension, well I already told you that we have core business that is now more easily and powerfully extended. What does that mean in the context of 2003? Simply put, we feel we are well positioned to pursue select acquisitions, allowing Autobytel to extend its current products and services, increase its share of the $21b that it spent annually on automotive marketing. And articulate a strategy that deepens and extends our footprint in the automotive marketing sector.

In fact, we are now so committed to pursuing this business strategy, that we have hired a senior top-notch corporate development executive to join our management ranks. His name is Rich Walker, and he comes to us having headed corporate development for MediaOne.

So what does this all mean? Let me hit the high points. First, 2002 was a foundational year for the company, during which time some very important fixing and building took place. Our projected performance and plans for 2003 would not be possible were we not the beneficiaries of the previous 12 months of progress. Second, we will consolidate our current gains and drive them forward. The management team now has a proven track record of profitably running the company, and has more knowledge and control than ever before. Third, there is considerable leverage in our core business, and management's focus for '03 is to expand margins. Fourth, we are going to selectively pursue acquisitions in 2003. We have all the resources needed for successfully executing this strategy, including the cash.

Before I move on, I'd like to reinforce and add some color on the important point of expanding margin. First, through continued optimization of our current business, we were able to gain increase operating leverage. Our core business is improving. As Hoshi noted, revenue per purchase request is up over 50% for the year, and gross margin per purchase request is up over 70% for the year. Dealer churn is slowing, and should soon be at a level that will allow us to grow program fees. This business is 55% gross margin, and incremental revenue drops at high rates to the bottom line.

Our enterprise accounts continue to develop, as evidenced by the fact that we grew revenue in this category 50% sequentially. Our relationship with General Motors, which was in its pilot phase during our last call, has more firmly taken hold, and I am confident that we will provide them with high quality service throughout 2003. Not only can we grow revenue in this category year-over-year with our current customer list, but we intend to expand that list this year as well.

On the advertising side we had a very strong 2003 up-front season. Visitors continued to be attracted to our sites in record numbers, and we have demonstrated a keen ability to develop and sell new product in this area. Advertising was up 60% last year, in what was characterized as a difficult year for online advertising generally. I feel very confident of our ability to grow this business in the coming year.

Finally, on the new product side, our service reminder business, RPM, is on a rapid grow trajectory. We anticipate this continuing throughout the year, as we gain market share from our competitors and deliver strong ROI for our dealers. Additionally, there is a huge opportunity for the company in the used car side of the business. We said we would attack this market last year, but our resources were committed to improving other parts of the business. We have built a solid base from which to grow. We had over one million cars in inventory on our site last year, and according to JD Power, we generate the second most online used car sales.

The progress we are making with the core business is furthered by two important developments in automotive e-commerce, which should accelerate our business. According to a recent study by Gartner, conversion of online shoppers to online car buyers has more than doubled in the past two years. Today, about 15% of online car shoppers have submitted a purchase request online and transacted at the dealership. This represents about 10% of all new car sales, and Autobytel has about 40% of that market, or 4% of US car sales.

This trend is impressive but not unexpected. The average online experience of online car buyers is about four years, and the average purchase cycle is about three years. As more people become net savvy, and work their way through their ownership cycle, they are increasingly likely to purchase online. The absolute numbers of online car researchers is already huge. They are here, using the internet to help them make informed purchase decisions. As time passes, they are converting into buyers at a more accelerated pace.

The second industry development that is likely to accelerate Autobytel's business, is the continue movement of OEM marketing dollars online. For the past year I've been telling you about this coming trend, pointing out the disconnect between a marketplace that includes over 60% of all new car buyers, yet commands less than 2% of automotive marketing dollars. Well, according to a recent Automotive News article, our day is coming. The world's largest manufacturer, General Motors, and others such as Toyota, have plans to migrate a greater percentage of their advertising and marketing budgets online, and away from traditional advertising. We have already begun to see the signs of this growth in our business, as evidenced by strong year-over-year growth in our advertising enterprise segments.

Adding to these favorable trends is a sales environment that continues to be strong. Last year, sales came in at $16.8m units, the fourth best sales year in the history of the industry. This year, estimates are for sales in the $16.5m unit range, which would be the fifth best in history. We will likely see the continuation of automotive manufacturers offering sizeable incentives. In fact, just this morning, General Motors ratcheted up incentives yet again. This favors consumers and retailers, and we are highly confident of our ability to execute our business plan in this sales environment.

As we enter 2003, I feel that Autobytel has all the ingredients for star quality success. We have a core business with improving operating metrics that is generating profit and cash. We have a strong balance sheet. We have strong market leadership, improving pricing, and expanding gross margins. We have an experienced management team that can execute division, and we are situated in a huge market sector with improving fundamentals.

So as I leave you today, I ask you to simply connect the dots. We anticipate this being a great year for Autobytel. I appreciate your continued support, as we move the business to an even stronger position of market and financial leadership.

Thank you. We will now open it up to calls.

At this time I would like to remind everyone, if you have a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Mike Crawford, of B. Riley & Co.

Jeffrey, with GM, Toyota and others ratcheting up their advertising spending, and your advertising revenue increasing for the second consecutive quarter, what are your pre-sales and expectations for '03 in advertising?

How, you doing, Mike. We're very optimistic that we're going to be able to grow advertising at strong double-digit percentage this year. So we have a great '03 up front, so we've got a lot of pre-bookings. We developed a lot of new products, including our Dynamic Content Placement, that launched on the site in January. Both Ford and Lexis have bought that, and we will be selling it throughout the year. So it's going to be, I think, a wonderful year on the advertising side.

Can you just go over again what differentiates your content placement from other technology that's out there?

Yes, there's actually no other technology in the marketplace like it. The Dynamic Content Placement actually dynamically generates a relevant marketing message for the consumer. So for example, if they're looking at a Ford product, rather than delivering a static General Motors ad, it would actually calculate the differences between the Ford and the General Motors product and serve up content such as, the General Motors product has 32% more horsepower and costs $422 less. So it's an entirely new marketing model, it's based on our ability to calculate all the competitive differences between the products. We've got that competency, we collect 500 pieces of information on every trim level vehicle, and we offer this offer to all the manufacturers. So I think we're uniquely positioned to be able to do this. I don't think anybody can follow us here.

Okay. That's on the enterprise initiative, so could you say what the current status is of the GM Buy Power, is that just month to month, or is that something that's locked up for a longer period of time now?

Yes, it's currently month to month. We're out of the pilot phase and we're in the month to month phase, and we've having discussions about firming up the relationship. But it's incredibly strong. We're pretty consistently, among their top volume producers and their top close rate producers, so I believe that they're quite happy with our service.

And who would you be targeting with the most vigor this year, as enterprise customer?

We're targeting just about everybody, but we've love to get Chrysler, Honda, Toyota on the program. We've got some mid-volume players that we're going to be putting up on the program pretty soon here in the next couple of months. We think we can grow with the current customer list, Mike, but we would love to add another one of the big producers.

One final question. On RPMs, do you say 100 dealers per quarter? So just physically, how do you add a dealer a day?

How do we physically add a dealer a day? We're taking the sales force from 15 to about 23, and we think we can easily hit 30 to 40 sales a month. That's been the track record of the business, and with the added sales resources we think we can beat that. As Hoshi said, there's some difference between the number of folks that are on today and billing, and then we've got a pipeline of 50 or 60 dealers going through the install process. So we think we can achieve that pretty easily.

Alright, thank you.

You're welcome.

Your next question comes from Peter Slider with Peninsular Capital.

Hoshi, great job on the quarter and the year.

Thank you, Peter.

I'm curious if you took -- I don't know if this is possible, but maybe you'll see where I'm heading. If you were able to look at your program fee revenue on kind of a same dealer basis for '03 versus '02, or maybe even '02 versus '01 as well. Taking out the weeding of the low margin, zero margin, negative margin dealers out, can you give us a sense of what that is growing, that revenue is growing or transactions are growing?

What you're asking is a monthly program fee for dealers if we took out the non-profitable dealers, would they be growing? This is [indiscernible] because the one set who are generating high monthly fees, could be also unprofitable. But to answer your question, yes, the profitable dealers are growing on a trend basis.

Any sense of a percentage that you can give us? It's kind of weeding through the --

Yes, I understand your question. Let me give you first of all overall sense. We went from about $700 in fourth quarter of 2001, to about almost $800 in fourth quarter of 2002. My guess is that we did not weed out the dealers that might be around $750, $770, somewhere in that range.

Okay.

Pete, this is Jeffrey. Let me just make one point really clear. We added 489 dealer relationships last quarter. We added 489 profitable relationships to the company. We only do business not profitably. So while there is still more cleanup of negative gross margin relationships, we are not adding dealers that are unprofitable to the business.

That's absolutely great.

That's how we've been able to grow -- I mean we grew gross margin per purchase request 70% last year.

And Jeffrey, how do you think the dealers are doing themselves with monetizing the leads you're giving them. If you took a rough sketch of how dealers are doing in terms of talking those leads and really making money off of them.

I think they are. I mean we survey every customer. We obviously do a lot of work with our dealers and then also [triangulate] our data-plates with our manufacturer customers. Typically dealers are closing 16%. Some of our OEM customers are actually closing at about 18%. But at 16% when they're paying $21 a purchase request, they're selling a car for $125 or so, which is a huge cost saving over traditional advertising. Almost $300, $350 per car, Pete. So it's still the most cost efficient way to sell cars.

Oh, no question about that. And then finally on this RPM, that's just a huge progress and the outlook is great there. What do you think a dealers gets in terms of revenue off of that per car, or per month, off of that service? You're actually paying a pretty good price for it, and it seems like you're [getting something back]?

yes, I know exactly what that number is. We monitor that every month. The dealer ROI in the quarter was 18 to 1. Meaning for every dollar they spent on RPM they generated $18 in service revenue.

That kind of answers the question, why you're going to be able to do 30 a month. I mean that's a huge benefit.

the other thing, Pete, is I think we've had three cancellations in nine months on the program, so we know that it's working for our dealers, because they're staying with us.

Thanks a lot for all the hard work.

Thank you, Pete.

Thanks, Pete.

Again, if you have a question, please press star then the number one on you telephone keypad.

Okay, thank you for joining Autobytel's conference call. Bye-bye.

This concludes today's teleconference, you may now disconnect.