Autoweb Inc (AUTO) 2003 Q1 法說會逐字稿

Good afternoon. My name is Gayle, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Autobytel First Quarter 2003 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 this time, simply press “star”, then the number “1” on your telephone keypad. If you would like to withdraw your question, press the “pound” key. Thank you. Now I will turn call over to Hoshi Printer, Executive Vice President and CFO of Autobytel Incorporated. Mr. Printer, you may begin your conference.

Thank you Gayle. Good afternoon and thank you for joining us today to discuss Autobytel’s earnings for the first quarter of fiscal year 2003. With me is, Jeffrey Schwartz, President and CEO of Autobytel. We will begin with the highlights of the quarter and a review of the financials. Jeffrey will discuss the business, and then we will open up the call 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 statements 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 with the Form 10-K for the year ended December 31st 2002. These documents identify the principal factors that could cause results to differ materially from those forward-looking statements. With that, I would like to turn the call over to Jeffrey.

Thank you Hoshi and welcome to Autobytel’s First Quarter Conference Call. I’m pleased to report continued progress in stabilizing our core business, capturing operating efficiencies, and growing our presence in automotive marketing services. Today we report Q1 net income of 900,000 or 3 cents per share, and cash generation of 1.3m. Revenue for the quarter came in at 20.3m. The results we are reporting today represent a continuation of the progress we’ve made over the past year. I told you during the January call that our mandate for 2003 was to consolidate operating gains, leverage our business for additional margin, and extend our leadership in automotive marketing services. Measured against these objectives, I believe this quarter represents more orderly progress.

During the quarter, we lowered dealer churn, increased revenue per dealer, and improved gross margin, we lowered dealer accommodations, increased close rates, and expanded EBITDA margin from 5 to 7%. We also made important progress on various strategic growth initiatives. After Hoshi reviews the numbers, I will highlight some of these accomplishments, discuss areas of focus for the year, and give perspective on the business climate. Hoshi?

Thank you Jeffrey. We are obviously pleased with the consistency of our financial performance over the last few quarters that demonstrate the effectiveness of operations. As I go through the financials, I will indicate the points of leverage. Where appropriate, I will also clarify our results against first call consensus.

We generated $1.3m in cash in the first quarter, which follows cash generation of $1.1m in Q4 of 2002 and $3.1m in Q3. The cash balance increased from $27.6m in Q4 to $28.8m in Q1. We expect to continue to be cash positive for every quarter in fiscal year 2003. GAAP net income for the quarter was $868,000 or EPS of 3 cents a share, versus a street consensus of 366,000 or 1 cent a share. This does represent a sequential increase from Q4 2002 of $462,000 and EPS of 1 cent. Total revenue increased sequentially by 243,000 to $20.3m. This compares to the consensus of 20.2m. I will now discuss each of the four revenue streams.

Program fees declined during 2002, but stabilized in Q1 and were sequentially flat at $13.1m. Program fees are what we receive from our 5,000-plus member dealers on a monthly basis. There are four metrics that are relevant to program fee revenue: dealer count, revenue per dealer, purchase request volumes, and revenues per purchase request. When we reported the Q4 results I indicated to you that management acknowledged the high dealer churn in 2002 and our assets to decrease it in 2003. You will recall that a substantial percentage of the cancellations in 2002 were actually terminations by the company, because the monthly fees received from those dealers were less than what is necessary to sustain a profitable relationship. In Q1, there were 580 cancellations and terminations versus 750 in Q4 of 2002, reducing the quarterly churn sequentially from 14% to 11% and versus 18% in Q1 of last year. So in the first quarter, we are headed in the right direction regarding the dealer churn. The net loss of dealers was 165 in Q1 versus 260 in Q4, and the dealer count at the end of Q1 was about 5,200 dealers. The average monthly program fees have increased from $788 to $820, because we eliminated most of the unprofitable dealers, and the amount of consumer credits has been reduced.

We delivered 795,000 customers, all purchase requests, to our dealers in the first quarter versus 804,000 in the fourth quarter. Of the 795,000, 612,000 was sent to our retail dealers, and the remaining 183,000 to our enterprise dealers. In Q1, the revenue per purchase request was essentially flat at $21.23. However, within that number is an interesting dynamic between the new and used. For new purchase requests, the revenue was up by 8%, but for used it was down substantially. In Q1, the volume of purchase request for used cars shot up by over 40%, but because most of the used car dealers are in the fix-fee program, we could not monetize that increased volume. To correct this imbalance effective in Q2, we have launched the [e] management system for used cars that has been so effective on the new car side of the business. We expect improved monetization, starting in the second quarter, and the overall revenue per purchase request is likely to increase.

The cost per purchase request declined from $8.21 to $7.79, but the gross margin per purchase request increased sequentially to $13.44. Year-over-year, we have seen a 40% increase in the gross margin per purchase request from 9.56 in Q1 of 2002 to 13.44 this quarter. The closing ratio continues in the range of 17%, which is a 30% improvement over the same quarter of last year. Based on the comments that I just made and the actions we are taking, we believe that program fees will continue to be stable for Q2 and begin to increase in the second half.

Enterprise sales revenue, which consists of major accounts such as AutoNation and General Motors, continued at a high level of $3.4m that was established in Q4. We expect enterprise sales revenue to be about flat in the second quarter and then begin to increase sequentially in the second half. Website advertising revenue increased by 14% sequentially to $2.8m in Q1 and grew 62% over the same quarter last year. Advertising is a step function [and] that a substantial portion of the bookings are known before the year begins. Therefore there will be modest sequential growth but a strong year-over-year growth.

Other products and services revenue in the first quarter was sequentially up by 10% at $941,000. As we have indicated to you over the last several quarters, revenue from legacy products and international has declined rapidly and will continue to do so for the balance of the year. Offsetting that decline was a substantial increase in revenue from RPM. RPM is our customer loyalty and retention marketing product that has shown strong growth since we launched it in April of last year. We added 71 dealers in Q1, and RPM has now been adopted by 217 dealers, paying us about $1,200 a month. We have an additional 28 dealers in the pipeline, waiting to be activated. Currently, RPM represents about two-thirds of this revenue stream. Going forward, we expect to see a sequential increase of 20% in other revenues as RPM becomes more significant. We expect to add about 75 plus dealers a quarter.

Moving on to expenses, total operating expenses for Q1, excluding depreciation and amortization, were about sequentially flat at $18.9m. Total depreciation and amortization was $608,000 in Q1, a sequential decline from 649,000 in Q4. My comments on expenses that follow exclude depreciation and amortization. We are relocating our AIC operations from Boston to Orange County which will allow us to capture operational efficiencies. We expect about a 20% reduction in expenses related to AIC to materialize by the end of this year. In Q1, it cost us approximately $300,000 to relocate the operations and this is included in the operating expenses. In other words, there is no special one-time charge shown separately. Additionally, we expect up to another $0.5m in the second quarter that will also be included in the operating expenses.

Sales and marketing expenses increased sequentially from $11.9m in Q4 to $12.8m in Q1 for two major reasons. One, we increased our sales forces to full strength for both the program-fee dealers and for RPM. Secondly, RPM has variable cost associated with it, so that as the RPM revenue increases the cost will increase proportionately. Product and technology development expense run rate has declined to approximately $3.3m a quarter because of a steady reduction in head count for the last year. The IT head count has been pared down from a peak of almost 100 employees and contractors to about 40. Going forward, these expenses will increase gradually with efforts on new products. G&A expenses increased by $600,000 from $2.2m in Q4 to $2.8m in Q1 due to impact of Sarbanes-Oxley, AIC relocation, and legal expenses. Going forward, we expect G&A to be at a level slightly higher than Q1 because of increased insurance expenses and for our compliance with Sarbanes-Oxley. The company’s employee head count was 252 on March 31, versus 229 at the end of Q4, an increase of 23 full time employees. More than half of the increase was related to converting the RPM sales force from independent contractors to full time. We now have 22 sales territories fully staffed for working with retail dealers, so most of the increase in head count was related to adding sales personnel.

In summary, the savings from internal operation efficiencies are being reinvested primarily in sales and some in regulatory requirement. Turning to the balance sheet, with $28.8m in cash and no debt, our balance sheet remains strong. In Q1, we generated $1.3m in cash versus $1.1m in Q4. There are a few business integrity measurements that would demonstrate the progress that we have made compared to just three quarters ago. DSO has declined from 43 days to 31 days. Net receivables declined from $9.9m to $7m. Sixty plus days aging has been reduced from 21% of total receivables to 2%. And finally write off declined from $3.2m to $800,000. As percentage of revenue, they have declined from 15% to 4%. These are not just collection metrics. They reflect genuine business and process improvements that Jeffrey will address. We do not expect to pay federal taxes this year because of [NROs]. However, we do expect to pay about $100,000 in state taxes. We expect to generate net income and cash in the remaining quarters of the year. We reiterate our previous forecast of overall organic revenue growth of 5% to 10%. I will now turn the call over to Jeffrey who will discuss the business and strategies implications. Jeffrey.

Thank you Hoshi. As you can see, we are beginning to settle into a rhythm of profitability. Over the last three quarters, we have improved EBITDA. The rhythm of profitability over the last three quarters we have improved EBITDA margin from 3 to 5 to 7%. We anticipate continuing this progress throughout the year. Stepping back to the unit economics of the business for a moment, the key to any successful business expansion or turnaround is to have good policy to make it known and measurable, and to ensure that it is strenuously followed. These characteristics have been the essentials of our progress over the past year. At Autobytel our policy has been to sharpen our focus on providing value to customers in our defined market segment. This policy has been made known and measurable each quarter and our sustained progress should tell investors that we are not letting up.

Let me give you a couple of concrete examples of how these efforts are driving integrity into our business. As Hoshi noted, during the quarter, the percentage of revenue accommodated to dealers was down to 4% from a high of 15% last year. Customers are now not only paying there bills but they are doing so on time. Our 61 day aging improved to 2% of receivables during the quarter, down from a high of over 20% last year. So our focus on customer value appears to be the right one and we are sticking to it quite strenuously.

Let me highlight some of the progress we made during the quarter. In our retail business, growth calculations declined by 23% as churn reached its lowest point in two years. We have told you that our objective is to decrease churn by one third this year, and we are on track to achieve this objective. During the quarter, dealers added on the program at $900 per month and cancelled off the program at $815 per month. The number of franchisees paying us less than $20 per purchase request declined sequentially by 27% to 688. These trends reinforce our strategy of doing business profitably with our customers. While this policy has come at some price, namely terminating some dealers. We are heartened by the fact that one third of the 400 franchises we added during the quarter had a prior relationship with Autobytel. I believe the customers will contribute to come back to Autobytel and when they do, it will be a mutually profitable relationship.

Our enterprise business remained flat during the quarter, as some of our accounts pulled marketing dollars in response to world events and slower sales. However we began some promising sales initiatives during the quarter, which should bear fruit in the second half of the year. We remain confident that we can launch three new brands during 2003.

The data licensing portion of our business remains strong and we announced the deal with Yahoo during the quarter to provide automotive pricing specification information. As Hoshi noted, we are in the process of moving our AIC division to Orange County. In the first half of the year, we will incur some added costs but overtime we expect the savings, operating and product synergies of co-locating the division to bring considerably benefits.

Our advertising business grew by 14% quarter-over-quarter, and 62% year-over-year reinforcing favorable industry trends. It was a good quarter for this sector of our business as we had 25 major brands actively advertising on our sites as compared to 20 brands in the first quarter of last year. We expect strong year-over-year growth in this area of our business.

RPM, our customer loyalty and retention marketing program continues to make progress. We added around 70 dealers net and our average revenue per dealer remained in the $1200 per month range. We secured another OEM endorsement during the quarter, which further reinforces my confidence that we will more than double the number of dealers on the program by year end. So our core retail business appears to be stabilizing and our growth areas advertising, RPM and enterprise continue to make progress. On a year-over-year basis, the constructive denotes that these three sectors combined have grown 83%.

Growth is now center stage at Autobytel, I am confident that this focus will create the same level of success as our efforts at attacking the expense in operational structure of the business. Let me give you three concrete examples of where these efforts are being placed and the benefits they may have on growth. Today we convert our percentage of total unique visitors into purchase requests. As visitors to our web site become more savvy and increased their online tenure, they are likely to convert some shopping to buying online at increasing rate, but we are not waiting for adoption to run its course. We are concentrating on various tools and techniques to increase the conversion of qualified car buyers on our sites. Let me give you an example of how the math might work. According to [ComSquare] Media metrics during the first quarter we had over 27m visitors to our websites. Increasing website conversion by 1 percentage point could increase purchase requests by 270,000 over a quarter. At an average revenue rate of over $21 per purchase request, the high margin revenue associated with this increase gets very big, very fast.

Another point of leverage in our business is that number of self generated purchase requests. We organically generate purchase requests in a number of ways today, including through direct site visits, search engine optimization and various visitor loyalty and retention marketing initiatives. At our current cost of customer acquisition, each 10% increase in this number could eliminate $100,000 of traffic acquisition costs and a doubling of the number could approach a savings of around $1m.

One tactic we are using to increase self generated purchase request is our recently announced launch of Personal Vehicle Reports. These principal reports which include pricing and specification information, comparisons reviews and reliability data are really taking off. We are already running at a rate in excess of 100,000 downloads monthly and we are finding that around 25% of these consumers are later submitting a purchase request.

Another point of leveraging the business is the average selling price of the purchase requests. Today that number stands at just over $21 for our retail dealer which is markedly improved from the $16 of Q1 ‘02. At 800,000 purchase request per quarter, a 5% improvement in pricing brings in another $800,000 in high margin revenue.

Hoshi and I have discussed the concept of operating leverage in the past. These 3 examples and areas of focus illustrate just how big the opportunity is at hand. Increasing website conversion by 1 percentage point and improving pricing by 5% could add $5m to quarterly revenue. And doubling the number of self generated purchase request could reduce acquisition costs by as much as $1m. Since most of this would flow directly to the bottom line we are focused on these opportunities and hope to deliver some of this benefit to the business during the year.

In addition to organic growth, we are also pursuing a number of strategic growth initiatives. During the quarter we mad e some important progress in this area and we continue to believe that are a number of financially and strategically accretive transactions which present opportunity. These initiatives would complement and strengthen our core product offering and allow us to expand the range of services we offer to new and existing customers. Improving the stickiness of our products will also have the effect of improving customer profitability.

Turning to the market environment; during the quarter automotive sales slowed as war, worry and weather took its toll. April appears to be back on track as record incentives stimulate sales. Online automotive marketing, however, continued its growth trajectory.

Let me give you the two key measurement points here, site visitors and sales generation. On the first point Autobytel remained the most visited new car buying and research destination on the internet, averaging over 9m visitors in each month during the quarter. As a point of comparison, our traffic was more than 3 times that of many traditional competitors. In terms of sales generation, while automotive sales were down 5% year-over-year, sales generated by Autobytel for its subscribing dealers remain steady. The business continues to demonstrate counter cyclical characteristics which should serve us well through the year.

Another growth factor, OEM internet adoption, continues on pace. According to a competitive media reporting during 2002 OEMs extended their 7th year-to-year increase in internet marketing extend. Autobytel ranked fourth in total OEM marketing dollars in 2002, behind only 3 major media players MSN, Yahoo and Disney's ESPN. As a reminder, the $110m spent by OEMs during 2002 on interactive marketing still represents a small portion of the 8.6b spent by these advertisers during the year. This presents a considerable growth opportunity for Autobytel. In closing, we remain confident and optimistic that this will be a stellar year for Autobytel. We are making orderly progress at improving our quarter operating metrics and expanding our margins, we are now focused on driving revenue growth. I thank you for you continued support of the company. We will now open it up to questions. Thank you.

At this time I would like to remind everyone in order to ask a question, please press "star" then the number "1" on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Rob Reedy (ph).

Hi guys.

Hey Rob how are you doing?

Fine thanks, how do you do?

Doing well thank you.

Jeff can you give us some more color on how you are going to go about -- what strategies you have in mind for increasing the conversion rate of your traffic, from visitors to purchase request generators?

Yes, there is a number of things that we are doing. We are already deep into experimentation on website language and I think that certainly going to have some positive effect. The other thing that we are looking at, are things like site optimization page load times. As we build the advertising business, we are very excited about it, it also as you know has the tendency to slow down page load times. So, technical things like that site optimization, site language and also experimenting with things potentially like, you know in channel chat, when somebody is submitting a purchase request, experimenting with live chat and also some advertising tracking, 800 phone numbers on the website, those are the some things that we are working with right now.

Okay and then similarly on the price generated per average purchase request, besides from replacing lower volume or lower margin dealers with higher volume dealers, is there anything else you get in the strategy bag for increasing that price?

The average revenue per dealer?

Yes.

Its really just more of the same, Rob, as we drive close rates up, we think our product points are higher priced, so, I will give an example, we exited the quarter in March with like an 18.7 close rate, which is about the highest that’s been in probably several years around here. So, it still cost a dealer around a $130 to sell a car using our service and 475 using traditional media. So, we think that there is some price opportunity there Rob. And as we demonstrate the product's effectiveness, we think that we can take some of that down.

Great. Thank you very much.

I would like to remind everyone in order to ask a question, please press "star", "1" on your telephone keypad. At this time there are no further questions.

Thank you for joining the call.

Bye, Bye.