Autoweb Inc (AUTO) 2003 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Autobytel, Inc. second-quarter 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. (CALLER INSTRUCTIONS).

Now, I will turn the call over to Hoshi Printer, Executive Vice President and CFO of Autobytel, Inc.

Good afternoon, and thank you for joining us today to discuss Autobytel's earnings for the second quarter of fiscal year 2003. With me is Jeffrey Schwartz, President and CEO of Autobytel. We will begin with highlights of the quarter and a review of the financials. Jeffrey will discuss the business, and then we will open 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 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. These documents identify the principal factors that could cause results to differ materially from the forward-looking statements.

With that, I would like to turn the over to Jeffrey.

Thank you, Hoshi, and welcome to Autobytel's second-quarter conference call. I am pleased to report continued progress in the financial performance of the Company. Today, we report Q2 revenue of 21.7 million and net income of 1.1 million, or 3 cents per share. During the quarter, revenue increased sequentially by 7 percent, while net income increased by 29 percent, further demonstrating the unique leverage and financial benefits of our business model. The balance sheet remains strong, with approximately 52 million of cash and no debt. We doubled our cash generation during the quarter to 2.3 million, and raised approximately 25.5 million in a private placement.

The second quarter represented an important milestone for Autobytel, delivering record revenue and net income. During the quarter, we continued to drive many of our operating metrics, and we made some very important strategic advances that further solidify our position as a leader in the automotive marketing services category. From an operating standpoint, we increased the number of franchises in the lead referral and CRM areas of the business and the unit economics in those categories continued their favorable trend. Dealers are up, pricing is up, gross margin is up and revenue is up. Hoshi will update you in greater detail in a moment.

On the strategic side, we completed the acquisition of Applied Virtual Vision and strengthened our balance sheet. ADC is the clear leader in automotive CRM, with several thousand dealers and multiple OEMs and major dealer groups using its products and services. Integrating it into our product offering has already proven to be highly beneficial, and I think you will see us continue to leverage this great asset and use it to drive growth rates and reinforce our competitive position. Raising additional capital with high-quality, long-term investors and producing strong cash flow will further enable us to execute our strategic growth plan in the coming quarters. We have told you in the past that we see considerable strategic opportunity in the marketplace. Having a strong balance sheet and growing cash flow reinforces our belief that we will be able to capitalize on this opportunity in the near term. The progress we are making today leads me to be bullish on the second half of the year and beyond. After Hoshi reviews the quarter and outlook for balance of the year, I will highlight key business trends and give you more color on our business strategy in the AVV acquisition.

We are pleased with the financial results we announced today. As Jeffrey noted, we grew revenue 7 percent sequentially to $21.7 million, and net income 29 percent sequentially to $1.1 million or 3 cents a share. The net income margin improved to 5 percent during the quarter. We had two major events this quarter, and as I discuss the financials, I will describe their impact. The first event was the acquisition of AVV, and the second was a private placement. The AVV acquisition was consummated on June 4th, and the private placement on June 24th. From a practical standpoint, AVV financials included here represent one month of operations and the private placement affected the quarter ending cash balance. I will also provide guidance during my comments.

Let me begin with cash. We started the quarter with $28.8 million in cash. We generated $2.3 million from operations, used $4.8 million in acquiring AVV and raised a net of $25.6 million in the private placement. The cash balance at the end of Q2 was $51.7 million. Jeffrey will discuss the potential strategic use of the proceeds from the private placement. We expect to generate cash in each of the remaining two quarters, and we also estimate that cash generation in the second half will be higher than in the first.

Because of the two events, it may be instructive to talk about impact on the share count. We began the quarter with 31.3 million shares outstanding, issued 711,000 in the AVV transaction and issued 5 million shares in the private placement, ending the quarter with 37 million shares outstanding. We expect fully-diluted share count to be approximately 39.5 million shares in the near term.

Revenues for the quarter were $21.7 million, a sequential increase of 7 percent, and the highest in the history of the Company. Included were about $400,000 in revenue from AVV. The reported revenues are in four categories, as you see in the press release. However, over the last several quarters, the business has evolved, and with a change in the product mix, it may be more useful to discuss the business in three product areas -- leads referral, advertising and OEM. Lead referral is the largest, and encompasses a generation of new and used car sales for individual dealers, dealer groups and automotive manufacturers. Advertising revenue is fairly straightforward, with most of the revenue coming from the 28 OEM brands that advertise on our site. CRM includes both RPM and the products acquired in the AVV acquisition.

Let me begin with lead referrals. In the second quarter, 20 million unique visitors came to our site, and more than 1 million consumers submitted their leads. About 15 percent of those leads were eliminated during our rigorous quality control process. We could not fulfill about 100,000 leads because we did not have a dealer in the area to satisfy the consumer. After all of this, we sent 790,000 leads to 20,900 franchises on the program, about 5,000 through the retail channel and the remaining through the OEM and major dealer group channel. We have been consistently sending about 800,000 leads to the dealers for the last four quarters. Of the 790,000 leads this quarter, about 575,000 were delivered to our retail dealers, and the remaining to the dealers through OEMs and dealer groups. We are pleased that we have been able to maintain the rate of 800,000 leads a quarter in the face of declining automotive Internet site traffic and automotive sales in the first half of 2003.

Let me now provide you some metrics on the consumers that we sent to the retail dealer network. The revenue for purchased requests increased 10 percent sequentially, from $21.23 in Q1 to 23.48 in Q2 and a corresponding increase in monthly dealer fees from $820 in Q1 to $890 in Q2. You may recall that in the last quarter, I had indicated to you that the revenue from purchase requests had remained flat, because the used car volumes of purchase requests was up by 40 percent, but we could not monetarize the increased volume. That imbalance was corrected in the second quarter, which resulted in a 10 percent increase in revenue per purchase request.

From a profitability standpoint, we are acutely interested in the gross margin per purchase request. That metric increased by 13 percent sequentially to about $15. Operationally, we feel confident about lead generation, and we are cementing that confidence with realigning and expanding the sales force. To use a sales expression, "We are putting more feet on the street to have more face time with the dealers." The new sales representatives are both energetic and tech savvy. Their focus will be on retention, up-selling and to expand the dealer network so we can place the 100,000 unsold leads. We expect to complete the realignment this quarter.

During the quarter, revenues from lead referrals were $15.5 million, representing a sequential increase of 6 percent from the $14.6 million level in Q1. We expect that the second-half revenue from lead referrals will increase by 5 percent over the first half. The second area is Website advertising. Advertising revenue hit the $3 million quarterly mark for the first time, and represented 13 percent of total revenues. The 2003 budgets of our advertising customers were fixed last year, and as Jeffrey will discuss, we're just beginning to get a sense of the spending level for 2004. We have reasonable visibility for the second half, and we believe that the second-half revenue will match the first half. It may be instructive to not here that if our projections materialize, advertising revenue for the full year 2003 will register a 40 percent plus increase over 2002.

The third area is CRM Tools and Services, which includes RPM, the AVV products and Autobytel's sales management tool, iManager. RPM grew sequentially by almost 40 percent, and is expected to grow about 25 percent a quarter for the second half of this year. During the second quarter, RPM registered 85 new dealers, activated 63 dealers and now has 40 in the pipeline awaiting activation. We indicated to you in the press release on the AVV acquisition that we expected revenue in the second half to be in excess of $3 million. During this quarter, revenues from CRM Tools and Services were about 13 percent. The balance of the revenues of around 5 percent came from data services and other products. We have now successfully completed the relocation of our AIC business from Massachusetts to Irvine, and we expect to see the synergies in the second half of the year. Overall, we expect to exit 2003 on a revenue run rate of approximately $95 million.

Turning to expenses, overall expenses increased from $19.5 million in Q1 to $20.7 million in Q2. About a third of that increase was due to costs associated with the AVV acquisition and a private placement, a third due to the relocation of AIC from Massachusetts to Irvine, and a third was due to the higher cost of purchase requests.

Regarding the headcount, we added 65 people during the quarter, most of them associated with AVV, and ended the quarter at 317. We expect some rationalization in the AVV Irvine workforce starting in the third quarter to migrate capabilities and competencies to the appropriate locations. We expect second-half expenses, excluding depreciation and amortization, will be in the range of $42 to $43 million, to reflect inclusion of AVV cost structure, higher variable traffic costs commensurate with the revenue increases, and certain resources in IT for integration and product development.

Capital expenditures in Q2 were $115,000. Additionally, we acquired $880,000 dollars of AVV assets. In the second half, we expect to spend about $1.1 million on CapEx, $400,000 on normal hardware and software and $700,000 related to AVV and integration-related expenses.

The DSO increased from 31 days in Q1 to 35 days in Q2, reflecting the AVV receivables. As I mentioned previously, we are comfortable with the range of about 35 days DSO.

To summarize the financials, we forecast that net income in the second half of 2003 will increase over 50 percent versus the first half. We also expect that net cash provided by operations will increase in the second half of the year. Jeffrey will now highlight key business trends and update you on the Autobytel business strategy.

Thank you, Hoshi. As you can see, we continue to make quarterly progress in the financial performance of the Company. We are settling into a rhythm of profitability, and are beginning to experience the unique operating leverage and financial benefits of our business model.

Let me briefly reinforce a few key trends for the quarter. First, the overall number of dealer relationships at Autobytel continues to grow. We added over 900 franchises to our lead referral business, reflecting the addition of Mazda during the quarter and the continued improvement of our dealer retention efforts. During the quarter, over 40 percent of the individual dealer additions were repeat customers, reinforcing my strong belief that dealers will continue to come back to Autobytel. The quarter-ending count in this category was approximately 20,900 franchises.

In the CRM business, we added over 3,000 franchises to the program with the acquisition of AVV. Additionally, 1,800 franchises use our RPM and iManager products, so we now serve approximately 4,800 franchises in this growing and strategically significant area of the business. The unit economics of those relationships continued to improve. In the regional portion of our lead referral business, for example, the average revenue per dealer increased sequentially by $70, and the average revenue per purchase request increased to $23.50. Gross margin per purchase request increased to $15 during the quarter, which represents a 13 percent sequential increase and 45 percent year-over-year improvement. Close rates continued their upward trend.

So a review of the key drivers in the lead referral area underscores that we are executing our business plan. We grew revenue in this category by $900,000 sequentially. Dealers are up, pricing is up, gross margin is up and average fees are up. Our strategy of driving close rates, increasing customer support and better leveraging our marketing tools with dealers appears to be supporting our overall pricing and business strategy in this area. Additionally, we continue to make strides in growing our diversified revenue stream. On a run-rate basis, while 69 percent of our revenue came from referring qualified car buyers to dealers, about 13 percent was CRM revenue and 13 percent was advertising revenue. The balance of revenue, around 5 percent, came from data and content services and other products. These categories have grown a combined 33 percent year over year, and represent important growth areas for the business going forward.

In this context, a major performer has been Website advertising. During the quarter, we had 28 brands advertising on our sites, and we generated $3 million in revenue, which is the highest reported in the Company's history and an 85 percent improvement year over year. CPMs averaged $40 during the quarter, which is a doubling of CPMs from the second quarter of last year.

As I have noted in the past, OEMs currently spend less than 2 percent of their budgets online. According to analysts, that number is expected to increase to 6 percent by 2007, making automotive the largest online advertising category at 1.8 billion. We see signs of this commitment developing today. The 2004 media upfront (ph) has commenced in earnest, and it is clear that many automotive manufacturers are increasing their commitment to interactive marketing. Our discussions thus far lead us to be optimistic about the category in general, and the Autobytel opportunity in particular.

Our CRM business, which includes RPMs, AVV and iManager, continues to show immediate strength and long-term potential. RPM becomes more strategic and financially significant to Autobytel each day. Consumers spend 97 percent of their time during the ownership lifecycle maintaining their cars. So having a best-in-class product that allows dealers to market to their customers during this phase is very important, when mapping our product strategy to the economic opportunity of the industry. Revenue increased per RPM by almost 40 percent sequentially, and dealer cancellations remained low. I am highly confident that we have the right product and business strategy in this area.

Turning to AVV, it is important to again review the Autobytel business strategy to properly understand the strategic nature of this acquisition. As you have heard me say in the past, Autobytel is an automotive marketing services company. This category operates along a continuum, and begins for us went a consumer enters the market for a new or used car. About two-thirds of these consumers log onto the Internet to begin their process, principally to do research, and an increasing number of these consumers use the Internet to transact, as well. But the transaction does not stop on the Internet; in fact, that is where it begins. In order to effectively prosecute (ph) the sale, dealers must have best-in-class CRM marketing and sales management tools. Dealers that have these tools in place can double their close rates, halve their customer acquisition costs and ensure that the consumer has a terrific car-buying experience. Happy consumers are more inclined to come in for service, and those who have a service relationship with the the dealer are seven times more likely to buy their next car from that dealer. So you can see that the dealer has an important economic interest in making this process work from the beginning. In order to effectively deliver this continuum of service, a dealer may need as many as a dozen different vendors. This is a considerable challenge for the dealer, but a terrific opportunity for Autobytel. Autobytel can offer dealers a more complete solution, eliminating the inevitable headaches that come with multiple vendors and incompatible technologies. So AVV was an important acquisition for Autobytel because it improves return on investment for dealers, which further supports our pricing strategy in the marketplace and the overall stickiness of our products in the dealership.

Adding to this is the capability that AVV brings to Autobytel in the downloading of inventory, sales and service data from the dealer's own management system. Having daily access to inventory will help us drive the used car side of the business. Having access to sales data will help us further demonstrate return on investment for dealers and give us business model flexibility going forward. Our model could be augmented to include a transaction fee, as well as a referral fee, with this capability. And having access to service data will prove highly strategic for us as we grew the RPM portion of our business. The strategic environment provides considerable market share and market development opportunities for Autobytel. So expect us to use our strong balance sheet and capital resources to continue to make prudent acquisitions. Your expectation as investors should be for accretive deals that add to earnings and the strategic position of the Company in this category. We remain confident that we have the right strategy, organizational discipline and sense of urgency. We are actively assessing opportunity, and hope to complete another acquisition in the second half of this year.

I've told you in the past that a considerable amount of operating leverage exists in the Autobytel business model. Last quarter, we grew net income at more than four times the rate of revenue, so the leverage is real, and it's starting to take in. Further to this point, I would like to give you an example of how our vast database contributes to the leverage in our business model. Autobytel collects considerable amounts of vehicle demand data each day, when consumers visit our site to research, configure, compare and buy cars. A recent report by Forrester highlighted the need for automotive manufacturers to move from a supply-driven business model to one that correlates production with real-time demand. So we're working on a project to analyze our demand data with the purpose of creating a demand dashboard for the OEMs. This could be quite sizable, given that OEMs spend in excess of $30 billion annually on rebates and incentives to move inventory that does not correspond to real-time consumer demand.

One brief note about the automotive retail environment. During the first half, automotive sales dropped by about 2 percent year-over-year, as war, worry, weather and a sluggish economy took its toll. Projections for the second half are more optimistic, with J.D. Powers indicating that sales should accelerate a bit. We remain very confident of executing our business plan in this retail environment, and continue to feel that we benefit from a series of broad secular trends such as Internet and broadband adoption, increasing online shopper-to-buyer conversion rates and continued OEM and dealer adoption of the Internet as a viable marketing channel.

In closing, I feel bullish about the second half of the year and beyond. We expect to exit the year with a revenue run rate of approximately 95 million, and increase net income by over 50 percent in the second half. Cash flow should increase in the second half, as well. These results could improve with another acquisition. As always, I remain thankful for the patience and support of investors. I've told you that our near-term goal was to get the business to double-digit EBITDA margins. Well, we feel that goal is well within reach now, and once we achieve this, I anticipate setting an even loftier goal for the company in 2004.

Thank you very much, and I will now open it up to any questions.

(CALLER INSTRUCTIONS). Andrew Lotti (ph), Roth Capital.

I think it's important to investors to understand what your acquisition strategy is. Although you and I spoke about this a week or so ago, if you could explain a little bit, I think it would be helpful to both current investors and potential investors.

Yes, I think I began that discussion on this call, but it's really quite simple. We see an acquisition strategy that pursues both a market share strategy and market development strategy. This is what I mean by that. There are other businesses operating in our core business -- the lead referral business, which encompasses about 70 percent of our revenue -- that are doing automotive content and lead generation on the Internet. We view there to be strategic opportunity in that category, and obviously the leverage is enormous when we do a transaction like that. Autoweb would be a transaction that would be illustrative of a market share deal. The AVV transaction would be more of a market development deal for us, where we extend our products and services deeper into this automotive marketing services continuum. So, as I indicated in my script, in order to effectively prosecute a sale, a dealer may need as many as a dozen different vendors, Andrew, and it's quite complex to be a dealer today, to try to have an effective marketing program. So, by extending our services and creating end-to-end solutions, completely integrated products, we think that that's very compelling. And with the strong balance sheet, we think very strong, and improving cash flow in the second half of the year, we think we will be able to execute that strategy.

Okay. And with AVV, do you see costs coming out of that? You mentioned 42 to 43 million for the second half; is that right?

Yes, that's the case. You know, it works both ways. We have already recognized some cost synergy, but we will make some investment in the business to fully integrate it during the third quarter, Andrew. So what we're going to do is we're going to be bringing a lot of the infrastructure back onto our infrastructure platform that will require some resource investment. But over time, the synergy and savings will pay for it.

Can you talk about how you got CPMs to $40 and where you see them going in the future future?

It's really an issue of supply and demand, Andrew. We have the greatest number of in-market car buyers, and only a certain number of pages that we can offer to the manufacturers. So it's sort of a perfect market working its course. It's that plus, as I said, the manufacturers continue to spend more and more money online, and we're going to benefit from that trend.

The other thing, frankly, to give ourselves more credit also, is we have done a terrific job, I think, on the product side. We have created a product called Dynamic Content that's a totally dynamic marketing model that allows dealers -- or allows manufacturers to target their messages, and products like the OEM showcase and a number of other products that are in the mix right now. So we have done a good job on the product side, where we are uniquely positioned as the number one or two most trafficked automotive site, and that combined with the fact that the manufacturers -- they have to be here; two-thirds of their consumers are here. So they have to be here, and that's where we get the benefit.

You said you have added 900 dealer franchises in the quarter. How many of those were from Mazda?

We're not disclosing that uniquely (ph).

Justin Martos (ph), WPG Farber.

Just another question on (indiscernible) advertising. You said CPMs were around $40. What were they last quarter? And can you just talk about just a little bit more -- you talked about your unique space, but how far do you think you are versus maybe some other comps that you have looked at?

I'm sorry; I didn't understand that last question, Justin.

What you look at other comparable sort of sites -- specific sites that have a specific targeted audience, I just want to understand maybe where that could go.

The CPMs last quarter were running around $32, so we did further optimize the CPM this quarter; they increased a bit. It's hard for me to say how we have positioned ourselves, how we come in relative to other targeted media sites. I know there's some CPMs in the $3 to $4 range. We actually have some pages that have CPMs as high as $50 to $70. So what you're getting in the $40 number, Justin, is a blended average across the most targeted page to sort of the general media (indiscernible) site. So there is a recent Jupiter report out that indicates that they expect CPMs to -- in this category to crest well above $50. That's sort of what we see, as we think about -- we're going through the '04 upfront (ph) right now, and we're seeing very good CPMs.

And going forward into the September and December quarters, is the -- there's a seasonally factor. Can you quantify that in relation to, I guess, the number of new models that are being added? You saw some seasonality last year. Maybe it's just the strength of refocusing your product last year. Can you just talk about how you're thinking about the advertising part with the seasonality versus (multiple speakers)?

The way the advertising business works for us is that we will typically book about 75 to 80 percent of the revenue. We will have visibility on 75 to 80 percent of the revenue going into the year, and that's what we'll book in the upfront. An then, what we do throughout the year is optimize that media and deliver that media, most importantly, and then shoot for that other 20 to 30 percent in upside. So the way this business works -- I think Hoshi's in the past -- is that it's more of a step function, rather than just sort of linear growth each quarter. So used to be last quarter we were sort of in the $2 million a quarter range. This year, I think you can count on seeing a $3 million number throughout the year. And then, if the trend holds, you will see a number probably north of $4 million a quarter next year.

And I might have missed this earlier on the call. What was your final program dealer count at the end of the quarter?

Hoshi, do you have that number?

The final dealer count -- I think we talked about it -- was about 20,000 dealers, including OEMs and the region (ph) channel.

Robert Radi (ph), Radi Capital Management (ph).

Of the the dealer adds -- maybe I misunderstood this last answer you just gave; I thought I saw somewhere in your report 20,900. Is that right?

Yes; that's 20,900, Bob; you're right.

So that looks to me like it was up --

The nine (ph) was up; that is correct.

So up about 1,000 over prior quarter?

Because of Mazda; correct.

Because of Mazda? Okay. If you guys look at your unique visitor count per media metrics on those guys (ph), 6.6 million average monthly. That's down from, I think, around nine in the first quarter?

Yes.

Several other Internet companies, in reporting, have cast some doubt on the accuracy of the media metrics numbers. I'm just wondering if that 6.6 million tracks at all to your internal logs?

Yes, there's a lot of variability in the comp store and the Nielsen numbers, but those are the numbers that everybody understands, and we report those. Our business, our internal Armiture (ph) numbers, track pretty steady growth. But we feel more comfortable reporting that which everybody knows.

Okay. But your internal numbers are showing something maybe a little different from that?

Yes, we feel pretty good about it. As Hoshi noted, there was a pullback probably in the 7 to 8 percent range in total automotive Internet traffic during the quarter. But I think that was driven in part -- the sequential pullback was driven by the unusually high January. January was exceptionally high for all the automotive Internet sites. We, for example, received, I think, 12 million visitors in January. So the trend is in place; the upward trend is in place. I wouldn't read too much into this data.

Program fees were 13.9 versus 13.1 in the prior quarter; that's a nice jump. Was there any kind of one-time thing there?

A lot of it is because, actually, as I mentioned, revenue per purchase request is up. And we also had -- there was only probably $100,000 or $200,000 what you might consider one-time. But other than that, most of it is actual increase in the program fees. Some of it was also driven by AVV, a portion of the AVV causes (ph) the program fees.

Hoshi, just right at the end there, you mentioned that share count was going to drift up to about 39.5 (multiple speakers).

Yes.

Why is that?

Well, the 37 million is the actual shares, and then we have to use the treasury method for fully-diluted shares. So 39 is the fully-diluted share count.

So that's the right number to use going forward?

Yes. Going forward, meaning at least, I would say, for the next two quarters.

Justin Martos, WPG Farber.

First on the share count, with 39 million really for the next two quarters, where do you see that going into '04?

Justin, what I would say, barring any acquisitions, the fully-diluted share count, as you know, varies by what the share price is. As the share price increases, obviously, that fully-diluted share count will go up. But that's the barometer as to how much it will go up.

And finally, regarding the close rates, how much better can close rates get, do you think, by the end of this year?

It's difficult to say, Justin. We took them basically from 16.5 to about 17.5 percent. Each percentage improvement is a huge amount of work. We think that with the rolling out the Web control tool, the AVV tool, that we're going to have a pretty nice increase here, as we try to get that installed across our current installed base. So that's probably the driver to get us to 20 percent, and I think 20 percent is well within reason. The opportunity around us, in terms of leverage, Justin, is that as we hold the cost of sale constant around $125, we take the close rate up to 20 percent. That gives us a lot of opportunity for pricing, probably even at $30 per purchase request.

And that 20 percent -- you are thinking that's within four quarters or so, or --

Well, it's the near-term goal; right. So whether it's two quarters or three quarters or one quarter, it's hard to say. But that's what we're driving towards, and if you have been following the Company for the last year and a half, you know that we're quite myopically focused on pricing and margin. So we have taken the revenue per purchase request from literally $13 to $23 in the last year and a half, and we have doubled gross margin from $7 to $15. So those are the fundamentals that we're focused on. A key way for us to drive those fundamentals is to drive the close rate. We are focused on it every single day that we come to work, and we're trying to get to 20 percent.

(CALLER INSTRUCTIONS).

Okay, not hearing any further questions, I thank you all for --

Sir?

Yes?

We do have one question.

Excellent.

Al Cashalk (ph), MBB Analysis (ph).

Could you add any further color on the advertising discussions that you are seeing right now, given your comments about the automotive market increasing more online presence?

I can give you some general comments, Al. I've told you in the past that over the last couple of years, the media upfront has been pushed further and further upfront, meaning a couple of years ago, it used to be that we did some '04 media reservations in the sort of November/December timeframe. Last year, they got pushed into sort of late summer, early fall. This year, we are actually going through some '04 media upfronts in late spring, and certainly, they are commencing in earnest all summer. So in traditional media, as you may or may not know, the upfront is typically in the May timeframe. And that's been codified over many years. It's interesting that our business is sort of formally creating an upfront. It leads me to this belief that we're going to have a lot of structured inflow of money over the next five years. If you look at the Jupiter data, for example, it will tell you that by the year 2000, $1.8 billion of automotive marketing money will be spent online, making it the biggest category -- the biggest online category, by the way, larger than financial services, travel, consumer packaged goods and media. So manufacturers understand a couple of things here. First, they understand that two-thirds of the car buyers are here. And second, they understand that in order to drive their market share, they have to drive their online share. Because mathematically, you can't grow offline share today without having strong online presence.

Would that translate -- or we can extrapolate, I guess, that the 3 million in Q3 that you are suggesting may have some upside?

The way we think about the advertising business is that it's sort of a step function business. As I said, we we booking around 2 million a quarter last year. We kicked it up to about 3 million this quarter. You can expect that to continue, and there might be some upside. But next year -- I think there is some sizable upside for next year.

Robert Radi (ph), Radi Capital Management.

Just one quick follow-up. For modeling purposes for next year, should we be thinking of any kind of taxes at the California level for you guys?

There are taxes for California, except I think we will also have to be balancing against we have some R&D tax credits coming up. So I think we will be able to offset those. I'll probably be able to tell you a little bit better in Q3. For modeling purposes, I think we can hold off on that one for the time being.

Jay Kim (ph), Sandler Capital.

Sorry if somebody has already asked this, but I was trapped on another call. Seasonality -- I was going back over the past few years, and I was just wondering what impact, if any, have you seen from the new model cars rolling out sometime in late summer?

That's typically a good quarter for us. Typically, the slowest quarter for us is the fourth quarter, because it includes the Thanksgiving to Christmas holiday season timeframe. Typically, the third quarter is a strong quarter for us. There's a great number of new model launches. I think last year, there were over 60 new model launches, and I think over the next year, we're looking at probably over 80. So there is going to be a tremendous amount of new product out there. I've been to some of the auto shows; the product looks great. I think it will create a lot of buzz, and I think it will create some excitement online.

And when you look at -- for example, if one were to look at your site traffic between today and, let's say, the end of the year, and if there was a material increase in the number of lookers, if you will, is it fairly -- when you look at the look-to-book ratio, does an increase in traffic lower your look-to-book ratio, or does it stay fairly constant, that most people who are looking are fairly serious, versus people who are just kind of like -- excuse the pun, but kicking the tires?

When you say look-to-book, are you talking about Website conversion, or are you talking about sales conversion at the dealership?

Website conversion.

We have got this tuned in pretty well. If you look at the Website conversion in the first quarter, it was around 3 percent off of a much higher visitor base. Last quarter, the website conversion was up around 4 percent, and what we are able to do, at least, is hold the purchase request constant even if the Website traffic, the overall Internet Website traffic goes down. So what I would say is that we just launched a new Website. I encourage you all to go see it; it looks terrific. And preliminary estimates are that it is performing quite well for us, from a Website conversion and page-view (ph) perspective. So I think you can look to us to continue with online conversion, Jay.

(CALLER INSTRUCTIONS).

Operator, any more questions out there?

No, sir, there are no questions at this time.

Okay, terrific. Thank you all for participating on the call. We look forward to giving you updates. Thank you.

This concludes today's teleconference. You may now disconnect.

(CONFERENCE CALL CONCLUDED)