Autoweb Inc (AUTO) 2003 Q4 法說會逐字稿

Good afternoon. My name is Amitris (ph) and I will be your conference facilitator today. At this time I would like to welcome everyone to the Autobytel's Fourth Quarter Fiscal Year 2003 Conference Call.

All lines have been placed on mute to prevent any background noise. After the speaker's 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.

Mr. Printer you may now begin your conference.

Thank you Amitris. Good afternoon and thank you for joining us today to discuss Autobytel's earnings for the fourth quarter fiscal year 2003.

With me, is Jeffrey Schwartz President and CEO of Autobytel. We will begin with highlights of the quarter and the year 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 statement that came in today's press release.

We would like to caution you that actual events are results that differ materially from those forward-looking statements. We refer you to documents the company has filed with the S.E.C., specifically the form 10-K for the year ended December 31, 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 over the call to Jeffrey.

Thank you Hoshi and welcome to Autobytel's fourth quarter conference call.

I am pleased to report continued progress in the financial performance of the company. Today we report Q4 revenue of 23,900,000 and net income of 3,800,000 or nine cents per share. During the quarter our cash balance strengthened by 2,700,000 and we closed the quarter with 62,000,000 on hand and no debt.

As you might imagine we're very pleased with the quarterly and full year results we are reporting today. In 2003 we generated 7,400,000 of net income for 20 cents per share, compared to a net loss of 20.7 or 67 cents per share in 2002.

In was a banner year for Autobytel. Our first full year of profits in the company's nine-year history and one which reinforced to us, that there are no short cuts to accomplishment. And that orderly progress is best achieved by focusing on the long-term character and quality of the business.

Each year on this call I outline management's goals and objectives for the upcoming year and discuss how we scored against our benchmarks for the prior year. In 2003, I told you we would work to consolidate our operating gains, leverage our core business and extend our reach and leadership in automotive marketing services. As we close out the year I'd like to offer some thought on how we scored.

My remarks later in the call will highlight the areas of focus for 2004. On consolidating operating gains, we told you that we would work to reduce program dealer cancellations in our core business by 1/3rd and we did.

During the year churn decreased from 60 percent to 38 percent as we successfully realigned our sales and support efforts and focused on product improvements. In Q4 churn decreased to 29 percent, our lowest rate in two years and we added almost 200 dealers to the program.

As we eliminated unprofitable relationships in 2003, we have seen steady improvements in pricing and margin. Year-over-year revenue per purchase request increased to 23 percent from $21-/$26 and gross profit for increased purchase request increased 31 percent from $13-/$17.

Adding dealers while improving pricing and margin demonstrates that we are seeing a favorable alignment of our marketing, sales and product efforts.

On financial leverage in 2003, we began to experience the unique financial benefits of our business model. For the year we generated 7,400,000 of profits and had an eight percent net income margin.

When you view the results from a contribution margin perspective, our progress is even more pronounced. In Q3 and Q4 we dropped about a 40 percent of incremental revenue to the bottom line.

On extending our reach and leadership position in automotive marketing services, during the year we began to deliver on our strategy of providing a broader array of marketing products to the industry.

Last June we acquired A.V.V. and its best in class year-end product and finished the year with over 5000 franchises using our sales automation tools. Adding a national account with Mitsubishi during the fourth quarter, further strengthened our leadership position in this important area.

We made impressive progress with R.P.M., our customer loyalty and retention-marketing product, growing revenue and dealer account and now have 10 automotive manufacturers to endorse and co-opt the program. With these relationships taking hold, this is an important area of growth and expansion in 2004.

We also extended our market shares, a percentage of total U.S. new car sales. In 2002 about five percent of U.S. new car sales were from consumers who submitted a purchase request on Autobytel. In 2003 this number increased to about six percent, representing $20,000,000,000 in gross market sales.

So when the score is tallied for the year, it's a clear win for Autobytel. We delivered on what we've set out to do in 2003. Operations have improved, margins are expanding, and our leadership position is deepening in our core business, and extending into new products and services.

After Hoshi reviews the financials for the quarter and prior year, I will highlight theories of the accomplishment for the year and discuss management's focus and objectives for the year 2004.

Hoshi?

Thank you Jeffrey. Consistent with the guidance that we have provided you in the past, I am pleased to report that this fifth consecutive quarter of record net income and our sixth consecutive quarter of cash generation. We are beginning to see a pattern of consistent performance that we have delivered for the last six quarters.

Let me begin with cash. The cash balance increased by $2,700,000 from 58.9 in Q3 to $61,600,000 in Q4 including cash, cash equivalents, and short and long term cash investments. Included in the cash from operations of $2,700,000 was the cash repayment of a $500,000 for a settlement of an ex-employee of Autoweb.

A year ago the cash balance was about $28,000,000 versus about $62,000,000 today, including $25,000,000 from the private placement in June 2003.

The continued cash generation of the business remains the high point of the business and I am pleased with our progress in this area. Going forward, we expect to generate cash from operations every quarter in 2004.

Consistent with our past pattern the cash generation in the first quarter will be lower due to recurring annual payments such as insurance renewal and the Annual Dealer Convention or N.A.D.A., which Jeffrey will discuss, in greater detail.

Operating income increased sequentially by 79 percent from 1,600,000 to $2,800,000. The main reasons for the $1,200,000 increase in operating income include a four percent increase in revenue, increased cost of traffic acquisitions, expense reductions in areas such as product development, and a reduction of a bad debt allowance.

Net income increased sequentially from $1,700,000 in Q3 to $2,800,000 in Q4. And the corresponding E.P.S. increased from four cents a share to nine cents per share. Besides the items that affect operating income that I just stated, there is other income and expense of $978,000 that includes a benefit of $762,000 due to settlement with a former Autoweb employee, of which $500,000 was in the form of cash, and the remaining was other considerations.

For 2003, net income was $7,400,000 or 20 cents per share versus a net loss in 2002 of $20,700,000 or 67 cents per share. This improvement reflects the management's discipline in the operating the business profitably and the leverage that exists in our business as we grow revenue.

We achieved record revenue of $23,900,000, a four percent sequential increase over the third quarter and a 20 percent increase over the same quarter of 2002. So the year revenue came in at $88,900,000, a 10 percent increase from the $80,900,000 that we reported in 2002.

Let me begin with the lead generation area, which is comprised of sending leads to retail dealers, dealer groups and automotive manufacturers. To properly understand the program fees and enterprise revenues, I would first discuss the metrics that drive those numbers.

By now many of you are familiar with the funnel concept that we have discussed in the past. To elaborate on that, consumer traffic jumped 31 percent sequentially with an average of 8,400,000 visitors per month to our site in the fourth quarter. Of those, approximately 1,000,000 visitors submitted purchase requests. We scrubbed out (ph) 194,000 leads that did not meet our quality standards.

Additionally, we could not place 61,000 leads, because we did not have that dealer in that area. 61,000 represents the lowest number of unplaced leads in 2003, and is indicative of the corresponding increase in the dealer network. We monetized the remaining 765,000 purchase requests. This volume was slightly higher than in Q3 and is the first time in eight quarters that we have increased the number of purchase requests.

In 2003, we delivered approximately 3,100,000 purchase requests. Our goal for 2004 is to deliver approximately 3,500,000 purchase requests. The mix of those leads was different in Q4 versus Q3.

In Q4, 66 percent of 506,000 rented a retail dealer network, compared to 71 percent of 548,000 in Q3. The remaining 259,000 leads went to the O.E.M.s in Q4 versus 216,000 in the third quarter.

Some manufacturers were particularly aggressive during the quarter, as they worked with Autobytel to drive their market share towards the end of the year. Given the progress we are making on the retail part of our business and adding dealers, we anticipate the retail mix increasing in 2004.

There are three representative metrics that would demonstrate that the mid year sales realignment and our focus on dealers are yielding positive results. The retail dealer account (ph) increased from 5,097 at the end of Q3, to 5,283 at the end of Q4, the net added 186 dealers in Q4 versus 89 dealers in Q3. This is the second consecutive quarter that we have net added dealers.

You may recall that the dealer churn in 2002 was 60 percent and it was management's intent to review (INAUDIBLE). In the fourth quarter we achieved that goal and the churn dropped to 29 percent annualized.

The percent of repeat dealers added to our program, increased from 36 percent in the first quarter of 2003, to 44 percent in the fourth quarter. The net revenue for purchase requests from retail dealers increased from $24.56 in Q3 to $26.86 in Q4, and up from 21.38 a year ago.

The above metrics resulted in a total program fees increasing sequentially from $14,500,000 in Q3 to $14,700,000 in Q4, and a 12 percent increase from Q4 of 2002. So the full year 2003 program fees declined to $56,000,000 in 2003, versus $58,000,000 in 2002.

However, as we demonstrated in the last two quarters, we have stemmed the erosion of the program dealer account and have begun to increase the quarterly revenues in program fees. As I noted earlier we expect to drive additional purchase request volume in 2004, so we anticipate this area of our business returning to growth in the coming year.

Enterprise sales revenue increased sequentially from $4,100,000-/$4,300,000, due to higher purchase request volumes, as I stated earlier. For the full year 2003, enterprise revenue was up 45 percent from $10,500,000 -/$15,200,000.

Most of that growth came from the leads we sent to the O.E.M.s and a small portion was from A.V.V. Westside (ph) advertising revenue regained its momentum and we delivered $3,200,000 in Q4 versus $2,800,000 in Q3.

During the fourth quarter, C.M. - C.P.M. was $44. Full year advertising revenue increased almost 50 percent from $7,900,000 in 2002 to $11,800,000 in 2003. And C.P.M. increased some $23 to $38.

The last category of revenue - Other products and services comprises of primarily of R.P.M. and a small portion of A.V.V. R.P.M. revenue continued to increase and we finished the year with 379 dealers on the program. I am pleased that we now have 10 automotive manufacturers, endorsing and co-opting the program, so our growth prospects for 2004 in this area, appear significant.

Beginning in the first quarter of 2004, we intend to change the presentation of the revenue categories on our financial statements. Our current presentation is in four categories - program fees, enterprise sales, advertising and other products. These categories were created a few years ago and have sold us well.

However as the company has evolved, and for increased investor comprehension, and to align with the way we operate with business, we will modify these categories. Starting in Q1 2004, we will report in four categories. Lead generation, advertising, C.R.M. services and data and other products.

Under the new presentation the Q4 2003 revenues are $23,900,000 would have been reported as $16,000,000 in lead referrals, $3,200,000 in advertising, $3,400,000 in C.R.M. services, and $1,300,000 in data and other products.

Turning to expenses. Total expenses declined sequentially from $21,500,000-/$21,100,000 in Q4, and reflect the wind down of costs associated with A.V.V. integration. Sales and marketing expenses increased slightly from $13,300,000 in Q3 to $13,400,000 in Q4.

Included are traffic acquisition costs, which increased, in the fourth quarter because of a more competitive acquisition environment from what is generally a slow quarter for automotive sales.

As stated before we revised our estimate for bad debt reserve and lowered the allowance by $917,000-/$800,000 dollars. We reduced the allowance based on our experience in 2003 of a lower level of bad debt write-offs due to aggressive collection efforts, improved customer relationships and increased quality of purchase requests and services delivered to our customers. We are very pleased with our progress in this area and believe that this level is sustainable going forward.

Product and technology development costs declined from $5,400,000-/$5,000,000 as we wound down the integration of A.V.V. Going forward we expect that these costs may increase modestly.

G&A expenses increased by 1/10th to $2,800,000. In 2004, G&A costs were increased to reflect the implementation of (INAUDIBLE) requirements and specifically the 404 (ph) attestations.

In prior calls I had indicated that capital expenditure for the second half of 2003 would be between $1,000,000-/$1,100,000. We ended the second half with $900,000 in CAPEX for normal spending and for A.V.V. integration. Going forward, we expect CAPEX to be between $300-/$500,000 per quarter.

Depreciation and amortization increased from $673, 000 in the third quarter to $708,000 in the fourth quarter. We expect G&A to increase gradually in 2004 to about $860,000 (ph) level per quarter.

Head count in the fourth quarter remained essentially flat at 333. Gross (INAUDIBLE) increased by one day from 48 to 49 days and the net (INAUDIBLE) increased from 33 to 40 days because of the change in bad debt allowance. We expect the net (INAUDIBLE) to be probably in the low 40 range for 2004.

That concludes my remarks on the financials. Jeffrey will now discuss the business. Jeffrey.

Thank you Hoshi. I am pleased with the consistency of our results and the unique leverage in the business. Before I turn my attention to areas of focus on leverage for 2004, I'd like to highlight and reinforce a few key trends and accomplishments during the year.

The milestone achievement of business during the year was returning growth to our core business. After nearly three years of eliminating unprofitable and noncompliant dealer relationships, I'm happy to report that our dealer account is now growing in a more predictable fashion.

In the fourth quarter, a record 44 percent of added dealers were repeat customers, which is a very positive sign. There are no shortcuts to accomplishment, so I'm pleased that we had the discipline in financial resources, to lay the foundation for the strategy that we believe wins in the marketplace over time.

Our relationships with the manufacturers continued their growth during the year. In our lead generation business we added about 4000 dealers to the program as we strengthened our relationship with existing customers and added programs with the likes of Lexus, Mitsubishi, Mazda, Volvo, Volkswagen and Isuzu.

There is no question that the automotive manufacturers are beginning to embrace Internet marketing, as an effective way to sell cars, which is logical, given that more than 2/3rd of all car buyers visit the Web to research and shop before they buy. Autobytel is the most visited new vehicle research and buying site, so as manufacturers increasingly adopt the Internet. they look to Autobytel.

Our advertising business grew at nearly 50 percent last year, as we saw the beginning signs of a more aggressive migration of media expanding from radio, print and television to the Internet. As a reminder the Internet still accounts for only 2-/3 percent of automotive marketing Dollars, but is expected to grow rapidly over the next three to five years as a percentage of total media spent.

Given our unique positioning with the leading traffic, the largest network of participating dealers, and innovative media products, we anticipate continued growth in advertising. Our C.R.M. business grew at 50 percent last year. This market is primed for significant growth, and given our leadership position we expect to sustain aggressive growth rates in the coming year.

The near term financial benefits of this business are terrific, but the longer-term strategic implications of our entry into this market keep me very excited. By providing a broader array of marketing products, our customer stickiness has increased.

Case and point - during the fourth quarter Autobytel customers who were using two of our products turned at an annualized rate of eight percent, a level three to four times lower than that of our single product customers. So as the utilization of our product drives process and delivers results, we will be able to more deeply penetrate our customer's interactive marketing spent.

Now that we have more than digital marketing to offer our customers, we can more aggressively tap into the vast marketing valors (ph) that are not currently being allocated to interactive marketing and media.

The automotive marketing world is slowly changing from unmeasured to measured media and from analog to digital content. Autobytel is well positioned for these trends.

Our data and applications business made strides during the year, and a key accomplishment was to capture application and product synergies, by relocating this division from Massachusetts to our California offices.

The unit developed our Spanish language content in 2003 and according to comScore Media Matrix; Autobytel is now the most visited new car research and buying site among U.S. Hispanic Internet users. We feel good about this business and we feel that it remains an important and valuable contributor to our overall strategy.

On the consumer side of the business, we make significant progress in the year on the quality and content of the Web site. We successfully launched a new Site during the year, which improved Site stickiness and conversion, launched new features, including reliability data, and free vehicle buyer's guides, and made important progress indexing our vast content across the world of Internet search. To this point we have seen page views, as a result of free search engine traffic increase 300 percent Q4 2003 over Q4 2002. There is great promise here.

As we begin a new year, it's an opportunity to highlight areas of management focus and attention. As I have done on this call and each previous call, I will report you on these areas of focus and ask you to measure our progress throughout the year. I will highlight five key areas of focus and leverage for the coming year.

First in the core business, our goal is to add approximately 750 new dealers to the program. Our expectation is that much of this growth will come in the form of our Flex (ph) model and that our used car business will be a major contributor. Our expectation is that we can grow total monetized purchase requests by about 15 percent to 3,500,000 during the year.

As part of this effort we will remain focused on the used car side of the business. To get to your current (ph) during the quarter we doubled the inventory on the Site to 250,000 cars with the addition of four (ph) direct to the program. And in January we launched a new program with Lexus to highlight their Certified Pre-Owned or C.P.O. inventory. We expect to add additional manufacturers to the C.P.O. platform during the year.

Second, in the C.R.M. segment of the business, we expect to add approximately 1,000 new dealers during the year. We will focus efforts on improving and better integrating the Web control and R.P.M. platforms enhancing the showroom (ph) and C.R.M. functionality or Web control and driving the sales prospecting side of the R.P.M. business.

Third, in the marketing area, the key focus continues to be optimizing our search engine placement and increasing the total percentage of traffic that is direct to Site or is free from a customer acquisition standpoint. Today that stands in the 12 percent range and we are focused on driving it to about 20 percent on an exit basis in 2004. As a reminder, each percentage point improvement brings huge leverage to the bottom line.

A fourth area of focus during 2004 will be to drive our market share, as a percentage of total vehicle sales. Recently we had our purchase request data analyzed by a respected independent organization, and their findings corroborated several years of Autobytel survey data.

In 2003, about six percent of U.S. new car sales were from car buyers who submitted a purchase request on Autobytel, which represents about $28,000,000,000 in gross market sales. Our goal for the coming year is to increase that by one full percentage point to around seven percent, which should increase our sales generation by an additional 4-/5,000,000,000.

Today one in 17 new car buyers in the U.S. submit a request at Autobytel. So our goal of driving one in 10 new care sales is well within reach in the coming years.

As part of this effort we're now focused on increasing the number of consumers to receive multiple quotations from Autobytel dealers. This percentage currently stands at around nine percent, and our goal is to double this percentage on an exit basis in 2004. This should increase close rates, improve the consumer experience and add additional leverage to our bottom line as we multi-monetize consumer purchase requests.

And fifth, in the area of the acquisitions, we expect 2004 to be an active year. We are currently in discussions with a number of potential partners and feel that there are deals to be done that could add to earnings, and a strategic position of the company over time. We have found that there can be substantial revenue and expense synergy in some of these opportunities.

You should have an expectation for management to use its available capital resources to drive revenue, earnings and the overall strategic position of the company in 2004.

Today is an opportunity to look back. But tomorrow we go to Las Vegas for the Annual Dealer Convention or N.A.D.A. and look forward to the upcoming year. We will announce our Annual Consumer Choice Awards, honoring the most requested vehicles on the Autobytel sites, launch our Gold Medal Dealer Program, which recognizes and rewards dealers who achieve high standards of customer satisfaction, and launch several new products including Dynamail and Do-not-call (ph) product, which were both great additions to our C.R.M. platform.

We will also launch a premium pre-owned product for dealers to highlight their inventory on our sites. I've been to N.A.D.A. five times now and I've never been so proud to represent the company as this year.

Let me conclude with two final thoughts. First we expect a bit of tail-length for the business in 2004, as automotive sales continue at their robust levels. Most estimates are for sales in the 17,200,000 range, which represents good growth from 2003 levels, which came in around 16,700,000 units.

We feel quite confident of our ability to execute our business plan in the current sales environment. Of course, continued consumer adoption of the Internet provides an accelerator to the secular growth we see in the market. So even if sales taper off a bit our growth should continue on pace.

My final thought is around the financial performance of the company in 2004. We expect to increase revenue organically in the 15-/20 percent range during the year and continue to experience the contribution margins previously discussed. We believe that there is upside to these numbers if we are successful in our strategic initiatives.

Thank you for your continued support of Autobytel. I would now like to open the call up to questions.

Operator?

at this time I will like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Mark May with Kaufman Brothers.

Hi, thank you. I have several questions - cut me off when you want to.

The first one has to do with - it sounds like that the emphasis - there are several emphases for this year. But of them is in the used car area.

Just wondering, can you talk a little bit about the pricing for used cars in addition to, you know, looking to add a quarter of a million - I'm sorry, that's not the number - but in addition to adding inventory, can you talk about the pricing there?

The second question. Is there a lag in the number that you've put up, in terms of the number of dealers that you have, and is there a lag between that - putting the inventory on then eventually monetizing that so that the net increase we see in the last two quarters, is there a lag in seeing that actually show up on the P&L?

And I guess, for Hoshi, looks like the net margins were around the 16 percent level in the fourth quarter. I'm wondering where you think that could go by the fourth quarter of this year.

Thanks.

How're you doing, Mark? This is Jeffrey.

Hi, thanks.

On the used car side of the business, we've improved pricing substantially over the last year. It used to be that the purchase requests on the used car side of the business were in the $12-/$13 range. Today they're tracking pretty consistent with new car - a little bit below but probably in the $23-/$24 range. So we feel good about the work we've done on the used side. And pricing, we've done it in a relative short order, about a year.

Second point is to the inventory on the Site. We've made substantial progress there. We added a Mark (ph) account. One of the manufacturers came on with about a 150,000 cars so we've almost or more than doubled rather, the inventory.

And there is some lag - in order to get the inventory published, get it displayed properly and get it distributed, marketed. So you'll see, I think the benefit of that coming in the next couple of quarters, of that inventory.

And Hoshi can answer the question about net margins.

Hi Mark, this is Hoshi. Mark (ph), there's a 16 percent net margin in Q4 going forward. What I would tell you is that I think we are consistent with the guidance that we gave you earlier, last quarter, which is, our intent is to double the net margin exiting fourth quarter of 2004. Which means last quarter we've put in seven percent. We are - we anticipate going out the year at about 14 percent. So you will see a continuous growth in the margins.

I was just - also a follow up question. Your beginning performance coaching, which seems like it will be - can you just talk a little bit about that? How important you think that is and what ultimately the impact of that parameter could have on your business?

Yes. I think, I alluded this to this in my script, Mark. And that is, when our customers are using multiple products of Autobytel - and it might be our lead generation product along with our sales automation tool, literally the churn goes down by about 75 percent.

So if you looked at the multi-product churn, in Q4 it was about two percent. And the single product churn in Q4 was about 7.2 percent. So dramatic impact for us to get in there and coach the dealers and get them, frankly, using multiple products. So the impact is significant, mostly I would say from the perspective of sell through (ph) being able to - sell through multiple products.

Great. Thanks a lot.

Your next question comes from Mark Argento with ThinkEquity Partners.

Good afternoon. I have a question regarding - can I ask what (ph) your thoughts are, as far as continuing to build the brand, the Autobytel brand and more specifically, you know, thoughts on how you could bolster that - either offline advertising or other mediums?

And the second question. Looking at your advertising business, what part of your inventory are you guys, you know, currently at, as far as sales. You know, you utilize an 80 percent of your inventory. Is it higher that that? And what can you do to grow the actual, you know, your inventory as well, given, you know, kind of the dynamics with - if you can do 15 or 20 percent organic growth?

Mark, this is Jeffrey. How are you?

Very good, thanks.

The - on the issue of the brand, yes we're looking at a number of things right now. As you may know, we have not done traditional media marketing for the brand in two-and-a-half years. And so we're doing most of our marketing online today. So, we're currently looking at that.

We've been, in fact, in the market, testing some creative, and we'll report back to you on how that works. So certainly traditional media is an opportunity.

And we're also looking at, and playing around with a number of less traditional marketing and brand awareness type programs like, guerilla type marketing programs, and lot of participation at the automotive shows, and things like this.

Of course, on the enterprise side, Mark, the brand is incredibly strong. So you know, across automotive retailers and the manufacturers, it's a highly ubiquitous brand, but always trying to build mind share with consumers.

And relative to advertising, we're currently running at about 60-/70 percent of inventory sold. So there is opportunity there. And as we focus on bringing more consumers to the site, there's more opportunities for sales there.

And just a quick follow-up. As far as the amount of traffic that's coming directly to your - to Autobytel or the Autoweb site, what is that - is that trending higher or lower, quarter-over-quarter or just in general?

Yes, it's a positive trend, as we continue to work with the search engines and things like this. The vast majority of the consumers that we transact with visit the Autobytel or Autoweb site. So what we're really focused on, Mark (ph) is, getting them to the site less expensively, or frankly for free, through some of this brand building activity or some of the natural search activities that are out there on the Internet.

Great, thank you.

Our next question comes from Robert Rady (ph) with Rady (ph) Capital Management.

Hi, guys.

Hi, Rob.

Hi Rob.

If no one else is going to say it, I will, nice quarter.

Thank you.

And most of my questions have been asked and answered, but did you guys give a revenue - average revenue per dealer number that I missed?

No, we did not. But essentially the average revenue per dealer number has remained almost flat in Q4 versus Q3 at the $800 plus - $800-/850 range. So that's remained almost flat.

OK. That's it. Thanks a lot.

Thanks, Rob.

Your next question comes from Peter Mirsky with Oppenheimer.

I wondered if you guys could talk a little bit, to the extent you can, about what you're seeing for January trend so far? Whether it's traffic, whether it's transaction or leave (ph) request?

Also I noticed in the press release, you didn't break out the dealer add for A.V.V. or I-manager (ph). Wondered if you could just give us a sense for where those might have gone?

Yes, Peter, this is Jeffrey. I'll speak to the January trend. January trend as far - as expected, very robust. You know, typically the business - you know, there is - the fourth quarter is typically a swell automotive sales quarter. And as we've told you in the past, the business starts to build in January and builds all the way through pretty much to July.

And then we go through a little bit of a slow period towards the second half of the year there. So business is building well, traffic is going well. Continue to see the positive signs on the cancellation front and also on the dealer add front

We're roll into N.A.D.A. tomorrow with a tremendous amount of energy and excitement and expect it to be a very good show. And a lot of commercial activity there for us. So you know, the trend looks good.

Relative to the dealer adds Hoshi can talk about that.

You know, we'll be adding about - you know, we have added about 200 dealers in Q3 and we'll be adding another 200 dealers in Q4. And we added another 200 dealers in Q4 on the A.V.V. side.

Regarding I-manager, I think as we move forward, I-manager (ph) and A.V.V. will be coming closer together. And so I do not know whether that is more - is relevant any more to talk about I-manager separately. But I can tell you that A.V.V. is definitely adding dealers at a clip (ph) of about 200 a quarter.

OK and just a quick follow-up, if I may. Could you just remind me, Hoshi, that the margin on used cars versus new?

The margins are the same. The growth profits are little bit different. The growth profit is a little lower. But the margins are almost the same on the used cars side as on the new cars side. We get a little bit less. We get about $20 on the revenue side versus about net of 24/25 on the new car side. But the cost for purchase request is also lower.

Great. OK, thanks very much.

OK, Peter.

Your next question comes from Frank Gristina (ph) with Avondale Partners.

Thanks. Hi guys. How's it going?

Hi, Frank (ph).

Hi Frank (ph), how are you?

Good. Congrats on the quarter. Couple of questions. What percent of the customers - Jeffrey, you mentioned a lot of customers that use two or more products are more willing to renew et cetera. What percent of your customer base currently use two or more products? That would be the first question.

And if we can drill into that or - is it, you know, customers who are buying leads are using Web control? You know, which is - what's the obvious built-on (ph) for those customers?

And then if you could talk a little bit more about used car products, since it is such a large market. But explain how your product is different from some really tough competitors out there, like Autotrader in giving E-bay its due? Explain the difference between your products and theirs.

And then Hoshi, if I could get some clarification? You may have touched on this. But this 745,000 in "Other Income" about two cents on the bottom-line, where was that from?

OK. Frank. Let me start with used. As you saw, we got some good pickup on the used cars side of the business with Q4 with the addition of a lot of inventory. And in January, we launched Lexus C.P.O. and would expect to launch additional C.P.O. with inventory.

The way our business is different - there's basically three business models out there. There are two companies that are both affiliated with newspapers, owned by newspapers that have classified models, for obvious reasons. And there is one company that has an auction model.

And then Autobytel, and we have a lead generation model. So the way our model is different is that typically we sign a dealer up, we publish the inventory. We tell him what he can expect, in terms of the number of purchase requests, and then we charge him as we perform. It's a pay-per-performance model.

But they don't have to pay to publish their inventory.

Typically not. Yes, we do have the model where they can pay a fixed rate to publish the inventory. But 75 percent of the new business, Frank, coming in, is the pay-per-purchase request model.

Which is fine, because, you know, we feel quite confident of our ability to market the product, and get consumers into the transaction, provided the inventory is good and well-priced and things like that. So we think that that is a - we think that that's a good model.

J. D. Powers has said that we're number two in terms of sales generations and number of leads we provide to the dealers. The close rate typically tracks in the 21/22 percent range. It's a very good product. We keep the inventory clean. We post it and put it up every night.

So we stand by our product. We think it's a very good model. And we think that with the addition, for example of some of those premium listing that we're now announcing at N.A.D.A. that it's model that we can really grow the business with, going forward.

Great. And then what percent of customers are using two or more products? Can you give that out yet or ...

Yes, Frank, I can give you an estimate of how many use more than one product. It's about a third of our dealers. So it's a third of our 29,000 dealers that we talk about use more than one more product.

...And is the second product typically you know, Web control or going forward, by manager Web control?

It will be an A.V.V. product. That's the one we are talking about - either A.V.V. or R.P.M. So it's a C.R.M. product.

Great. So is there a way to determine what percent of the customers that are currently buying new car leads are signed up to buy used car leads?

It's a very small percentage. You know, we have about 1,200-/1,300 dealers on the used car program today, as compared to something over to 20,000 franchises on the new car program.

Great.

So, there is - as you might imagine, tremendous sell-through (ph) opportunity here for us.

And then the 745,000 - if you've already mentioned it, I apologize.

That's OK. OK, what I said was, of the 745, half a million was for cash and the other one was for a different considerations. And this was an agreement with - pardon me, a settlement with an ex-Autoweb employee. So those are the two parts to the 725.

OK, thanks very much.

OK, thanks, Frank.

Your next question comes from Justin Martis with Weiss, Peck and Greer (ph).

Yes, hi. I just wanted a get a little more clarification on the advertising side. How do you see 2004 playing out on the advertising sales?

I think it's another year of growth, Justin (ph). You know, we grew the business 50 percent last year. And you know, it's still too early to tell exactly how the year's going to unfold. But we feel very good about it. We had a good upfront. Gives us some momentum going into the year. Traffic is doing well. Site's performing well. So we feel pretty good about it.

Where do you think the C.P.M. is going with the, as you said, the (INAUDIBLE) went well pretty well for this quarter.

Yes. You know, C.P.Ms jump around. So it's difficult to forecast them with exact precision. And it - they're not perfectly linear, right? But they came in at around $44 in Q4. You know, we would expect that they stand at $40 range.

Most analysts suggest that in this category, C.P.Ms over time, target the media, like we're delivering are properly closer to $50 than $40. And you know we feel confident about that trend. And seems to be holding churn on our own business.

Thank you.

Our next question comes from Peter Treadway (ph) with Tracer Capitals (ph).

Hi guys how are you?

Hi Peter.

Quick question regarding the anticipated growth - just from our own sides from 12 percent you said, to ideally, 20 percent by the end of '04. Can you talk about the impact on your sales and marketing expenditures that we're going to see as you make that change? And what - how much do you think you're going to have to devote to that?

Peter, this is Hoshi. OK, what I would tell you is first of all we have - our growth margin is about 55 percent typically. In other words we get a revenue of about $24 in net per purchase request for the cost of about $9. So obviously as we improve that percentage - for every percentage point that drops down to the bottom-line note (ph), we would not have to spend $9 per purchase request.

So you are looking at putting out additional 40 percent margin dropping to the bottom-line for every percentage point that we move. So we go from 12-/13 percent and so on. So you can get a sense from the Dollar value that I just told you, we would not have to spend $9 per purchase request.

But how about in terms of just driving people - the sales and marketing to get people to go to your own side as opposed to (INAUDIBLE) purchasing. Same thing?

That's the - that was the question I think that was asked earlier and Jeffrey answered the question saying what are we doing in terms of offline advertising et cetera. That's what we are doing in order to drive more people directly to the site.

OK. And the other question was, in terms of your program dealer growth, how much of that has been conversion of A.V.V.? Some of the A.V.V. dealers that you guys added in, I think it was June?

Yes, that conversion right now, at least in Q4 was, I would tell you, quite minimal.

Great.

As we go forward we may not - obviously we'd like to leverage that one. But right in Q4 it was minimal. So most of that growth was coming from dealers that are signing up with the - if you may, the program fees side - the retail side.

Great, that's it. Thanks, guys.

Thanks, Peter.

Your next question comes from Richard Fetyko with Merriman and Company.

A good quarter, guys.

Thank you.

Thank you.

Just a couple of questions. How many sales people did you have at the end of the quarter? How does that compare to prior quarter? And how does that break down between new and used?

OK, we had about 90 people - almost close to 100 people on the sales side and sales support side. And that number increased only slightly in Q4. In Q3, as you know, when we announced our results, we said that we had realigned our sales force in the second - in the third quarter in June/July timeframe. So that's when we added the sales people. So between Q3 and Q4 there has not been a massive change in the sales headcount.

So I would say, between sales and sales support, it's between 95-/100 people, across all sales forces.

And did you break them down between new and used?

The way it works is that the telesales force handles both the new and the used. So it's difficult to say a portion - to say in other sense, the same group of people that handle both new and used.

Thank you. One other question. You mentioned, sort of, a little bit of an increase in traffic acquisition, or I guess a lead cost - lead generation cost. Could you, sort of, get into that? What kind of competitor pressures that you're seeing out there, is just the fourth quarter type of event?

Yes, Richard, this is Jeffrey. I think it was somewhat anomalous, somewhat isolated, the fourth quarter. It was a - it's typically - fourth quarter's typically a slow automotive sales quarter.

And at the same time we had a tremendous amount of activity with our O.E.M. accounts coming to us saying, "Hey look, you know, the sales are slow, we need you to help us drive market share," which is the good news, right? So we're now viewed as a meaningful way for the manufacturers to drive market share.

As a result we went out. We were quite aggressive at the marketplace and others were as well, to keep up. And I think it has heated up the whole marketplace for the quarter. We see things settling down in January. And generally don't view that as a long-term trend.

OK, great. And finally, I think I missed the close rate and I was pleasantly surprised by the strength in pricing, which obviously the closing rate drives that to some extent. Could you remind me what the close rate was in the fourth quarter and where do you see that trending?

Yes, flat at 17 percent, and as you know, we've had good success keeping it in the 17 percent range. So we feel good about that.

You know, Richard, another way to look at the close rate - and I reference the fact that we send a good portion of our data out to have it analyzed by a very respected third party - if you look at the total number of car buyers, of all those people that are submitting purchase requests on the sites top 38 percent.

So about 38 percent of the people submitting a purchase request from Autobytel go on to buy a car in 90 days. And you know, of course you know, Richard, we're looking at about a 10-day snap at it.

So, we're going to be rethinking the way, potentially we report on and measure close rates. Because it's capturing it after 10 days is not fully illustrative (ph) of the value that we're providing.

Right.

We'll be talking to you about that throughout the year.

OK and then finally on the market share. You mentioned six percent or so ...

... Yes ...

... Or the five percent of all new cars sold actually go through Autobytel. But you don't catch it necessarily. Or rather I should say, not all those deal - interested consumers or purchase requests end up buying the cars from the dealers. But that's - assuming the - for the 38 percent close rate, right?

... Yes, that's right.

OK.

And that's ...

... That's the opportunity, though.

Yes, that's the opportunity, right. Because you know, we've been collecting this data for three years. And the close rate - the number of total close rates in that 10-day period has not been lower than 39 percent and has not been higher than 41 percent. So they actually run the data against the D.M.Z. (ph) registration records and come up with 38 percent is - you know, it's pretty similar, right? So what we just have to continue to do, Richard (ph) is improve, you know, the execution and marketing of our current customers, make sure they get more opportunity there.

OK, thanks.

You're welcome.

Your next question comes from Jason Heringstein (ph) with Deutsche Banc.

How are you?

Hi Jason.

Hi Jason.

Hi, a couple of questions. The first is on the advertising side. Can you talk about, to what extent the boost we saw on the C.P.M.s was driven by a mix shift of some of the scarcer inventory like featured model, versus just an increase in kind of overall commitment by the O.E.M.s to allocate our marketing Dollars online?

Yes, I would tell you that a good portion of it was driven by sponsorship Dollars. So I think you got it right, Jason.

OK, and then the second question is, we still obviously see a pretty big gap between the 60/70 percent of people who are researching cars and then you know, six to eight percent who actually submit a purchase request obviously going to be a demographic shift that'll drive that back. How do you guys think about proactively making changes to the site and other things you could do to drive greater Website conversion?

Jason, we're at it every single day. We're experimenting with new, you know, new navigation, new U.I., new content - online real-time check that we've launched. And we're always looking at ways to improve conversion. Of course we could have a very high rate of conversion on the Web site and a very low rate of sales conversion four our customer, we can't have that, because that impacts pricing and margin for us.

But we're continually focused on it. Our approach is that, you know, we need to make sure that we're appropriately qualifying the car-buyer before we send them to the dealer, that's our responsibility.

Ands so we can't get too cute (ph). And part of this, Jason, just has to happen naturally. Conversion increases over time and as you know, it increases because of time. You know, the longer individuals have used the Internet, the greater their frequency and likelihood and comfort in transacting. And increases - it increases over time, obviously because the younger demographic, this is the way they transact.

OK, thank you very much.

You're welcome.

Next question comes from Al Kaschalk with M.D.B. Capital.

Hello?

Hi, Al.

Hi Al.

Excellent quarter

Thank you.

A couple of questions, more directly for Hoshi. Hoshi, can you tell us how we should be thinking about core operating expenses either in Dollar terms or percentage for '04?

Secondly, could you just remind us as I missed the total headcount at the end of the quarter? And how that should - how we should be thinking about that as we exit '04?

And then finally, diluted shares for '04.

OK, in terms of headcount, let me answer your second question first. In terms of we ended the year at 333, which is almost flat from the Q3. And we will selectively add headcount as we grow revenue.

I'm now talking on organic basis only. And when I say selectively, meaning maybe some end on the sales side and there are two or three key positions that we would like to fill, going forward. So we may end up with about 10-/15 more people in 2004. OK? Gathered across those various functions.

Your first question had to do with, I believe the ...

... Core operating expenses.

The core operating expenses. The core operating expenses, I think I answered that question when I was answering somebody else's question on the net margin. Our net margin - our intent is to grow the net margin from seven percent in Q3, which was not the last quarter but the quarter before that, to about 14/15 percent exiting Q4 of this year, 2004.

On the revenues side, we have previously given guidance that the revenues will increase, you know, about 15-/20 percent, which is the guidance that we just reinforced. So you will get a sense from those two numbers as to what the operating expenses should be. OK?

And finally on the number of shares, it should grow from about 42,700,000 shares to about 44,000,000 shares in Q4 of this year. That's what we are looking at.

Thank you.

OK. Thanks, Al.

Your next question comes from Andrew Lahde with the Roth Capital.

Hi there.

Hi Andrew.

How are you?

Good, how are you?

Doing well.

I believe I heard you mention that you have 10 manufacturers endorsing your R.P.M. program. Did I hear that right?

Yes.

Can you talk about what that means what they're doing?

Yes. The R.P.M. program is one that's entirely driven by a manufacturing co-op. So if you get through the process with the O.E.M.s and I assure you it's a process that takes some period of time and is rigorous. But if you get through that process, then they will pay for 50 percent/75 percent/or 100 percent of the marketing program for the dealer. Their intent is to do that because they want to drive obviously the O.E.M. parts business through the dealer channel.

So we've gone through this process. Product's been out for about five or six quarters. We're starting to get some nice endorsements. You'll see some announcements here, hopefully coming up. And what it does is it basically provides the hunting (ph) license, Andrew (ph). And without those co-op relationships, very difficult to create the - you know, the level of awareness for your program.

That being said, without most of these co-ops - you know, we put 400 dealers on the program in five quarters. So we feel pretty good about it.

OK, and do you plan to restate your financial statements to show what it would look like if you had those four new categories?

Andrew, I'm sorry, I'm missing your question. When you said ...

... You said you're going to have a different format for your income statements. I was wondering if you're going to restate what you had in the past to show what it would have looked like if you had those new categories.

Definitely it works from an S.E.C. standpoint - reporting standpoint. Starting in Q1 of 2004 we will report in the new categories. And then in the 10K, which is next year, we will do all the proper comparisons for the last three years.

OK.

And - just to complete my answer. In the quarterly numbers we will show the appropriate quarterly comparisons.

OK, and one last question. You mentioned the - I'm not sure what you call it - but the - basically your add inventory was 60-/70 percent sold (ph). I know you have a very specific advertising category and I don't know what you call it. But it is the - when you're basically looking at a particular model, another manufacturer can advertise a competitive model.

Yes.

How - what's your inventory like in that?

The inventory is deeper. Yes, the product you're talking about is what we call D.C.P. - Dynamic Content Placement.

Right.

And it's very deep, low-level configuration inventory. There's obviously not as much of that. But what we do have is typically sold out.

OK. And that is your highest ...

... Yes.

... D.C.P. that you have currently ...

... Yes. When we give you a number that you know, 65-/70 percent of the inventory is sold, that reflects every single page that we produce.

OK. Go ahead (ph). Pretty clear.

Thanks.

Thanks, Andrew.

Thanks.

At this time, there are no further questions. Gentlemen, are there any closing remarks?

No, I just thank everybody for participating and we look forward to chatting with you soon.

Thank you so much.

Thank you.

Thank you for participating in today's, Autobytel's Fourth Quarter Fiscal year 2003 Conference Call. You may now all disconnect.