Autoweb Inc (AUTO) 2004 Q2 法說會逐字稿

Good afternoon. My name is Patrice, and I will be your conference facilitator. At this time, I would like to welcome everyone to Autobytel's second-quarter 2004 financial results conference call. (OPERATOR INSTRUCTIONS). Mr. Printer, you may begin your conference.

Thank you, Patrice. Good afternoon and thank you for joining us today to discuss Autobytel's earnings for the second quarter of fiscal year 2004. 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 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 this Safe Harbor statement contained in today's pressure release. We would like to caution you that actual events and 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, 2003. These documents identify the principal factors that could cause results to differ materially from those forward-looking statements.

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

Thank you, Hoshi, and welcome to Autobytel's second-quarter conference call. I'm pleased to report continued progress in the financial performance of the Company. Today we report Q2 revenue of 31.5 million and net income of 1.3 million or 3 cents per share. The balance sheet remains strong with over 54 million of cash on-hand and no debt, including 8 million attributable to Autobytel Europe. We generated 2.6 million of cash during the quarter.

Before I turn it over to Hoshi to review the financials, I would like to highlight a few of our accomplishments for the quarter. As you already know, we completed the acquisition of Stoneage Corporation and iDrive in April. We were very pleased with these transactions as they represent important strategic assets in two areas we have focused on for an investment -- our core lead generation business and the rapidly growing and promising area of automotive CRM. These deals add scale, leverage and product breadth to our business.

These acquisitions were important contributors to this quarter's revenue, which was the highest reported in the Company's history and a 45 percent increase year-over-year. We certainly have a growth engine in acquisitions.

We are also pleased with the progress of the underlying business. During the quarter, organic revenue per purchase request increased, lead acquisition costs declined, and we saw a pickup in gross profit per request. We added dealers in every area of our business, including our core core lead generation area which marks the fourth consecutive quarter of net additions. We are very pleased with these trends and believe that they are sustainable in the second half of the year.

A high point of the quarter was the progress we made in the area of dealer closing ratio. For those of you who have been following it, the dealer closing ratio has been in the 17 percent range for the past year. In the second quarter, this rate increased to 18.5 percent. During the quarter, around 40 percent of consumers who submitted requests through Autobytel purchased a vehicle, which means that our highly targeted marketing efforts remain effective. This progress reinforces our confidence that we will be able to sustain an upward bias on pricing in the second half of the year, and reinforces our market share objectives. We continue to believe that 9 percent of all new car buyers in 2004 will submit a purchase request through Autobytel.

On the expense side, the second quarter was somewhat unusual. During the quarter, we incurred $1 million of integration-related expenses, $300,000 in transaction costs, and about $600,000 in expenses related to 404 (inaudible) compliance for Sarbanes-Oxley.

Additionally we incurred 400,000 in acquisition-related non-cash intangible amortization. Some of these items impacted earnings for the quarter by several cents. We believe a good portion of these expenditures will be reduced in the second half of the year which should provide a better picture of the Company's operating leverage and earnings potential.

On that note, from a financial reporting prospective, we will begin to guide investors towards the use of EBITDA for the foreseeable future. Revenue guidance for the year remains between 120 and 125 million. EBITDA guidance for the year is in the $15 million range or 33 cents per share, which equates to GAAP net income of 11 million or 25 cents per share. These amounts include approximately $2 million of integration-related costs. Excluding these costs, EBITDA would be closer to 17 million for the year.

I will now turn it over to Hoshi to review the financials. Hoshi?

Thank you, Jeffrey. Let me review the financial highlights of the quarter. We booked record quarterly revenue of $31.5 million, a sequential increase of $6.8 million or 27 percent and an increase of $9.8 million or 45 percent year-over-year. Revenue for the second quarter includes revenue from the two acquisitions completed in April 2004, IDrive and Stoneage.

For our prior guidance for Q2, we delivered $1.3 million in GAAP net income or 3 cents per share versus 5 cents per share in Q1. There are three primary reasons for the sequential decline in net income. First, we incurred $1 million of integration-related expenses during the quarter. These include transition salaries, severance, stay bonuses and travel. Second, we incurred $400,000 in amortization of intangibles, and third we incurred about $300,000 for an abandoned transaction.

On a going forward basis, the Company will be using EBITDA as a supplement to its financial statements which are presented in accordance with GAAP. Given the Company's current business strategy, we believe that EBITDA will assist investors in their understanding of Autobytel's operations, cash generation and resources available for strategic opportunities including acquisitions and reinvestment in the business.

For the second quarter, EBITDA increased 31 percent year-over-year to $2.2 million or 5 cents per share. This amount includes the $1.3 million of integration and transaction costs, but excludes the $400,000 in amortization of intangibles.

Cash continues to be a high point for our business. We generated $2.6 million of domestic cash during the quarter, including the $20.6 million used during the quarter for acquisitions. The Company's cash balance at the end of Q2 was $54.5 million of which amount $46.2 million was for domestic operations, including long-term marketable securities of $15 million.

I would like to make one overall comment as we walk through the revenue and expenses. The two acquisitions in Q2 are very compatible with the existing operations and are already being tightly integrated. Where possible we will provide you with organic and nonorganic data. However, as we move forward and the businesses become indistinguishable, the separation will be eliminated.

The first revenue category of Lead Fees represents fees that are paid by retail dealers and OEMs for the delivery of new and used car leads from Autobytel. Beginning this quarter, in this category of Lead Fees, we now include finance leads that are center dealers and major financial institutions.

Lead fee revenue increased by 27 percent from $16.8 million in Q1 to $21.5 million in Q2, including Car.com. Lead volume increased 45 percent sequentially from 860,000 in Q1 to $1.2 million in Q2. About 35 percent of those leads in Q2 were from Car.com, including the finance leads. Total leads to organic member dealers increased from 580,000 in Q1 to 594,000 in Q2, a 3 percent sequential increase. Enterprise leads declined from 280,000 to 230,000 during the quarter. The decline in enterprise leads was a result of one of our OEM customers slowing down his marketing initiatives during the quarter. However, we recently added two new OEMs and expect to increase enterprise leads in the third quarter.

Revenue per purchase request on an organic basis increased from $19.59 in Q1 to 1973 in Q2. This increase was driven by improved modulation of the purchase requests sent to our fixed three dealers, and we made this improvement in spite of a sequential increase in revenue reserves. The average revenue per purchase request in Q2 for retail and OEM combined and including Car.com was $18.10. Going forward we will be reporting to you the composite metric. We expect to see this number gradually increase through the balance of the year.

The composite customer acquisition costs declined 14 percent sequentially from 875 in Q1 to $7.55 in Q2, about half of it driven by the lower acquisition costs for Car.com traffic. We are pleased with the progress that we have made in this area of the business.

During the quarter, the percentage of multichoice leads submitted by consumers increased from 6 percent to 8 percent of all organic leads. We added about 1400 dealer relationships to the core business in the second quarter, of which 1300 came from Stoneage acquisition. Used vehicle Lead Fees grew 5 percent from Q1 to Q2, and the current inventory is at a record level of about 340,000.

The second revenue category is advertising, and that revenue increased 10 percent sequentially from $3.1 million in Q1 to $3.4 million in Q2. Ad page views at 81 million were about the same as in Q1, but the CPM increased from about $38 to $40.

CRM revenue increased 53 percent sequentially from $3.5 million in Q1 to $5.3 million in Q2, including the acquisition of iDrive. RPM ended the quarter with 680 dealers, 180 of which were added through the acquisition.

As we indicated to you at the time of the iDrive acquisition, the iDrive monthly dealer fees are twice that of RPM dealers of about 1075. We anticipate that this will result in higher composite fees going forward.

The last category of data applications and other represents 4 percent of the revenue, and that category declined 3 percent sequentially to $1.3 million.

Let me now move to expenses. During the second quarter, while revenue increased $6.8 million, expenses increased by $7.6 million. This negative leverage was driven principally by four items totaling $2.3 million. $1 million related to integration costs. We estimate to spend another $1 million in the second half so that the quarterly rate of spending will decline in the balance of the year. $400,000 for amortization of intangibles. This will be at a $500,000 run-rate for the next six quarters and then start to decline. $600,000 for 404 ad registration in compliance with stocks. We estimate spending to continue at this rate for the balance of 2004 and then taper off in 2005. $300,000 for another potential transaction that I referenced earlier.

Additionally going forward we will capture the full benefit of about $300,000 per quarter as a result of a 40 percent reduction in headcount from the acquired companies.

Moving to DSO. As a result of the acquisitions, DSO increased from 39 days to 48 days. We expect that DSO will decline to about 45 days in the next two quarters.

At this stage, let me recap the significant points of the acquisitions that affected Q2 results. We used $20.3 million to pay for the acquired companies. An additional $1.4 million was for related legal, accounting and other fees. The P&L and cash impact of another potential transaction was about $300,000. Integration costs for Q2 were about $1 million out of an estimated $2 million for the full-year 2004.

We reduced headcount from the acquired companies by 43 percent. We acquired fixed assets of $900,000, and the associated depreciation in Q2 was 51,000. Intangible assets increased by $5.3 million, and amortization of those intangible assets amounted to about 400,000 in Q2 and will be about $1.5 million for the full-year 2004. And finally, the goodwill related to the acquisitions amounted to $52.6 million.

Let me conclude my comments with guidance. We are reiterating our previously stated financial guidance for the balance of 2004 and fiscal year 2005. For 2004 we anticipate revenues of between $120 and $125 million, GAAP net income of around $11 million or 25 cents per diluted share, and EBITDA of approximately $15 million or 33 cents per diluted share. We expect to spend approximately $2 million of integration costs for the acquired businesses of which $1 million were spent in Q2. The taxes for 2004 are expected to be minimal, probably less than $300,000.

For 2005 we maintain our guidance as follows. Revenues of $150 to $160 million, profit before taxes of $25 million, tax rate of between 22 percent and 25 percent pending further analysis of our NOL, and EBITDA of approximately $30 million or 65 cents per share.

This concludes my comments. Jeffrey will now provide the business update.

Thank you, Hoshi. We are pleased with our accomplishments during the quarter. We completed two acquisitions, grew the business 45 percent, saw improvements in pricing and margin, and finished the quarter with dealer closing ratios at an all-time high. We are adding dealers and seeing increased OEM adoption of our marketing programs and software systems, and we remain on track to achieve our financial objectives for the year.

This quarter represents a continuation of what we've been working on for several years. In terms of strategy, our objective has been to gain market share in our core business and invest in our fast-growing CRM segment. In terms of execution, our objective has been too steadily move our key operating metrics forward step by step. This is what we have consistently told investors we were going to do, and it is what we are indeed doing.

Progress is never perfectly linear, but the direction is unmistakable. We are growing the business, setting the stage for increased earnings, and positioning Autobytel to leverage the substantial market opportunity ahead of us.

On strategy let me recap the rationale behind each of the two acquisitions completed during the quarter. The acquisition of Stoneage Corporation and its Car.com brand is consistent with our belief and industry projections that the Internet will continue to evolve as the dominant influence in the consumer shopping and buying experience. This acquisition brings about 1300 new dealer relationships, increases are projected number of purchase requests in 2004 from 3.5 million to 4.5 million and moves our market share from an estimated 7 to 9 percent of new car sales this year.

Market share is a key business objective of Autobytel today for the simple reason that as we represent an increasing share of our customers total sales, we experience lower churn and increasing price flexibility. Remember our pricing umbrella. It cost the dealer about $150 to select core using Autobytel last quarter versus over $500 using traditional media. We expect Autobytel to benefit from the narrowing of this arbitrage.

In addition, Car.com brings a growing business in the area of specialty finance. We are new to this business, but believe there is substantial promise in this area. In the coming quarters, we will be bringing the full leverage of Autobytel to bear on this opportunity, including increased customer distribution and access to the Autobytel sales channel.

On the integration side, we have already made considerable progress. We have fully integrated all of the finance and accounting systems and completed our work in integrating sales and dealer operations, including all customer support functions. We are making progress in the underlying IT systems and anticipate that they will be fully integrated by the end of the year. We expect that when the IT integration work is completed additional revenue and cost synergy will be realized.

By accelerating the integration work, we have not increased expenses for the full-year, only advanced them into the second quarter. Let me say that once again for emphasis. Total integration costs have not increased from our previous estimates of $2 million.

Let me give you a concrete example of how accelerating the integration work has allowed us to move more quickly to capture the synergy and financial benefit of this transaction. While the overall Car.com ASP is currently around $18, since the acquisition we have added a good number of dealers at an average ASP of $23. We are pleased with these early results. The acquisition of iDrive is consistent with our believe that dealers will increasingly turn to CRM marketing tools and services to enhance their customer loyalty and retention marketing initiatives.

As I have noted in the past, the service business at the dealership represents about 12 percent of revenue but 48 percent of operating profit. We recognized this opportunity several years ago when we set out to build RPM, which has proven to be the fastest-growing area of Autobytel.

The iDrive acquisition further enhances our competitive market position and should accelerate profitability in this area of the business. We have already seen the strength behind the acquisition. We have recently signed contracts with both Hyundai and Mitsubishi and have doubled our monthly sales rate since the acquisition.

On the integration side of iDrive, we are making progress bringing the RPM and iDrive platforms together. We told you that it would take a few quarters of work, and we still see this as being realistic. We continue to support two products in the marketplace, and we will effectively merge operations once we have a unified platforms.

Upon completion we will have aggressively positioned ourselves as a leading provider of CRM solutions for the automotive industry. Jeff Bonforte, the Founder and CEO of iDrive, is leading this area with great enthusiasm and competence, and we are very pleased that he has joined our team.

So our strategy is sound. and our execution has been quite good. We were pleased that a good portion of the integration has been completed and that we're beginning to rapidly accrue the financial benefits of these transactions. As Hoshi noted, we have already reduced headcount at the acquired company by more than 40 percent.

In terms of the underlying business, as Hoshi noted, most of the key operating metrics are moving in the right direction. Let me highlight a few of those for emphasis. In the core business, organic revenue per purchase request is up and lead acquisition costs are down. In fact, acquisition costs are down 14 percent from Q4 '03 levels, which indicates that we are making progress in generating an increasing amount of organic traffic.

On that note, during the quarter, 38 percent of our page views came from our organic marketing effort, including search, versus 33 percent in the first quarter of the year. Year-over-year this percentage has more than doubled from around 17 percent. We added over 1400 retail dealer accounts during the quarter, including the acquisitions of iDrive and Stoneage. This is our fourth consecutive quarter of net dealer additions in our core business. Churn remains stable, and closed rates reached an all-time high of 18.5 percent.

We increased the number of purchase requests going to retail member dealers during the quarter, which is great for our margin, and delivered over 1.2 million purchase requests, a record for Autobytel. Unplaced requests were at an all-time low for the company, reflective of increased dealer coverage. We remain on track to deliver 4.5 million purchase requests in '04, which is a 45 percent increase year-over-year.

Advertising increased by 10 percent sequentially, and CPMs came in at $40, reversing a trend from the previous quarter. Given what we have seen thus far of the '05 advertising upfront, we believe that CPMs will be sustained at their levels moving into next year.

The overall sales and business environment remains strong for Autobytel as well. While automotive sales were strong in May, they tailed off in June by about 13 percent from a sales rate of 17.8 million units to 15.4 million units. However, the Autobytel business was not similarly affected. During that same time period, Autobytel increased the number of leads sent to member dealers, excluding the acquisition. This indicates that dealers have an increasing appetite for Internet generated sales, a point driven home recently by one of our customers, AutoNation, which announced that 25 percent of their new car sales and 17 percent of their used car sales are derived from the Internet today. They are a best-in-class performer that is for sure, but I believe this is where the overall industry is headed.

So we remain confident that we can execute our business plan in this environment given the growing adoption of the automotive Internet and Autobytel's increasing market share. Remember, at current estimates of 16.8 million units for the year, this should be the fourth best sales year in the history of the automotive industry, and given current inventory levels, there should be negligible impact from increasing interest rates.

In closing, our strategy is on track, and we are continuing to execute. We have work to do in the second half of the year, but we believe that this was an important set-up quarter for delivering the future financial results that we have discussed. Given the unique nature of the quarter from an expense perspective, we believe that investors will see increasing leverage in the business as we move throughout the year. Guidance remains on track. We are focused, energized and fully committed.

With that, I will open the call up to questions. Operator?

(OPERATOR INSTRUCTIONS). Christa Sober, Thomas Weisel Partners.

A couple of questions. First, could you -- just some housekeeping items. Could you give us I guess the used car percentage and then the retail only price per lead? And then I guess the longer-term question, first of all, the 18.5 percent, did that include Stoneage? And if so, is that what helped you start to gain in terms of pricing with the new dealers that you were signing up there? Thanks.

I will take the latter two questions and give Hoshi the pricing questions. The close rate of 18.5 percent did not include Stoneage. It is an organic measurement. You know it is pretty consistent. We have had the close rate around 17 percent for the last year or so, so for us to take it up over 18 percent, we're quite pleased about that. That has to do with marketing mix and a number of things we're doing -- the Autobytel interactive marketing program, which is allowing the dealers to brand on their Web site and a number of tools in the field, things like that. So it does not include the Stoneage leads.

The Stoneage leads close at a range that is probably 14, 15 percent. The key for us in moving that close rate up is going to be getting the IT platforms blended, which we think we can do this quarter, beginning of next quarter, and once we do that, then we can leverage the yield management system and the quality verification system of Autobytel, and then that will help us begin to drive the Car.com ASP up.

The new deals coming on are coming on around $23. The current ASP is about $18 on Car.com. And, of course, all of our field sales support, those folks are out there visiting those dealers as well. So Hoshi can answer the pricing questions.

In terms of the percentage of leads coming through our sales, approximately, Christa, about 13 to 14 percent of our revenues come from used today, and the leads are almost in the same fashion, the lead volume.

In terms of the revenue per lead, we are getting approximately the same revenue per lead in Q2, say $20 to $23 per lead. On the cost side, the cost side is a little bit lower than the normal rate. So those are the economics on the used lead.

I was actually asking the cost on just general retail leads, if you had that? Excluding the OEMs.

Excluding the OEMs, first of all on the cost side, the difference between the OEM leads and the retail leads is relatively minor. So the cost went from 875 in Q2 --

I was actually asking you for the revenue, sorry, not the cost per lead. The revenue per lead for just the retail. Sorry.

The retail remained about the same at about $23 from Q1 to Q2. That did not change that much. It went down a little bit, but not substantially.

Okay. Just philosophically if Stoneage is closing only at about 14 to 15 percent, are you guys -- how are you able to start closing those dealers at $23?

In part it is driven by the support in the field. You know we think that that adds some value, and we have already begun working on that close rate. So we have been able to rejigger their marketing mix coming to the site, and so we think that's going to have some nice impact.

As I said, the real benefit will come when we fully have the blended platforms and technology. Part of it also frankly is just market share. As we gain market share, we have more price flexibility.

Mark Argento, ThinkEquity.

A couple of quick questions. I know in Q1 you guys had talked a little bit on the call about test marketing, basically selling a lead to multiple dealers, allowing the consumer the choice of how many dealers that a lead gets sent to. I just wanted to know, I think you said last quarter it was about 6 percent, call what that percentage was this quarter, and also I noticed the allowance for doubtful accounts came down again, sequentially down to about 850,000. I was just wondering where you expect that number to go in the coming quarters?

The two questions that you asked, the first one was what we call multichoice leads, and as I mentioned in my comments, that went up from 6 percent of total leads to 8 percent. So this is what the consumers have elected to do. It went from 6 percent to ate percent.

On your second question about the allowance for bad debt and reserves, let me just talk about overall. We are not going forward. As you know, we do this analysis on a quarterly basis. And going forward I do not think that that balance is going to change that much. It may go up and down a little bit, but not that much either on the revenue reserve side or on the bad debt reserve side because I think including Car.com now, we are where we think we should be.

And then, okay, going back to the leads, what was the actual number of multichoice leads, the actual unit number if you have that handy?

I do not have that handy, but it is 8 percent of the total volume that we sent out.

So 8 percent of the 1.2?

No, 8 percent of 800,000. This is excluding Car.com.

So just to get a little bit more clarity on the leads where they were coming from in the quarter, I know I think earlier in your comments you had talked that dealers leads were 594,000. Is that correct?

Yes.

And then Enterprise was 200,000?

Yes.

Okay. So you add that up, that is what, 824. Was that just organic? Is that pre-Car.com?

That is organic. And then you add another 280 plus 140, that will take you up to 1.2, 1.3 million.

And a 140 is the finance leads?

Correct.

And one final question. What is the average revenue per finance leads?

That is much lower than what we get on the car lead. It is running about maybe $10 to $11 a lead.

I know you guys are new to the business, but do you anticipate that going up, going down or staying fairly consistent?

My sense is that, first of all, let me acknowledge that you are correct in saying we're new to the business. But my sense is that that should go up as we gain more traction and more experience with that one because our dealer coverage is higher, and I think we can bring a little bit more financial and headcount muscle to that business.

Richard Fetyko, Merriman.

Good quarter. I was just wondering now that you have been jiggering these two business for a couple of months, anything that surprised you or disappointed you, and what kind of sale synergies do you have built into your guidance?

I'm sorry. What was the last question? What kind of what do we have?

What type of sale synergies do you have built into your guidance?

Yes, the thing that is most surprising to me frankly is the amount of leverage in a transaction of this nature and the ability for us to go in and integrate, how quickly really we can go in and integrate finance accounting and sales. Literally within 60 days we can get that none and get the headcount out. So that is the thing that has been most encouraging to me and gives me some degree of confidence both about doing another acquisition of this nature and frankly our ability to execute in this area.

In terms of synergies that we have built in, you know the guidance we have given, Richard, includes all the synergies. So there would not be anything more or less that we would offer.

On the CRM side, it looks like you did a little bit better than I anticipated. You were ramping up pretty quickly. Obviously the acquisition of iDrive online helped, but can you just give us an overview of the competitive landscape there? You're taking market share and from whom? Is (multiple speakers) on the losing end of the this?

Yes. You know what I would tell you is in both product groups, the Web Control and the RPM product group, we are absolutely on fire I would say. In terms of Web Control, we had a lot of success during the quarter, signing up Mitsubishi dealers. I think we have got 450 Mitsubishi dealers on the program now. This in pretty short order. So we are very encouraged about our execution and the market opportunity there. You will see it has built-in some additional (inaudible) functionality into that product which we will be launching in the second half of the year, and we think it will keep that product very competitive.

On the RPM side, obviously the acquisition added a lot, and what I would tell you, Richard, is in the last couple months since we have done the acquisition we have literally seen our sales rate double in terms of the number of dealers we think we can go out and add.

So we had a very encouraging sales month last month. This month looks to be a very encouraging sales month. I think that we're taking market share from a number of competitors out there. I also thing that the market is growing. I think that dealers like everybody else are increasingly realizing that the Internet and technology can be a productivity tool. So case in point, one of the aforementioned OEMs that we have mentioned that we had signed up during the quarter, we just got some initial responses back, and they are running at 25 to 1 ROI. So for every dollar they are spending on the program, they are generating $25 in customer pay service revenue, which is obviously the highest margin revenue for them.

And then the last question if I may, could you talk about the one OEM that you said that is scaled back on their marketing initiatives I suppose and that is scaled back on purchasing leads? Could you just elaborate as to why would the OEM do that, and is it temporary? I think that in these times when their inventory is piling up, there would be more of this perhaps.

Yes, you would think so. We continue to see the majority of our OEM accounts trying to drive more and more volume. But you know it is obviously a very idiosyncratic market, and some manufacturers are directing their resources on the Internet in varying agrees. So what I would tell you is with that particular OEM we still have a very deep relationship, a very strategic relationship, and it is their prerogative to flex their marketing spend up and down on the Internet, and we're here to help them when they want to spend a lot of money.

But what I do not want you to come away with is, is this indicative of some larger trend? I would tell you that we added two new OEs to our enterprise marketing platform during the quarter, and we saw a deepening of our relationship in two or three more. If anything, we see really a nice uptick in the OEM adoption right now of our marketing programs.

Mark May.

I have a handful of questions, so just cut me also. The first one has to do with the '05 guidance, which I think just from a stock perspective is probably the most important thing to get our hands around. It looks like your guidance implies around 50 percent incremental EBITDA margins in '05. I just want to get a feel for why that is a reasonable assumption?

And then another question. I know you guys have experimented a little bit with TV advertising in a handful markets, and I'm wondering if you viewed those experiments as successful, and if you plan on maybe launching a wider effort maybe this quarter?

And I think, Jeffrey, in one of your answers to a question earlier, you sort of alluded to the integration process with these last two most recent deals. Has it given you comfort that you know you could also grow the company through further acquisitions? In fact, are you contemplating some more Stoneage-like marketshare-like deals going forward?

I will take the latter two and defer the first question to Hoshi. On television advertising, we did do some substantial advertising in the quarter. We were in a number of markets with some new creative. It certainly moved the needle in terms of pre and post awareness of the brand, page views and purchase requests. It still does not remain our most cost-efficient way to drive traffic and revenue and profit in the business. But we know that we can do it and that we can move the needle in a particular market. So that is encouraging.

What I would tell you is that it is still most efficient for us to drive the business through the money that we spend online. And after all that in essence is our value proposition right. I mean the value proposition is based on the fact that increasingly consumers will turn to the Internet to research and transact for cars. So it is somewhat intuitive that we would be more efficient online than off-line. That is point one.

So what I would tell you headline is we would not tell you that we would not do it or continue to do it, but we would do it in moderation with discretion knowing that it is not going to be that efficient.

The second point on acquisitions, yes, we have had some great success on the integration. As I have told you in the past, we will not miss an opportunity to invest in the business and do accretive transactions of this nature, and we continually look at opportunity and assess the marketplace. So that is what I would tell you there. I will turn it over to Hoshi to discuss '05 guidance.

Mark, you are correct in saying that EBITDA at least from a guidance standpoint is doubling, but not the margin. The margin was probably growing from maybe 12 percent to 18, 20 percent or so.

And why is EBITDA doubling? Let me summarize what I said on the call as to how we're going to grow in the second half, and some of those things will continue into 2005.

First, on the revenue side, we see the lead volumes growing both organically and especially with the acquisition of Car.com. That is number one.

Number two, we also see pricing initiatives that we could launch in the second half that would help us quite substantially on the revenue side. That would also help on the marketing side obviously.

Then the integration costs that are in 2004 will not continue in 2005, the $2 million of integration costs. The amortization obviously will continue.

CRM, you saw the growth in Q2 versus Q1, so that growth will continue. The (inaudible) expenses that we talked about, which will be almost $2 million in 2004 unfortunately both externally and internally that was, that will continue but certainly not at that level. We're talking about a more modest maintenance costs on 404.

And so with all these things happening, the CRM revenue growing and the core business growing from a revenue standpoint and expenses coming down from 2005, that is how we think we can double EBITDA on an absolute basis and include some margins from about 12 percent to maybe 18, 20 percent. Does that help you, Mark?

Yes, that is very helpful. And if I could just ask a follow-up, because the close rate improvement is obviously important. I'm trying to figure it out because given the churn that you had in your dealer base over the last year or two and a lot of it obviously just natural churn, but the churn nevertheless, so you have new clients using the leads and then your increasing your multichoice leads. Why would you contribute the increase in close rate because it seems like those two have fairly major factors with both the close rate down or steady or something like that?

Yes, what I would tell you is that it is continually tuning the QVS, the quality verification and the yield management system, that piece of middleware gets better everyday. We learn more and more about the business. That is why I love this business because it's a business you can learn more about each day. That is point one.

Point two is we are doing a number of things on the Web site that we think are improving close rates. We call it (inaudible) in the Autobytel marketing interactive program. We're giving dealers an opportunity to brand themselves, put custom messaging on the Web site for the consumers, put an 800 number that we call track back into their CRM system, and also a link to customer commentary, our Gold Metal Dealer Program, all these things that help the dealer on the Web site.

And then back out in the dealership, we're really pushing our performance coaching and selling and trending like we have not sold in the past. That is really picking up. So training is never going to be a multimillion dollar business here, but it will be a business that helps us improve close rates, which will help us improve retention which will help us improve pricing.

So we told you last quarter that we spent a lot of time training our sales associates out in the field, all the performance coaching modules. I think that is having an impact. And I also think at some level there is also some secular trends at play here, which is people are a little bit more sophisticated online. They are used to transacting this way. It is not as foreign to them. So I think there is going to be a natural upward bias to the close rates over the next couple of years.

I'm not asking you to announce anything, but I have heard that you may have struck a new partnership with a contextual search company? I wonder if you could talk a little bit about the ad revenue has started to improve in the quarter, and I am wondering are there other things that you're doing such as contextual search listings and the like and other things beyond that that maybe we could really start to see that revenue line move in the second half of the year?

Yes. Without making reference to your comment, I would tell you that there are opportunities for us to do some search-related activity on the site that would potentially help us grow the advertising line. We're looking at those and exploring a lot of different partnerships. What I would tell you is that at the appropriate time we would make an announcement and then start to guide you as to what to expect there.

Could they be meaningful revenue sources?

Yes, they could be, Mark. We think there is a meaningful opportunity there for us that we're exploring and making sure we do the right deal. But such a partnership would not be included in this quarter's results.

What about in the guidance?

No.

Nancy Rink (ph), B.Riley & Co..

Hello. (inaudible) with eBay motors inventory growing, how would you characterize the differences for dealers to direct their inventory to them as opposed to you?

Very very different. It's a very different product and approach, Nancy. We have about 350,000 cars on the site. Typically 95 percent of those cars come from franchise dealers. They are typically full retail, meaning dealers would list their inventory with us for the first 45 days. After 45 days typically you have a depreciating asset, and add a dealer might be interested in sending that car to auction.

My understanding of what is happening, a good portion of what is happening on eBay motors as regards to the franchise dealers is that they are using it as what they call a hotel in the hotel space right before they send it to the wholesale automotive options. So it is sort of a different segment in the market. And you know, we just do not see them -- we don't see them in the marketplace (multiple speakers)

Nancy, the model is completely different, right? Theirs is an auction model. Ours is an inventory-driven model, and our model on the used side is very similar to the new car side. In other words, they post the inventory, and then when a consumer clicks on it, we generate a purchase request and send it to the dealer. So the model is a lot different.

Okay. On the RPM front, how do you feel you were competing against alternatives such as NewGen results?

We believe that we compete quite favorably against NewGen and the other folks in the industry. So as regards to market share, we believe that we are in that gainer of market share. But I am respectful of NewGen. They have built a terrific business in this space and have done a good job.

How many RPM deals did you have at the beginning of the quarter and how many at the end?

We currently have about 650 dealers, and we're adding maybe 40 to 50 dealers a month is what we are adding.

Okay. And regarding churn, what were your adds and what were your drops during the quarter?

The churn happens to be, as we mentioned, it has been stable between 7 and 8 percent in Q2. So that is what -- as we mentioned to you, we went from about 54, 5500 dealers, to 6650 dealers. So that was the net adds.

Okay and what was your wholesale cost per lead delivered this quarter?

Wholesale? The cost per lead in response to your question, I mentioned to you that the cost per lead really does not vary that much whether it is wholesale or retail. Wholesale we're now getting a little bit better pricing, I mean better cost than we do on retail because of negotiations with our affiliates. But I mentioned to you the composite number. We have not broken out that number between retail and wholesale. But the composite number went down from 875 in Q1 to 755 in Q2.

Okay.

I just want to put an exclamation point there. We are making tremendous progress in this area of driving down our customer acquisition costs. I mean in Q4 of last year of '03, our cost per lead customer acquisition was about $9.50, and we're at about 755 including Stoneage now, just a couple of pennies above $8.00 excluding Stoneage. So this is an area of great focus for us. It is an area that is driven by renegotiating contracts driven by our multichoice program. It is driven by increased search activity and more more people coming directly to the site. So it's an area we are quite enthusiastic about.

Okay. And I have just one last question. What is the revenue per purchase on the program dealers and Enterprise channels during the quarter?

Nancy, this is Hoshi again. For quite some time, we have not put that one out, so let me give you the composite number. The composite number right now is $18.10, and the reason why we do not put out the OEM is seriously to what Jeffrey just mentioned. From a competitive standpoint, that's a difficult number for us to give out.

All right, thank you.

Peter Tradeway (ph), Trace Capital.

I had one question regarding the TV advertising. Is that factored into your cost per lead of 775, or when you talk about your cost per lead, is that number excluded?

When we talk about the price per lead, it is only the online cost that we do not include like, for example, if it was television advertising or print, we do not include that.

Do you have any sense as to -- let's say you put that in there, whether you guys would still be down on a sequential basis? Considering that I guess it would drive some of your organic straight to site leads? First of all, the amount of advertising that we did in Q2 was I would say fairly minimal. We did a test in three cities that was not substantial to begin with. I don't think it will drive up the cost that much per lead.

Okay. And the second question I had was, Hoshi, can you walk through -- following up on an allowance for doubtful accounts question from before, how you got from 2.1 million to I think it was 850,000, and where the reversals are hitting the income statement there?

2.1 million to what?

I think it was 850,000 for allowance for doubtful accounts.

Okay. Let me just say it differently because I'm not getting there. But on the bad debt expense side, the bad debt balance is right now at about $400,000. In Q1 versus Q4, which was one of the items that we talked about, it went down by about $1 million. Right, that is the one that we disclosed in the Q4 conference call. And then in Q2 versus Q1, it went up by about $400,000. It went up by $400,000.

Maybe I got the number wrong on the press release but --

I would be happy to talk to you off-line. Certainly we will be happy to answer that question for you.

Okay and then one last thing. Have you guys seen any sort of -- you mentioned Stoneage. It does not look like you guys saw any dealer churn there. Am I right that you guys just in terms of the numbers that you guys have been successful in terms of keeping the dealers on?

That is accurate. There is a little bit of breakage right up front, but as I said, we have assigned all those accounts for our field sales force, and I think that their churn rate, which was frankly much higher than our churn rate, we think that that will come in line this quarter.

Frank Gristina, Avondale.

Thanks, guys. I feel like that guy on Jeopardy who cannot get his clicker fast enough. I've got some original questions here. What is the average contract per dealer in Stoneage? When are you going to roll off the old pricing on Stoneage dealers and introduce them to the newer price with better customer support, etc.?

Let me just answer that. That is more a function, Frank, not at the length of the contract, but the terms around your ability to change prices. Right? And in all of our contracts, we pretty much have a 30 day, and in those contracts, a 15 to 30 day certification period.

So they have already seen the notification of increased pricing?

No, I did not say that. What we have said and we still stand by this, that we really wanted to really to substantial improvements in the quality of the close rate and all the support on the dealer side before we even looked at really moving the built-in Car.com base out. What I did say is that the new guys coming in are getting it at Autobytel market price, which is in the $23 range.

So on a composite basis, do you guys feel like the ASP at 1810 is kind of troughing here in the quarter?

I would say to you that based on the response that Jeffrey just gave you, our intent is to move that price up. So in general, my answer to your question is yes.

Okay and another question. It seems like the margin opportunity in the lead business is while you're going to have some increased pricing, hopefully it is really on that cost side, and I think Peter was alluding to it. How can you guys drive more organic leads? And if you can, maybe tell us a little bit about the next mix now, and I guess it even ties to why aren't you doing more TV advertising or more Internet advertising if you get that organic lead higher and bring your cost per lead down?

Yes. The television does not do much to bring your cost per lead down, Frank. That was the point I was making.

It costs too much to buy the ads and --?

Yes, I mean you know, if you just look at it on a cost per purchase request basis over even factor in the increased page use for advertising, you still don't get anywhere close to what we can market in terms of efficiency online.

What I would tell you that I think we're making tremendous progress. This quarter last year about 17 percent of our traffic was organic of our page views rather were organic. This quarter it is 38 percent up from 33 percent last quarter. We are making terrific progress here.

But the page views, we will get a conversion on those page views into organic leads, but still trying to get them to pull the trigger there?

Yes. You know, it is a process, right? But we have got now I think 350,000 pages listed in the search index and Google. That is a huge improvement from the 25,000 or so pages at the beginning of the year. We are optimizing the pages. We are a building a tremendous amount of content.

Ultimately it is all about content, right? The better your content is, the more useful it is, the more people want to come to your site. We are investing a lot of money in content and rich media and video and pictures and all that other kind of stuff.

Ali Mogharabi, Roth Capital Partners.

I just wanted to get back on the CRM side. I think you mentioned you've got 450 dealers on Web Control. Can you give me the number for RPM?

No, I think you misunderstood me. We added 450 Mitsubishi dealers to Web Control. We have got maybe 5000 using Web Control and iManager. And then on RPM, we have got 680 dealers.

680 total?

Yes.

Can you break that down a little bit? Can you give us any progress on the Hyundai announcement that you made?

Yes. I would not give you -- quantitatively I would not tell you -- it is a little too early to give you quantitative data. But what I would tell you is qualitatively we're signing on a ton of Hyundai dealers, and qualitatively the results from those that have signed onto the program are quite good from an ROI prospective. Better to give us another full quarter so we can give you numbers that are perhaps a little more substantial.

Okay. And going back to -- I think briefly you touched on organic leads versus the purchase ones. Is there any way you guys can give us a number on that? Not on the page views, but on the leads?

I think you may be confusing the term organic here. I think you are -- including the prior -- including Frank's question. I think what you mean probably is direct to site. Is that what you're looking for?

Yes.

The direct to site leads are running at about 12 percent of our total leads, and that has gone up from 10 percent, maybe three of four quarters ago. So the needle has moved. We would like to someday, as Peter and Frank suggested, we would like to move that needle obviously a lot more toward 15, 20 percent.

Great. Thank you.

Justin Martos (ph), Graham Partners.

On the page views, they were flat quarter-over-quarter. I just wanted to understand how you guys see that, was wondering why that was, and how you view that going forward?

The page views were flat. As we have told you in the past, we are quite inventory constrained. We are quite focused on generating really high-quality traffic. So this is not going to be a business that is going to grow at 50 percent a year, but we think that we saw a very nice increase in revenue this quarter driven by CPM principally.

Typically third quarter from an automotive advertising prospective is down. We have some optimism that our third quarter is going to be good in the advertising area, and then fourth quarter is typically very nice.

And then also the increase in the advertising is all from the increase in CPM, or was there any part from the acquisitions?

A very modest amount from the acquisitions. The way this business works is that a good portion of the business is presold the previous year. So as we go through our '05 upfront with a lot of the OEMs, we're starting to put the Car.com site into the product mix, and we will start to make sure that the traffic gets increased there. So next year you will start to see some benefit from Car.com in advertising.

And finally, with a lot of the car manufactures increasing incentives probably over the next month, what does that do usually to traffic and purchase requests when they have done that historically? Do you have any experience with that?

You know the incentives have been very high, and certainly they are increasing them with the new model years coming out and the high inventory levels as high as 100 days in some cases. We don't think it's going to have any substantial impact on our traffic.

As I said, you know the May numbers, the May sales rates were at about 17 8. The June numbers were at about 15 4, as sequential decline month-to-month of about 13 percent. We actually increased the number of purchase requests we sent to dealers from May to June. So our business we think will just continue to grow based on market share execution and the secular Internet trend.

Peter Mirsky, Oppenheimer.

Thanks very much. I've got a question for Hoshi, a question for Jeff, and then just a clarification. First, Hoshi, can you give us the mix or the relative mix of fixed fee and pap per lead dealers during the quarter and how that compared to Q1?

Yes. First of all, let me answer the question more fully that says that the total mix is running about 57 percent, 43 percent. 57 percent fixed, 43 percent flex or pay per lead. For the new ones that are coming in, that is running at about 75 percent coming in at on a pay per lead basis, for the new ones that we sign on.

Okay and just clarify one more thing. The fixed fee, are they also typically on a 30-day contract?

Actually, all of them are on a 30-day contract whether it is fixed or per lead. (multiple speakers). That is cancelable by either side.

Right. Okay. Jeff, can you just address to the extent that you can what you did differently or better with ad sales in this quarter versus last quarter when you had the issues?

I think we are getting better at making sure that we're selling to the right inventory levels, and that's just the continual process of learning more about how to predict and gauge the traffic. Part of where we stumbled last quarter was a mismatch between supply and demand if you recall. So I think we are lining that up a little bit better.

I also think that as we get better at search and as more more people are coming to the site, this number, 38 percent of our page views being driven organically, that's just a huge huge benefit to us. It gives us just a little bit more inventory to sell hopefully as we build the business. So it is I think better execution.

The sales opportunities are there. There are tons of sales opportunities, and as you said, we are feeling good about the business in the third quarter and think the fourth quarter will be very strong as well. So sales opportunities are there, and right now it is just execution getting the quality traffic there.

Right. And the clarification question, did you say towards the end of your prepared remarks that you signed two new dealers, two new OEMs at about $23 per lead? Was that what you said?

No, no, no. What I said was that we've added about -- since the acquisition, we've added about 50 new Car.com dealers, and the ASP is $23 of those 50 coming in.

Okay. You did not say anything about the ASP for new OEMs?

No, but I did tell you that we added two new -- we added two new OEMs during the quarter to the Enterprise fleet program.

Al Kaschalk, MDB Capital.

Two quick questions. Hoshi, can you talk about the gross AR? I may have missed something why the DSOs are up north of the high 40s and will drop down in the mid-40s?

The reason why the DSO went up is primarily because of the acquisition, the Stoneage acquisition, and the Stoneage DSO was substantially higher. So the average DSO went up. The other thing I would tell you is that the organic DSO also went up, so I don't want to give you half the answer. It went up to maybe about 43, 44 days. And the reason for that is because the same resources were also involved in collection for Stoneage. So I think as we go forward in Q3 and Q4, that is why I am saying that I think we should look at like 44, 45 days DSO.

And further out --?

That is nothing -- excuse me. From an operational standpoint, there is nothing that happened, so that is the only thing I want to assure you. So we will start collecting it again in a more normal fashion.

And then 12 to 18 months out should be sort of built in to DSOs in that 40 range?

Yes. 12 to 18 months out, yes. Absolutely.

And then, Jeffrey, I don't know if you can comment at all further on the aborted transaction, whether it is a particular area, type, size, location or not? Maybe I can answer that. (multiple speakers)

Let me just say this. We're continually assessing opportunity out in the marketplace, and sometimes the opportunity works and sometimes it does not. What I would tell you is that we as a management team have the discipline to not do deals that we don't think work for whatever reason once we get into due diligence. And if 100 percent of the transactions that we are looking at worked, then we probably are not doing our jobs as well.

I don't disagree with that. But going forward is there lessons gained here about perhaps these that we won't have to see going forward on things where you get further down the road that you decide to pull away from or (multiple speakers) --?

Oh, yes. No question about it. As you move down the path with certain candidates, targets, you know you learn about trends in businesses and sectors that perhaps might be new to you. So there are always lessons to be learned.

But what I would tell you, just to come back to the previous point, you know we will continue to look for opportunity, and this is just part of being in the business of acquiring companies now.

But to put it into context, in the last 18 months since we hired a very senior person here, this is the first transaction of this size that we have abandoned that cost us. And what I would tell you is there are several others that we have looked at. So we look at everything quite cautiously, but this is the one that we had to -- we thought it best to terminate at this time.

And then one final more macro level in looking at how purchases or consumers will actually buy online on cars, there has been some recent studies out there that say that four out of five that come into a dealership to buy a car actually do research online, but don't buy online. What do you think -- you have talked about some of the potential ideas, but what do you think jump-starts that or kicks that to a little bit higher where maybe we are down to 60 percent or something like the 75 percent of the folks that do research actually buy online?

Well, first of all, you've got to clarify what you mean by buy, right? You cannot buy a car home on the four corners of a computer screen like you can buy a plane ticket. Right? So fundamentally it is a transaction that takes place at a physical geography called the dealership, and fundamentally the franchise dealer is firmly ensconced in the automotive retail channel. That is not going to change.

We believe today as we have over the last number of years that the business that succeeds here is a business that helps dealers succeed. So the question is how many of those people that do research are going to submit price quotations I think and begin to use the Internet as a way to facilitate, solicit bids? That number is growing. I will remind you that we will do 4.5 million purchase requests this year, and about 40 percent of those people go on to buy a car. That is nigh almost 10 percent of total car sales this year, which translates into about $43 billion in gross market sales. So clearly transactions are taking place facilitated by the Internet.

Another question is whether somebody will have a brokerage type model that scales perhaps, but it won't be us.

Operator, any more questions?

(OPERATOR INSTRUCTIONS). At this time, there are no further questions. Mr. Printer, are there any closing remarks?

No. Thank you very much for joining the call, and we look forward to chatting. Take care. Thank you.

This concludes today's Autobytel second-quarter 2004 financial results conference call. You may now disconnect.