Autoweb Inc (AUTO) 2005 Q1 法說會逐字稿

Good afternoon. My name is Meredith, and I will be your conference facilitator. At this time, I would like to welcome everyone to Autobytel's conference call to discuss its first quarter 2005, fiscal year 2004, third quarter 2004 and restated financials for the first two quarters of fiscal year 2004 and full years for 2003 and 2002. (OPERATOR INSTRUCTIONS). Ms. Klein, you may begin your conference.

Thank you, Meredith, and welcome to everyone on the line. Before we start the call today, I would like to make some comments on forward-looking statements. 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 all covered by the Safe Harbor statement contained in our public filings. We would like to caution you that actually events or results may differ materially from those forward-looking statements. We refer you to documents the Company has filed with the SEC, specifically the Form 10-K for the year ended December 31st, 2004 and the Form 10-Q for the quarter ended March 31, 2005. These documents identified the principal factors that could cause results to differ materially from those forward-looking statements.

On the call today are Rick Post, President and CEO of Autobytel; Mike Schmidt, CFO, and Rich Walker, COO. The call will begin with Rick giving an overview of the Company's status, followed by a review of the financials by Mike, and a discussion of operational focus from Rich.

With that, I would like to turn the call over to Rick Post. Rick?

Thank you, Jennifer. The past seven months have been a time of significant change and challenge at Autobytel. As you are aware, I joined as CEO April 27. I'm excited to take on my new role as CEO. I believe in the people that are on our team and the strategy that we have deployed.

My first task was to bring to closure the restatement process and return the Company to a current filing status with the SEC and NASDAQ. I am happy that we have concluded the challenging process of restating our financial results for the past three years, and I look forward to discussing the outcome of this process with you.

Last week we filed an extensive amount of information in our 10-Q and 10-K. I urge you to fully review these documents for complete information about the adjustments to our financial results. Today's call will focus on the main outcome from the restatements and the results of the first quarter for fiscal year 2005 and the full-year fiscal year 2004.

Joining me today on the call are Mike Schmidt and Rich Walker. I'm pleased to announce that Mike Schmidt has been appointed Chief Financial Officer, and Rich Walker was named Chief Operating Officer in April. Mike, Rich and I will be working together to optimize our operations and maximize our market position.

While the past seven months have been very trying, we have seen significant accomplishments in our business. Let me begin with the results for the full-year 2004. In 2004 we reported record revenues of 122.2 million, a 38.3% increase over 2003. Operating income for 2004 was 5.5 million, which included the expenses associated with the internal review and restatement.

The fourth quarter of 2004 was particularly strong for our leads business. We delivered a total of 1.1 million purchase requests to our retail and Enterprise relationships during the fourth quarter with an average revenue per lead of $18.53. Both CRM and advertising experienced double-digit year-over-year growth. Autobytel celebrated its 10th anniversary at NADA earlier this year, and it is interesting to reflect on how radically things have changed and the degree to which consumers and the automotive industry are now responding to Internet marketing.

According to a recent study by Borell Associates, most of the 61 million consumers who bought a new or used car last year began their search on the Internet. 39% of all new car sales are expected to be Internet generated by 2008, and in 2004 the Internet surpassed newspaper, broadcast media in influence on consumer car buying decisions. No other medium in the past half-century -- not TV, auto magazines or cable programming -- has forged such a dramatic commanding path to active car buyers as the Internet. As you can tell, the industry trends continue to move in our favor, and we believe that we are well-positioned in the marketplace with the right products and services.

Now let me review the first quarter of 2005. As of March 31, 2005, our total revenues were 33.3 million, an increase of 35% from a year ago. Drilling down, you will see that over the course of a year Autobytel increased revenues from the leads side of the business by 26%, advertising grew by 54% and CRM by 91%.

Total revenues of 33.3 million in the first quarter declined by $700,000 from the fourth quarter of 2004. A good portion of this slowdown in our core business came from pulling back on lead delivery in an effort to increase our lead quality. In addition, the increasingly competitive market resulted in a decline in our retail dealer base. We are taking actions to grow our dealer base, increase lead quality and increase revenues from all parts of our leads business.

Part of Rich Walker's role is to implement the controls that will keep our business strong in an increasingly competitive lead generation market.

We recently completed the integration of the car.com Web site into the Autobytel technological and marketing infrastructure. This should allow us to more quickly deploy product, better leveraged search and advertising, and improve the overall distribution of leads coming from the site. We would expect that over time this will improve the efficiency of our business in many ways, including improving purchase requests quality for car.com member dealers.

The finance lead business continues to be strong, improving 13% sequentially during the first quarter. The finance lead business is an area of growth of Autobytel.

Another one of the highlights in the first quarter 2005 was our record growth in advertising revenue. We saw a 25% sequential growth in advertising revenue. Ad page views increased 99.2 million, from 94.3 million, and most notably CPM increased to $41.75 from $37.44 per page.

To give you a frame of reference, during the first quarter of 2004, we generated 86.8 million ad page views at an average CPM of $35.75.

We continue to launch products to differentiate Autobytel. During the first quarter, we launched and expanded several exciting initiatives including CarTV.com, Autobytel Direct and search engine optimization. Now integrated throughout Autobytel's car buying Web site, CarTV further expands available advertising inventory with a lineup of highly desirable automotive content that includes streaming video test drives, reviews, autoshow coverage and car care kits.

We further expanded our advertising portfolio with the launch of Autobytel Direct, a fully integrated multimedia direct marketing product that targets end market car buyers during the pivotal window between submission of a web site vehicle purchase request and off-line purchase. Borell's projects that by 2005 the automotive Internet ad category will have grown to nearly $2 billion or 6.4% of all dollars spent on auto advertising. This is a 40% increase from 1.2 billion in 2004. Significantly, dealerships nearly doubled their interactive marketing budgets in 2004. And according to a recent Jupiter report, 30 to 40% of those dealer ad dollars now go to online lead generators such as Autobytel.

We expect advertising to continue to be a significant source of opportunity in our business. As we announced yesterday, we are putting considerable efforts behind search engine optimization and growing direct to cite traffic.

One approach that we have taken is to increase the quantity and quality of our editorial content. We believe this strategy is right on track. In May 2005 we generated 1.7 million editorial page views, a 150% increase from May 2004. Our focus on editorial content is one reason why we are making progress in natural search with over 10 million pages now indexed by the leading search engines.

Another example of our investment in automotive content is Autoahorros, which is renamed and relaunched or was renamed or relaunched in December 2004, and it is a leading Spanish-language auto site online. This site generated over 800,000 page views in May of 2005, a dramatic 600% increase year-over-year. Additionally we launched an innovative relationship with AOL Latino and are seeing business to our Spanish pages increase month-to-month at a steady rate.

We continue to focus on striking strategic relationships that would further extend our reach. During the first quarter of 2005, we announced relationships with EarthLink, MSN Latino and Kelley Blue Book.

This year at NADA the buzz was about CRM products. We have been providing online lead management tools to dealers for nine years, and this year we are proud that for the third year in a row Web control is the number one independent lead management tool among the nation's most successful Internet dealers according to Ward's Dealer Business. We saw record CRM revenues of 5.8 million in the first quarter of 2005. We are pleased with this continued growth in this area of our business.

Automotive CRM is a highly fragmented and competitive market. Our strategy is to offer dealers an integrated CRM solution to encompass customer generation, customer management and customer retention. We are making progress in our plans to combine our CRM offering, Web control and RPM into a single solution for dealers. Once this is completed, we should have significant product differentiation in the marketplace, which should help us increase our market position.

As I have said at the beginning of this call, there has been a lot of change at Autobytel over the past seven months. The one thing that has not changed is our fundamental belief that Autobytel has the right strategy to leverage the substantial market opportunity ahead of us.

Progress is never perfectly linear, but the direction is clear. Going forward our key initiatives are to grow the core lead business, continue to leverage the strength of our advertising business and focus on integrating our CRM products. We will invest accordingly to grow revenue and profits in these areas. We will continue to see the effects of the restatement process through the second quarter as we have incurred significant cost to complete this process.

Our underlying strategy still is quite simple, provide dealers and OEMs with the best in class, most cost effective and comprehensive online marketing solutions.

In closing, our strategy is on track, and we are continuing to execute. We have work to do, there is no doubt. We are focused and fully committed to creating shareholder value.

Now Mike will take you through the financials. Mike?

Thank you, Rick. Let me begin with the net impact of the restatements. The aggregate impact of the restated items on the statement of operations for the period January 1, 2002 through June 30, 2004 is a reduction in net income of approximately $3.1 million. The aggregate impact on our balance sheet at June 30, 2004 is a reduction in stockholder's equity of approximately $800,000.

The impact of the restated items on net income for the fiscal years 2002 and 2003, as well as for the first six months of 2004, is as follows.

Net income was reduced by approximately $300,000 for the 2002 fiscal year. Net income was reduced by approximately $1.1 million for the 2003 fiscal year, and net income was reduced by approximately $1.7 million for the six months ended June 30, 2004. Overall the restated items which impacted net income can be categorized into the following areas.

Unapplied credits. The restatement for unapplied credits resulted in approximately a $500,000 reduction in net income for the period January 1, 2002 through June 30, 2004. Unapplied credits were basically customer credit balances which resulted from customer overpayment and/or credits issued which were inappropriately reversed and recorded as an increase in revenue. Of the $500,000 reduction in net income, approximately $420,000 impacted the 2003 fiscal year.

The second category of restatement items impacting net income are stale checks. The restatement for stale checks resulted in approximately a $130,000 reduction in net income for the period from January 1, 2002 through June 30, 2004. Stale checks are outstanding checks issued by the Company which were voided and the corresponding obligations inappropriately reversed and primarily recorded as a reduction in expenses. Almost all of the restatements for stale checks impacted the 2003 fiscal year.

The third category of restatement items impacting net income involves revenue recognition. The restatement related to revenue recognition, excluding the previously mentioned unapplied credits, resulted in approximately $2.2 million reduction in revenue for the period January 1, 2002 through June 30, 2004.

Two of the revenue recognition items requiring restatement totaling approximately $1.3 million resulted in a corresponding decrease in cost, thus having no net income impact. The first of these items related to a barter transaction in 2002 which had insufficient support to establish fair value. While the second item related to an under-accrual in 2002 for customer credits allowance, which had a corresponding over-accrual for bad debt allowance. The remaining revenue recognition items resulted in approximately a $950,000 reduction in both revenue and net income for the period from January 1, 2002 through June 30, 2004. Of the $950,000 reduction in net income, approximately 360,000 and $120,000 impacted the 2002 and 2003 fiscal years respectively. Approximately $470,000 impacted the six months ended June 30, 2004.

The fourth category of restatement items impacting net income relates to the accounting for NADA. The restatement for NADA resulted in approximately an $800,000 reduction in net income for the period from January 1, 2002 through June 30, 2004. The National Automobile Dealers Association, or NADA, normally holds their annual tradeshow during the first quarter of each year. Autobytel participates in this tradeshow and incurred substantial cost related to our presence at the show.

With regards to NADA, the Company was incorrectly recording expenses throughout the preceding fiscal year for the tradeshow to take place in the following first fiscal quarter. These expenses should be primarily expensed when the tradeshow takes place being the first quarter of each year. While the $800,000 reduction in net income, approximately $400,000 and $90,000 impacted the 2002 and 2003 fiscal years respectively, approximately $310,000 impacted the six months ended June 30, 2004.

With regards to the impact of incorrectly accounting for NADA prior to 2002, the accumulated deficit at December 31, 2001 was reduced by $1 million.

The next category of restatement items impacting net income relates to accruals. Restatement for accruals resulted in approximately a $340,000 reduction in net income for the period from January 1, 2002 through June 30, 2004. As a result of the restatement for accruals, 2002 net income increased by approximately $460,000, while 2003 net income also increased by approximately $20,000. For the six months ended June 30, 2004, net income was reduced by approximately $820,000 for the accrual restatements.

The final category of restatement items which affected net income was the accounting for loans made by Autobytel Europe. The restatement related to the accounting for loans made by Autobytel Europe resulted in approximately a $390,000 reduction in net income for the period from January 1, 2002 through June 30, 2004. This restatement item resulted from a loan being recorded at cost instead of net realizable value. Of the $390,000 reduction in net income, approximately $340,000 impacted the 2003 fiscal year, while approximately $50,000 impacted the six months ended June 30, 2004.

Although the restatement of iManager revenues did not impact net income, it did result in a significant restatement of revenue which is worth mentioning. Restatement related to iManager had no overall impact on revenue or net income for the restatement periods, but did impact the allocation of revenue between CRM and lead fees.

As many of you know, prior to the acquisition of AVV, iManager was the Company's main CRM lead management tool. Historically iManager was funded with purchase requests and was not sold as a stand-alone product. Do to the fact that iManager was always bundled with purchase requests and sold at varying price points, there is no objectives and reliable evidence of the value of iManager. As a result, all revenue previously classified as iManager in the CRM revenue category is now classified as lead fees.

The restatement for iManager resulted in approximately a $5.7 million, $2.8 million, and $900,000 decrease in CRM revenues for the fiscal years 2002, 2003 and for the six months ended June 30, 2004 respectively. Correspondingly, lead fee revenues increased by the same amount over their respective periods.

With regards to restatements aggregated impact on our balance sheet at June 30, 2004, stockholders equity was reduced by approximately $800,000. The net reduction in stockholders equity is the result of the restatement items which impacted net income for the period January 1, 2002 through June 30, 2004 being $3.1 million which was partially offset by the following. One, approximately $1.1 million of increased net income which is classified as an adjustment to the cumulative deficit at December 31, 2001 primarily resulting from the NADA accrual as previously discussed. And two, approximately $1.2 million of increased paid in capital resulting from a balance sheet restatement item relating to the value attributable to common stock issued for the car.com and iDrive acquisitions.

Before we discuss our results for 2004 and the first quarter 2005, I would like to discuss the reclassification of two items. The goal being to provide transparency into our operations for investors. The most significant reclassification is the addition of cost of revenues for operating expense classification. Cost of revenues will contain certain costs previously classified as sales and marketing, as well as product and technology development. Former sales and marketing costs now included in cost of revenues include traffic acquisitions and related compensation costs, fees paid to third parties for data and content included on our properties, and printing, production and postage for RPM's customer loyalty and retention program.

Former product and technology development costs now included in cost of revenues included connectivity cost, technology license fees, amortization of acquired technology, amortization of internally developed technology, fees paid to third parties for data and content included on our properties and server equipment depreciation.

The other classification which impacts our statement of operations is the reclassification of bad debt expense, which is now included in general and administrative costs. Previously bad debt expense was included in sales and marketing.

I will now review the results for the full fiscal year 2004. In 2004 Autobytel reported record revenues of $122.2 million. Revenues increased by $33.8 million or 38% from $88.4 million in 2003. 2004 revenues attributable to car.com and iDrive's customer loyalty and retention program were $16.3 million and $5 million respectively. Both car.com and iDrive were acquisitions which took place in 2004.

In addition, revenue growth attributable to AVV was $4.8 million, a portion which is attributable to a full year of ownership of AVV in 2004. AVV was acquired in June of 2003.

Revenue from lead fees increased by $20.5 million or 32% to $84.8 million in 2004 compared to $64.3 million in 2003. This increase was driven by an additional 1.1 million purchase requests and 500,000 finance leads delivered in 2004. Total purchase requests delivered in 2004 totaled 4.2 million compared to 3.1 million in 2003. In addition, we instituted a price increase to some dealers in the second half of 2004.

Online advertising revenue increased by $2.2 million or 20% to $13.7 million in 2004 compared to $11.5 million in 2003. This increase was driven by increased web site advertising sales including car.com, as well as revenue from our direct to marketing offerings which is a new product for the Company as a result of our acquisition of car.com.

Total paid ad page views totaled approximately 350 million in 2004 compared to approximately 313 million in 2003. The advertising CPM per page for 2004 was approximately $38 compared to $37 in 2003. CRM service revenues increased by $11.7 million or 153% to $19 million in 2004 compared to $7.2 million in 2003. The increase in revenue was due to higher RPM revenues, including RPM's customer loyalty and retention marketing programs, as well as higher revenues at AVV.

Data and other service revenues continued to decrease primarily driven by lower revenues from our AIC division. Cost of revenues as a percentage of total revenue was 41% in both 2004 and 2003. Overall cost of revenues increased by $14.2 million or 39% to $50.7 million in 2004 compared to $36.5 million in 2003. The increase in cost of revenues was primarily driven by higher cost of purchase requests and finance leads from third parties primarily related to the increased number of purchase requests and finance leads delivered in 2004.

In addition, printing, postage and production costs for RPM's customer loyalty and retention program were higher due to increased volumes in 2004.

Other operating expenses including sales and marketing, product development and technology, general and administrative, and amortization of intangibles increased to 54% of revenue in 2004 from 52% in 2003. Overall these costs increased 19.5 million or 42% to $66 million from $46.5 million in 2003. The increase is driven by higher sales and marketing costs, higher product and technology development costs, higher general and administrative costs, as well as higher amortization of intangible assets related to the car.com and RPM acquisitions.

Included in the 2004 G&A costs is $1.1 million associated with the settlement of a contract dispute and $1 million related to the internal review and restatement. Net income for the fiscal year 2004 was $5.8 million or $0.13 per fully diluted share. Fully diluted shares outstanding for the fiscal year 2004 totaled 44 million shares.

For the year ended December 31, 2004, we generated $7.6 million in cash from operations. Domestic cash, cash equivalents, short and long-term investments totaled $52.8 million as of December 31, 2004.

I would now like to discuss the Company's results for the first quarter of 2005. The Company's revenues increased by $8.7 million or 35% to $33.3 million from the first quarter of 2005 compared to $24.6 million in the first quarter of 2004. Revenues attributable to car.com and iDrive's customer loyalty and retention programs were $5 million and $2.8 million respectively. Both car.com and iDrive online were acquisitions which took place in April of 2004.

Lead fees increased by $4.4 million or 26% to $21.6 million in the first quarter of 2005 compared to $17.2 million in the first quarter of 2004. The increase in first-quarter lead fee revenue was driven by an additional 150,000 purchase requests and 200,000 finance leads delivered. Total purchase requests delivered in the first quarter of 2005 totaled 1 million. Revenue per purchase request in the first quarter of 2005 was $19.01 versus $20.05 in the first quarter of 2004 and $18.53 in the fourth quarter of 2004. Total finance leads delivered in the first quarter of 2005 totaled 200,000.

As of March 31, 2005, retail dealer relationships in the Company's lead referral program increased to 6200 from 5500 as of March 31, 2004. The number of Enterprise dealer relationships with major dealer groups and the Company's lead referral program was approximately 670 as of March 31, 2005, an increase from 580 at March 31, 2004. In addition, we had six direct relationships encompassing 16 brands with automotive manufacturers or their automotive buying service affiliates representing up to approximately 17,600 Enterprise dealer relationships at March 31, 2005. This compares to four direct relationships encompassing 15 brands, representing up to 18,200 Enterprise dealer relationships at March 31, 2004. The Company's finance lead referral network at March 31, 2005 also included approximately 300 relationships.

Advertising revenues increased by $1.7 million or 53% to $4.8 million in the first quarter of 2005 compared to $3.1 million in the first quarter of 2004. The increase was driven by higher web site ad sales combined with revenue from our direct marketing offerings. Total ad page views in the first quarter of 2005 totaled approximately 100 million compared to approximately 87 million in the first quarter of 2004. The advertising CPM per page for the first quarter of 2005 was approximately $42 compared to approximately $36 in the first quarter of 2004. Revenue from CRM services increased by $2.7 million or 91% to $5.8 million in the first quarter of 2005 compared to $3 million in the first quarter of 2004. This increase was primarily due to an increase in the number of Web control and RPM customers combined with increased volumes for RPM's customer loyalty and retention program. The number of Web control customers and RPM customers were 2850 and 750 respectively at March 31, 2005 compared to 2540 and 450 respectively at March 31, 2004. Data and other service revenues decreased by $100,000 from the first quarter of 2005.

Cost of revenues declined as a percentage of total revenues to 40% in the first quarter of 2005 from 43% in the first quarter of 2004. Overall cost of revenues increased by $2.9 million or 27% to $13.4 million in the first quarter of 2005 compared to $10.5 million in the first quarter of 2004. The increase in cost of revenues was primarily driven by higher cost of purchase requests and finance leads from third parties primarily related to the increased number of purchase requests and finance leads delivered in the first quarter of 2005.

In addition, printing, postage and production costs for RPM's customer loyalty and retention program were higher due to increased volumes in 2004.

Other operating expenses including sales and marketing, product development and technology, general and administrative and amortization of intangibles increased to 69% of revenue in the first quarter of 2005 from 55% in the first quarter of 2004. Overall these costs increased $9.4 million or 70% to $22.9 million in the first quarter of 2005 from $13.5 million in the first quarter of 2004. The increase was driven by higher sales and marketing costs, higher product development and technology costs, higher general and administrative costs, as well as higher amortization of intangible assets related to the car.com and RPM acquisitions.

Included in G&A costs for the first quarter of 2005 are approximately $3.2 million of cost related to the internal review and restatement. Excluding the costs for the internal review and restatement, other operating expenses increased to 59% of revenue.

In addition, we incurred approximately $700,000 of costs related to NADA, which took place in the first quarter of 2005. Net loss for the first quarter of 2005 was $2.8 million or $0.07 per fully diluted shares. Fully diluted shares outstanding for the first quarter of 2005 totaled 41.9 million or 2.1 million lower than the full-year 2004. The lower fully diluted shares outstanding are due to the exclusion of employee options as they would be anti-dilutive.

For the first quarter of 2005, we used $100,000 in cash from operations. Domestic cash, cash equivalents, short-term and long-term investments totaled $52.2 million as of March 31, 2005.

I will now hand over to Rich who will discuss our operational focus.

Thanks, Mike. Let me reiterate a few points around the current market environment and our general corporate strategy to provide the backdrop as we move to establish our specific operational agenda over the next few months.

I have been at Autobytel for more than two years now. Our initial focus was establishing a framework to direct our strategic growth initiatives. The prevailing market conditions at the time were well-documented. In addition to being a very large high-growth market, the automotive marketing services category was and continues to be fiercely competitive, highly fragmented, and when viewed from the eyes of our OEM dealers -- our OEM and dealer customers, often very inefficient in terms delivering integrated and cost-effective solutions. The result had been limited strategic or product differentiation in the marketplace.

While the market environment remains very complex, our core business mission is really quite simple -- to help dealers and manufacturers sell cars. As Rick said, our underlying strategy is also quite simple -- provide dealers and OEMs with the best-in-class, most cost-effective and comprehensive online marketing solution.

Over the last two years, we have made important progress in executing on this strategy including our acquisitions of AVV Web Control, car.com and iDrive Online. With the suite of integrated products and services that we now offer, Autobytel helps manufacturers build their brands, consumers contact dealers and dealers sell cars and build marketing relationships that convert to reoccurring service revenue and produce future new and used car sales opportunities. As Rick also pointed out, numerous industry research and underlying consumer trends suggest continued growth in the automotive online category. The automotive Internet and dealership CRM market is large, influential and rapidly developing. As a result, we firmly believe our strategic framework remains the correct one for Autobytel.

As we continue to develop best-in-class integrated products and services, we have seen a natural bias to increase complexity, not simplicity in key areas of product development and operational scale and scope. We must, therefore, ensure at a tactical or operational level our organization is functioning with extreme efficiency as we execute within the broader strategic environment. The lengthy internal review process that we just completed has revealed significant opportunities for us to improve our internal processes, as well as to rectify those that were impacting the efficiency of our operations. These opportunities will become the basis for our specific operational agenda over the next few months. I will continue to work very closely with Rick, Mike and each of the business units to develop improved organizational processes.

The specific process improvements will be designed to make the organization perform at a very high level, particularly with respect to the following -- efficient communications, effective prioritization, and appropriate research balancing around those priorities. I am extremely focused on completing these initial assessments and developing specific recommendations. We will be reporting to you in the quarters ahead on our progress, and I'm committed to making sure these improvements have measurable impact on the Company's overall results.

I firmly believe that Autobytel has a great future in this rapidly emerging and evolving market. My job is simply to lay down a solid foundation internally that allows us to be operationally prepared to compete and continue to compete and win effectively as we execute on our strategy.

With that, I will now turn it back to Rick.

I want to thank Rich and Mike for joining me on the call, and thanks to everyone on the call for listening today. We had a lot of information to go through, and with that said, I would like to open the call up for questions. Operator?

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

Hi, guys. A couple of questions, and yes, it was a lot of data, so forgive me if I had gotten some of the details wrong. But I think you guys had mentioned something about your retail dealers being reduced. Just could you give us an update as to sort of the retail and OEM leading pricing trends just to give us a sense as to an overall health of the market? Obviously we have not had an update in a couple of quarters.

Actually I've got a couple of questions there.

The second question would be, can you update us on the cost of your purchase request? (inaudible) that leadtime in the past. I am just trying to understand if that has changed at all. And then if you could highlight the complication from other lead generation sites? You know, companies like Mix Tag (ph) I know have adopted a lead generation auto product. I don't know if they are starting to have any impact at all.

And then the final question is, can you quantify the G&A costs from handling the restatement, i.e. is your cost structure as we look at it in Q1 something that is likely to continue and sort of margin implication going forward? Thanks.

Okay, I'm not sure I got all those down, but we will --

I have got them written down.

Yes. We will do the best we can here, and if we miss one, would you come back to us?

As far as the market place, the competitive environment, I do believe we are seeing a more competitive environment on the lead side than we did, let's say, a year or two ago.

With that being said, we believe that we can grow the retail lead base, that it is still a very good business for us. Cost per PR bounce around a bit, and Mike can maybe give us a few steps on that. But they generally are within a range of $0.50 or so between quarters. Mike, do you have any --?

Yes, I mean the cost of PR, what we've done with the cost of revenue classification is especially we do paid search, and we obviously buy keyword searches for -- key purchase requests, as well as page views for advertising. We think in the old tack there is an essence and allocation similar to processes, and that is (technical difficulty) the cost of revenue something we try to get a better alignment of what was the total direct cost to drive not only believe in the advertising, but as well as some of the RPM products.

From a cost per lead perspective, I think going forward especially for competitive reasons we are going to avoid giving you specific acquisition costs per lead.

From a G&A cost perspective, I can talk with regards to the restatement. The costs related to the investigation restatement in Q4 were approximately $1.1 million. They were 3.2 million in Q1, and there will be some costs in Q4. Obviously we just recently filed all the Qs in the case, so some of those costs will carry over into Q2 of this year.

So there is 3.2 million in Q1 and then give an estimate for Q2 yet?

I would say it will be somewhere between Q4 and Q1, Q4 of '04 and Q1 of '05.

In terms of sort of where you are in your ability to give outlook and how much visibility do you have in the proceeding quarter or two, and are you willing at this point to comment on what that visibility looks like?

No, I would say we are not prepared at this point to talk about the next few quarters. We hope to be in a better position at the end of Q2 as we have got -- set significant management changes and other things that we would focus on to get the restatement done.

Again, the trends in the business we believe our advertising revenue is growing. Our CRM business is growing. Our lead business has in the first quarter for a variety of reasons including competitive reasons, try to drive quality, had a decrease on the lead revenue side. Our finance lead business has continued to grow. So as we go forward, we want to focus on driving all of those on growth, and some of the dealer base on the retail side, the dealer base declined as we expected after the car.com acquisition. We knew there is some overlap, and there would be some migration off. I think our challenge now is to end that decline on the retail dealer base that we have been seeing slowly erode and turn that around. We instituted a number of activities to do that, including more aggressive pricing on larger transactions in the marketplace, along with a variety of technology tools that we have been deploying to improve delivery, higher quality leads and more leads to dealers than we have in the first quarter. So that is all being implemented as we speak.

Okay. Well, thank you.

Richard Fetyko, Merriman Curhan Ford.

Thanks for taking my question, guys, and congrats on finally getting through that difficult stage.

Just trying to figure out on the core business, which it appears to be really the challenging part right now, segment. How do you sort of think about how can you differentiate your product and how can you differentiate your lead generation business? Where do you see the competitive pressures reserved from some of the Kelley Blue Books of the world or perhaps even from the OEMs, the actual purchaser of the leads that are demanding more aggressive pricing of the leads?

Richard, it is Rich. I think we are seeing pretty intense competition on both the acquisition and distribution. We are -- it is the usual competitive sets in the lead generation business.

We are trying to be -- in terms of differentiation, I think our sales and support model is an area that we look at as providing significant differentiation. The challenge is to differentiate both across lead quality and price and ultimately the sales and support model. We think our model of premium sales and support is the winning model. But we have to continue to navigate through a very competitive environment with aggressive pricing both in lead acquisition and ultimate pricing of the end customer.

The good news is you have seen in our cost of sales line that despite some pressure on that line as we do affiliate relationships and acquire leads from third-parties, we have been able to mitigate that significantly through our search engine optimization program, the paid search activity along with just scale. Scale does help in this business, and I think the car.com acquisition, again while we knew we would have some loss in attrition of dealerships because of the overlap, that scale should give us the right footing to move forward and the differentiation we think again is our sales and support field force that we have. We need to take better advantage of that going forward.

How do we think about the drivers on that core lead generation strategy, the drivers of growth? Is it really dealership count, or is it -- can you just drive -- even with the constant number of dealers, can you drive more revenues or more volume?

Well, it starts with quality. The higher level of quality we can deliver and demonstrate to the dealer that we are increasing their sales closure ratio is where we are going to start. Absolutely, our dealer base -- growing our dealer base network is beneficial because that provides a greater area of delivery that we can address with our affiliates. So if an affiliate looks to us for delivery of a lead and we can fulfill that, they don't need to turn to another party for that activity.

So yes, absolutely, the dealer base coverage is important.

We have also as you can see on the OEM side, and particularly on the dealer group side, focused on growing that part of the business where we have a single relationship with a large dealer group, significantly reduces our cost of interfacing and retaining dealers, and we are able to provide a higher quality of service to that dealer group.

I would add, Richard, that the math around it is fairly straightforward. It is adding new dealers and lead delivery points. It is laser focused on improving retention, reducing customer turnover, and it is also increasing the demand for leads with an existing customer. There are multiple ways to do that. There is training. There is tools and technology like AVV Web Control, which improves an individual dealer point and improves their ability to process and consume more leads. And if you ultimately increase the capacity of our throughput, the distribution network, you create the drivers for growth that you alluded to.

Could you remind us how many dealerships in the U.S. you think that there are to target on the new and used car side?

North of 35,000. I don't have an exact number in front of me, but I know the most recent number I saw was north of 35,000. So I think you have hit an interesting area. The ability to increase our presence is there. We are at 6200 or so, right around 6200 relationships on the retail side. And while we do have significant coverage through some of these OEM programs, we are still not on a direct relationship basis as opposed to going through an OEM. On a direct relationship basis, we have a lot of opportunity to grow the business.

(OPERATOR INSTRUCTIONS). Justin Cable, B. Riley & Company.

Thank you. On the leads business, you talked about improving the quality of those leads. Should we take that to mean that you are not giving certain leads to dealers because you feel that they are low quality leads?

Yes.

I.e., being that the reduction in the leads lead referrals might be more of a decision on your part rather than a reduction in the general market or competitive threats?

It has absolutely been a decision on our part over the last two quarters, Q1 and continuing to Q2 to some degree. But the issue is, is the dealers at some point won't just accept any lead. The lead has to meet some level of standard on an aggregate basis around their close ratios. I think we found a tipping point to where we were not delivering -- in our minds we were not delivering a high enough level of quality to differentiate on an ongoing basis and to grow the business. So to grow from where we are, we think we need to improve that quality mix, and we have -- we have we believe a number of tools that we have deployed in the last literally in the last 30 days that will improve our ability to find and deliver higher quality leads. Search engine optimization, which provides a higher quality lead as they come direct to site. Identifying affiliates that have higher levels of leads, we have new tools in place to identify and track that so that we can better align ourselves with those affiliates. And we also are -- part of it is also at the dealership level, it is the training required to optimize the lead. So even a great lead can go in the round can if, in fact, nobody is following up and driving that sale. So part of it is the sales force that we have in the field, the support force, is getting them to work with the dealers to optimize that lead that might come through the dealership.

I would add to that simply each of our customers measure the value of our product on an ROI basis, their traditional type of measure. There are -- I would make the general statement there are plenty of leads in the market. Volume is not an issue. It is really around quality, and we very actively measure and monitor the quality of all of our affiliates and lead sources, and very selectively determine the appropriate mix to achieve a return proposition that is attractive. We had chosen and will continue to not accept leads from lower lead quality providers or affiliates.

Okay. But it sounds like you have kind of narrowed down that process, or are you still kind of in that test mode in terms of trying to figure out what the best -- how to best determine the quality of those leads are?

No, we think we have got the right tools and framework now going forward. And part of it, quite frankly, on the delivery slide for the car.com site is integrating that business fully into the Autobytel business. We were not able to -- we just were not able to optimize leads coming in in the way we can now. The integration of that took place a week and a half ago. Full integration took place a week and a half ago. So we think -- we believe we are already seeing an improved level of quality delivery to those dealers.

Okay. In terms of the dealer group's business, is the competition the same versus going direct to individual dealer sites?

Generally the players that we are seeing are the same, yes, and we're competing for the business as we would on an individual retail -- individual franchise level basis. So yes, it is generally the same competition.

What we are seeing is with a lot of the large dealer groups there is some trade-off in different business models around centralization and standardization of certain marketing practices, as well as providing for what is at the end of the day a very localized business, and we have had great success in attacking both of those opportunities where we can provide a standard program across the entire dealer group and provide an acceptable solution, even when it is a very localized basis as well. But it is generally the same competitive set that we are facing.

Okay. And in terms of the market size in terms of the number of dealer groups in the U.S., do you have that number?

In terms of just what we would consider large dealer groups?

Yes.

I don't know that I have that number in hand.

You gave the dealership count for the 35,000 in the U.S. market, but how much of that is --?

If you look at dealers that have franchises, then I would say large dealer groups would be north of, say, 20 to 25 depending on who. In the industry, I think that is generally the breakpoint. And you know, we would estimate that there is somewhere north of 200 of those larger dealer groups.

That being said, I would characterize the market as extremely fragmented. The largest dealer group still represents a very small fraction of the overall market in aggregate terms. It is still an opportunity of many smaller less than 25 dealer groups or rooftops at the end of the day. So it does require, while there is some scale and we have taken advantage of that from a sales perspective, there is still -- the greater opportunity lies in smaller individual retail opportunities.

Okay. The last two questions are just, one on operational improvements. Any more color there? I know you are kind of vague and they are kind of going through the initial assessments of what changes might need to be made or what areas to focus on, but is the overall goal there just to improve your processes, or is there -- are you looking to improve your operating margins overall?

And then the second question is just on the NASDAQ listing status. When should we hear back from NASDAQ in terms of getting the E (ph) removed sticker?

The good news on the E is according to your General Counsel, the E is going to come off on Thursday at the end of -- I believe it is the beginning of trading on this Thursday. So we will no longer have that associated with us. The --

Two questions. I think operationally I think the investigation has identified certain opportunities to improve the effectiveness and the coordination across all the functional groups. So it is all about profits and very disciplined process, disciplined thinking, disciplined processes to ensure that internally the organization functions very efficiently and highly effective.

And in terms of specific initiatives, we are looking at the organizational structure to make sure that we are appropriately aligned with the opportunities externally and making sure importantly that we are investing appropriately in those opportunities. I think we will, as Rick alluded, to continue to look at the overall cost structure of the Company and ensure that we are diligently managing the cost environment.

This is Mike. And from an up margin perspective, I think obviously as Rick alluded to we can probably give more color after we report Q2 results. I think as well we need to (inaudible) -- there is obviously if you look at the report there is a fair amount of remediation that needs to go on in these processes throughout the year as well, and obviously there will be some costs related to that as we remediate those processes throughout the year.

We have significant costs we incurred in 2004. We would expect in terms of the ongoing compliance of SOX, which is really the remediation of some of these processes, we would expect for those costs to continue. But at the end of the day, the improvements in processes should result in our ability to scale these activities and improve margins in the long run. Absolutely.

Jason Ascamalla (ph), Joe Feshbach Partners.

Just actually a follow-up on the previous. Were you willing to give trends on the 404 costs for '05 or any sort of estimate there and willing to break out anything in Q1?

I think 404 costs for '05 is still a bit early, and I think we will give color to that in Q2. Obviously there won't be the restatement costs, but there will be some of the remediation costs, which as we are going through the restatement obviously did not have a lot of time to focus on that remediation during the first half of '04.

In terms of 2004 SOX-related cost, I don't know if we have broken that out specifically in anyway.

We have not at this point.

Okay. I guess we have not broken that out. It is a significant amount of expenditures, and that would likely continue on. But the restatement items obviously the three main in Q1 and a very large number in Q2 will go away.

Okay. Then as far as Q1 for '05 for 404 costs, is that significant as well?

404 costs in Q1 would not be overly significant. I think most of the costs in Q1 were focused on the restatement.

Okay, thanks. One more follow-up or unrelated -- growth plans for your advertising/media and CRM business. Can you give us a little more color on that on the plan for '05?

Well, not really at this time, other than we believe the advertising revenue for the year will continue to be at a significant -- for advertising, we will have significant growth over '04. CRM we continue -- to look at the increasing rates revenue significantly there also this year. We are integrating the AVV and RPM business, so we think from a long-term cost structure standpoint we will be better positioned to deliver that product.

I can probably give you a bit more color around the '04 Sarbanes cost. Again, I cannot give you an exact amount, but they are probably slightly north of $2 million.

Okay. And then if I understand it when you talk about significant growth, you're talking about sequential growth in '04, going back to the CRM in your business in particular?

'05 over '04, yes.

And you have got -- yes, you've got it pretty easy. I guess I am just trying to understand when you mentioned the significant growth. Is that sequential from here, or is that year-over-year?

In terms of details on that, we will have to you know in Q2 we will hopefully be able to give you a better look at where we are going to be sequentially is what you're asking, I guess sequentially on the CRM business for the rest of the year.

Yes, that is fine. Okay, thanks.

Mitch Putman (ph), Apax Capital.

Advertising has been growing real nicely. One of the things that I have always understood as a constraint for that line item is the amount of inventory you have. Is that still the case, and if so, are the CarTV videos and all these types of other things helping to increase inventory? Is that what you're doing with all that?

Yes, that is absolutely increasing inventory as are some of the -- we're working on a number of relationships that would be cobrand type of relationships that would increase the inventory available for advertising, along with -- the other area of growth in advertising has been these e-mail campaigns. Now they are not predictable in terms of how they roll through. It is oftentimes last-minute in the quarter. Somebody -- a large OEM will want to put out a large e-mail campaign. That has been a nice area of growth for us.

But in terms of the inventory on the ads, yes, we are doing everything we can to look at ways to partner and cobrand, expand our footprints so to say to create more page views to sell.

And what are the gross margins on the advertising that you're getting right now? Is it above 90%?

They are very good. They are very good. In terms of breaking that out, we have not done that to date.

Do you expect to be in a position where you would be able to project what the growth might be in the advertising business?

I would hope to be in a position to give you a better range of what that might look like over the next year or two. It is a bit -- it is obviously very very dependent on the largest OEMs in terms of their continuing to allocate more and more dollars to the Internet, and I think what we are seeing is a migration from traditional -- a reallocation of traditional media dollars to the Internet, and we have been a beneficiary of that. We hope to continue to increase and take advantage of that going forward.

Yes, the upfront fees and it has already begun and continuing for the '06 now. What is already in place in terms of the commitments on '05 is fairly well understood. What we continue to work aggressively is for some of the spot opportunities in the incremental programs, and that remains a very fluid process. Key areas of growth there being around the e-mail and the CarTV, and we get some very attractive CPMs on a lot of the video opportunities in the rich media.

In terms of just the trajectory, the Borell's report that I cited, the advertising dollars spent by the automotive industry in the Internet category was about just a little over 6% of all of the dollars spent on auto advertising. That is up from 3% or about 3% in 2004. So that was, you know, a significant amount of dollars.

Now will that doubling continue? I don't -- I would not expect it to continue to double, but you know going from 1 billion to 2 billion to, let's say, 3 or 4 billion over the next year or two could have a significant impact on our ability to drive that line item. We think we're trying to do things like CarTV, richer editorial content, things that will see people at the site, keep them interested, allow them to differentiate in terms of advertisers when somebody is clicking on a specific model. We can go deeper on that advertising relationship, too. So there is a lot of opportunity there. We have got -- we're working on ways to take better advantage of it.

And maybe to finish the thought, it clearly is when you look at a competitive set around our core business, this area of the business is not only high-growth, but probably the most significant point of differentiation for us as we look across that competitive set.

Great. Let me ask you one more question if I may. If you were to look ahead two, three, four quarters out and all the extraordinary costs are taken out of the P&L, look at operating income on say a $35, $36 million quarter, what is your target operating income percentage? Do you have any sense of where that could be after you have kind of done some of your guys' magic with the cost structure and so forth?

I do. We have not talked about it. We are working through that right now, and it would be nice to have a discussion about that hopefully in the future.

Do you think there will be a 2 in front of that number?

I don't know. It would be great if it was. That would be a great goal.

We would love to hear about that in the next conference call.

Okay.

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

I want to thank you today for your patience. I know that was a tedious thing to listen through as we described the last three years of events. We look forward to speaking with you at the next call. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.