Autoweb Inc (AUTO) 2006 Q1 法說會逐字稿

My name is [Marika], and I will be your conference operator today. At this time, I would like to welcome everyone to the Autobytel first quarter 2006 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. Thank you. Ms. Klein, you may begin your conference.

Thank you, [Marika], and welcome to everyone on the line. Before we start the call today, I'd 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 actual events or results may differ materially from those forward looking statements. We refer you to the documents the Company has filed with the SEC, including the Form 10-Q for the quarter ended March 31, 2006. These documents identify the principle factors that could cause results to differ materially from those forward looking statements. With that, I'd like to turn the call over to Autobytel's CEO, Jim Riesenbach. Jim?

Thanks, Jennifer, and welcome to Autobytel's first quarter 2006 earnings conference call. As most of you know, I joined Autobytel as CEO at the end of March. The past six weeks have been an educational and exciting experience for me; and quite frankly, has validated my rationale for joining the Company. Today, I'm looking forward to sharing some of my views about the future of Autobytel, both the opportunities and some of the challenges that we will face in the months ahead. I've joined Autobytel with what I think are highly relevant experiences to the business situation at hand. At both Comcast and at AOL I led innovation, development and market rollouts of countless media based products targeted toward both consumers and businesses.

And I've led [INAUDIBLE] dramatic growth in a number of advertising and media properties, an area where I plan to focus significant energies and attention at Autobytel. And most recently, as Head of AOL's Search and Directories businesses, I recognized the need for and built world class analytics and popularization capabilities, areas that are critical to creating a sustainable revenue and margin growth in today's internet-based businesses. Each of these areas of my experience will be central to the work needed to deliver upon the promise this Company has going forward. We will begin today's call with a review of the financials by Mike Schmidt; and following Mike's comments, I will discuss the quarter as a business going forward, and we'll conclude the call with a question and answer session. Now I will turn the call over to Mike for a review of the financials. Mike?

Thank you, Jim. Revenue for the first quarter of 2006 totaled $29.1 million, a sequential decline of $900,000 or 3% from the fourth quarter 2005, and a decrease of $4.3 million or 13% for the first quarter 2005. Our revenue mix for the first quarter of 2006 was 62% leads, 22% CRMs, 13% advertising and 3% data, applications and other revenues. For comparison, our revenue mix for the fourth quarter of 2005 was the 59% leads, 21% CRM, 17% advertising and 3% data, applications and other revenue. Revenue from lead fees for the first quarter 2006 totaled approximately $18 million, representing an increase of 2% from lead fee revenue in the fourth quarter of 2005 and a decline of 17% from the first quarter of 2005.

This is the first sequential increase that we have seen in lead revenue since the first quarter of 2005. Average revenue per lead, which includes finance leads for the first quarter of 2006, was $17.51 compared to $19.22 and $18.67 for the fourth quarter and first quarter of 2005, respectively. The decline in average revenue per lead we experienced in the first quarter of 2006 was partially attributable to an increase in the number of purchase requests per dealer that we delivered to dealers on our flat fee pricing program, primarily being dealers in our used car program. Approximately 50% of retail dealers in our network are on a flat fee contract. This means that they pay a flat fee every month regardless of the number of leads delivered. When we are able to supply more leads to these dealers, the average revenue per purchase requests for those dealers will decline.

In the first quarter of 2006, we delivered approximately 900,000 purchase requests compared to 1 million purchase requests in the first quarter of 2006. Approximately 500,000 purchase requests were delivered to retail dealers and 400,000 were delivered to enterprise dealers in the first quarter of 2006. We delivered approximately 100,000 more purchase requests in the first quarter of 2006 than we did in the fourth quarter of 2005. Additionally, we delivered approximately 200,000 finance requests in the first quarter of 2006. Average revenue per finance lead in the first quarter was $13.38 as compared to $13.20 and $11.72 for the fourth and first quarter of 2005, respectively.

Our lead referral dealer relationships, representing domestic and imported makes of vehicle and light trucks sold in the United States, as of March 31, 2006 we had approximately 5560 detailed relationships, 760 enterprise dealer relationships with major dealer groups, and 9 direct relationships encompassing 19 brands of automotive manufacturers or their automotive buying services, which represented up to an additional 20,000 enterprise dealer relationships. As of March 31, 2006, approximately 690 retail dealers had more than one retail lead referral relationship with us. Our finance lead business grew in terms of dealers, leads delivered and average revenue per finance lead. As of March 31, 2005, we had 350 -- 2006 -- we had 350 retail finance lead customers, an increase of 15% from 1 year ago. We delivered 185,000 finance leads in the first quarter 2006, with an average revenue per lead of $13.38.

Advertising revenue was approximately $3.8 million in the first quarter of 2006, a decline of 26% from the previous quarter and 21% from the first quarter of 2005. Advertising pages used in the first quarter of 2006 were approximately 119 million compared to 110 million and 99 million for the first and fourth quarters of 2005, respectively. PPM for ad page use for the first quarter of 2006 was $28.02. This compared to a PPM per ad page use of $42.01 and $36.41 for the fourth and first quarters of 2005, respectively. Revenue from CRM services for the first quarter was approximately $6.3 million, a sequential increase of 3% and a year-to-year improvement of 10%. CRM growth came from both the RPM and web control products, where we also grew the number of customers for each division.

Both web control and RPM grew the customer count in the first quarter. RPM increase in the number of customers from approximately 750 at March 31, 2005 to approximately 870 at March 31, 2006. And web control increased the number of customers from approximately 2870 at March 31, 2005 to approximately 3020 at March 31, 2006. Revenues from data, applications and other revenues for the first quarter of 2006 was approximately $1 million, sequential decrease of 7% and a year-to-year decline of 18%. Now on to costs. The first quarter of 2006 is the first quarter that we have reported the expense of expensing stock options under FAS 123-R.

The Company reported $1.3 million of stock based compensation expense, which is now included in cost and expenses in a consolidated statement of operations for the three months ended March 31, 2006. Cost of revenues, which includes traffic acquisition costs, or TAC, for the first quarter of 2006 totaled $14.8 million. As a percentage of revenues, cost of revenues was 51%. This compares to 45% in the fourth quarter and 40% in the first quarter of 2005. Cost of revenues increased for the fourth quarter of 2005, primarily as a result of an increase in search engine marketing campaigns that were implemented to increase direct to site traffic and purchase requests Sales and marketing expense include costs for developing our brand equity, and personnel and other costs associated with dealer sales, CRM sales, website advertising sales, and dealer training and support.

Sales and marketing expense was $7.5 million, or 26% of total revenue in the first quarter 2006, compared to $6.1 million and $8.1 million for the fourth and first quarter of 2005, respectively. Sequentially, sales and marketing expense increased by $1.4 million. This increase was driven by costs incurred from our attendance at the National Auto Dealers Association Annual Trade Show of $500,000; stock based compensation cost of $300,000; higher salary and wage costs, excluding stock based compensation, of $300,000; and higher salary related cost of $300,000. Salary related costs consist of the Company's cost for payroll taxes, 401K matched and medical benefits. First quarter 2006 product and technology development expense was $5.6 million or 19% of revenues. This compares to $5.1 million and $6.1 million for the fourth and first quarter of 2005, respectively.

Sequentially, product and technology development expense increased by approximately $600,000, driven primarily by stock based compensation costs of $200,000 and higher salary related costs of $200,000. General and administrative expense was $9.7 million. This compares to $6.7 million and $8.3 million for the fourth and first quarter of 2005, respectively. Sequentially, general and administrative expense increased by $3 million. The increase was primarily due to higher professional fees for accounting and tax of $1.4 million, stock based compensation costs of $700,000, higher legal costs of $500,000, primarily for defending our patent, and severance cost of $200,000. The net loss for the first quarter of 2006 was $8.5 million, or $0.20 per fully diluted share.

As of March 31, 2006, the Company had $43.8 million in domestic cash, cash equivalents, and short-term investments. Days sales outstanding, or DSOs, were 62 days during the first quarter of 2006, unchanged from the fourth quarter 2005. Before I turn the call back over to Jim, let me build a bridge between the Company's results for the first quarter of 2006 compared to the fourth quarter of 2005. For the fourth quarter of 2005, the Company reported net income of approximately $100,000, which included the realization of a $1.6 million foreign exchange gain due to the dissolution of Autobytel Europe.

With regard to cost in the first quarter 2006, there are additional costs for stock based compensation costs due to the adoption of FAS 123-R, increased costs due to timing, higher legal costs for the enforcement of our patent, as well as additional severance costs. With regards to stock based compensation, the Company incurred an additional $1.3 million of cost when compared to the fourth quarter of 2005. In addition, costs for professional accounting and tax fees increased $1.4 million, as the Company went through its year-end audit for the filing of its 10-K annual report. As many of you know, the Company maintains a presence at the National Automobile Dealership Association, or NADA Convention, which normally takes place in the first quarter of each year. The 2006 is no different, and the Company incurred approximately $500,000 of costs related to the NADA Convention.

Finally, the Company spent an additional $500,000 in the first quarter 2006 for legal costs enforcing its patent, as well as from additional severance costs. The forementioned costs resulted in approximately a $3.7 million increase in costs in Quarter 1, 2006 when compared to Quarter 4, 2005. As previously described in my remarks, advertising revenues was $1.3 million lower in Quarter 1, 2006 when compared to the fourth quarter of 2005. Costs of revenues were $1.4 million higher in Quarter 1 versus fourth quarter of 2005, primarily driven by higher spending on traffic acquisition costs. Jim will provide more color around these two items in his remarks. Now, I will turn the call back over to Jim. Jim?

Thanks, Mike. I'm going to go into a bit more detail on the first quarter before I talk about some of my observations from the past month and the next steps ahead for Autobytel. During the first quarter, the Company experienced a series of challenging circumstances that affected advertising revenue and operating expenses, particularly the tax and total of costs of revenue. The Company's prime directive over the past six to eight months was to reduce churn in our dealer base by improving the key component of dealer retention, lead quality. Now, we know that the leads that come from direct to site traffic are generally of a significantly higher quality than those generated from many of our affiliate'. So in the first quarter, to drive improved quality in our leads, our search engine marketing team was given the mandate to increase the direct to site traffic using keyword bidding.

Although this process drove up private acquisition costs, we still had an improvement in closing ratios, an increase in the number of leads generated and an improvement in retail dealer charts. So we're seeing a number of encouraging signs in the business. Let's talk about advertising. As we all know, automotive online advertising in general is on the increase as automotive manufacturers continue to evaluate their marketing spend away from traditional media and onto the Internet. However, in the third quarter, we saw a decline in both advertising revenue and CPM, which were impacted by several factors. First, a number of our advertising deals came in later than expected because several of our OEM customers did not launch their programs until the latter part of the quarter.

Second, our CPMs declined as we increased our [INAUDIBLE] marketing initiatives due to the increased number of [INAUDIBLE], essentially the [INAUDIBLE] inventories increased at a time that we didn't have sufficient demand from advertisers in place. Ultimately, my take on this is that speaking to Autobytel needs increased significantly improved capability for analyzing and understanding the way our individual business units impact each other, as well as the opportunities for tax break synergies between each of our products. This certainly includes optimization enhancements to our search marketing program known as Black Condor. So since I'm talking about opportunities, this would be at a good time to get into where I see Autobytel going forward. Autobytel has an 11 year history of being the leader and innovator in the automotive Internet.

The Company's original mandate was to create an Internet based marketplace to effectively and efficiently bring together consumers and auto dealerships while added value for each. This was accomplished through creating the most robust online buying experience for consumers and the most extensive set of marketing and customer management tools for dealers. Over the years, Autobytel developed a network of websites that provide in-depth accurate and objective automotive information to consumers. At the same time, the team here has built what we believe is the largest network of dealers and auto manufacturer relationships in the business, which is one of Autobytel's key assets. Autobytel has a lot to be proud of, and I believe our assets place us in a strong position to again become number one player in our space and to recapture what I believe is this Company's legacy. The challenges that faced the Company over cut past few years impacted the results of the first quarter. That was the past. It's now my job to focus on the future.

So I'm going to outline 3 key part priorities for the remainder of 2006, and then I will elaborate on each of them. First, we will move to a more media centric business model to significantly expand direct to site traffic, advertising, and high quality leads. Second, we will focus on providing best of class media and marketing services for our dealer and manufacturer customers. And third, we will take action to capture the synergies and integration opportunities between our business units to create enhanced value for our customers, as well as operating efficiencies. So again, first and foremost, we are going to transition the Company toward a more media centric business model. But what does it mean for the Company right now? It means that we're going to work aggressively in innovation, reinvigorate our consumer [INAUDIBLE] offerings with the objective of growing both our lead base and our advertising revenues. As a true media model is deployed, I expected advertising will increase as a percentage of our total revenues, [INAUDIBLE] up to diversify our revenue stream. Our major concern on advertising growth today is the availability of predictable and sustainable advertising inventory.

And as we reinvigorate our web offerings, I expect that we will see growth in backstage news and advertising revenue ultimately driving advertising up as a percentage of total revenue. This process will take some time, so it's unlikely to have a significant impact in 2006. The auto industry is the largest advertiser in the world. In the U.S. alone, the industry spent more than 17 billion in the first 11 months of 2005. And a recently published [E-Marketer] report expects automotive online [INAUDIBLE] will grow from 1.4 billion in 2005 to 2.67 billion in 2007. In order to capture this growth, we must reinvigorate our consumer basing offering and reclaim our position as one of the top automotive site on the web.

Quite frankly, this is not been [INAUDIBLE] with Company in recent years and in [INAUDIBLE], consumer products have suffered as a result. Despite this, though, we had a strong foundation in place. We have world class data capabilities through our AIC division, extensive original content, video assets, comparator tools, [INAUDIBLE] and much more. But I know from my experience at AOL there is more we can do and plan to do to achieve our goal of creating the best of auto buying and selling expenses for consumers on the web. While I have been on the job for a little more than a month, I believe there are a number of specific areas that will come together to create this outcome. We're underbellying a comprehensive evaluation of our brand to rationalize the respective positions in the marketplace. At the same time, I believe there are a number of unique opportunities in the market to create significant and differentiated avenues for consumers through innovation in areas such as search, local, community [INAUDIBLE], video and pod cams, targeted market products, and more.

This innovation will be accompanied by appropriate marketing initiatives to encourage trial and word of mouth among consumers. Additionally, we are already working aggressively to become more efficient and analytical in our search engine marketing effort and expect continued improvement on this front. And absolutely everything we do to create value and innovation for consumers should have a direct and valuable impact on our dealer and OEM customers, which in turn increases the consumer value. So it's ultimately a virtual circle, one which I believe we can help redefine. At the same time that we'll be enhancing [INAUDIBLE] our consumer products, our second priority is that we'll provide [INAUDIBLE] media and marketing services for our dealer and manufacturer customers. A major part of this focus is to grow our dealer base through improved lead quality, convergence, and ROI for our dealers. Autobytel must stay true to its original mission of helping dealers generate the most efficient return on their marketing dollars. We must continue to relentlessly improve quality in the lease business.

I believe we need to increase our focus on the number of dealers, and not the gross volume of leads delivered. And we need to explore evolving models around lead deliver and pricing that will provide the optimal experiences for both consumers and dealers. I believe there is a tremendous opportunity for innovation in this area as well, and you can expect more to come in the months ahead. According to words [E-Dealer 100] reported that came out in April, 82% of the top 100 the e-dealers in the nation user subscribe to Autobytel's products or programs. Last week, I was out in the field meeting with a number of our sales reps, dealers, and manufacturers. These meetings at the [INAUDIBLE] and others reinforce my belief that Autobytel must focus on delivering innovative products that help dealers sell more cars at better ROIs, and I've seen many opportunities in this area.

As an example, dealers for the most part are just beginning to get acquainted with the context of global search. I think that this is just of the areas where we have an opportunity to drive more value to our dealers while creating new revenue streams to leverage our extensive dealer network and relationships. As I previously mentioned, our focus on growing the dealer base is important ,as that becomes a key task to introducing new products and revenue streams for the Company. At the same time that we're improving the value proposition for both consumers and dealers, our third priority is to take advantage of the synergies and integration opportunities between our businesses -- I'm sorry, between our business units -- to create enhanced value for our customers, as well as operating efficiencies.

I believe there is an immediate need for improved sales and opportunities for improved sales and technology efficiencies. We need to explore how we can increase value added components by integrating our existing products and services, such as our CRM offering. As you probably heard, a common theme [INAUDIBLE] I talk about are 2006 priorities, the theme of innovation. Dealers and consumers are waiting for new world class products and experiences to help with each side of the car buying equation. I believe that those who innovate and deliver an ever increasing value to all their customers win in the marketplace. I'm committed to testing a number of new ideas and programs to reestablish Autobytel's place as an innovative market leader.

Of all these lines as we transition the Company toward a more media center model, I plan to enhance the Company management talent and operating leadership in several key areas, including marketing, finance, business development, and web page management. At the same time, we must tightly control our costs in order to allow for investment in the areas and innovation that we believe will drive sustainable growth in returns for our shareholders. I've already begun a rigorous review of the cost of each of our business units. While I don't expect that our expenses on an absolute basis will decrease, I do believe that we can do a much better job of generating an improved return on investment capital. There are, I believe, many opportunities to improve the leverage in our business.

On the topic of Sarbanes-Oxley, what it comes down to is that we must make stocks compliance with tight controls, analytics and processes a way of doing business. The enhanced discipline in automation in our by products of stocks and bonds are actually good things for a business like ours. It is critical that we utilize these capabilities to allow us to move swiftly in this dynamic and competitive marketplace. Along with that out, I want to stress my continued commitment to work for improved transparency and predictability to our investors going forward. Ultimately, the plans that I'm putting in place are about raising shareholder value. And I believe it is fundamentally important that we be as transparent as we can possibly be in that process.

We issued a press release on May 1 announcing that Mike will be transitioning out of the CFO role. We have retained Heidrick and Struggles to help us with our research. Mike is planning to stay on until the new CFO is found and will introduce and assist with the transition. I'd like to take a quick moment to thank Mike for his hard work and his dedication. So as you can tell, my first six weeks on the job has been educational and it has also been invigorating and productive. I am more enthusiastic than ever about the opportunity for Autobytel. The types of changes that I have outlined must be strategic and thoughtful; and quite frankly, it will require imitation. I will be back with more details in the months ahead as these plans evolve. I am looking forward to leading the charge and creating shareholder value as we transform this Company. Operator, with that I would like to open up the call to questions

Operator?

At this time, I would like to remind everyone in order to ask a question, please press star then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Christa Quarles with Thomas Weisel Partners.

Hi, a couple of questions. First, referring to your quantifiable way of spending, and it looks like your page use grew around 20%, which is not too dissimilar from, I guess, you know, the prior couple of quarters in terms of increase. So I was just wondering sort of A, what the delay was, and then B, you know, why you had trouble monetizing that increase? And then as we look at the [SEM] costs, I guess how should we think about those in terms of the return? It sounds like, you know, you've had some increased movement toward the site, but obviously, you know, the overall cost -- you know, the overall cost [INAUDIBLE] -- the overall cost seemed to be much, much greater in terms of the revenue that came and I was just wondering how we should think about that in the next couple of quarters as you sort of optimize that business. Thanks.

[INAUDIBLE]. The ad spending itself, I mean, I think going forward I would hope to see advertising return to normal -- more normal rates than it was in Q1. I mean, the delay was across a number of OEMs. It wasn't just related to one. On the SEM side, I think as you point out, the percentage revenues, you know, were at 51% versus 45 in the fourth quarter and 30% in Q1 of last year. And again, I think, you know, we pointed out in the remarks, you know, sort of the directive to spend to [INAUDIBLE] more add at the end. So were starting to look at that going forward to see if we can do that more efficiently, I would obviously take that 51% down to probably a more historical rate going forward.

And how many quarters will it take for you to get there?

I mean, I think, we'll -- you know, as we look at the effort and we work on getting more efficiency at [INAUDIBLE] Black Condor [INAUDIBLE], we're not giving estimated timelines at the moment but I think, you know, obviously the goal was to get it closer to where it was --

Christa, this is Jim.

Hi.

How are you doing? The SEM costs, basically what that is is that we were able to capitalize on the opportunities that it created in the lead generation space and we created a lot of leads that have helped with in the growth of the lead business. We did not have as much optimization placed in order to capture the concurrent opportunities in advertising. And I think that those are systems that I'm working to put in place right now.

We're looking for a number of opportunities to optimize our buying behavior and we just have to make sure that any time that we're buying SEMs we're able to capture the revenue opportunities that apply to every one of our businesses. And that's kind of the approach that we were -- when I talked out third priority being the synergies and capturing those integration opportunities, we're going to make sure that when we do something for one business that it can have an impact on the others, and we are able and prepared to capture that.

Okay, and then just finally, in terms of the longer range vision that you have, you know, can you just discuss the personnel that you have in place, whether or not you would need to consider -- you know, go out and acquire part additional personnel that have the capability sets that you have for is it, you know, about this sort of rewind and playing people that you already have internally to basically drive the new vision that you have?

Well, Christa, the answer to that is it's a mixture. The reality is that we have a great and highly talented team at Autobytel, and I've been very impressed and energized by the opportunity to work with so many talented and creative people. At the same time, the experience base that has been within this Company has begun to focus primarily on the skills of building the dealer network and the OEM network, which is absolutely critical to our business. I think that there has been less focused over the past couple of years on creating compelling consumer basing experiences and understanding how to create around the inside of consumer behavior is shifting.

So I expect that some of the focus that I will be bringing in, that I expect to bring in additional leadership and talent enhancements to our -- in marketing and in website product development as well as -- as we said, with Mike's transition on the CFO side, we certainly have an opportunity there.

Thank you.

As a reminder, please press star 1 on your telephone keypad to ask a question. Your next question comes from Peter Slater with Peninsula Capital.

Yes, I'm wondering on the lead generation side of the business, how long you've been doing the flat -- you know flat pricing, flat rate pricing, and what do you expect that trend to do over the next couple of quarters?

The Company has been doing flat pricing for many years and has always done so.

Peter, as far as the overall direction, we're taking a look at all of our pricing models and everything that we do. In some states, we have put some constraints that cause us to test to be locked into the flat pricing model. But I believe that in some ways that model has a lot of value in that we are able to basically demonstrate on an ongoing basis the value that we're delivering to those dealerships. And so I'm going to be exploring a number of models that we're going to be going out, as I said, when we go out listening to dealers I'm going to be doing quite a bit more of that. And all of it is going to be figuring out how do we deliver better long term value to dealers that as we're trying to grow our dealer base, if flat fee pricing is going to be the way that we can grow that and then use that as a launching pad for new revenue streams, we'll do that. If there's other ways to price more effectively, then we'll do that.

And where do you stand with the whole Black Condor project in terms of increasing the relevance and getting better search results?

Well, I think that there's a number of things that we're doing right now. As I said, this is an area that I come in with a base of experience. I think that there was admirable work done here and creating Black Condor. I also think that there's many opportunities to begin to improve upon that, both on the organic side in getting our product slated into [INAUDIBLE] and organically, as well as to more effectively buy the terms in the marketplace and to optimize those terms that we're able to look term by term the ROI that that generates and -- not only for the leads, but for advertising. So there's a lot of work underway and some of it's vision being driven directly by me and some is being driven from people that I have had some experience with and that I trust.

Great. Thank you.

At this time, there are no further question. Mr. Riesenbach, are there any closing remarks?

I want to thank everybody; and again, we look forward to talking more in the months ahead. Thank you.

This concludes today's Autobytel first quarter 2006 earnings conference call. You may now disconnect .