Autoweb Inc (AUTO) 2006 Q2 法說會逐字稿

Good afternoon, my name is April and I will be your conference Operator today. At this time, I would like to welcome everyone to the Autobytel second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Jennifer Klein, VP of IR for Autobytel. Please go ahead ma'am.

Thank you, April 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 but 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 June 30, 2006. These documents identify the principle factors that could cause results to differ materially from those forward-looking statements and with that, I would like to turn the call over to Autobytel's CEO, Jim Riesenbach. Jim.

Thanks, Jennifer. Hello everyone, and welcome to Autobytel's second quarter 2006 earning conference call. Six weeks ago we hosted a conference call to outline the Company's strategic vision and to provide some visibility into our expectations for 2006 and 2007. On that call, I detailed our top near term priorities and we put the pieces in place that I believe will reinvigorate the Company and move us forward toward a long term growth project trajectory.

Initial focus over this quarter has been to take a number of essential steps to stabilize the foundation of our business. Those steps include focused efforts to reduce churn and to recapture growth among the dealer base, initial cost reduction and containment efforts, as well as initiatives to deeply integrate our sales product and operational efforts across our business units. I am happy to report that over the second quarter, Autobytel has made significant progress toward stabilization and number of the strategies and tactics we initiated are beginning to pay off. We continue to stress the importance of reducing return in our dealer relationships partially by improving the quality or conversion rates of purchase requests that we provide through our network. We close the second quarter with 5,570 retail dealer relationships.

This is the first time in seven quarters that we have seen a net gain in the number of retail dealer relationships. It is also the first time in a year and a half that we have seen improvement in our cost of revenue lines as well as the first time since fourth quarter of 2004 that revenues improved from the prior quarter. While admittedly modest, these [formal] results are signs of the stabilization of the business is well underway. Mike Schmidt is going to review the financials for you before I continue with the my comments. Following Mike's report, I will discuss the quarter and the business going forward and we will 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 second quarter of 2006 totalled $29.4 million, an increase of $300,000 or 1% from the first quarter of 2006 and a decrease of $2 million or 6% from the second quarter of 2005. Our revenue mix for the second quarter of 2006 was 60% leads, 22% CRM, 15% advertising, and 3% data, applications, and other revenue. Revenue from lead feeds from the second quarter of 2006 totalled approximately $17.8 million down $200,000 from the first quarter of 2006 and a decline of $1.9 million or 10% from the second quarter of 2005.

Average revenue per purchase request for the second quarter of 2006 was $18.51 compared to $17.61 and $19.09 for the first quarter of 2006 and the second quarter of 2005 respectively. In the second quarter of 2006, we delivered approximately 800,000 purchase requests compared to approximately 900,000 purchase requests in each of of the first quarter of 2006 and the second quarter of 2005. Approximately 500,000 purchase requests were delivered to retail dealers and approximately 300,000 purchase requests were delivered to enterprise dealers in the second quarter of 2006. Additionally we delivered approximately 200,000 finance requests in the second quarter of 2006. Average revenue per finance lead in the second quarter was $14.37 compared to $13.38 and $11.81 for the first quarter of 2006 and the second quarter of 2005 respectively. Our lead refer dealer relationships represents domestic and imported makes of vehicles and light trucks sold in the United States. As of June 30, 2006 we had approximately 5,570 dealer relationships, 760 enterprise dealer relationships, major dealer groups, and 10 direct relationships encompassing 20 brands with automotive manufacturers and buying service affiliates which represented up to approximately 21,350 enterprise dealer relationships. As of June 30, 2006, approximately 660 retail dealers had more than one retail lead referral relationship with us. Our finance lead business grew from the first quarter of 2006 in terms of number of dealers, leads delivered and average revenue per finance lead. As of June 30, 2006, we had approximately 370 retail finance lead customers; an increase of 21% from one year ago.

Advertising revenue was approximately $4.3 million in the second quarter of 2006 an increase of 14% from the previous quarter and decline of 4% from the second quarter of 2005. Advertising paid views in the second quarter of 2006 were approximately 115 million compared to 119 million and 90 million for the first quarter 2006 and the second quarter of 2005 respectively. DPM per ad page used for the second quarter of 2006, was $32.32. This compares to a C P M per ad page used for $28.02 and $44.23 for the first quarter of 2006 and 2005 respectively.

Revenue from CRM services for the second quarter of 2006 was approximately $6.3 million or flat with the first quarter of 2006 and an increase of approximately $300,000 from the second quarter of 2005. Revenues and data, applications, and other for the second quarter of 2006 was approximately $1 million effectively flat with the previous quarter.

Now, on to expenses. [Tops of] revenues which includes traffic acquisition cost or TAC for the second quarter of 2006 over $14.4 million. As a percentage of revenues cost of revenues was 49%. This compares to 51% in the first quarter of 2006 and 40% in the second quarter of 2005. Cost of revenues declined from the previous quarter, partially result of search engine marketing initiatives.

Sales and Marketing expenses includes cost for developing our brand equity in personnel and other costs associated with dealer sales, CRM sales, website advertising sales, and dealer training and support. Sales and Marketing expense was $7.3 million or 25% of total revenue in the second quarter of 2006 compared to $7.5 million and $7 million for the first quarter of 2006 and the second quarter of 2005 respectively. Second quarter of 2006 product and technology's development expense was $6.2 million or 21% of total revenues. This compares to $5.6 million and $6.3 million for the first quarter of 2006 and the second quarter of 2005 respectively.

Sequentially, product and technology development expense increased by $600,000 driven primarily by increased software costs, severance costs associated with the recent realignment of our work force, and higher consulting and officiating cost. General and administrative expense was $9.5 million. This compares to $9.7 million and $8.5 million for the first quarter of 2006 and the second quarter of 2005 respectively.

Net loss for the second quarter of 2006 was $7.9 million or $0.19 per fully diluted share. As of June 30, 2006 the Company had $38.1 million in domestic cash, cash equivalents, and short term investments. Day Sales Outstanding, or DSO, was 58 days during the second quarter of 2006, an improvement of four days from 62 days in the previous quarter. With regard to cost and in the second quarter of 2006, the cost incurred included stock based compensation due to the adoption of FAS 123-R, legal costs, enforcement of our patent , and additional severance costs associated with the recent realignment of our work force as well as for a former officer of the Company.

During the second quarter, the Company incurred $1.2 million of cost associated with stock based compensation. We also spent approximately $3 million in the second quarter for legal costs enforcing our patent and roughly $800,000 for severance costs. And during the second quarter of 2006, the Company also received a $400,000 reimbursement from our insurance carrier for previously incurred legal costs. Included in the $800,000 of severance is a realignment of the Company's work force we announced in June. Which included a reduction of our workforce by approximately 10% or 46 employees. As a result, the Company recorded a $299,000 charge, consisting of severance costs during the period ended June 30, 2006. This charge was included in the sales and marketing expenses, products and technology expenses, and general and administrative expenses of $102,000, $138,000, and $59,000, respectively. The Company paid $197,000 of severance cost during the three months ended June 30, 2006. And as of June 30, 2006 the remaining accrued liability related to this realignment of $102,000. The Company expects the remaining accrued liability to be paid in the third quarter of 2006.

Now, I will turn the call back over to Jim. Jim?

Thanks, Mike. It is only been a few weeks since we last spoke, but I am very encouraged by the progress we are making. As previously said, my top three near term priorities are: first, to transition the Company toward immediate [sensor] business models, second, to provide high value internet marketing services for our dealer and manufacturer customers and third, to capture integration and growth opportunities between our businesses. Making these priorities a reality requires that we enhance our operating leadership team in key areas, while tightly managing our operating expenses to allow for investments in the strategic growth areas that we we believe will drive our long term turnaround and the road back to profitability.

The key focus of the second quarter of 2006, my first quarter as CEO, was the stabilization of the business while implementing the necessary changes to set the foundation for future growth. I am pleased to say that we made significant progress towards accomplishing these goals. During the quarter, we reduced head count, realigned our operations and hired key management talent. Operationally, we're seeing signs of forward momentum. For the first time in seven quarters we experienced growth in our retail dealer customer base. Sequentially, total revenues increased modestly. However, despite increasing the number of dealers in our network, revenue from purchase requests dipped as our focus initiatives is to improve lead quality as well as to ratchet back the number of purchase requests that we distributed to our retail dealers. As a result, we did a better job of advertising the leads that we delivered and the average revenue per purchase requests increased to $18.51 from $17.61 in the previous quarter.

Advertising revenues rebounded from the first quarter as we improved our sell through capabilities and implemented initial efforts at inventory optimization. While a number of our OEM advertisers have increased their spending with us in 2006, we're continuing to work actively to improve our performance with some of our larger advertisers. It is the migration of automotive advertising [balance] to the internet continues, these improvements validate the urgent work we are doing to reinvigorate our consumer basing offerings with the objective of growing both our lead based and our advertising revenues.

Our major constraint on advertising growth today is the availability of predictable and sustainable advertising inventory. As we reinvigorate our web offerings, I fully expect that we will see growth in ad page views and advertising revenue. Ultimately driving advertising up as a percentage of revenues. This process will take some time. So our expectation is that we will see advertising positively impacted as we move forward with our immediate [sensor] strategy for 2007.

CPM for the quarter was $32.32 on that page [use] of 115 million an improvement from the CPM in the first quarter of 2006, up $28.02. We implemented efforts in Q2 primarily in search marketing to improve efficiency in the traffic acquisition that generates our [pay deep]. These efforts led to the improvements of average CPM for the quarter.

On the previous call, I addressed the need to reduce costs associated with running our business. I am pleased that we reduced the cost of revenue on both an absolute basis and at the percentage of total revenue. In the quarter we worked aggressively to become more efficient and analytical in our [inaudible] marketing efforts and we expect continued improvement on this front. We'll continually, actively address the [cross] side of our business with the utmost of urgency and responsibility.

I would like to quickly review and reiterate the guidance that we provided on our previous conference call. For the full year 2006, we expected that revenue from leads in advertising will both decline between approximately 4% to 7% from fiscal year 2005. CRM revenues are expected to increase an estimated 10% to 12% for 2006 versus 2005. Cost of revenue is expected to be approximately between %48 and 50% as a percentage of total revenue for the year. Operating expenses, excluding cost of revenue, are expected to increase 6% to 8% from 2005, not including the previously out lined investments required to implement our strategic growth initiatives. Total expenses include approximately $5 million of stock based compensation expense due to the implementation of FAS 123-R and approximately 8 million related to defending our patent.

As I said previously, Autobytel has a legacy of leadership and innovation. I am optimistic that these initiatives that we are putting in place will, once again, establish our Company as the industry leader. Let me reiterate the four major areas of focus that will be at the core of our corporate mission. We will be very busy throughout the end of 2006. First, we have set the goal with launching powerful new internet marketing services for dealers with initial products in search marketing that will complement and enhance the purchase requests dealers received through Autobytel. We plan to leverage our extensive dealer network and relationships to become full service internet marketing specialists to our dealer base. In my continued business with dealers, I regularly hear that dealers plan to move more of their marketing budget to the internet and they need qualified and expert assistance to do so. I believe Autobytel is well positioned to provide that service as extension of our existing business.

Second, we plan to relaunch our consumer website around the end of this year. We expect that a series of innovations in our next generation site will significantly improve our research and buying experience for consumers by integrating a number of capabilities. Including: better and more focussed search, local information in advertising. enhanced pricing and statistical data, expanded editorial and video content, user generated content, and personalization. Ultimately we expect this new website will be a significant source of both [take cue] and revenue growth for the Company. Both through advertising and organic purchase requests.

Third, during this past quarter we took initial steps to realign our business units and to shift from [silos] to integrated operations. We already made good progress in the area and as further activity plans through the remainder of this year and for 2007. As of August 1st, we have, for the first time, started actively selling our web control CRM products throughout our entire retail dealer network utilizing our in market retail sales force. Over half of our retail lead customers don't currently utilize web control and over half of our current web control customers are not currently retail lead customers for Autobytel. We see extensive cross selling and growth opportunities in this area.

In the coming quarters, I expect to have even further integration efforts across our business units which should ultimately lead to greater operational efficiency as well as potential cost reduction opportunities. Our team is excited to complete the task at hand and expects the benefits on the outstanding opportunities that exist for the internet automotive [article] which is selling strong industry wide growth. I am looking forward to providing more details our plans progress. However, we do exist in a highly competitive environment and it would not benefit us to disclose detailed specifics of our future plans on today's call.

Going forward, we will continue to develop and innovate new products, services, and partnerships that are designed to bring the power of the internet to our dealer customers and a superior research and buying experience for active and prospective car buyers. I am committed to managing expenses and bringing them under control across the board.

Once again, I am focused on driving Autobytel forward on the road to profitability. We still have a lot of work to do. Each day until we complete with the mission of increasing shareholder value. With that, I will turn the call over to questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Christa Quarles with Thomas Weisel.

Hi. Couple of questions. I guess, first, have you guys thought any more about brand consolidation and, I guess just, what is your general thinking there?

Hi, Christa. Thanks for the question. Yes, we have spent time evaluating our core brand and Company name as well as other brands in our portfolio, and we are continuing through that evaluation. As we reintroduce our consumer [flight] later on in the year we are certainly going to have some key decisions to make.

Obviously the brand Autobytel has been out in the marketplace and has been aggressively marketed for a number of years. At the same time it hasn't been as focused in the marketplace in its messaging over the recent years. So we are evaluating our opportunities. We do believe that there are some key decisions that we need to make. Not really prepared to talk about length about where they are going but I do think that we need to focus our efforts as I have said before and having a portfolio of brands that are all fighting for consumer attention probably is not going to be the most productive way for us to manage the business in the long haul.

And just stay on sort of the marketing side, can you qualify how much you are spending in search marketing this year, and if not, can you just give some sense of the magnitude of growth on the year-over-year basis and then how you are measuring the ROI on that near term and I guess kind of longer term.

Okay, I'm going to ask Mike to check and see where the numbers are. So I can be sure to be fully accurate. At the same time what I will tell you is that---and I talked about this on our last quarterly call. We put a lot of focus around making sure that we are buying our search officially out in the marketplace and reducing the spend where we can't buy efficiently.

Now, buying efficiently today and tomorrow probably means something different than it has in the past, because what we have done in the past has been to---to focus on getting the traffic for leads through the---through search and we haven't really been as focused on using that for advertising revenue and hence the problems we had last quarter where we had a bunch of page views show up that we couldn't effectively monetize for advertising purposes. What we have done is we've put in a lot of efforts in the recent months to manage those processes to understand and track the efficiency of everything we do and to make sure that as we by search that we are optimizing both the lead and the advertising revenue streams so to look at the CPC's and CTA spends that we had, we spent about $3.6 million approximately in Q1 and a little bit less than that in Q2, about $3.5 million.

Okay. Then just a last question, as you look at the free cash flow, I guess, loss in the quarter, obviously you are spending a lot in legal costs this year, I guess, it is combined question in terms of when did the legal costs begin to ebb and also when you get through that, I guess, through the patent defense, I mean are you much better prepared also given the fact that you have the severance this quarter to be in a cash flow production situation?

So, couple of questions there. So the first question is is when do we anticipate the expenses ebb on the legal side? I would say at this point we are moving forward. And the patent case is scheduled to go to trial in the November time frame, and we are moving forward with that. And remain confident that we are on the right track with it. However, we are continuing on an ongoing basis to analyze where we are going with that and assert that in the long run, we will either move forward because we believe that it is the right thing to do and generates the positive momentum for where we believe the Company is to go or alternatively we will look at other paths but for right now we are on that path and we think it is the right way to go. Now, the second question, could you reiterate that?

It was just in terms of when do you think you will be free cash flow positive.

Yes. I would say that we're---our path is that in 2006 we are probably not going to be cash flow positive as evidenced by the guidance that we talked about. I would expect that we will see a path back to profitability during 2007. It is hard to say exactly when that will be.

Okay. Thanks.

[OPERATOR INSTRUCTIONS] Mr. Riesenbach, are there any closing remarks?

I just want to say thank you again for calling in today. We are very optimistic about the future. I want to thank again our investors, our employees, and our customers and I think that we have a bright future ahead of us. Thank you again.

This conclude today's Autobytel's second quarter 2006 earnings conference call. You may now disconnect.