Autoweb Inc (AUTO) 2007 Q2 法說會逐字稿

Good morning. My name is Lynn and I will be your conference operator today. At this time, I would like to welcome everyone to Autobytel's second-quarter 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. (OPERATOR INSTRUCTIONS).

Thank you. Mr. Roger Pondel, you may begin your conference.

Thanks, operator, and good morning, everyone, especially to those of you on the West Coast. Welcome to Autobytel's second-quarter conference call. I'm Roger Pondel, Autobytel's Investor Relations representative. With us today from New York are Jim Riesenbach, Autobytel's President and Chief Executive Officer, and Monty Houdeshell, the Company's Chief Financial Officer.

Before we begin, I would like to remind everyone that, during today's call, including the Q&A session, any projections or other forward-looking statements made regarding future events and the future financial performance of the Company are covered by the Safe Harbor statement contained in today's press release and in public filings with the SEC. I caution you that actual events or results may differ materially from those forward looking statements. Specifically, we refer you to the Company's Form 10-K for the year ended December 31, 2006, which identifies the principal factors that could cause results to differ materially from those forward-looking statements.

With that, I will turn the call over to Jim.

Thank you, Roger. Thanks, everyone for being here today, especially those of you on the West Coast who are up very early to join us.

Today, I will make a few brief comments before turning the call over to Monty for a detailed review of our Q2 financials. When Monty is through, I will come back to discuss the progress we're making, and then we will close the call with your questions.

Our second quarter came in very much as anticipated from a financial perspective and our new brand and Web site, MyRide.com, is now up and running in beta with significant work currently underway to prepare and refine the site for our planned broad market launch and rollout in September.

Again this quarter, ad revenue increased and expenses decreased. We've also continued to grow and stabilize our dealer base, and we've unlocked additional value from our noncore assets through the recent sale of our RPM business.

Despite these areas of progress, the entire Autobytel team fully realizes that additional and sustained progress and execution is required in order to reach our objectives of long-term growth and profitability. We're definitely making progress toward our goal of becoming the leading online automotive experience and destination for consumers and the premier online marketing partner for dealers and manufacturers. We are extremely excited about our prospects.

Through MyRide and related efforts, will execute our media-centric strategy to best leverage the many significant opportunities in the online automotive marketplace. We will do so with an expanding focus on stringent cost management and prudent financial decision-making to enhance shareholder value.

Now, I will let Monty provide some details about our second-quarter financial results. Then I will come back to update you on MyRide and discuss some of the exciting things underway at Autobytel. As always, we will wrap up with your questions.

Monty?

Thanks, Jim. As Jim mentioned, we are pleased to have completed the sale of our RPM or Retention Performance Marketing business. As we have discussed, RPM was not a core Autobytel operation, given the Company's strategic goals and focus.

For purposes of our financial reporting, RPM revenues and expenses have been excluded from our operating revenues and expenses for all periods reported and the $100,000 loss attributable to RPM has been reported in discontinued operations along with a $3 million gain on the sale of that business. Discontinued operations in the second quarter also include $500,000 received in June as the final payment for our AIC division, which was sold in January of this year. As a result, our net loss for the quarter benefited from the inclusion of these items.

Now, let's move onto our second-quarter operating results. Revenue for the three months ended June 30, 2007 was $24.3 million versus $25.1 million in the prior-year period and $24.7 million in the preceding first quarter.

In terms of mix, 69% was from leads for the quarter, versus 71% a year ago. I will to more about that in a moment. 20% was from advertising, up from 78% last year, and CRM and other was 11% for both periods.

Total ad revenue was up 15% year-over-year, primarily the result of an increase in revenue per thousand page reviews. Revenue per thousand page views was $40.02 in the second quarter of 2007, versus $30.52 in the second quarter of last year and $40.40 in the prior sequential quarter. The year-over-year increase was due to better management of ad inventory, taking advantage of high demand from automotive advertisers. As a result, revenue attributed to the site advertising on all Autobytel brands was actually up a healthy 28% year-over-year. This is somewhat offset by a decline in our direct marketing advertising.

With regard to lead revenue, we encountered some softness in this market as the overall industry lead supply has been under some pressure relative to dealer and OEM demand. We also faced a tough sequential comparison since we recognized $1.1 million of previously deferred lead revenue in the first quarter of this year. As Jim will discuss later, we think there's significant long-term value in this market for Autobytel, as MyRide.com moves from beta to full launch in September and we begin to expand our focus on the used segment of the market. In the near-term, however, we don't anticipate meaningful improvement in lead revenue as we move into the traditionally slow fall months.

Average revenue per purchase request was $17.70 in the second quarter of 2007, compared with $18.51 in the year-ago period and $20.30 in the first quarter of this year. The decline is primarily the result of a change in the mix of purchase requests delivered with a higher proportion of requests sold wholesale to OEMs, which generally carry a lower average price. The sequential decline also relates to the recognition in the first quarter of the $1.1 million of previously deferred revenue, which had the effect of increasing our average revenue for purchase requests last quarter by about $1.60.

During the quarter, we delivered approximately 771,000 purchase requests, compared with 799,000 in the prior-year second quarter and 699,000 in the first quarter of this year. The year-over-year comparison was impacted by the market softening I just discussed, while the sequential comparison reflects the increase in wholesale purchase requests.

In the second quarter of 2007, approximately 60% of our purchase requests were delivered to retail dealers, compared with 63% one year ago. The remaining 40% were delivered to enterprise dealers and OEMs, compared with 37% to enterprise dealers and OEMs in the second quarter of last year and 35% in the first quarter of 2007.

We delivered 195,000 finance leads in the second quarter of this year, versus 207,000 in the year-ago period and 199,000 in the first quarter of 2007, reflecting a bit of softness in consumer lead volume in this market. Average revenue per finance lead in the second quarter of 2007 continued to grow, coming in at $15.55 in the second quarter of 2007 versus $14.37 in the second quarter of 2006 and $15.30 in the first quarter of 2007.

At the end of the 2007 second quarter, we had approximately 2,670 new car lead referral dealerships, up from approximately 2,520 in the same quarter last year and up from 2,640 in the prior sequential quarter. The Company's used car lead referral dealerships totaled approximately 610 at June 30, 2007, up from 1,570 at June 30, 2006 and down slightly from 1,640 at the end of the first quarter of this year.

Just a quick word on these metrics -- we believe it is becoming less meaningful and useful to report our number of dealer relationships. While we will continue to focus on expanding our relationships with the dealer community, the consolidation that is occurring in the industry makes it increasingly complex to consistently distinguish and count dealer relationships versus franchises, versus brands, versus physical locations. As a result, in the future, we plan to focus on the number of purchase requests delivered and to deemphasize dealer count as a key metric.

Moving now to our expenses, costs of revenue, which includes traffic acquisition costs, totaled $12.7 million or 52% of total revenue in the 2007 second quarter, compared with $12.3 million or 49% of 2006 second-quarter revenue, and $11.6 million or 47% of revenue in the 2007 first quarter. Cost of revenue was higher in the current quarter as we tapped into a greater number of third-party leads to meet dealer demand. Additionally, the cost of acquiring the best-quality third-party leads continues to escalate, creating added pressure on margins. We expect that, once MyRide is fully launched and growing, that it will mitigate this impact, as we will be able to generate more organic leads to meet the increasing demands of automakers and dealers.

I'm very pleased to see continued overall OpEx improvements. As Jim mentioned, we are committed to managing our cost structure in line with revenue generation and at appropriate levels vis-a-vis our development, launch and marketing of MyRide. Operating expenses for the 2000 second quarter declined almost 16% year-over-year to $17.4 million from $20.6 million and declined almost 9% from $19.1 million in the first quarter of 2007, excluding the $9.9 million patent settlement gain and accrual of $1 million for a tentative legal settlement recorded during that quarter.

Operating costs were down from the year-ago second quarter largely as a result of lower legal expenses as well as reductions in other professional fees and certain corporate costs and lower amortization and depreciation expense.

This all brings us to a loss from continuing operations of $5.2 million or $0.12 per fully diluted share for the 2007 second quarter, a significant improvement over a loss of $7.4 million or $0.17 per share in the year-ago quarter. In the first quarter of this year, we posted income of $3.2 million or $0.07 per share, which included the items already discussed.

Our net loss in the second quarter of 2007, including income from discontinued operations, was $1.7 million or $0.04 per fully diluted share, versus a net loss of $7.9 million or $0.19 per share in the prior-year quarter. Non-cash, share-based compensation expense in the second quarter of 2007 was $1 million, compared with $1.2 million in the second quarter of 2006. The reduction was related to options canceled and options that became fully vested.

Capital expenditures related to MyRide were approximately $1.8 million in the second quarter of 2007. We spent $4.3 million in the first quarter of this year related to the new site, bringing us to $6.1 million year-to-date and keeping us in line with our original estimate of $5 million to $7 million for the year.

We also said that launch and marketing costs related to MyRide would total another $5 million to $7 million. Our spending in this area has been pushed back by couple of months as we continue to refine the MyRide site and user experience. We know expect to spend toward or below the lower end of that range in 2007, primarily near the end of the third quarter and into the last quarter of this year.

Turning to our balance sheet, as of June 30, 2007, our domestic and restricted international cash and cash equivalents from short-term investments totaled $28.3 million versus $28.1 million at the end of March of this year and $26.1 million at December 31, 2006. During the quarter, we received a total of $7.7 million in cash from the sales of our RPM and AIC businesses.

As with our operating expense management, we remain extremely disciplined in our balance sheet and cash-management activity. We believe we have sufficient funds and access to capital markets to fully implement our growth strategies and reach our previously stated goal of profitability by the end of 2008.

Now, I'd like to turn the call back to Jim for an update on the operational progress we've made against our strategic initiatives. Jim?

Thank you, Monty. During the past quarter, our most significant event has been the introduction of the beta edition of our new consumer Web site, MyRide.com, which brings together focused automotive smart search capabilities with a great auto research and buying experience, and rounded out with innovative social networking and multi-media capabilities -- in short, a completely new and different way for consumers to experience the automotive Internet.

We created MyRide to bring consumers increased and easy access to the expanding range of online automotive content and information related to the entire automotive purchase and ownership lifecycle. For example, we partnered with Amazon.com to give users access to an extensive automotive parts and accessories search while creating new revenue opportunities for Autobytel in a lucrative and growing field. MyRide also offers consumers what we believe to be the Internet's most extensive used car listings, an important component of MyRide as we seek to significantly increase Autobytel's impact in the used car market, which currently represents only about 10% of our lead business. This opportunity provides us with tremendous longer-term upside, given the current trend toward increasing consumer use of Internet for used car shopping. More than 40 million used vehicles are sold in the United States each year, dwarfing the 16.5 million new cars sold annually.

Now, let me fill you in on the site rollout. Having launched dozens of Web sites and Internet products over the years, I've come to know that every major Web site introduction has its technical issues, and the MyRide beta rollout has been no exception. We faced some technical hurdles along the way as were introduced an entirely new Web platform, one that's been created so we can continuously improve and expand the user experience as well as optimize the revenue opportunities. The beta phase has been opportunity for extensive refinement and improvement from both the performance and usability standpoint. I remain very confident that, when we fully launch and begin to market MyRide starting in September, that the site will be in great shape to attract and build a growing audience.

While I would have preferred MyRide to be in its full market rollout sooner, our financial model did not anticipate a significant impact from MyRide in 2007. We remain on track for our end of 2008 profitability target and our longer three to five-year financial objectives. In the shorter term, however, we did not expect to see revenue growth in the third quarter in either advertising or leads. We typically experience a moderate seasonal downturn in the leads business. In addition, we will begin to anniversary our improvements in optimizing ad revenue a year ago and it will probably be too early to see meaningful positive impact from MyRide.

Over the next several months, post-launch, we will begin to ramp up our marketing initiatives and spend to attract a wider range of users to this site. We plan to execute a highly focused consumer marketing and advertising strategy developed in conjunction with Young & Rubicam, one of the world's leading advertising and marketing agencies, and KSL Media, the leader in strategic media buying. Together, we've created a comprehensive, multifaceted plan that will primarily utilize the power of the Internet to promote the MyRide.com site and brand, generating excitement, buzz and ultimately site usage among automotive consumers.

We plan to advertise on many of the Web's top sites, engage in proactive e-mail campaigns and utilize search engine marketing and optimization techniques while also levering our extensive internal customer database and our millions of legacy brand customers. All of our campaigns will focus extensive ROI tracking tools to measure the effectiveness of each marketing activity and we will focus our spending on the activities with the highest return. We will only continue to spend where we know we're getting the appropriate return or reaching our ROI thresholds. This is the great power of marketing on the Web -- high visibility and control, which is why we're focusing almost all of our media spend on Web-based advertising and marketing.

While the rollout MyRide, we will remain squarely focused on cost management and getting the best possible return for every dollar of marketing investment.

On the last quarter's conference call, I devoted a good deal of time outlining the value proposition of MyRide.com to consumers. Today, I'm going to focus a bit on the other side of the equation, the significant value Autobytel brings to automotive dealers. Our ability to roll out products and services and generate new and sustainable revenue streams is dependent on maintaining a large and strong dealer network. Much of our efforts there are geared toward building and strengthening new and existing dealer relationships by anticipating their needs and developing methods to help them achieve increased marketing success. For the fourth consecutive quarter, we've seen growth in our dealer base versus losses in the previous seven consecutive quarters. I believe this is because we've worked very hard to enhance the quality of leads we send to our dealers and to provide them with the wide range of tools and services they need to be effective online marketers.

A recent study conducted by Yahoo! Search Marketing concluded that, before buying a car, 88% of consumers do research before stepping foot in a showroom, and 83% of consumers use the Internet to research cars prior to purchasing. With these types of statistics, it's important for dealers to partner with a company that can provide them with a variety of effective and efficient methods to reach these consumers. We believe Autobytel is that company.

Over the last 18 months, we've been working hard to bring new products and services to auto dealers to help them generate or sales and better close rates and to build their local market branded awareness. First, through MyRide, we are presenting automotive marketers with new national and local online advertising opportunities, which is especially important given the current significant demand for high-quality, focused ad inventory across the industry. Once again, during the quarter, ad revenue grew on both the year-to-year and sequential basis, as we've made continual improvements in inventory optimization and pricing. As Monty discussed, our RPMs or revenue per thousand page views have increased year-over-year as a result.

We recently brought David Armitage on board as our Vice President of Advertising. We believe this extensive industry network and automotive marketing experience will help us expand our innovative advertising programs and build a solid foundation for long-term growth in this area. David spent several years at Edmonds.com and [Rever.com], and we look forward to his growing contribution as we execute our mission of further enhancing the value and diversity of our advertising services.

Second, we're working to improve the number and quality of leads delivered to dealers. We expect MyRide to deliver meaningful upside through our new and advanced multiple lead-generation technology, which allows us to tie into multiple dealer networks to connect consumers with more than one dealer at the same time. Additionally, we plan to take advantage of our new MyRide functionality, as well as favorable trends in the used car market that increase our volume of used car leads. Given seasonal trends, however, it is unlikely we will see significant change in the new car leads business in the coming two quarters.

Third, we're developing unique tools to help auto dealers be more responsive to their customers while improving their ROI by improving their closing conversion rates. Our range of new products, like Rapid Response, E-mail Manager, local advertising, pay-per-call leads, and preferred positioning in our used car area, should allow Autobytel and MyRide to provide a strong and sustained value proposition to our dealers.

Just last week, I participated in the meeting with our dealer advisory board, including about a dozen dealers ranging from the largest national dealer groups to large and small individual dealers. We received outstanding and useful feedback, and we plan to incorporate many of the advisory board's ideas into our product features and packaging. This is reflective of the Autobytel approach, which is somewhat unique in the market today -- a relentless focus on improving the value of our products and services to our clients, the auto dealers and manufacturers, based on their real and continuous input and feedback.

Finally, in addition to our focus on growing the business and creating value for our customers, we will continue our efforts to improve efficiency, reduce cost, simplify the business, and streamline our internal processes. The creation of a scalable infrastructure to support our growth is essential to achieving our profitability goals.

So, in summary, we've made significant progress over the last three months and believe that we're heading in the right direction with a strategy that brings together the best of consumer, dealer and manufacturer offerings in today's automotive Internet market. We are enhancing our media-oriented focus that will take advantage of strong industry trends, yet we're doing so with a continuous eye on cost management. We're building the Company and MyRide for long-term success, for sustained growth and for profitability, and we're very confident that we will succeed.

That concludes my comments. Operator, I'd now like to open the call to questions. Operator?

(OPERATOR INSTRUCTIONS). Christa Quarles.

A couple of questions -- I wanted to focus in on the advertising business, the growth of 15% in the quarter. First of all, I was wondering if you could give us what the page views were in the quarter. But more importantly, I'm assuming there was no spending related to MyRide in the quarter. I was just wondering. Based on sort of the hard launch in Q3, whether you expect some inaugural spending there and expect to trend up on the advertising side.

Then along on the advertising side, it looks like your sales and marketing costs were a bit lower. I think, Monty, you indicated that you would be spending at the low end of the 5 to 7 incremental. But I was just wondering if we should use the 5.7 baseline in Q2 to think about that.

Then just another question for Monty -- are you going to be putting a schedule out with the restated numbers? Thanks.

Thank you, Christa, for the questions. This is Jim here. So, the first thing, as far as the spending on MyRide, no, we did not really put any spend against MyRide. Our plan has been to get it up in beta, refine the site, refine elements of the user experience based on real-world input and improve the performance of this site prior to putting marketing dollars out there.

We are now preparing, in the next few weeks, to start to ramp up pilot marketing spend just up to kind of refined elements of the buy and find out what's actually performing best for us. As I said on the earlier part of the call, we are focused on where are we going to maximize our ROI against that marketing spend, but we did not put dollars against MyRide specifically. We do continue to have overall search engine marketing spend, and that's a piece of our overall costs. At the same time, that spend is divided between spend up towards lead generation versus spend that generates page views.

Monty, do you want to address the specific questions?

Yes. With respect to page views, in the second quarter of '07, they were approximately 118 million.

Then the schedules?

We haven't published a schedule yet but we would consider doing so.

Just to follow up on the advertising side, Jim, the one other thing I wanted to ask was just if you had any advertising dollars generated on MyRide. I assume not. So, the 15% was all via the Autobytel sites and so here, you would expect that to accelerate in Q3?

Well, the answer to that is we did have some revenue although it was very, very small from MyRide, because MyRide was really not promoted actively in the marketplace. It was something where there were page views and as those page views are generated, we did monetize them on MyRide. The majority have existed against (inaudible) Autobytel. Some of that has been a result of our continued optimization efforts, as we mentioned. Our RPMs have improved and we do continue our focus on having a blend of CPM and CPC-based advertising on the sites.

As far as our direction, we do not expect that, in the next quarter, we're going to see a significant increase in advertising. As we get into Q4 and we start to ramp-up the marketing on MyRide, we expect to see some improvement but we are not providing any specific guidance at this point.

Okay, thanks.

Mark May, Needham & Co.

Thanks for taking my question. This is probably for Jim. Given your experience in the online media space, if you look out a couple of years or so, giving you time for some of the strategic initiatives to take hold and then the initiatives I'm sure that back that in terms of monetization, what do you think is a reasonable goal in terms of RPM, based on others in the space and the specific dynamics, both within the industry today and at Autobytel?

Well, Mark, thank you for the question. I guess the way I look at this is that it is a very difficult question to answer because what we're doing with MyRide is we are expanding into a broad range of areas where we are actually viewing MyRide as a site that's oriented towards the entire automotive purchase and ownership lifecycle. As a result, we're going to be expanding into areas that are going to diversify and enhance our overall revenue stream, but as you build out in the social networking space, as you build out in areas like parts and accessories, the areas that are about enhancing your vehicle, areas that include enthusiasm as well as service and maintenance, we expect that we're going to find that there are some areas that are very high RPM and some areas that are lower RPM, but still higher because of the endemic nature of the category. We think they're going to be higher than general, general pages on more general sites.

But as we see the blended average, I think that we may find that the RPMs in total don't grow significantly because we're going to find that some areas are going to grow significantly, some areas are going to offset that. It's very hard to predict because we are expecting that we're going to see growth in all of these areas as we are launching something that's completely new and different in the marketplace. It's hard to know exactly what the mix of page views in the various areas are going to be.

The other thing is, as we put search engine marketing and other marketing out in the field, we may find that we get a very strong ROI in some of the areas that actually generate a lower RPM, and so we may put more dollars against that to initiate trial and bring people into the network, which over time we think is going to create a strong lifetime value. But that's kind of the way we look at it -- that we're looking to grow overall revenue and the specific RPMs are still going to be seen as time goes on.

Okay, that's some good color. Thanks.

(OPERATOR INSTRUCTIONS). [Jeff Markley], Helios.

I just had a quick question on the cash balance at the end of the quarter. I believe it was at $28.3 million. Does this include all of the proceeds from the AIC and RPM sales? I mean, what else do we have coming forward as far as cash payments? I know there's somebody from the Dealix settlement. Maybe you can refresh us how much that is and when you will receive that?

Approximately, let's see, approximately a little over $2.5 million is due on the Dealix settlement next March, in the first quarter of next year. There is about $0.5 million due from escrow of contingent payment on the sale of RPM and a small amount contingent with respect to adjustments to working capital.

Okay, great. You guys did a nice job in cutting costs, particularly G&A this last quarter. Can you talk about the leverageability of your business model going forward, as revenues begin to ramp up? What should we expect on the cost side?

We would not expect our overhead costs to increase. As we've mentioned, we will see some incremental spending at least around the launch related to marketing to bring traffic to the site. Continued spending in that area would just depend upon the ROI that we're getting on it. But it's fundamental to our strategy, going forward, that we create a scalable infrastructure, which means reducing costs, overhead costs, in proportion to revenue over the next couple of years.

Great. That's all I had. Good luck with the launch.

At this time, there are no further questions.

Okay, well, thank you all again for joining us this morning and for your continued support. We believe we're on the right track and we're moving in the right direction, and we look forward to giving you up-to-date on our progress. Thank you again.

This concludes today's conference. You may now disconnect.