Autoweb Inc (AUTO) 2008 Q1 法說會逐字稿

Good morning. My name is Beverly, and I will be your conference operator today. At this time I would like to welcome everyone to the Autobytel first-quarter financial results conference call. (OPERATOR INSTRUCTIONS). Thank you. Ms. Berman, you may begin your conference.

Thank you, Beverly. Good morning and welcome to Autobytel's 2008 first-quarter conference call. With us on the line today 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 you that during today's call, including the Q&A session, any projections and 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 the Company's public filings with the Securities and Exchange Commission. Please note that actual events or results may differ materially from those forward-looking statements. Specifically please refer to the Company's Form 10-K for the year ended December 31, 2007. This filing identifies the principal factors that could cause results to differ materially from those forward-looking statements.

Now I will turn the call over to Jim.

Thank you, Laurie, and thanks, everyone, for joining us so early this morning. After a few brief introductory remarks, I will turn the call over to Monty for a detailed discussion of our first-quarter financial results and then return with some comments on our progress and where we are headed.

It has only been eight weeks since our last conference call, and since that time we have remained hard at work everyday on the blocking and tackling required to achieve our operational and our financial goals. In the midst of an increasingly challenging environment for our dealer and manufacturer customers and in the period in which new cars sales have declined significantly, we remained focused on growing our Web audience through MyRide.com and our network of sites, providing high-value innovative solutions for automotive marketers and, of course, continuing our progress toward operating this Company more efficiently. We're closely watching the broader economy and its impact on the automotive market and in all likelihood will continue to face some uncertainties in light of the macroenvironment.

However, as a result of our strong balance sheet and the efficiency initiatives we have undertaken during the past year, we believe Autobytel is relatively well-positioned to weather the potential challenges brought about by industry conditions.

Further, online advertising industry trends are also in our favor. Online advertising spending in the auto category continues to grow. In fact, over the next few years, online auto advertising is expected to become the second-largest medium for auto marketers, surpassing newspapers, cable, radio, direct-mail and all other media besides broadcast television.

After Monty discusses our first-quarter financial results, I will come back to provide more details about the things we're doing to improve Autobytel's long-term position. Monty?

Thank you, Jim. First, a quick reminder that for purposes of our financial reporting, revenues and expenses associated with the RPM and AIC businesses, which we sold in 2007, and the AVV business, which we sold in January of this year, have been reported as discontinued operations. My comments today, unless otherwise noted, refer to continuing operations only.

First-quarter revenue came in at $20.7 million, down 5.7% versus last year. Lead referral revenue was up more than 5% from the first quarter of 2007, offset by an approximate 47% reduction in advertising revenue, primarily related to the traffic quality initiative we discussed with you on our March call.

Revenue for the first quarter of 2007 included $1.1 million of previously reported deferred revenue related to an OEM contract. Excluding that, total revenue was relatively flat year-over-year, and leads revenue was up more than 12%.

On a sequential basis, revenue was up 10% as lead referrals were substantially higher, offset by the decreased advertising revenue.

In the first quarter of 2008, approximately 88% of total revenue came from lead referrals and the remaining 12% from advertising compared with 79% from lead referrals and 21% from advertising in the first quarter of 2007. We delivered approximately 915,000 purchase requests in the first quarter of 2008, up considerably from 699,000 in the same period last year and up sequentially from 722,000 in the fourth quarter of 2007.

The increase from last year is mainly attributable to our new multiple lead distribution technology, which permits us to optimize the value of each consumer lead by distributing the lead to several customers simultaneously. The sequential increase resulted from growth coming off of a seasonally weak quarter for auto lead referrals.

Roughly 52% of our purchase requests this quarter were delivered to retail dealers compared with 67% one year ago, while 48% were delivered through wholesale channels in the first quarter of 2008 versus 33% last year.

We delivered 149,000 finance leads in the first quarter of 2008 versus 199,000 in last year's first quarter and 148,000 in the fourth quarter of 2007. As we discussed last quarter, the year-over-year decrease in finance leads relates primarily to disruption in the supply of leads from affiliates due to competitive auction-based models. The average revenue per finance lead was $18.05 in the first quarter of 2008 versus $15.30 in the 2007 first-quarter and $18.14 in the fourth quarter of 2007. The year-over-year increase relates primarily to the mix of retail versus wholesale finance lead delivery. As a result, revenue from finance leads was $2.7 million in Q1 2008, down from $3 million in Q1 2007.

We are currently seeing the effects of more individuals falling into the subprime classification and increasing the potential number of leads in the marketplace, offset by financial institutions seeking to limit their exposure to subprime automobile financing. These offsetting effects are expected to continue to play out through 2008. It is unclear what the overall effect will be on our business at this time.

Page views in the 2008 first quarter were 85 million, down 30% from last year's first quarter but up 6% from the fourth quarter of 2007. The year-over-year decline in page views was the result of the previously disclosed initiative to eliminate low quality traffic.

Advertising revenue per 1000 page views was $26.16 in the first quarter of 2008 compared with $36.09 in the first quarter of 2007 and $36.39 in the fourth quarter of 2007. The year-over-year and sequential decline in revenue per 1000 page views primarily relates to the reduction in CPM rates from some advertisers due to the previous poor ad performance and delays by advertisers in commencing their 2008 campaigns, resulting in a lower percentage of sell-through early in the quarter.

We are happy to report that ad performance has since improved considerably as a result of our traffic quality initiative. Click-through rates in the first quarter of 2008 on ads on our Web site, a measure of ad performance, were up more than 70% from the fourth quarter of 2007. As we continue the transition of our search engine marketing spend to a more effective platform, our goal is to grow our advertising revenue at improved margins, while maintaining the performance of the ads.

Moving to expenses, cost of revenue, which includes lead and traffic acquisition costs, equaled $13.8 million or 67% of revenue in the first quarter of 2008 compared with $11.7 million or 53% of revenue in last year's first quarter. Cost of revenue as a percent of revenue declined 2 percentage points from 69% of revenue on a sequential basis, although actual costs were a bit higher as we continued to source a larger number of third-party leads to meet consumer demand.

The 14 percentage point increase in cost of revenue as a percent of revenue from last year's first quarter included a 5 point increase due to the impact of the deferred revenue recognized last year, for which there were no corresponding costs, a 4 point increase as a result of the higher cost of acquired leads in the shift in revenue mix and a 5 point increase due to increased depreciation and amortization related to MyRide.com, which was launched later in 2007.

We spent approximately $3.1 million in the first quarter of 2008 for marketing, acquiring and attracting both traffic and search-based leads to MyRide and the Autobytel legacy sites. For the remainder of the year, we expect our spend will initially decline and then ramp up as we transition to a more effective platform. Jim will talk more about our marketing plan shortly.

Total operating expenses in the first quarter of 2008 were $13.5 million compared with $6.8 million one year ago. It is important to note, however, that last year's first quarter included a $12 million credit to expenses related to our Dealix patent litigation settlement, while the first quarter of this year included only a $2.7 million credit to expense.

For comparison purposes, excluding these credits, operating expenses would have declined approximately 14% year-over-year, driven by a decrease in sales and marketing expense and a nearly 27% reduction in general and administrative costs related to our cost management initiatives, as well as lower legal and consulting expenses. This was somewhat offset by a 9% increase in product and technology development costs, primarily related to improving and optimizing MyRide.com.

Our loss from continuing operations was $6.1 million or $0.14 per share in the first quarter of 2008 compared with income from continuing operations of $3.9 million or $0.09 per diluted share in the prior year period. Again, operating results for both periods benefited from a credit to expense related to Dealix.

Our net loss in the quarter of -- in the first quarter of 2008 was $2 million or $0.05 per share versus net income of $7.7 million or $0.17 per diluted share in the first quarter of 2007. Net income in the 2008 period included a $4.2 million gain related to our AVV sale earlier this year. Net income in the 2007 first quarter included a $3.7 million net gain related to the sale of our AIC business and the previously mentioned credit to expense related to the Dealix settlement.

Non-cash share-based compensation in the first quarter of 2008 was $900,000 versus $1.5 million last year. Total capital spending in the quarter was approximately $500,000 principally related to ongoing infrastructure projects. Capital expenditures related to MyRide were approximately $100,000, principally related to the new functionality of our vehicle hub which Jim will address a bit later.

As we discussed on our last several calls, our MyRide spending is now primarily focused on marketing the site to consumers. We ended the March quarter with approximately $43.8 million in cash, cash equivalents and short-term investments, including the $21.9 million received from the sale of AVV during the quarter. We are fortunate to be in a strong financial position at this time, and we have no immediate plans for a major outlay of capital until our business has fully stabilized.

Given the challenges of the broader economy, we believe this is the most prudent course of action. Once we have demonstrated our ability to consistently generate positive cash flow, we will reexamine our position and begin identifying additional ways to utilize our capital to enhance shareholder value.

Now I will turn the call back to Jim for an update on our recent activities. Jim?

Thanks, Monty. I would now like to discuss our progress in key areas, as well as some of our more recent initiatives. Then we will open the call to your questions.

During this strategic transition over the past two years, we faced some challenges and a few setbacks as we have worked to transform the Company and position it for long-term success. While I had hoped that our ride would have been a little less choppy, I remain highly confident in the path we have taken, and I am pleased with the considerable progress we have made to date. The opportunities for online automotive advertising remain a bright spot given the tough overall economy, and all signs point to continued spending growth in the category. This growth is expected to come from a wide variety of sources including OEMs, regional dealer associations, local dealers and related automotive categories. In fact, although total auto ad budgets are expected to grow slightly less than 9% between 2005 and 2011, the Internet is expected to rank number one in spending growth among all media, rising roughly 84% during the same timeframe.

Concurrently we are in a great position to leverage our relatively strong and stable leads business, which we believe we can incrementally improve and grow while we are moving toward a more media-focused strategy. Although growth in our Web advertising business may be a bit more difficult to attain and may take a little bit longer to achieve, we do believe that this segment of our business will eventually become the primary driver of topline and margin growth for Autobytel over the longer-term.

As we discussed last quarter, we believe that a primary growth opportunity for Autobytel revolves around increasing consumer traffic and ad impressions across our network of owned and partnered sites. We are taking a number of actions in order to accomplish this.

First, since the launch of MyRide.com late last summer, we have made and continue to make substantial improvements to the site, providing a catalyst for us to capture growth opportunities.

During the first quarter, we introduced our new vehicle hub which facilitates better and deeper navigation through the research and buying funnel for an end market car buyer. As a result, we have already seen a significant increases in user engagement in this area, which we believe will lead to better monetized page views. We have received consistently positive feedback from our key OEM and dealer clients on these improvements.

Second, the new infrastructure and website we created for MyRide puts us in a better position to capture a piece of the growing online advertising market among Tier 2 or regional associations, Tier 3 or local dealers, related category spending and behavioral targeting. Since we can now efficiently serve and track thousands of ad campaigns across multiple sites, we have the ability to provide a wider base of advertisers with a broad range of marketing opportunities across our network.

We are already making steady progress. For example, in April we moved our new local dealer [geo] targeted advertising program from the trial phase into its operational phase, and we have begun to recognize revenue from a number of dealers participating in this program.

Third, the flexibility of our new ad platform creates another opportunity to grow our advertising business through our new AutoReach Ad Network, which we just launched in the fall. Although still relatively small, the network is realizing importing growth across the board with respect to publishing partners, advertisers and traffic, the three ingredients necessary for a successful Ad Network.

Since launching the network in the fall of 2007, we now have a small handful of publishers and can cumulatively offer clients more than 100 million ad impressions a month through the network. By bringing advertisers and third-party Web publishers together, we are providing a base of millions of end market automotive consumers to automotive marketers, giving participating network publishers the ability to better monetize their traffic and allowing Autobytel to capitalize on positive trends in the online automotive market.

Fourth, we have made quite a bit of progress in the transition of our search engine marketing spend from our legacy sites to MyRide.com and from our in-house management of search marketing to a very experienced and highly skilled search marketing agency. This transition will be critical to our success in the coming months as we work toward driving increased traffic to our sites, getting more and more consumers to initiate trial on MyRide.com, and further enhancing consumer engagement.

We also expect these transitions to result in improved margins as we spend more effectively and are able to better measure the performance.

Our unique visitors in the fourth quarter of 2008 were 11.6 million, down from 23.2 million a year ago and 15.2 million in the fourth quarter of 2007. The principal reason for the decline in unique visitors was our initiative to eliminate low quality traffic sources, which we completed during Q4 2007. Page views per visit were 6.7 in the first quarter of 2008 compared with 2.9 in last year's first quarter and 3.9 in the fourth quarter of 2007. We believe that the design of MyRide.com and the elimination of our lower quality traffic is driving this increase in user engagement.

As you noticed in this morning's news release, we're beginning to provide a host of metrics that we hope will help you gauge our progress on a number of different fronts. We will continue to report on these key metrics in the coming quarters.

As we achieve positive cash flow and optimize our SCM spend, we will begin reviewing and testing other marketing alternatives to drive traffic to the sites.

Finally, we're in the process of enhancing the consumer opinion and participation components of MyRide.com, as well as our vertical search capabilities. We believe increasing numbers of consumers are looking to customer reviews and other user generated content when researching vehicle purchase, and MyRide is the perfect place to accomplish that.

Over the next few months, we plan to roll out an enhanced community platform that allows bloggers and engaged consumers to more effectively use MyRide.com as their publishing and monetization solution.

Given our goal to be the starting place for end market consumers and car lovers to gather and exchange information on all things automotive, we remain committed to providing innovative social networking and multimedia capabilities, an experience unlike any other on the automotive Internet.

Moving on to our lead business, growth in our core lead business remains very important to Autobytel, and we continue to intelligently invest in the growth of our advertising business. Despite a challenging economy, we have done an excellent job of significantly improving and streamlining our leads business starting in mid-2006 when we began a quality imperative. That decision has had a very positive impact. We believe we will see a similar impact in our advertising business as a result of the ad quality initiative we implemented in the fourth quarter of this year.

As Monty mentioned, our leads business was up 12% year-over-year, excluding the deferred revenue from last year. To date our experience has shown that both manufacturer and dealer demand for leads has remained robust, even in today's reality of considerable economic pressure.

Not surprisingly, consumer demand for the best deals in pricing is growing as well. With more than 55% of all online leads ultimately converting to a sale, OEMs and dealers are likely to continue using this marketing channel to drive increased business.

In the recent past, we have developed and launched several new and innovative technologies to capitalize on positive industry trends and to help us maximize the lead opportunity across the retail and wholesale channels. Our multiple lead distribution technology, for example, has enabled us to significantly grow lead volume over the prior year and has also helped enhance and grow our dealer and OEM relationships. These relationships represent a key leverage point for additional revenue opportunities such as Tier 2 and Tier 3 advertising.

As we have discussed, we're also now well-positioned to capture new opportunities in the huge used car market via our new pay per call offering and our consumer product via MyRide.com. In 2007 the Internet surpassed all other shopping methods for used cars for the first time, and Internet-generated used car sales are expected to grow from 3.2 million in 2005 to 5.1 million in 2010, representing 10% of all used car sales by that year.

Our used car listings on MyRide are nearly 4 million strong, and our premier listings, which occupy those top spots on our used car listings, are supplied by dealers that pay us for leads on a performance basis, paying us only for the leads they actually receive. A dedicated trackable phone number allows consumers to directly contact the dealer, which remains the preferred method for used car shoppers. We are continuing to work on growing the number of partner dealers who provide their used car inventories to our network on MyRide.

Nine months ago we set some very aggressive operational and financial goals, and we have been taking a systematic multi-pronged approach to meeting them. We remain on track to remove a total of $15 million in costs by the end of 2008, and we're diligently monitoring our costs relative to our revenue and business requirements. We're committed to driving expense ratios down to best-in-class benchmarks, and we are prepared to take additional cost-cutting actions if warranted.

We also continue to make steady improvement towards reaching our goal of cash flow breakeven before working capital and CapEx requirements by the end of the second quarter. This objective is quite measurable, and we are continuing to take major steps to achieve it. And while there are still uncertainties given the economy and over half of the quarter remaining, we expect to be very close to meeting this goal.

As to attaining GAAP profitability by the end of 2008, more than half a year is still ahead of us, and with the elusive and difficult economic environment we're living through, the future is quite challenging to predict. Nevertheless, GAAP profitability remains a primary objective.

One thing we do know for certain is that to be successful we will need to execute our transition to a more effective search engine marketing spend, keep our advertisers satisfied during the transition and manage our way through the challenging macroenvironment in both the automotive and Internet advertising markets. We're committed to taking advantage of all of the opportunities before us in providing consumers, automotive marketers and our shareholders with increasing and most importantly sustainable value.

Operator, we will take questions now.

(OPERATOR INSTRUCTIONS). Steve Denault, Northland Securities.

Monty, I missed your comments on the absolute number of finance leads in the first quarter and absolute marketing spend against MyRide.

The finance leads in the first quarter were 149,000. The marketing spend in aggregate in the first quarter was $3.1 million.

Do you feel at this point in time that the finance lead piece of the business has bottomed?

This is Jim, Steve. I think that there is continued pressure on the subprime marketplace where most of our finance leads are being placed, and so we are watching it very closely. We are not seeing any definitive trends in either direction. We do think that basically it is an area we're going to have to watch very closely, and we don't see anything dramatically changing right now. But it is an area that given the economy we have to watch very closely.

Okay. And just kind of trying to read your body language in terms of your cash flow breakeven and GAAP profitability goals and measures, I mean we all know that it is -- the environment in which you are dealing in the automotive market has been under incredible pressure, but it sounds like you are really not changing your tone or posture much from 60 days ago. Is that a correct read?

Yes, I would say that we have seen obviously increased challenges given the automotive marketplace. Auto sales have been down considerably and trending downward. April was a very rough month for new car sales, and so we are continuing to watch it. And subject to any significant changes for the worst, we continue to keep our focus on the goals that we have placed out there. And at this point, we still believe that we are going to be either there or very close to the goals that we stated for cash flow breakeven.

Okay. Has there been any significant change in new car versus used car lead mix?

We're starting to put a lot of increased focus on bringing more dealers into the mix. We have not seen -- due to some of the changes with MyRide taking down some of the lower quality traffic, we have not seen as much of the growth in traffic to the used car listings. And so that has slightly offset the increase in dealers. So we have not seen a tremendous shift yet. We do expect that that is something that we will see over the course of this year, and we believe that is a metric that we will start to be talking about later on this year.

Okay. What was the absolute number of lead partner dealerships in the quarter?

I think it was roughly 2600, but I will get you the exact number, Steve.

(OPERATOR INSTRUCTIONS). George Grose, American Capital Partners.

If I look at the page views per visit here, I mean that really jumped very substantially on a sequential basis, can you maybe go over again like some of the factors that caused that jump? Is this purely the elimination of the poor quality traffic, or is it just your content is getting more traction?

Sure. So what we have actually seen is a combination. There was absolutely a significant amount of low performing traffic. People were coming into network not driving significant number of page views or engagements or click-throughs to our advertisers, which really resulted in our decision to take down the low quality ads. But, at the same time, we have absolutely seen significant improvements in the engagement. As we're ramping up our search engine spending and other spending to drive traffic and trial into MyRide, we are finding that MyRide is achieving particularly in our new vehicle hub significant levels of engagement higher than what we have seen elsewhere across our legacy sites where the initial implementation of the vehicle hub on MyRide. We expect that that is something we're going to continue to focus on and continue to see improvement.

The things that we are now working on that I mentioned on the call, including our enhanced social networking capabilities and our enhanced vertical search capabilities that we're going to be launching over the coming quarter or so, we think that each of those will continue to drive our page views per user up.

So it is absolutely a combination, and it is one of the things that we think really demonstrates our ability as we now bring more and more users to the site and more quality traffic, the trend that makes us optimistic about our ability to really turn the ad revenue around over the remainder of this year.

So I guess with the increase in page views, they are really not as of yet seeing much contribution from the used car network?

I think that used car is going to be an area that we will start to see some growth in. We're basically in this major transition right now of our search engine marketing spend. It is underway as we speak from our in-house system to an out of house agency that is doing some excellent work for us, and we are just now in Q2 really starting to ramp up our efforts around driving traffic into the used car parts of the site via a number of marketing efforts. And so we do expect that Q2 and over the course of the remainder of the year that we will see more progress on the traffic and, of course, then the lead generation from used.

Okay. And then in terms of being able then to monetize like the page views per visit, when do you think you will start seeing the advertising revenues per 1000 page views go up there?

Well, what we have done, there are a couple of factors that contribute to this CPM decline in Q1. So one was the fact that as a result of some of the lower quality and lower click-throughs that we had been experiencing in the second half of 2007, as we entered 2008 we were in a position where we had to take down some of our CPMs to a couple of our key customers. And now that we are actually seeing significant improvements in those -- in the click-throughs and the performance metrics, we expect that over the next couple of quarters we're going to be able to see some positive movement on those CPMs.

So some of those CPMs that we are receiving from our major OEM partners are very much tied to the performance. So with the performance, we expect we will see that improvement.

The other thing that impacted Q1 was that in January there was a very late start to a lot of the creative that came in from a number of the agencies. And that typically happens, but it was actually more delayed than it has been elsewhere, and it affected pretty much everybody in the online automotive space. And that late start caused us to have lower sell-throughs, which then diluted our CPMs. So we expect to see improvement in Q2 and more significant improvement as we move further through the year.

And maybe a question for Monty here. On your cost-cutting initiatives, I think last when you reported I think you were at $10 million out of the $15 million that have been taken out, where are you now?

Well, we still expect to take out at least $15 million by the end of the year.

Okay. So I guess you cannot say where you are now?

No, we have not put an exact number on that as of the end of this quarter.

Okay. And then I guess when you mentioned on the call that you were prepared to take even more drastic action on the costs should the situation warrant that, when would you be deciding on that?

We look at that continuously and just based upon the overall results and our ability to be successful on some of our other initiatives.

Okay. And last, where is the headcount at the end of the quarter?

Headcount was around 260 something approximately. We will get you an exact number.

(OPERATOR INSTRUCTIONS). Peter Schleider, Peninsula Capital.

Good progress on the lead generation. First, is that a sustainable number as you look at it from where we are right now?

Thanks for the question. The answer is we are absolutely very, very happy and confident in what we have seen in the lead business. Despite the fact that the economy has been very soft and, of course, new car sales have been extremely soft, we continue to feel as though the efforts that we have made to improve our quality of leads have resonated with our base of both dealers and OEM partners. And given the challenging marketplace, I think that the dealers and OEMs are seeing that leads are still one of the most effective channels of marketing today, and probably they are going to continue to spend there. Before they cut those, they are going to cut almost all of their other marketing spend. And so we were confident that we're going to see continued spending in the lead category. We're confident that the lead volume is going to be relatively strong, but we are obviously watching it very closely given the economy, and I think that there is always some risk that as the pressure continues, that total marketing spend from dealers and manufacturers may be pressured. But we do not see anything that points to a lot of pressure, a lot of decline on that. Of course, a lot of what is driving the growth in lead volume has been the mix, and we're seeing a lot of growth in wholesale leads, leads that we're delivering directly to our OEM clients. And while that is a good sign in our ability to monetize the same consumer more times as being part of the growth driver, I would want to note that some of the new leads that come into the system coming in at lower margin than we might have seen through our retail channel.

So the gross margin on those leads will be less than what you have seen in years past?

I think we're going to see continued pressure on that. Of course, there are other offsets as we continue to grow -- put focus on growing our retail channel and growing our partnerships and growing the volume of leads we are bringing into our network through retail. We think that we are going to continue to be balancing it, but I would say that there will be continued pressure on margins.

Okay. On the various line items in the P&L, I wonder if you could give us some insight because there's a lot of things -- there has got to be a lot of progress from this quarter to the second quarter that you all are going to get to get closer to cash flow breakeven. I wonder if you could tell us what areas of the P&L or give us even a range of dollar numbers that they are going to go to. For example, G&A, sales and marketing and technology support.

Yes, I cannot be specific about the numbers, but I can tell you generally that costs reductions are focused on headcount, people-related costs broadly throughout the business, but probably most specifically in the G&A area. And the other key item that affects the ability to achieve that goal is the margin on advertising revenue, the transition of our search engine marketing spend to a more effective platform so that we can spend either less dollars to produce the same amount of revenue.

So actually the gross margin side of it is going to go up a little bit given that comment?

Yes, if we are successful in spending our search engine marketing dollars more effectively, that would have a positive impact on gross margins.

Alright. What was headcount at the end of Q4?

I do not recall. I think it was like something over 300.

And where do you think the optimal headcount of a company should be?

Well, that depends upon where our revenue is. We're around 260 or so now, and we expect further cost reductions. So headcount will probably continue to decline.

Do you feel like you have got your hands around the cost side of the equation now to where the goals that you're telling us, which now you're actually reaffirming to some degree from the last quarter to this quarter of being cash flow breakeven by the end of the quarter, not for the quarter, but by the end of the quarter. You have got your hands around the cost side of that equation to be able to reaffirm that?

Well, we've have implemented a number of cost reduction initiatives, and I think we are being successful across a broad front on reducing our costs and will be successful in eliminating at least the $15 million in costs that we had identified a year or so ago.

We may need to take additional costs out. That would depend upon the trends in the rest of the business. But I think we will be able to identify additional costs if that is necessary.

Alright. And Jim, the one blemish obviously on the P&L today or the results today is the advertising side of the equation. And that is an area obviously you have got a lot of experience in and one that you can kind of get focused. Also, you all have said it is going to be the growth area in years to the future. Can you give us an idea of how successful or maybe on the other side of that how unsuccessful we have been in searches and optimization and also just getting traffic to us to be able to monetize our site better?

Yes. Well, first of all, I would absolutely agree with you that we believe that advertising will be a key growth driver in both margin and topline revenue over time for the business. And that a lot of what we're doing and the hard choices we made around taking out low quality performance was a long-term decision that we felt was absolutely critical to be able to improve and build our relationships with the key advertisers that are going to drive -- help drive that growth for us.

So it was an eyes wide-open decision that was hard, and we're very, very strongly convinced that that will pay off in the long run as our lead quality initiative has been doing on the lead side.

Where we have been going with search engine marketing, we realized that basically we really needed to be with a firm that was at the state-of-the-art with search engine marketing technology and bidding and optimization, and that some of the in-house efforts that had been going on for a number of years at Autobytel, while a good effort were really starting to lose some of their traction, and that is why we made the decision to shift gears.

We're in the middle of that transition right now. So some of what we have experienced in Q1 was really a kind of pullback as we moved this spending over to this firm, and the firm is now ramping up the spending as we speak.

So we expect to see improvement, and as Monty said, I think that we are assuming that we're able to achieve the goals that we have set out there. We expect to see improved margin as a result of the efforts from the transition of search marketing, but it does take time. It is not something that happens overnight, but we expect that this quarter and into Q3 and Q4 we will see improvement there.

We're continuing to make a major effort around search engine optimization as we have now enhanced our buying funnel where we received the highest value page views, and as we're seeing that improved consumer engagement in the buying funnel, we think that search engine optimization or getting ourselves placed in the key search engine on the buying funnel and MyRide will be absolutely critical. And, of course, that is something that from the time that you launch a new product like that, it starts but then it can be three to six months to really ramp up and get placement.

So we're working on that. We're seeing some progress, and we will continue to make that a big focus.

E-mail marketing has continued to be an important element of our mix, and we have roughly 10 million consumers in our database who have opted into newsletters and other e-mail marketing through Autobytel. And that e-mail marketing channel has been an effective way to drive consumers into the site, initiate trial on MyRide and initiate repeat visits. So we're continuing to use that.

We have found that some of the banner activities that we have done, we did a number of campaigns on a number of the big Ad Networks and a number of the sites out there. We found that to be less effective, and so we basically pulled back that spend. We're retooling it, and we believe there are some opportunities to do that a little bit different in a little bit more focused way. And we actually are looking at some ways to use our relationships with some of our Ad Network partners to help drive some traffic as well, and we think that that is something that will be beneficial to us this quarter and beyond.

So we are continuing our focus on all of those fronts as we continue to improve the site. And, of course, as we ramp up our community products and our social networking products, we think that is going to help drive improved word-of-mouth and the lowest cost traffic that we can possibly generate to the site, which is consumers talking about the site, telling others about the site, and bringing their friends into the site. And we still believe that that is an important element of the mix that has not been particularly effective as of yet.

Alright. Do you think you have seen the low in ad revenue?

We believe that Q1 is probably a low point. We think that we will see some improvement in Q2 and more significant improvement in Q3. Q4 tends to be a seasonally rough quarter.

So we're watching it very closely. We do recognize, as I said, that the overall economy is having an impact, and the first thing it is going to impact among -- that impacts us will be ad dollars before it impacts the lead dollars. I think that the lead dollars are the most direct opportunity for the dealers and manufacturers to generate consumers who were going to turn into sales, and advertising, while important to them, is an area that they made cut back, and we have seen in general some pressure there. So we are watching it very closely, but we do expect that Q1 will most likely be a low point.

And let me just add, if I could, just some clarity on the headcount numbers that you had asked about previously. As of year-end, we reported that we had 269 employees at the end of February. So that was post the sale of AVV. And in the 10-Q that we will file later today, we will report that as of the end of April we have 247 employees.

Okay. Well, it is refreshing to finally see some progress in the areas that we really want to be long-term -- our long-term business plans. So good work. Thank you, guys.

(OPERATOR INSTRUCTIONS). Steven Becker, Greenway Capital.

Can you just back out or give us a sense of what non-cash costs would be in the quarter so we can kind of get to a true operating income number or operating loss number?

Yes. Share-based compensation was $900,000 in the quarter, and depreciation and amortization was roughly $1.2 million in the quarter.

Okay. So if I'm doing the math correctly, we're closer to a $2 million operating loss?

I'm not sure I followed the question there, Steve.

Well, walk me through the actual operating loss less the non-cash.

Well, the loss from continuing operations, the operating income loss was $6.6 million. And then if you wanted to add back non-cash, that would be about $2 million, $1.2 million in depreciation and amortization, and $900,000 in share-based compensation. But, of course, that operating loss also included income of $2.6 million on the patent litigation settlement.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS). There are no further questions at this time.

Okay. I want to thank everyone for participating today, and we look forward to updating you at the end of the second quarter. Thank you again for your continuing support.

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