Autoweb Inc (AUTO) 2008 Q2 法說會逐字稿

Good morning. My name is Phyllis and I will be your conference operator today. At this time, I would like to welcome everyone to the Autobytel Second Quarter 2008 Financial Results Conference Call. (OPERATOR INSTRUCTIONS.)

I would now like to turn the call over to Mr. Lawrence Brogan, Vice President of Financial Planning and Analysis. Sir, you may begin your conference.

Thank you. Good morning and welcome to Autobytel's 2008 Second 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'd 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.

Today's press release, which includes certain disclosures regarding non-GAAP information, which will be discussed in this conference call, may be found on our corporate website located at www.autobytel.com. Click on Investor Relations and then click on Earnings Releases.

Now I'd like to turn the call over to Jim.

Thank you, Larry. And thanks to everyone joining us today, either on the phone or the webcast.

After some introductory comments, I'll turn the call over to Monty for a detailed discussion of our second quarter financial results, and then I will return to talk about the current state of our business.

Against a difficult overall environment, we made considerable progress this quarter with respect to removing costs from our P&L, while creating a more streamlined and efficient infrastructure. The steps we have taken should enable us to capture future growth and better position us for achieving profitability.

Nine months ago, we told you we planned to remove $15 million in annual operating costs by the end of 2008, primarily by increasing automation, improving business processes and updating obsolete systems. I'm happy to report that these actions were completed ahead of schedule and we're beginning to see the benefits this quarter. Operating expenses in the second quarter declined by more than $3.7 million year over year. We expect to see additional benefits accrued from these actions in the quarters to come.

In addition, we've now begun implementing the next phase of cost reductions with an eye on making our organization even more efficient and sustainable, while mitigating the risk to our ability to grow the top line. I'll talk later about the specifics surrounding this initiative.

In what has shaped up to be a much tougher external environment than we had anticipated, we made significant progress toward reaching cash flow goals, reducing our negative cash flow before working capital and capital expenditures by more than 50% from the first quarter of 2008. We're closely watching the economy and its impact on the automotive and online advertising markets, and in all likelihood, we will continue to face some of the same challenges and uncertainties being reported by others in both the automotive and advertising spaces.

Despite these market challenges, our core auto leads business held up reasonably well through the second quarter, which we believe is a testament to the value of our products to auto dealers and manufacturers. There is still much work to do, but the entire Autobytel team is highly-focused on the goal of achieving break-even cash flow before working capital and capital expenditures by the end of this year, which we believe will give us additional flexibility with respect to our capital structure and the many revenue opportunities before us.

Now I'd like to turn things over to 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.

As you saw on this morning's press release, the second quarter financial results also reflect a charge for goodwill impairment. In accordance with Statement of Financial Accounting Standards #142, goodwill and other intangible assets with indefinite lives are not subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired.

During the second quarter of 2008 and continuing into July, our stock price declined. This resulted in the Company's market capitalization periodically falling below its book value. As a result, based on the requirements of SFAS142, Autobytel's goodwill was tested for impairment as of June 30, 2008, and a goodwill impairment charge of $52.1 million was recorded in the second quarter. This is, of course, a non-recurring, non-cash expense and is reflected on a separate line item under operating expenses on the income statement.

Now on to the operating results.

Our leads business continued to perform well in a difficult market environment. Lead referral revenue was up 3% over the second quarter of 2007, with a 5.4% increase in auto leads offset by an 8.1% decrease in finance leads.

Advertising revenue came in below our expectations, as we continued to work our way through a strategic reduction in traffic that we initiated in the fourth quarter of last year. When we last spoke with you, we believed that advertising revenue would begin a steady ramp in the second quarter. However, our search engine marketing transition to a new technology platform, which is aimed at generating increased profitable traffic to our site, has not produced results as quickly as we would have liked. We are seeing increasing efficiency, but we have not yet achieved a sufficient ROI to allow us to ramp up spend as much as we would like.

On the other hand, our SCM costs are dramatically lower than the first quarter, resulting in a net positive incremental contribution to gross profit as a result of the transition. Jim will discuss this in more detail later in the call.

Total revenue for the 2008 second quarter was $19 million, or a 12.3% decrease from the same period last year. On a sequential basis, revenue was down 8.3% as the result of a decline in both lead referrals and advertising revenue.

In the second quarter of 2008, approximately 90% of total revenue came from lead referrals and 9% from advertising, versus 77 % from lead referrals and 23% from advertising in the corresponding quarter of 2007.

We delivered approximately 865,000 purchase requests in the second quarter of 2008, up 12% from 771,000 in the same period last year, but down from 915,000 in the first quarter of 2008.

The year-over-year increase in purchase requests is the results of a slight increase in used retail leads and a more than 50% increase in wholesale leads attribute to new OEM lead relationships and our new multiple lead distribution technology.

The reduction in purchase requests from the first quarter of this year is related mostly to the weaker market for [auto].

Roughly 54% of our purchase requests this quarter were delivered to retail dealers, compared with 62% one year ago, while 46% were delivered through wholesale channels in the second quarter of 2008 versus 38% last year.

We delivered 157,000 finance leads in the second quarter of 2008 versus 195,000 in last year's second quarter and 149,000 in the preceding 2008 first quarter. On a year-over-year basis, the Company was impacted by the continuous disruption in the supply of leads from affiliates due to competitive auction-based model. The sequential increase in finance leads delivered is mainly attributable to the additional of a large affiliate supplier and to more individuals falling into the sub-prime classification, which has increased the number of potential leads available to us.

As we mentioned last quarter, this is being offset by financial institutions reducing the amount of financing available in an attempt to limit their sub-prime exposure.

The average revenue per finance lead was $17.80 in the second quarter of 2008, compared with $15.55 in the 2007 second quarter and $18.00 in the first quarter of this year. We continue to be impacted by a higher percentage of wholesale leads.

Moving now to some of the metrics we follow internally.

Ad page views in the 2008 second quarter were nearly 55 million, down from approximately 122 million in last year's second quarter and 85 million in the first quarter of 2008. The year-over-year decline in page views resulted from our traffic quality initiative and our still-developing transition to a new outsourced search engine marketing for SCM model. The sequential decline primarily resulted from the SCM transition.

Advertising revenue per 1000 page views was $29.00 in the second quarter of 2008, compared with $39.00 in last year's second quarter and $23.00 in the first quarter of 2008. The year-over-year decline in revenue per 1000 page views relates mainly to the reduction in CPM rates from some advertisers due to last year's weak quality performance. The sequential increase in RPMs reflects the mix of traffic on the website.

You'll recall that ad performance picked up in the first quarter of this year as a result of our traffic quality initiative. That positive trend continued in the second quarter with click-through rates on ads on our website up 117% compared with the same quarter last year. Over time, we believe this will favorably impact our ability to maintain and grow our key OEM relationships.

On to expenses. We made significant progress bringing costs down this quarter. As a result of the actions we've taken, total operating expenses, excluding the goodwill impairment, fell nearly 24% from the second quarter of 2007. On a sequential basis, total operating expenses fell more than 23%, excluding the impairment charge in the second quarter and excluding a $2.7 million credit to expense related to the Dealix patent litigation settlement that we realized in this year's first quarter.

Cost of revenue, which includes lead and traffic acquisition costs, equaled $12.2 million, or 64% of revenue, for the second quarter of 2008, compared with $12.8 million or 59% of revenue a year ago. Cost of revenue as a percent of revenue declined by $1.6 million, or 3 percentage points, from $13.8 million on a sequential basis, primarily as a result of the transition to a new SCM platform, which allowed us to eliminate less effective spending.

We spent approximately $1.3 million in the second quarter of 2008 for marketing, acquiring and attracting both traffic and search-based leads to MyRide and the Autobytel legacy site. This is down substantially from the $3.1 million spent in Q1 2008, primarily as a result of a $1.7 million reduction in SCM spending.

Our loss from continuing operations was $57.4 million, or $1.30 per share, in the second quarter of 2008, compared with a loss from continuing operations of $6.9 million, or $0.16 per share in the prior year period.

The 2008 second quarter loss from continuing operations before the impairment charge would have been $5.3 million, or an improvement of $3.5 million over the first quarter of 2008, when excluding the patent settlement recorded in the first quarter.

Our net loss in the second quarter of 2008, including the impairment expense, was $57.3 million, or $1.30 per share, compared with a net loss of $2 million, or $0.05 per share, in the second quarter of 2007. The net loss in the 2007 period included income from discontinued operations of $4.8 million, or $0.11 per share.

Non-cash share-based compensation in the second quarter of 2008 was $700,000 versus $1 million last year in the same period.

Total capital spending in the quarter was approximately $1 million. Capital expenditures related to MyRide.com were approximately $500,000, generally related to new search functionality and vehicle hub functionality.

Other capital spending was principally related to ongoing infrastructure projects. Capital spending will be reduced significantly going forward as the infrastructure projects move towards completion. We have essentially completed the capital spending on MyRide.com.

We ended the June quarter with approximately $36.4 million in cash, cash equivalents and short-term investments. As Jim mentioned, our cash flow from operations before working capital and CapEx requirements was a negative $2.9 million in the second quarter. This was an improvement of more than $3.4 million from the first quarter, excluding the patent settlement.

With the next phase of cost reductions that Jim mentioned and will describe in more detail later, we expect to be cash flow break-even before working capital and capital expenditures by the end of this year. We did consume about $3.8 million in cash related to working capital adjustments due to a slowdown in the collection of receivables at the end of June and the timing of payouts on certain accrued expenses.

The company has experienced significant fluctuations in working capital from quarter to quarter, but we would expect this to be about break-even over the course of the year.

Our current financial position is solid. We continually -- we are continually evaluating the best use of our cash, given continued uncertainty in the macroenvironment and believe we will have much greater flexibility with respect to uses of our cash as the company reaches its target for cash flow break-even.

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

Thanks, Monty.

I'd like to spend a few minutes discussing our progress in certain key areas, as well as provide some specifics about our cost-cutting initiatives, and then we'll open the call to your questions.

Although it is not yet clearly reflected in our top line results, we believe we're making very important progress. First, our leads business performed reasonably well in a difficult market during the second quarter. For the short term, we expect the market difficulty to continue for two reasons. First, there has been an unprecedented shift in consumer demand, creating a substantial disconnect between the consumer desire for a more fuel-efficient car and the excess dealer inventory of less efficient trucks and SUVs. This disconnect is causing a mismatch between the leads consumers are submitting and the leads our dealer customers require.

Second, with consumer sentiment glum due to macroeconomic conditions, purchase decisions are being delayed. The latest revised estimates for North American light vehicle sales for this year are roughly 14 million vehicles, a level not seen for 15 years. This is leading to a lower number of leads available in the marketplace. At this time, no one has good visibility into how much of an impact these two factors will have or how long their negative pressure will continue.

That being said, over the next several years, we still firmly believe our leads business can grow and become more profitable. We are currently sourcing more than 90% of all the leads we deliver from third parties. As we continue to efficiently build traffic to MyRide and Autobytel's other web properties, we expect to generate more leads organically, thereby increasing margins.

The used car market represents a significant growth opportunity, as we've discussed on our prior calls. During the quarter, we updated our technology to allow us to display dealer phone numbers on our used vehicle inventory on the sites of our affiliate lead partners, thereby increasing the number of consumers with the potential to submit a used car lead. We'll now continue our focus on this area over the next several quarters.

Additionally, we continue to put in place many innovative programs and services to assist dealers in closing more leads and selling more vehicles. For example, we recently introduced our new lead call service, which sets up appointments with prospective buyers on behalf of dealers.

Our advertising revenue has been very disappointing, as we've taken difficult but necessary steps to rebuild this revenue stream. For instance, we continue to work through the significant traffic hit we took when we began eliminating low-quality traffic late last year. In the second quarter, we scaled back our SCM spending significantly as we transitioned off of our legacy in-house program to a new outsource solution, which, in return, resulted in a major reduction in traffic to our websites. However, we firmly believe that this transition is vital to our ability to scale our traffic generation marketing efforts and to drive sustainable, positive margin traffic and advertising revenue growth.

We also believe that these efforts will drive more consumers to initiate trial on MyRide and enhance consumer engagement across our sites.

While traffic decreased significantly in the quarter, our traffic generation marketing spend was much more effective when compared with the first quarter of this year.

In addition to our marketing program, we expect to gain traffic and advertising revenue through new advertising streams via syndicated content, cobranding MyRide, local dealer advertising and our AutoReach Ad Network. The network is slowly gaining traction with publisher participation and that impression's growing. We're realigning our sales resources to bring more focus on the unsold impressions in our network, and we're working on the introduction of a behavioral targeting product that we expect to be very attractive to our OEM customers.

Although it will likely take another few quarters before the AutoReach Ad Network is contributing meaningfully to our business, we believe we're building the foundation for significant and proven growth opportunity.

As you know, online advertising is a segment that we believe holds significant opportunity for Autobytel over the long term. While both the automotive and advertising categories are currently experiencing challenging times as a result of the broader economic climate, we believe that the Internet automotive space will continue to grow over the coming years and that Autobytel is well-positioned to capture significant revenue growth as a result.

Although total ad spending by the US automotive industry has been declining, online advertising spending in the industry is expected to grow from $2.5 billion last year to $5.6 billion in 2012, as automakers look to invest their advertising dollars more effectively.

The last topic I'd like to discuss this morning is the significant headway we've made reducing our overhead and developing a lean and nimble infrastructure. We're right-sizing the organization to help achieve profitability without, we believe, significantly jeopardizing our ability to grow. As I mentioned earlier, we completed the actions to remove $15 million in annualized costs and realized the first meaningful benefits of our strategy this quarter. The majority of these costs came in the form of headcount reductions, as we eliminated redundancies and automated processes that were previously very labor-intensive.

In total, approximately $12.5 million in savings was headcount-related, and another $2.8 million was non-headcount-related. The majority of the cost reductions were in corporate support functions, such as finance, accounting and information technology. Reductions were also made within the revenue-producing business groups under a plan to streamline business operations.

With these plans complete, we have now developed the next phase of our right-sizing strategy. Through additional restructuring aimed at driving best-in-class business processes, we believe we can remove an additional $12 million to $15 million in annualized costs over the next 12 months, with some actions beginning immediately.

These additional reductions will take place across the organization, but again will be focused principally on the corporate support functions.

Through process improvement, automation and some outsourcing, we believe that this level of cost can be removed without placing revenue at risk.

Rest assured that achieving cash flow break-even is our immediate goal -- one we're addressing with the utmost of urgency. And we're prepared to use every rational cost reduction tool available to us to achieve it. By effectively restructuring the organization to generate cash at the current revenue level, we believe Autobytel will be well-positioned to leverage our expected future top line growth.

However, with the current lack of visibility due to the macroenvironment, we did not believe it would be prudent to project the precise timing for GAAP profitability.

As we continue to work diligently to increase consumer traffic to MyRide and to more effectively sell all of the advertising inventory available to us, our team remains very positive and excited about the company's opportunities. If we are successful in our goal of steadily ramping traffic to the site over the coming quarters, we now have the proper infrastructure to drive profits to the bottom line. At the same time, we have been and continue to evaluate all options available to us in these challenging economic times, and we stand ready to take whatever action is necessary to enhance shareholder value by driving revenue, further reducing costs, acquiring traffic, forming partnership combinations, or other strategic alternatives.

Operator, we're now ready to take questions.

Thank you. (OPERATOR INSTRUCTIONS.) Your first question comes from the line of Christa Quarles with Thomas Weisel Partners.

First question, I guess, when you say cash flow break-even by the end of the year, are you also talking about EBITDA break-even, and it sounds like you're assuming the current revenue run rate is what you're expecting to see in the top line?

Yes. Excuse me. Essentially, the cash flow break-even, as we defined as before working capital and capital expenditures, is EBITDA. It just includes -- also includes interest expense -- interest income, since that's significant for us.

Okay. And then in terms of sort of where you are on the advertising side, does it, I guess, continue to make sense to pursue that strategy? It's obviously a much smaller percentage of the total. We're in the middle of an ad recession, so --. I guess, how expensive is it to fund, is really what I'm trying to get at?

Well, Christa, this is one of the challenges we're spending a lot of time on. I think the fact of the matter, as you said, is we are in a challenging economic time for the advertising sector. However, there's still a continued commitment on the part of OEMs and dealers to spend their advertising dollars more efficiently, and what that's resulting in is still, even in a pullback, a movement to spend more dollars on the Internet. So we believe the dollars are there, and in fact, we have significant buys that are available to us right now as we're able to grow the traffic. So we're -- our revenue challenges are more of a result of the traffic shortfalls than they are of the dollars that are available to us in the advertising market right now. We have, as we've mentioned, significantly reduced our spend, and we've put a lot of focus around reducing inefficient spend, hence the reduction in spending against SCM which, as we've just delved into it, using our -- the homegrown legacy systems here, we found to be much less efficient. That's why we've moved toward a partnered solution that we believe is going to allow us to ramp up much more efficiently. But we're not going to spend those dollars until we know that we are able to generate them at a positive ROI.

Okay. And then I guess, the last question. If you could just update us on where you are with your lawsuit with InsWeb et al., and if you could give us what your average share count was in the quarter. Thanks.

Okay. As far as the InsWeb situation, we're continuing a number of efforts related to our litigation, not only with InsWeb, but several others to protect our patents. There's a number of things that are going on right now that we're really not in a position to talk about at length, but we still, as I said, strongly believe in the value of our intellectual property, and the way that we've structured our litigation allows us to pursue these issues while minimizing the legal expenses on a forward-looking basis.

Have you given the legal expenses roughly or --?

No.

Okay.

Christa, the average share count during the second quarter of '08 was 44,079,601.

Great. Thanks.

Thank you.

(OPERATOR INSTRUCTIONS.) Your next question comes from the line of Steven Denault with Northland Securities.

The initial $15 million in cost savings -- how much -- within the second quarter itself, did you realize a full quarter impact or a partial quarter, and if so, how much?

Pretty close to a full quarter. There are other benefits -- some actions that we took that will accrue in the next few quarters, but we achieved close to the full benefit in the quarter.

Okay. And you make reference to an incremental $12 million to $15 million in cost savings you've identified?

That's correct.

How should one expect that sort of phasing to occur? You referenced over the next 12 to 18 months. Is that immediate? How should we think about that?

I think we said our target was to take that $12 million to $15 million in costs out over the next 12 months, and we will certainly do everything we can to accelerate that. There are significant actions that we will take in the very near term and then some things that we have identified will take longer to implement to realize those savings.

Okay. You make reference to the leads being -- total leads being 865,000. Is that inclusive of the finance leads?

No. That's just auto leads.

Okay. So that was 865,000. What was the finance lead number?

The finance leads in the quarter were 157,000.

Okay. That's it. Thank you.

There are no further questions at this time. Mr. Riesenbach, do you have any closing remarks?

I just want to thank everyone for joining us today. We look forward to updating you at the end of the third quarter, and we thank you again for your continuing support and patience.

Thank you. This concludes today's Autobytel Second Quarter 2008 Financial Results Conference Call. You may now disconnect.