Autoweb Inc (AUTO) 2009 Q1 法說會逐字稿

Good afternoon. My name is TK and I will be your conference operator today. At this time, I would like to welcome everyone to the -- Autobytel announce its first quarter 2009 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

Thank you. I would now like to turn the conference over to Mr. Lawrence Brogan, Senior Vice President of Strategic and Financial Planning. Please go ahead, sir.

Thank you. Good afternoon and welcome to Autobytel's 2009 first quarter conference call. With us on the line today are Jeff Coats, President and Chief Executive Officer, and Curt DeWalt, 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 10K for the year ended December 31st, 2008. This filing identifies the principal factors that could cause results to differ materially from those forward-looking statements.

We have included some slides which help to illustrate some of the points being made and discussed during today's call. For those of you with access to a computer, you can find these on the Investor Relations Section of Autobytel.com.

Now, I'll turn the call over to Jeff.

Thanks, Larry, and thanks to everybody for joining us today. Before we begin our discussion of this quarter's results, I want to acknowledge the recent unsolicited tender offer made by Trilogy Enterprises for $0.35 per share in cash.

As we mentioned in a press release earlier this week, the Board of Directors is reviewing the terms of the offer and expects to make its recommendation in a Schedule 14B9, which we plan to file with the SEC within the next couple of days. Until that time, we urge our stockholders to take no action with respect to Trilogy's unsolicited tender offer.

As SEC regulations preclude the Company from making any comments with respect to Trilogy's unsolicited tender offer, until we file our Schedule 14B9, we plan to focus today's call solely on our first quarter results. Accordingly, we will not be discussing the tender offer beyond what I have just communicated, nor will we be answering any questions about it.

Moving now to the quarter -- when we spoke just six weeks ago, I said there was still a significant amount of work ahead to stabilize the Company and return it to a position of sustainable growth and profitability. Today, I'm pleased to report that we have made significant tangible process (sic) towards achieving that goal in the first quarter and we are continuing to make additional improvements every single day. Our net loss was substantially reduced through aggressive cost containment and improved gross margins.

Importantly, we settled all outstanding patent litigation, freeing up important monetary and management resources during the first quarter. I'll speak more about this positive development a bit later.

We finished the quarter with a very strong cash position and remain debt free. The strength of our balance sheet provides us with the flexibility and foundation necessary to succeed in a challenging environment. While it is obviously too soon to predict any type of trend, and the macro and automotive environment remains challenging, we are very encouraged by our progress, especially after only four months under the new leadership team.

I'll now turn the call over to Curt DeWalt, who will provide the financial details of our first quarter results and then I'll return to say a few more words. Curt?

Thank you, Jeff. Before I begin, I remind you that for purposes of financial reporting, revenues and expenses associated with our AVV business which was sold in January 2008, have been reported as discontinued operations, and my comments today, unless otherwise noted, refer to continuing operations.

Our net loss for 2009 first quarter was reduced by 82% to $357,000 or less than 1% -- $0.01 per share from a net loss of 2 million or $0.05 per share, including income from discontinued operations of 4.1 million or $0.09 per diluted share last year.

Our operating loss for 2009 first quarter was reduced by 92% to 504,000 compared with an operating loss of 6.6 million last year, marking considerable progress.

As a result of cost-cutting measures and continued improvement in business processes, gross margin also improved considerably, coming in at 36% versus 33% last year.

Cost of revenue was 8.9 million for the first quarter compared with 13.8 million for the same period last year.

As seen on the Q1 operating expense slide, total operating expenses for the first quarter of 2009 were reduced by 52% or 7.7 million from 16.1 million for the same period in 2008, excluding the $2.7 million credit (inaudible) expense in both periods related to patent litigation settlement with Dealix Corporation and 500,000 of severance expense in the first quarter of 2009.

On a sequential basis, operating expenses were reduced 16%, excluding severance expenses of 500,000 and 4.8 million in the first quarter of 2009 and the fourth quarter of 2008 respectively, the Dealix settlement payment of 2.7 million in the first quarter of 2009 and the software impairment charge of 1.2 million in the fourth quarter of 2008.

Non-cash share-based compensation in the first quarter of 2009 decreased to approximately 268,000 from 910,000 in the first quarter of 2008.

Moving to the top-line -- and I'm now referencing a slide on Revenue Results -- total revenue for 2009 first quarter were 13.9 million, a decline of nearly 33% from the same period in 2008. On a sequential basis, revenue was down about 2%. As a point of reference, U.S. light vehicle sales fell by 38% during the same time frame, as seen on the slide regarding revenue results.

Total leads in the advertising business continued to be impacted by difficult market conditions. Total lead revenue was down approximately 33% in the first quarter of 2009, compared with the same quarter last year, but remained relatively stable compared with the prior sequential quarter. Auto lead revenue declined 31% year-over-year, while finance lead revenues dropped 43% due principally to continued tightness in consumer credit.

Advertising revenue declined approximately 32% year-over-year, as improvements in page views and CPMs in the last two-thirds of the quarter were not enough to slow -- offset a slow January. As expected, advertising revenue declined on a sequential basis by approximately 11%.

Lead referrals accounted for 88% of the total revenue in the first quarter of 2009, with advertising revenue contributing to the remaining 12%, the same as in the first quarter of 2008.

During the 2009 first quarter, we delivered approximately 680,000 auto leads versus 915,000 the same period last year and 652,000 in the fourth quarter of 2008. The reduced number of leads year-over-year reflects continued muted customer demand for cars and reductions in marketing spend by auto dealers and manufacturers.

This comes as no surprise, given the current state of the auto industry, although we do see some signs that the sector will return to a moderate growth next year. J.D. Power currently predicts the U.S. light vehicle sales will be 10.4 million in 2009, rising to 13.4 million in 2010 -- again, as seen on the Auto Industry sales slide.

Approximately 58% of our leads for 2009 first quarter were delivered to retail dealers compared with 52% for the first quarter of 2008, while roughly 42% of the leads were delivered to wholesale channels versus 48% last year. This is due to lower demand for manufacturers and certain wholesale customers.

We delivered 90,000 finance leads in the first quarter of 2009 compared with 149,000 in last year's first quarter and 101,000 in the fourth quarter of 2008. This is principally the result of continued lack of available consumer credit, softness in dealer demand and increased competition from other finance lead suppliers.

The average revenue per finance lead was $17.02 for the first quarter of 2009 compared with $18.00 in the first quarter of 2008 and $18.43 in the fourth quarter of 2008. The decline in average revenue per lead was driven by a mix of retail versus wholesale lead placement.

There were 41 million total web page views across our internet properties in the first quarter of 2009 versus 74 million during the 2008 first quarter. The decrease is primarily the result of a significant reduction in search engine and marketing spend. We spent approximately 700,000 in the first quarter of 2009 for acquiring traffic and search-related leads for our web properties compared with 3.1 in the first quarter of 2008. The decrease was the result of our focus on eliminating negative ROI activities, particularly related to search engine marketing.

As we discussed on our last conference call, we've hired two former Autobytel executives, Tim Nelson and Zane Rathwick, to refocus our website strategies and traffic acquisition activities. Tim and Zane are making tremendous progress toward driving positive ROI marketing and we expect to continue to ramp up in coming quarters.

At the end of 2009 first quarter, our network of new car dealer franchises totaled 2,473 compared with 3,620 in the last year's first quarter and 2,651 at the end of fourth quarter 2008.

Our network of used car dealer franchises totaled 1,078 versus 1,434 last year's first quarter and 1,106 at the end of Q4 2008.

Importantly, for the month of March, we had a net increase in dealers to our network, which was the first monthly increase in almost a year.

We had 212 finance dealer franchises compared with 359 in the first quarter of 2008 and 214 at the end of 2008 fourth quarter.

Our balance sheet remains healthy, with a cash position of 25.8 million at March 31st, 2009, and no debt. Our cash investments consist of short-term, high-grade money market funds and U.S. government-sponsored and backed short-term securities.

In the first quarter of 2009, we paid severances of 3.2 million, bringing to closure a vast majority of the liability from the workforce reductions.

We received a payment of 2.7 million from Dealix Corporation last month under terms of a $20 million patent litigation settlement in the fourth quarter of 2006. We are due a final payment under this agreement in March 2010.

Additionally, with our patent litigation suits now settled, 1.9 million that had been held in escrow related to the sale of AVV is expected to be released. The 1.9 million was not carried on our balance sheet as a receivable, so we expect to record an additional gain on the sale related to AVV in the second quarter, somewhat offset by legal fees related to the settlement.

Our current ratio has improved to 4.3 to 1 at the end of March 2009 from 3.3 to 1 at the end of December 2008.

Now, I'll turn the call back to Jeff for a brief business update.

Thanks, Curt. I'd like to share a few highlights and thoughts with you today and then we'll open the call to your questions.

As I mentioned earlier, and as Curt has just described to you, we are pleased with our first quarter results, especially against the backdrop of continuing economic uncertainty. We obviously have no way of knowing when the market will turn. Nevertheless, rest assured that we are fully prepared to take additional actions to meet our profitability and cash flow goals, should the market deteriorate further.

As important and as exciting as the progress we made is, we are in no way finished. We are working tirelessly to ensure that our focus and execution remain laser-sharp. Each of us reads with interest every day about the challenges facing our industry. If you refer to the slide on Page 2, Auto Industry Sales, you can see what I'm talking about. To be sure, this is one of the worst cycles ever experienced and while many might have found that the imminent demise of one or more of the big three auto makers will have a serious impact on our business, our receivables are overall in good shape and we currently have limited exposure to the larger companies.

In this type of market environment, auto dealers and manufacturers are leaving no stone unturned in terms of finding serious end market consumers. Our effective marketing programs and premier automotive websites remain among the best and most economical ways to drive these consumers to the right dealers and manufacturers.

In terms of our recent legal settlement, obviously, removing the distraction of patent litigation allows us to focus on running our business, optimizing revenues and driving toward profitability. With the distraction and associated legal expenses of the patent litigation out of the way, we've immediately freed up important resources.

Perhaps even more importantly, we've structured the agreement as we have in our settlements with Edmunds and internet brands to provide Autobytel with significant new rich content, reviews, photos and tools for our suite of internet automotive sites. We believe that this content and these tools, such as the New Car Configurator, will drive the user experience and utility of our sites to their highest levels ever.

Until this point, we've been paying several hundred thousand dollars each year for the use of certain types of third-party content. The new content made available from these settlements is superior and will be available to us at little to no cost, as we begin to cancel the legacy arrangements.

Finally, I want to reiterate the magnitude of the changes we've made in just the last four months alone, which have significantly reduced costs and in turn, are helping to improve our margins, eliminate our cash burn and provide the wherewithal to move to operating as a profitable entity.

The Company had $32 million of cash in September 2008 and over 27 million in December 2008. As you can see from the slide on Page 4, Cash and Investments, as of today, our cash balance stands at over $27 million and during this time frame, we have paid approximately $6 million in severance costs to restructure our organization.

In addition to reducing headcount, improving business processes, settling outstanding litigation, we've looked in every nook and cranny of the Company to remove unnecessary or bloated expenses. As you can see on the slide on Page 7, Further Cost Reductions, there are several examples of additional reductions. For example, we've recently renegotiated our building lease, reducing our rental expense by approximately 55% beginning as of April 1. We are also planning to consolidate our website platforms which will result in additional future savings of approximately $700,000 per year.

We have negotiated reductions in audit fees, insurance and telecommunications costs. We are continuing to make additional business process improvements as well, such as accepting credit card payments from dealers, overhaul our travel administration and leveraging electronic contracting to optimize contract processing and revenue recognition.

The result of all of these initiatives is that we are now operating a much healthier, stronger and more sustainable business. Given the turmoil Autobytel has faced over the last several years, and especially during 2008, we are doing very well with a lower revenue base in a very difficult market.

I believe we are as well positioned as any company in our industry could be, given the economy, and our primary financial goals are well within reach. I believe that this sector of the automotive industry is ripe for consolidation and we have positioned ourselves well to benefit from this opportunity.

As I said last quarter, we will need to execute our plans with the utmost precision and with a watchful eye on what's happening around us. We will need to continue to nurture our dealer and OEM relationships to make sure that we are responding to their needs during this challenging time. We will need to further develop innovative ways to help our dealer and OEM partners maximize car sales.

Given the hard work and commitment I've seen from the team since taking over as CEO in December, I'm very optimistic that we can do all of this and more.

Operator, we are ready to take questions, and as I said at the beginning of the call, we are not allowed to take any additional questions about the Trilogy unsolicited tender offer.

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

Good afternoon, everybody, and a great job controlling the operating expenses.

Thank you.

That brings me to my first question which is, in the first quarter itself, how much -- was it $500,000 in severance or was the number something other than that?

Are you talking cash or expense, Steve?

Expense.

Expense in the first quarter, there was 500,000.

Okay. And what about legal expense in the first quarter that goes away?

In the first quarter, legal expense, again, a vast majority of the litigation related to the patent settlement was on a contingency arrangement. As we mentioned, or as I mentioned briefly, part of the settlement will free up the AVV escrow money. We'll have to negotiate a portion of that as the legal settlement of the legal fees related to the contingency. So actual P&L hit, there is none; there never was. If you will, they're small amounts that go on as far as normal litigation, but related to the actual litigation, you won't see any major blip from quarter to quarter.

Okay. And should we expect to see a severance expense of what kind of level in the second, third and fourth quarter?

At this point, zero.

Okay. So, I mean, I guess the bigger question is, what are your operating expenses now on a go-forward basis?

Well, again, if you look at the slide that outlined the first quarter, after we remove a lot of the one-offs, which is really what's made it difficult to track things in the past, if you start with the 7.7 million --

Um-hum.

-- that's probably a normal run rate and we've also mentioned there's ongoing efforts here to continue to carve out costs. Costs to the tune of 10, 12% are clearly within range here short term. So we're talking sub-7 million.

Okay. The gross margin uptick to that kind of 35% level, what specifically drove that sequential improvement?

Well, again, a lot of that is the negative ROI spend that we were burning through. There was a lot of spending going on that didn't have bang for the buck. That, we've pulled way back on and that we will continue to see improve again, as Tim and Zane do their thing. Really, I think we're going to continue to really scrutinize the spend on the leads. There's a balancing act between the quality of the leads and what you're paying for the leads. We'll continue to look at that very carefully as well.

Okay. And the dealer count, wasn't this -- I guess, wasn't down as much as I would guess I expected and I mean, do you have any sense of how many dealers are no longer in business today versus where it was a year ago?

I believe the National Association of Auto Dealers, the last I had seen, was something in the neighborhood of 1,000 dealers had dropped off the map last year and the likelihood of yet another 1,000 this year.

Okay. Okay. Thanks. I'll jump back in queue.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of George Grose with American Capital Partners.

Good afternoon. With all the cost-cutting that you did last year and also, I guess, in Q1 here, can you give us a sense as to when you plan on being where you want to be from a headcount point of view, so that you can be breakeven?

Well, we're currently -- headcount-wise, we're where we had wanted to be. There is, at this point, no further plan to reduce the headcount. That's not to say if necessary, we would make further adjustments, but at this point, the headcount is pretty much where we wanted to be. There's a delicate balance as a publicly held company, where if you cut too deep, you obviously impact controls and we don't want to impact any Sox issues that we have.

We think we've -- less is more. We've gotten a smaller group of people. We're very effective. Our auditors are very satisfied with the results, but there are certainly definitely additional savings out there. It would probably be more in the non-headcount area that we referred to. I think there's a lot there in the way of the websites, the 700,000 a year, etc. Plus, the full impact of this free content that we're going to be getting as a result of the settlement, that will continue to play a very positive role in our bottom line results as well.

Okay. And just back to -- where's the headcount now or --

We're just a little over 100 people, 103 people.

Okay, 103, okay. And so I guess if I back out the one-time items that you incurred in the quarter, it looks like your -- and that's not counting the, I guess the savings that you have on your Slide 7 there. It looks like your breakeven revenue is at 16.5 million. Is that -- is my math correct or --

That's probably about right. That may be a bit high. Again, we've got some additional savings that are in the hopper that will drive down the required revenue to get to that breakeven.

Okay. and so I guess if you take some of the savings in those, I guess the 1.8 million in savings, you probably won't see -- you'll probably see maybe three-quarters of that total there this year then, or is that a way to see it, like of the 1.8 million?

That's correct. I mean, it's all going to get phased in before it has full annual effect, but those -- on an annual basis, those would be savings we're looking for.

Okay. Okay. So that means -- I mean, there's still a little bit of a gap then in terms of revenue growth there that -- like where you need to be there. How do you plan to get to that level of revenues or is that going to come from the cost side there, like the savings?

It'll come from a combination of a focus on revenue growth, as well as additional cost savings. I mean, there are still a lot of things that aren't really flowing through the P&L at this point from a cost-saving standpoint, and we're continuing to focus on turning around our dealer count. We had a positive month in March, which is (inaudible) for us. We're continuing to focus on that. Dealers drive a lot of revenues for us. The OEMs drive a lot of revenues for us. So we've definitely worked on improving our relationships with those guys, really, in a focused way the last four months.

Remember, the lead side of the business was not getting a lot of investment and a lot of management attention until recently. Most of the attention was on the MyRide side of the business. Dramatically all of the capital was being invested on the MyRide side of the business and the strategy has now changed, as we discussed on the fourth quarter call, that we're now focused on our core leads business. We've made a lot of progress already. You don't just turn around on a dime.

Um-hum. And so, like what percentage of the dealer base have you touched, would you estimate there? I mean, in terms of visiting and getting to know what their needs are?

Every dealer within 90 days.

We touch every dealer within 90 days.

Okay.

With our people here -- we have our sales force in the field. We have people here who are calling them. Mark gets out to meet -- Mark Garms, our Chief Operating Officer, is on the road a fair amount and has been on the road a lot in the last couple of months meeting with dealers. I'm getting out to meet with people as well, so we're -- there's a big push on and obviously, dealers have a lot on their plates right now, but we're really pursuing that.

Okay. But I guess -- I mean, the quality of your leads should be of, I guess, of importance to them there?

Yes. Well, we've also talked publicly about the fact that we're definitely working on improving the quality of our leads to dealers. It was part of bringing Tim and Zane back and driving users to our own sites that absolutely provides us with higher quality leads that we can then turn around and provide to our dealer and OEM customers, as well as doing business with Edmunds and other very high quality lead providers, so that we're working very hard to both increase the quality of our leads and have it known to the dealers that we're increasing the quality of their -- of the leads. They're able to start seeing it, I think, now in the closing ratios.

Okay. Okay. Thank you.

(OPERATOR INSTRUCTIONS). There are no questions at this time. I would now like to turn the conference back over to Mr. Coats for any closing comments or remarks.

We'll keep -- keep it open for another moment or two for additional questions, if anybody has anything to follow-up. Certainly, you're welcome to call us and speak directly with us.

Stay tuned for the filing of our 14B9 with the Board's recommendation on the Trilogy unsolicited tender offer.

Let me just say we've made a lot of progress in a very difficult environment. We're continuing to make progress. We're bullish about our prospects this year. We're making -- we're getting through this and we're looking forward to a very good year.

Any last questions?

Yes, sir. We do have a question from Steve Denault with Northland Securities.

I realize you're prohibited from talking about the Trilogy offer, but are you willing to discuss some of the conclusions that came out of your strategic alternatives review?

We're not really able to do that as a result of this thing right now, Steve.

Yes, that's what I figured. All right, fair enough.

But when we can, give us a call and we'll be happy to talk to you.

Okay.

There are no questions at this time, sir.

Okay. Well, thank you, everyone. We appreciate you dialing in today and supporting us, being with us. Stay tuned. You'll hear good things.

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