Autoweb Inc (AUTO) 2009 Q2 法說會逐字稿

I would like to welcome everyone to the Autobytel [announces] second quarter 2009 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions.)

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

Thank you. Good afternoon and welcome to Autobytel's 2009 second quarter conference call. With me 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 our Form 10-K for the year ended December 31st, 2008, our Form 10-Q for the quarter ended March 31st, 2009, and our Form 10-Q for the quarter ended June 30th, 2009 which we expect to file shortly. These filings identify the principal factors that could cause results to differ materially from those forward-looking statements.

We are including slides with today's presentation which help to illustrate some of the points being made and discussed during today's call. For those of you with Internet access, you can find these in the Investor Relations Section of our website Autobytel.com.

Now, I'd like to turn the call over to Jeff.

Thanks Larry. Good afternoon. It's not news to anyone that we continue to operate in a challenging economy, especially in the automotive sector where things seem to be shifting on an almost daily basis. While both Chrysler and General Motors have successfully emerged from bankruptcy, which is positive, the impact of their difficulty lingers and likely will for a while. Nevertheless, at Autobytel we are continuing to make important progress as our team works tirelessly to not only stabilize the Company, but position it for long-term growth as the economy slowly works its way out of this deep recession.

The Company's cash position remains strong at $26.8 million as of June 30, 2009 and, with no debt, we have increasing flexibility to manage through these tough times and to build a stronger company, better able to capture strategic opportunities. As I mentioned last quarter, the auto industry and its diverse segments are ripe for change and consolidation and we expect to be part of those opportunities.

I'll now turn the call over to Curt for review of our second quarter results. Curt?

Thank you, Jeff. In the interest of time, I'm going to highlight just a few key metrics from the second quarter. You'll find more detail in the press release we issued earlier and in our 10-Q for the quarter ended June 30th, 2009, which we expect to file shortly.

As a reminder for those who have Internet access, there are slides posted to our website within the Investor Relations section that highlight some of the items we'll be discussing today. I'll guide you through them as I proceed.

Not unexpectedly, as you'll see on Slide 3, revenues declined approximately 29% year over year to $13.4 million. On a sequential basis, revenue was down only slightly showing stabilization in our business. Auto lead revenue dropped 29% year-over-year commensurate with declines in US light vehicle sales during the period, which are highlighted on Slide 4.

Finance lead revenues declined 51%, due primarily to the continued tightness in consumer credit. Our wholesale OEM lead delivery continued to show stability during the quarter, but was not enough to offset the declines in our retail and finance leads businesses.

Slide 5 details our quarterly revenue by product over two years. During 2009 second quarter, we delivered approximately 690,000 auto leads versus 865,000 in the same period last year, about the same as 680,000 in the first quarter of 2009, reflecting continued demand for weakness -- weak demand for vehicles along with associated reductions in marketing expenditures by dealers and manufacturers. We delivered 87,000 finance leads in the second quarter of 2009, compared with 157,000 last year's second quarter, and 90,000 in the first quarter of 2009, with the decline primarily reflecting the lack of available consumer credit, particularly in the subprime market.

Our dealer network clearly felt the turmoil in the significant decline in auto sales across all manufacturers. At the end of 2009 second quarter, we were serving 2,263 new car dealer franchises compared with 3,459 the prior year period and 2,773 in first quarter 2009. On the used car side, dealer franchises totaled 1,016 at the end of 2009 second quarter, versus 1,373 in last quarter's (sic) second quarter, and down from 1,078 at the end of Q1 2009.

Finance dealer franchises totaled 201 at the end of 2009 second quarter compared with 341 in the 2008 second quarter and 212 at the end of first quarter 2009. We believe this decline in finance leads is a direct result of lack of available financing to our targeted consumers.

Advertising revenue was about equal of last year's second quarter and sequentially. This is a result of lower page views offset by the capture of some deferred revenue. There were nearly 37 million total webpage views across our Internet properties in 2009 second quarter, versus 45 million during the year ago period and 41 million last quarter, primarily as a result of the reduction in search engine marketing spend, all meant to reduce negative ROI activities and transition SEM in house. To that end, at the end of the quarter, we began seeing an upward trend in page views as a result of new, in-house SEM activities and some fine tuning to our sites under the direction of Tim Nelson and Zane Rathwick, who were rehired by Autobytel back in January. Under their leadership, we have high aspirations for improvements in our user experience and engagement across our sites, which will drive more organic growth.

Moving now to the expense side of the income statement. Gross margins declined to 33% from 36% in last year's second quarter. Slide 3 shows margin history over the last six quarters. We have significant retail auto lead promotions in response to the economy as well as an increase in expense for acquiring highest quality online leads, which contributed to the gross profit decline this quarter. With these promotions now refined, we expect to see margins improved somewhat in future quarters.

Turning to Slide 6, total operating expenses for the second quarter 2009 were reduced significantly, by approximately 47% to $6.6 million from $12.4 million in the same period last year. This $12.4 million excludes a goodwill impairment charge reported in the second quarter of 2008 which totaled $52.1 million. If we were to exclude approximately $0.25 million in expenses incurred related to Trilogy's unsolicited tender offer, the year-over-year expense reduction would have been 49%.

On Slide 7, you'll see significant improvements we've made in expense management and on Slide 8 an update to the initiatives we discussed in the first quarter. Noncash share-based compensation in the second quarter of 2009 decreased to $257,000; $658,000 in last year's second quarter.

The net loss for the 2009 second quarter was $251,000 or $0.01 per share. These results included approximately $580,000 of other income related to the sale of third party common shares. We acquired these shares through the purchase of Autoweb several years ago. And they were sold in conjunction with our recent patent litigation settlements. Additionally, $1.3 million of escrow funds related to the sale of the Company's AVV business in January 2008 was released in the second quarter of 2009 and recognized as income from discontinued operations.

At the end of the second quarter $610,000 remained in AVV escrow account. In July, an additional $448,000 was released to us and will be reported as income from discontinued operations in the third quarter. We expect the majority of the remaining $162,000 in escrow will be released in the third and fourth quarters of 2009, upon completion of software license transfers to the AVV buyer. These amounts are not carried on our June 30th balance sheet.

For the second quarter of 2008, the Company recorded a net loss of $57.3 million or $1.30 a share, including $52.1 million of goodwill impairment. As Jeff mentioned, the balance sheet remains healthy. See Slide 9 for our cash trends. Cash grew to $26.8 million or $0.59 per share, from $25.8 million at March 31st, 2009, compared with $27.4 million as of December 31st, 2008, and we carry no debt.

Of note, we are comfortable with our exposure to receivables from Chrysler and GM and we continue to have positive dialogue with both customers. Chrysler's announcement to close 789 franchises resulted in a loss to us of 45 franchise customers. With GM, we are closely monitoring the situation with respect to the dealership closures, which have not been publicly announced, and won't know the full impact to our business until affected dealers are identified to us.

Our current ratio again improved 4.4 to 1 at the end of June from 4.3 to 1 at the end of March and 3.3 to 1 at the end of December 2008. Now, I'll turn the call back to Jeff.

Thank you, Curt. As I said earlier, we are working hard, not only to stabilize our business, but to emerge from the current significant recession stronger, more nimble and better positioned for long-term growth. In a short time, we have taken a business that was bleeding significant amounts of cash and posting substantial operating losses to one that has its operating expenses under control, is making strategic progress and is improving its financial condition during a time that is extremely challenging for our industry and our country. That said, we are continuing to make appropriate changes throughout our organization, reestablishing or strengthening ties with longtime partners and forging new relationships externally that we are confident will help us build a stronger company.

As we discussed last quarter, our patent litigation settlements with Edmunds, Internet Brands, InsWeb and others have provided Autobytel with significant and rich content for consumers, including reviews, photos, and tools for our family of automotive websites at minimal cost. This new content combined with an ongoing upgrade to the user experience on our sites is intended to further increase the utility of our consumer offerings by providing the best automotive experience available on the Web.

Last week, we announced an important initiative with Kelley Blue Book in the used car space. We've been working to increase our penetration in this important market, which is substantially larger than that for new cars by an estimated magnitude of 4 to 1. The used car segment represents a tremendous growth opportunity for Autobytel. Through our new agreement with Kelley Blue Book, one of the most recognized consumer brands in the automotive market, our used car dealer customers will gain access to millions of potential buyers through KBB's trusted marketplace. This new classified online vehicle experience currently attracts 12 million end market vehicle shoppers each month, providing our dealers with an enhanced stream of motivated used car buyers and providing Autobytel with a strong value proposition for additional used car dealers.

In addition to improving our consumer and dealer experiences, we are continuing to rationalize costs based upon the current marketplace and our near-term expectations. Recently, we transitioned myride.com to the core platform that is being used by our other websites in our network, which will result in meaningful savings going forward. As we move forward throughout the rest of the year, we intend to continue to enhance our core business, strengthen Autobytel's offerings for our manufacturer and dealer customers to maximize vehicle sales and carefully control costs, responding quickly to marketplace changes. At the same time, we will use our financial strength and flexibility to our advantage by capitalizing on opportunities that result from economic turmoil in the general economy and in the automotive sector.

I believe we are as well-positioned as any company in our industry could be given the economy and our primary financial goals are clearly well within reach. As I mentioned earlier in this call, the auto industry and its diverse segments are ripe for change and consolidation and we expect to be part of those opportunities. Although our work is not complete, we are making additional improvements every day. I'm extremely proud of the Autobytel team and gratified by the significant process we've made thus far. So stay tuned.

Operator, we're ready to take questions.

(Operator instructions.) Your first question is from the line of [Alan Young].

Yeah, hi, guys. Just wondering if we could get a little color on the movement in the quarter, the interplay between lead quality, lead volume and lead pricing?

I guess the best way to describe that is it's a very dynamic marketplace. We've seen a lot of pressure -- we've seen downward pressure on the price that we sell leads for. We've seen upward pressure on the price that we buy leads for. And while at the same time, we're actually working to develop new lead sources. So, it's a very tumultuous time in terms of what we're doing.

Any comment on how that dynamic has been working so far in this quarter?

I'm not sure how you mean that.

Well, any changes recently?

I would say that if anything those pressures have become more pronounced recently.

Okay.

The thing I would add is that we've seen a lot of, as far as the quality of the leads, which again was one of the impetus to go after the Edmunds lead, the quality and retaining people --

Good point.

-- which the -- as you have the higher quality, you're better able to hold the line on the ASP. So, but again, it's a constant interplay between what you're paying and what you're able to sell for the whole margin compression thing and quality of leads to just stay in the game.

Okay.

Yeah. Curt makes a good point on that. Let me expand on that a little bit. We've made a conscious effort to focus on and improve the quality of the leads that we provide to our dealer customers. To that end, we have significantly increased our business with Edmunds, which is having a positive impact -- a significant positive impact on the quality of the leads that we do provide. We're also working with our other existing sources of leads to do the same thing and working to identify new lead sources. So, I would say quality in the market in general has certainly come under some pressure. But since we've begun focusing more on a select few suppliers, we've been working to increase -- to improve the quality of our leads.

Okay. Just on the expense side, I see sales and marketing, tech support, and G&A, am I correct from Slide 7 that that's a pretty clear number -- a pretty clean number? Can we kind of use that as a number going forward? You may want to talk about any severance costs that may or anything else that may show up there that's unusual in the near future.

There is no severance in this quarter. And I think we mentioned in last quarter's call and again this quarter, there's no -- there's nothing planned that would change any of that. So, we're getting -- we're really starting to scrape the bottom of the barrel. We think there's some additional savings to be had, but I think we're in the ballpark with that $6.3 million adjusted and we'll hopefully see some additional activity. So, again, I mean we had the [NYRO] expenses, which we're in the process of negotiating. There will be some -- hopefully that will be resolved. And again I think you're starting to see some stabilization and a lot of the static that we've had in prior quarters will be going away.

Alan, that's a pretty good number, I'd say that's a pretty good number for you to consider.

Okay, great. Thanks very much.

We are still working on improving it, but it's a pretty good number for the time being.

All right. Thanks, Jeff.

(Operator instructions.) Our next question is from the line of [Brian Horay].

The cost cuts that you -- cost reductions that you detailed on Slide 8, how should we think about those kind of getting phased in or are they reflected really at this point in the Q2 results?

Hi, Brian.

Hi.

With regards to the lease reduction, that's done. We signed a new lease and that will feather in -- it began April the 1st, so that will move in over the 12 months and we'll have realized the benefit of that. The Web platform consolidation, we did the consolidation. There are various benefits to be had out of that. Some supplier contracts that we are terminating, have terminated. So, those benefits are going to kind of feather in over the course of the next 12 months. And then third party content, again, that's going to feather in over the next 12 months. Some of it comes as a result of the litigation settlements we've done where we obtained some very rich content from Internet Brands and Edmunds, as well as others, and will allow us to eliminate other suppliers that we currently have as we kind of roll through the next 12 months.

So, is there anything you can say about the second half of the year in terms of what kind of OpEx reductions we might see as a result of these things being implemented as -- over time?

It's difficult to really talk about that in any detail. I mean, we are continuing to focus on expenses. As Curt mentioned, there are some things that we're focused on, but I think for the time being the 63 number, something in that range is probably reasonable to focus on. We'll be talking more about that in the third quarter.

Okay. Can you add any color to your efforts to grow your traffic organically and just whether, I know you've hired some folks to help with that, whether there's anything quantitative you can say about that or qualitative for that matter?

There's not much that we can say quantitatively about that at this point. But from a qualitative standpoint, again, in part the litigation settlements and one of the reasons we did the litigation settlements the way we did was to obtain a lot of this very rich content and tools and reviews and editorials and pictures from some of the top suppliers in the market, so that we can enhance our websites, because obviously SEM and other methods will drive traffic to our websites, but if we don't have a meaningful, exciting user experience, we won't keep people or they won't come back or they won't click very deep. So, we are focused on absolutely improving that. We have made progress. We are seeing improvement in direct to site traffic and obviously the leads that are generated off of our direct site traffic tend to be among the top quality leads that we have. So, we are very focused on developing that. And we'll be talking more about that in future quarters as well.

Okay. And, in terms of cash flow, is getting the cash flow neutral by the end of the year, is that still a reasonable objective for the business do you think?

I don't really want to sound like I'm dissembling, but it's problematic. We're faced with kind of a situation where we've taken a lot of costs out of the business; we're reassessing where we may have gone a little too far in terms of taking out costs, and where it makes sense to reinforce certain business initiatives versus where else can we look at doing things. We are continuing to identify some opportunities as a result, for instance, of bringing into our website some of this content that we licensed as a result of the litigation settlements. Most of that content is only now coming into our sites. It takes time after you get it done. And as we bring that content, those tools, those photos into our site, we are actually identifying some incremental existing supplier situations that we can no longer pay for. So, there are some opportunities, but it's problematic.

Okay. And lastly, I mean, do you guys have a feel at this point for whether the marketplace is kind of leveling out? I mean, there's -- if you listen to people on earnings calls this week and last week, there seems to be a sentiment that the economy's kind of leveling out. And I'm wondering are you guys -- do you guys have the sense that that's what's going on in the car market at this point?

I would say while I have heard some of those earnings calls and seen some of those reports, at least from our perspective, we don't currently see any material improvement in our portion of the automotive market.

Has it stopped getting worse?

It's hard to even say that it's stopped getting worse. I think it's -- I think the deterioration has slowed down. But, it's not -- what you read and what you hear about the general economy does not really seem to be filtering down, at least into our sector of the automotive market, thus far.

Okay. Thanks very much for the color.

Thank you. Our next question is from the line of [Seth Pedrockin].

Hi guys. It seems like you guys are doing as well as you could regarding controlling the controllable, at least on the operating expense line. And a lot of the pressure is really from the industry dynamic of a very weak automotive and economic outlook, but also competitive pressures from within the industry, meaning your peers. You spoke about consolidation and opportunities that may exist there. How material do you think that would be to I guess your margin profile going forward if in fact you were able to participate or other material players participated, meaning less competition?

I think your interpretation of -- hi, Seth, by the way -- I think your interpretation of the situation is pretty good. We really are as effectively as we can controlling our costs. We're kind of changing the focus or evolving the focus to improving our gross margin and driving the top line, which is why I said earlier we may have gone a little too far at one point on cutting some costs and we may need to moderate that a little bit in order to drive the top line.

With regards to consolidation and the impact that could ultimately have on our margins, I obviously can't say a whole lot, particularly with my general counsel sitting here looking at me the way he is. But I would say that generically of course there should be improvement from building better scale as a result of some consolidation. I think that a lot of this market recognizes that building some scale would be a positive thing. And we're -- we certainly are doing what we can to push forward on some of that.

Now, just a follow-up question also. What kind of -- and I don't know if you can answer this, but hopefully we can get close -- I guess right now maybe the automotive industry is looking at a $10 million SAAR-type number. Based on where we've taken our operating expenses to and noting that maybe it has to go slightly higher again to feel more comfortable with really capturing all the business opportunities that we've cut too far, what SAAR number would you more or less be comfortable with saying that, "We'll be making money"?

It's hard to say there's a direct correlation between the SAAR and our revenue, because we do have a couple of other factors. We are -- we do have advertising and some other things. So, I don't want to give you the wrong impression that there's a direct correlation. There's certainly an indirect correlation.

Sure.

I think all of us across this market and the industry would feel a whole lot more comfortable if we could get back up to at least something north of $11 million. Right now, there are some people that are predicting that this year is going to be closer to $9.5 million than $10 million. JD Power recently lowered their 2009 estimate from $10.4 million to $10 million. They've not -- as I believe that was back in May. I haven't seen any further updates from them. And at one point they were -- from the slide that we have on Page 4 -- they were predicting a $13.4 million for 2010. We can only hope and pray that we would get anywhere close to that. They have not updated their projections, but we certainly don't think it's going to be close to that for 2010.

Yes, yes.. Okay. Just congrats on doing all you can and good luck.

Thank you.

(Operator instructions.)

Okay, well, thank you. Thanks everybody for participating in this call. And as I said earlier, stay tuned. We look forward to speaking with you at the end of the third quarter.

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