Autoweb Inc (AUTO) 2010 Q2 法說會逐字稿

Good afternoon, my name is Britney, and I will be your conference operator today. At the time, I would like to welcome everyone to the Autobytel announces second quarter 2010 financial results conference call.

(Operator Instructions).

Thank you, I would now like the turn call over to Mr. Larry Brogan. Sir, you may begin.

Thank you, Britney. Good afternoon, everyone, and welcome to Autobytel's 2010 second quarter conference call. With me on the line today, are Jeffrey Coats, President and Chief Executive Officer, and Curtis 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 statements contained in today's press release, and in the Company's public filings with the Securities and Exchange Commission. Actual events may differ materially from these forward-looking statements. Specifically, please refer to our Form 10-K for the year ended December 31, 2009, as well as our Form 10-Q for the quarter ended June 30, 2010, which we expect to file shortly.

These filings identified the principle factors that could cause results to differ materially from those forward-looking statements. We are including slides with today's presentation to help illustrate some of the points being made, and discussed during this call. You can access them by clicking on the link in today's press release, or by going to the Investor Relations section of our website at www.autobytel.com. When there, go to Investor Relations, and then under News and Events, click on Presentation. Note that during this call, we'll be discussing some non-GAAP financial measures, as defined by SEC Regulation G. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures, are included in the slides posted on our website. Now it's my pleasure to turn the call over to Jeff.

Thank you, Larry. Good afternoon, folks. Although some of the strategic decisions we've made have affected our gross margin, and the bottom line results this quarter, we are convinced that we're making the right moves to better position Autobytel for an expected upswing in the automotive market. Strategic new hires, additional investments dampen results in the short term, but are driving important progress that is intended to improve operations over the long term.

A series of newly launched innovative products has resulted in new and used dealer count growing by more than 10% over the last three quarters. Our OEM business was again strong, with revenue up 14% in the second quarter on a year-over-year basis. And our finance lead business also continued to show strength during the second quarter, with revenue growing by 27% on a year-over-year basis. Overall, total revenue increased on a sequential basis for first time in more than five quarters. In addition, internally generated leads, which has been a major focus, grew to over 35% of total leads delivered during the second quarter.

As you know, we are deploying significant enhancement to our web properties through innovative content and tools, during the coming months. These enhancements are specifically focused on attracting a broader scale of consumers across all stages of the car shopping and ownership experience, as well as bringing new product offerings to build sales for our dealer and OEM customers. Our ongoing commitment to the end market buyer is reinforced by a just released J.D. Power study, which shows that a staggering 80% of new vehicle buyers who use the internet, visit third party sites like Autobytel.

In addition to shoppers, we are developing several exciting content services for a new and used owners, enabling us to continue our relationship with customers beyond their purchase. By continuing to serve owners needs after their purchase, we will strengthen our ability to generate repeat visits, and benefit from greater word-of-mouth with the Autobytel brand. To that end today, we are pleased to announce long term commercial alliance with DriverSide, the leading online vehicle ownership experience, and the most comprehensive customer acquisition and retention program for the auto industry.

Their world-class, digitally innovative products enables automobile owners to register their vehicle, in order to receive personalized expert advice on service and maintenance, parts and accessories, warranty updates, and vehicle equity. This engaging tool will be rebranded on our Autobytel.com with our trademark, MyGarage moniker, and customized over time. We believe strongly that this ownership offering combined with our best-in-class research and shopping tools, uniquely positions Autobytel as the trusted adviser throughout a consumers entire automotive lifecycle.

By expanding our core offering to include the vehicle ownership experience, we also opened up several new monetizable streams of site traffic, automotive related advertising, and lead generation, including a new service lead revenue stream, and rev share opportunities with new products like auto insurance, and parts and accessories. Additionally, the investments we've made in key people and new products are expected to enhance our revenue and margins, as we deliver enhanced utility to consumers, as well as dealers, and manufacturers. On slide three, you'll see that the automotive industry while slowly improving, remains choppy and somewhat tenuous.

US light vehicles sales increased 19% in the second quarter 2010, when compared with the prior year, and 17% on a year-to-date basis. However, it appears that fleet sales and heavy manufacturer promotions and discounting have contributed significantly to the sales increases. The optimism that prevailed earlier this year, has given way to short term caution and trepidation. As former Federal Reserve Chairman, Alan Greenspan was recently quoted, we have a major economic acceleration coming out of the crisis, and it was very impressive until May. And then it's like we hit an invisible wall. I believe that Chairman Greenspan's comments are very much on point, with respect to the auto industry, and uncertainty continues to in the minds of both consumers, and auto dealers.

However, short term choppiness not withstanding, overall the long term prospects for the industry picture are getting better, and should be more conducive to growth in our business. In July, the 2010 seasonally adjusted annual rate for new light vehicle sales came in at 12.2 million units. J.D. Power also recently reaffirmed it's 2010 light vehicles sales forecast of 11.7 million units, and projected sales growing by 15% to 13.6 million units in 2011. A.T. Kearny recently presented a high case optimistic projection, which called for vehicle sales potentially reaching 16.8 million units in 2012, and 17.8 million in 2013.

As we've seen strong results for Q2 reported by the major OEMs, including GM's impressive results today, it is interesting to note that the major restructuring and reductions in production capacity at the OEMs have certainly improved their outlooks. Dealers on the on other hand, continue to struggle in many areas with heavily incentive-related sales, and according to Automotive News, continuing severe inventory shortages for many popular models across most OEMs, brought on by the OEMs new production discipline.

Recent announcements of model specific production increases, should begin to alleviate this, and help improve actual sales. As you know, we have maintained a very strong financial position, which has provided us with the flexibility needed to take advantage of a growing market, and has allowed us to reinvest in our business. Our optimism remains strong, and we continue to improve our business fundamentals, and participate in the inevitable industry recovery. Curt will now review our second quarter financial performance, and then I'll return to discuss some of our key initiatives. Curt?

Thank you, Jeff. Before I begin, I would like to remind everyone that the slide we are referring to on today's call can be found on our website, under news and events, and then presentations. Or simply click on the link, included in today's press release. As shown on slide four, total revenues for Q2 were down less than 10% year-over-year to $12.1 million, but were up approximately 3% on a sequential basis, in what is still a quite challenging markets. This marks the first time in more than year that we have driven sequential top line growth. Total lead revenue declined by less than 3% from Q2 of last year, but increased nearly 5% sequentially. Retail revenue generated from new and used car dealers declined by approximately 18% from Q2 of last year, but was relatively stable with the first quarter of this year.

The year-over-year decline in auto lead revenue relates to a smaller base of new and used car dealers in our network. As Jeff mentioned, however, new and used dealer count has increased in each of the last three quarters, which is expected to translate into revenue growth over the longer term. At the end of the second quarter, our dealer network included 2,223 new car franchises, down about 2% from prior year, but up 4% sequentially. Used car dealer franchises grew 2% year-over-year to 1,040 at the end of the second quarter, and were up 8% sequentially. We see the used car market as a major opportunity. Wholesale OEM lead revenue continue to improve, and grew approximately 14% in the second quarter over the same period last year, as well as 9% on a sequential basis.

The improvement resulted from contracts with new and existing manufacturers that executed -- that were executed earlier this year. Of particular note, we added a major luxury car manufacturer as a customer, and increased the number of leads deliver delivered to existing OEMs this quarter. We now deliver leads to a vast majority of major automotive manufacturing -- manufacturers doing business in the United States. Finance lead revenue was also a bright spot, increasing 27% from last year's second quarter, and 17% sequentially. We've been very encouraged to see the progress in this business, and believe that as economic recovery gains strength we will continue to see growth in this business line.

Finance dealer franchises equaled 261 at the end of the second quarter 2010, up 30% from last year, and 4% sequentially. We firmly believe that the acquisition of AmeriCredit by General Motors, and the expected competitive response will further stimulate growth in the subprime auto finance markets. Advertising revenue in Q2 declined by more than 50% on a year-over-year basis, and by 17% sequentially. The decline is related principally to reduced page views, as we continue to eliminate poor quality traffic sources, while focusing on the development of more encouraging, engaging customer experience.

To expedite this strategy, we've engaged Wunderman, a leading digital agency to dramatically redesign the flagship site, Autobytel.com, with innovative offering such as the previously mentioned, Autobytel's MyGarage powered by DriverSide, with many more to come. Since quality engaged traffic is key to our advertisers, we're enthusiastic about the current click-through rates, which are at all time high. This important performance indicator, combined with the strategies to drive volume, is expected to increase advertising revenue in the currently coming quarters.

Slide five provides a summary of our quarterly revenue by product line over the last seven quarters. We delivered approximately 658,000 auto leads for the second quarter, down 5% from the second quarter of 2009, but up 6% sequentially. We delivered approximately 117,000 finance leads in the current quarter, 35% higher than the last year's second quarter, 16% higher sequentially. On slide six, you will see the change in our cost structure and head count over the last two years. Although operating expenses increased this quarter as a result of the increased spending for recruiting and personnel to enhance our resources in sales, marketing and IT, we made tremendous progress in bringing efficiencies to our operation.

In the second quarter of 2010, total operating expenses were $7.5 million, compared with $6.6 million for the same period last year, and $4.1 million for the first quarter of 2010, which included $2.8 million credit to expense, related to patent litigation settlement, $2.7 million of which is final payment under one of those settlements. The current quarter included severance and related expenses approximately $425,000 associated with the departure of Company's former Chief Operating Officer in May of 2010. Non-cash share-based compensation for Q2 2010 was $330,000, compared with $257,000 in Q2 2009, and $242,000 in Q1 2010. This increase principally being related to accelerated vesting of awards, associated with departure of our former COO.

Net loss for the second quarter totaled $3 million, or $0.07 per share. This compares with net loss of $251,000, or $0.01 cent per share last year, and a net income of $797,000, or $0.02 per diluted share in the first quarter of this year. The second quarter of 2009 resulted in approximately $580,000 of other income related to the sale of an asset, and $778,000 of released escrow funds related to the sale of the Company's AVV business in 2008. Our cash and equivalents balance was $23.9 million or $0.53 per share at of June 30, 2010, down from $25.1 million or $0.56 per share at December 31, 2009. The current ratio of 4.9 to 1 and 4.8 to 1 respectively. And the Company's balance sheet is debt free. With that, I will now turn the call back to Jeff.

Thanks, Curt. I would like to discuss some of our key initiatives which are aimed at growing revenue, regaining profitability, strengthening our reputation in the marketplace, with both the consumer and our dealer and manufacturer customers, and increasing shareholder value. Over the last several quarters, we've talked about the importance of increasing our dealer and manufacturer base, by delivering the highest quality leads available. Our new and used dealer count has grown for three consecutive quarters, and the positive trend continued in July. During this period, our new dealer count grew by 10%, and our used dealer count grew by 13%. We have been aggressively stabilizing our customer base to enhance our market reach, and generate additional revenue opportunities to drive the top line.

We reinstituted our proprietary in-dealership internet processing training, which has been extremely effective in increasing retention with our dealer customers. Additionally, a variety of promotional offers have stimulated dealer growth, but with that gross margins have been temporarily dampened. Over the long term, we think this trade off is the right thing for our business. However, we have also stepped up our application of sales pressure in the marketplace, by increasing our sales force by approximately 20% from year ago levels.

While we continue to innovate new ways for dealers to sell more cars, we are also working to further improve the quality side of the equation. Because lead quality is the utmost important to the dealers and manufacturers who participate in our programs, we need to make sure leads meet stringent quality standards. Perhaps most importantly, on the lead quality front, we have continued to substantially increase the number of internally generated leads, as shown on slide eight. Through the recent hiring of additional great in-house SEM and SEO talent, we believe that our lead generation ability is now better than it has been in several years. We are now generating in excess of 35% of our leads internally.

Our customer facing websites, bolted on to our lead distribution engine, gives us unique competitive advantage in the marketplace. We intend to continue to drive this advantage which will allow us to continuously to aggressively cut back, and eliminate leads acquired from third parties that don't meet our quality threshold. Products introduced earlier in year, such as iControl, which gives dealer the ability to configure their lead mix, to reflect realtime markets conditions, and our quality advantage program which prevents duplicate leads from being sent to our dealers, are helping to expand our dealer base, and it should continue to do so. Marketplace reaction has been quite favorable, iControl was brought out of beta in the first quarter. And by the end of the second quarter, over 300 dealers had signed up for this program, a 13.5% penetration rate. We expect that number to double by the end of the year.

More recently, we launched AutoPilot in July, a new car buying service for consumers who receive financing from their local credit union or bank. Designed to make the car buying process better for all parties, this program, which offers VIP dealer service, and no-haggle pricing provides dealers with greater access to pre-qualified buyers. Autoland, the leading producer of auto purchase services for credit unions, is our premier program partner. We also plan to expand our list of partners for this, in the coming quarters.

We also joined with NAMAD, the National Association of Minority Dealers in July, through an exclusive marketing alliance specifically designed to help NAMAD member dealers sell more cars. Under the agreement, we will be providing member dealers with many our leading products including iControl, as well as our in-dealership Internet process training. While the short term impact of our actions has created some temporary margin pressure, we are confident that we are providing more value to our customers, which significantly enhances our future prospects.

As you can see on slide nine, we are continuing our website development activities to ensure that we are providing a clear point of differentiation for consumers. As Curt mentioned we have recently engaged Wunderman, a leading digital agency to dynamically redesign Autobytel.com. We recently launched an interactive video pilot program, and have other exciting consumer and dealer products on the road map for Q3 and Q4. In the fourth quarter, we will also be initiating Ride and Drive events, as well as a multi-platform strategy, that will leverage social media and mobile applications.

We recently made several management changes, and enhanced our bench strength, with several new hires that have both extensive online and automotive experience. Steve Lind, who rejoined us earlier this year as Executive Vice President of Corporate Development, now also have responsibility for sales and dealer operations. Steve has over 15 years of online automotive experience, and began his career at Nissan. Jim Helberg, a marketing and media veteran, who has driven strategy for leading OEMs, including Toyota, Nissan, Honda and Chrysler, and major ad agencies, recently came to Autobytel in the newly created position of Executive Vice President Product, Marketing and Analytics. Jim is focused on further development of our consumer brand, dealer and OEM product marketing, and beta analytics initiatives. Beta analytics is big area of opportunity for us, and you will be hearing more about this in the future.

In addition for strengthening our senior management team, we also made numerous strategic staffing investments. When I became CEO of Autobytel in December 2008, at the height of the meltdown in the financial and automotive markets, and with the economy heading into a severe recession, I made the decision to reduce costs dramatically, including reducing headcount by over 60%. These actions aligned our cost structures to the uncertainties in the economy and the auto industry. While these cuts were necessary, given the situation in 2008 and 2009 now, 2009, now as the economy and industry slowly recover, we feel it is prudent to reinvest in the resources that will drive sustainable growth and profitability.

We've increased our total employees from 112 at the end of 2009, to 137 today. Of these 25 new employees, approximately 30% are dedicated to sales, 30% are dedicated to enhancing our website, and 30% are in our technology group, to support sales and website development. As industry dynamics are improving, Autobytel's capabilities are being enhanced, and we have the right team in place to make sure our actions successfully position the Company to take advantage of what we believe are significant growth opportunities. Through the rest of this year, we will continue to fine tune our business by delivering new dealer and OEM products, more and higher quality leads, and a better consumer-facing web experience from which to the build larger revenue streams.

We have made tangible progress, and I firmly believe we're on the right track. The great recession of 2009, and the choppiness of the recovery, have not always been easy to navigate. Although it has taken more time than any of us would like, to return to a path of sustainable growth and profitability, the Autobytel team is committed to increasing shareholder value. I look forward sharing our progress next quarter, as we continue to work on building Autobytel. We've seen increasing activity, in what we believe is a market ripe for consolidation. And we continue to pursue strategic opportunities that we believe will provide significant benefits for our automotive consumers, dealers, manufacturers, and shareholders. Britney, we'll now take questions.

(Operator Instructions).

Your first question comes Steve Dyer from Craig Hallum.

Hi, good afternoon, guys.

Hi, Steve.

Can you hear me okay?

Very well, thank you.

Good, with respect to gross margins, I was wondering if you could drill down a little bit more specifically into the factors influencing that. And may be just kind of the level we should expect near term and going forward?

I think it's probably fair to expect that level near term, but we do not expect to see that level on a going forward basis. We do expect to be able to get back to levels we saw earlier this year as we move forward.

Okay, and then operating expenses, are you at the head count you think you'll be at? Or are you still in the process of hiring? And I guess where I am going with that is, when you back up severance expense, you arrive at a quarterly run rate around $7 million. Is that a good number to use going forward, or are there still additions to that?

I think it's probably a pretty fair number at this point. We don't see any additional meaningful head count additions at this point.

Okay. And then just kind of given what you seen in July, and the first half of August here, and I know realizing you guys don't give guidance. Do you feel pretty confident that sequential growth on the top line is going to be doable here going forward?

We currently expect to see sequential growth on the top line, based on all the initiatives we have in place.

Okay, and then, I guess, when you put it all together, it sounds like profitability is pushed back a little bit a quarter or two, relative to maybe it was a quarter ago. Is that fair to say? And would you care to hazard a guess as to when that may happen?

I guess I would say that is a fair statement. And at this stage sense the automotive economy is still pretty choppy, I'd really not like to hazard a guess.

Okay.

It is interesting, the OEMs are doing much better. I mean we're seeing strong results coming out of Detroit, and other OEM they're production discipline is definitely doing well for them. It's just not translating all the way down to the dealer level at this point. Consumers are still some what hesitant. New car -- I mean used car prices, as we understand were up 11% this past May year-over-year from the prior year. People are holding on to their cars a year or two longer than they have been historically. So I think there's still some pretty significant caution out there, given high unemployment rates and questions about tax increases and things like that.

Okay, And then I guess back to kind of my original question, would you be able to kind of expound some of the factors driving gross margin? I think you touched on a few of them, but sort of more specifically what brought it down quarter-over-quarter?

It's specifically a combination of paying more, or rather increasing our purchase of leads from certain high quality suppliers, who can command and do a higher price, because they are also selling higher quality leads. The promotions that we have had ramped up a little bit in the market during the second quarter, and continued into the third quarter to increase our dealer count. And somewhat related to that, some of the commissions that we have been paying our sales people, is part of that whole ramp up. We've also -- we had in the second quarter adjusted our margin expectations for our SEM activities for a while, which we've now backed away from, and working more towards improving our margin profile as we move forward for the rest of the year.

Okay, that helps. And then a couple more real quickly, if that's okay. In terms of driving organic leads to 35%, that is a great number. Do you have kind of a end point in mind, or sort of a near term goal as to where you think you can get by the end of the year?

We think there's some additional run rate here. We think we can increase it somewhat. I prefer not to hazard a guess right now, but that's predominantly because we are also, at the same time ramping our efforts to improve our direct-to-site percentages, as well as our SEO penetration. Some of the investment and talent that we've been making in the last two quarters, have been designed to enhance our abilities to do both of these. So that we can actually cut back on some of our SEM activities, to the benefit of significantly better margin SEO, and direct-to-site traffic, which is as we discussed in the past, one of the primary drivers we see towards improve our gross margin again. As the percentage of our overall site traffic, and direct-to-site and SEO picks up over tim,e we expect that to have a meaningful positive impact on our gross margin.

Okay, and then I guess wondering if you can give as it relates to MyGarage some of the thing that you're looking at.

Sure, we're very excited about MyGarage. The DriverSide guys have built an incredibly world class offering. There really is nobody else out in the marketplace that has anything like this right now. We've developed a really close relationship with them, going back to my prior life and their prior lives. We'll be customizing the offer they currently have, as we stand it up as an Autobytel offering. We'll be able to create a new revenue string for service leads, which we can sell to our dealers. A few months ago we had a dealer advisory board meeting. And one of the thing that I talked to the dealers about what level interest they would have, if we were to create a new service lead stream, and the response was overwhelming.

Most dealers make a significant amount of their profit out of their fixed operations, which are their service bays. So they're very interested in receiving those kind of leads. DriverSide MyGarage will certainly drive us into a marketplace, so we're very bullish about that. And there will be rev share opportunities for some of the opportunities that they either, products they currently offer, products that we'll jointly begin to develop, or products that we'll develop, related to auto insurance, warranties, parts and accessories. So they'll be some pretty meaningful rev share opportunity. They, DriverSide, itself is up and running today. They are a fully functioning company and a fully functioning offering.

The Autobytel version, we expect to have stood up sometime in the fourth quarter. And we'll begin generate revenue through it as a result of that. Certainly depending on how deep into the fourth quarter it gets stood up, it'll impact how much revenue we're able to do with it. But for instance, our plan is to drive consumers who have come to Autobytel historically, to the new MyGarage offering through e-mail campaigns. And as we move forward -- get involved on a going forward basis, people that come to our sites, or that we're doing purchase leads with, will be natural opportunities for us to encourage to move into at ownership channel. It will for the first time in many years, give Autobytel the ability to keep an ongoing, meaningful relationship with car buyers throughout their ownership experience, so that we're with them, when they're ready to buy their next vehicle, as opposed to only touching them every three or five years when they go through the purchase process. So we're very excited about this.

Okay,Okay, that's helpful. In one housekeeping item you have depreciation and amortization for the quarter?

Yes, one moment.

If it's easier to move on, you can chime back to it a little late for

It's $321,000.

Thanks a lot guys. Appreciate the time.

Thank you, Steve.

(Operator Instructions).

Your next question comes from Brian Horey from Aurelian Management.

Hi, good afternoon.

Hi, Brian.

Congrats on increasing the dealer count and seeing improvement in lead volume. That's very encouraging.

Thank you.

Can you first of all, just repeat what you said about your SEM activities? I didn't quite catch that when you were responding to the question.

The internally generated leads that we've been able to get up over 35% for the first time this quarter, have-- and as I've mentioned historically, have been for the most part generated through our SEM activities. That's been one of the things that allowed us to improve our margin over the last few quarters, in part because we've been eliminating that margin from some of our former suppliers. As we move forward the growth rate, in terms of that particular internally generated lead may moderate a little bit, as we focus more and more of our activities on replacing some of the SEM growth, with SOE which is optimization of our own site as well as driving direct-to-site traffic. And pure organic traffic is really the best traffic at the end of the day, and the most cost effective, and should have the most positive impact on our gross margin going forward.

Okay. Understand. I just didn't quite -- quite catch it all. With respect to direct-to-site and SEO improvements that we look forward to, do you anticipate that we're going to see some of the effects of that, in terms of the financials the P&L by the end of the year? Should that show up in Q3 and Q4?

We're starting to see some benefit from it, but SEO doesn't happen overnight. We brought in some smart folks earlier this year. The Company really had not had much meaningful internal SEO capability for quite a while, so we brought in some smart people. We're making progress. I think, honestly, it's unlikely that we'll see a lot that you would notice, or that we would break out by the end of the year. We should make some meaningful progress. And I would hope that during 2011, it's something that we can start talking about on a more focused basis. We have put a lot of resources, and a lot of time behind it. We have some other very interesting initiatives going on which would certainly support that, which we hope to be able to talk about in the future.

Okay. Could you talk about what kind of trends you're seeing in the revenue per lead?

Revenue per lead is little bit choppy. Again, it's -- dealers are not overly optimistic these days, so I think probably the best way to think about it is, choppy to flat.

Okay. And how much that is due to competitive activity, and how much of that is due -- you mention promotions and competitions and stuff like that. Can you comment at all in terms of which of those is having a bigger impact on it?

It's both. There's a lot of promotional activity in the marketplace right now, which is one of the banes of being in the automotive leads business. There is a lot of promotional activity, in the leads business and sales part of the equation -- so that's a big part of it. That's probably the biggest part of it.

Okay. And speaking of that, the topic of consolidation in the automotive leads base has been one that we've touched on for several quarters. I'm curious whether, with a more tepid outlook for the recovery and the economy ,whether you think those kind of conversations are going to accelerate over the second half the year. Or does the uncertainty make people a little less willing to engage in that conversation?

My personal opinion is that that kind of outlook enhances opportunities.

Okay. Okay, thanks very much.

Thank you.

(Operator Instructions).

We have no further questions at this time. I will now turn the call back over to Mr. Coats for any closing remarks.

Thank you, Britney. Folks, we really appreciate your interest. This is the most well attended earnings call, that the Company has had for quite a few quarters. We appreciate your interest. Stay tuned, we're looking forward to some very interesting future activities. Thank you very much.

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