Autoweb Inc (AUTO) 2010 Q3 法說會逐字稿

Goo day, ladies and gentlemen, and welcome to Autobytel announces third quarter financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's call is being recorded.

At this time, I would like to turn the conference over to the Senior Vice President of Strategic and Financial Planning, Mr. Larry Brogan. Sir, you may begin.

Thank you, Jeff.

Hello, everyone, and welcome to Autobytel's 2010 third quarter conference call. With me on the call today are Jeffrey Coats, President and Chief Executive Officer, and Curtis DeWalt, Senior Vice President and 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 and results may differ materially from these forward-looking statements. Specifically, please refer to our Form 10-K for the year ended December 31, 2009, our Form 10-Qs for the quarters ended June 30, 2010 , and March 31, 2010, and our Form 10-Q for the quarter ended September 30, 2010 , which we expect to file shortly. These filings identify the principal factors that could cause results to differ materially from this forward-looking statement.

We are including slides with today's presentation to help illustrate some of the points being made and discussed during the call. You can access them by clicking on the link in today's press release or by going to our website at www.autobytel.com. When there, go to investor relations and then News and Events.

Also, please 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 measure to the most directly comparable GAAP financial measures are included in the slides posted on our website.

Now it is my pleasure to turn the call over to Jeff.

Thank you, Larry. Good afternoon, everyone. During the third quarter, we continued to build a strong foundation to meet our goals for sustained revenue growth, margin enhancement and profitability in in 2011. Our recent purchase of Cyber Ventures and Autotropolis was intended to solidify our position as the industry's premier provider of automotive related consumer purchase requests. After Curt reviews our third quarter financial performance, I will return to discuss the acquisition in greater detail, as well as some of our other key initiatives. Curt?

Thank you, Jeff. Before I begin, I would like to remind everyone that the slides we are referring to on today's call can be found on our website under Investor Relations, and then News and Events.

As shown ons slide three, total revenues for 3Q, although down approximately 3% year-over-year to $12.9 million, were up 7% on a sequential basis, driven by improvements in our auto purchase request referral revenue as well as advertising revenue. This marks the second consecutive quarter of revenue gains. Total auto request revenue, which we used to refer to as lead revenue, increased 2% from the third quarter of last year and grew approximately 6% on a sequential basis, driven primarily by substantially improved wholesale OEM purchase request revenue which grew approximately 36% in Q3 over the same period last year and 24% on a sequential basis. The improvement was driven by a combination of new accounts added and existing accounts increasing their purchase request spending with Autobytel, a clear indication that our quality initiatives are working. The year-over-year and sequential improvements also benefited from two weeks of revenue from the addition of Cyber Ventures and Autotropolis.

Improvements in the wholesale OEM channel were somewhat offset by a reduction in retail dealer purchase request revenue. While our dealer count has increased in each of the last four quarters, our total purchase request per dealer is down on a year-over-year basis for two reasons. First, the 2009 period which included the Cash for Clunkers program. Because of the popularity of this program in July and August of 2009, we had an abnormally high purchase request where available in the marketplace which allowed higher delivery to dealers. Secondly, in 2010 we have eliminated certain under-performing affiliates from our purchase request supply chain. The purchase requests are now being replaced with higher quality, internally generated purchase requests. Sequentially dealer purchase request revenue declined by 2% from the second quarter of this year. As well as purchase requests delivered per dealer was down. We are confident that delivering the quality proposition and continued innovative program offerings will address revenue generating opportunities.

As seen on slide four, at the end of the third quarter our dealer network included 2,300 new car franchises, up about 12% from the prior year period and up 3% sequentially. Used car dealer franchises grew 13% to 1,042 at the end of the third quarter and were flat sequentially. We delivered approximately 681,000 auto purchase requests in the third quarter of 2010, up 1% from last year's third quarter and up 5% sequentially. Year-over-year increases reflect increased delivery of purchase requests into our OEM channel. Finance request revenue was strong again this quarter, up 36% from last year's third quarter and up 2% on a sequential basis. While the subprime auto finance market has yet to return to its previously seen robust levels, credit has loosened somewhat and we believe further growth will follow. We had 253 finance franchise dealers at the end of Q3 2010, up 36% from last year but down 3% sequentially.

We delivered approximately 117,000 finance requests in the third quarter of 2010 which was 34% higher than last year's third quarter, and flat sequentially. Advertising revenue declined by 36% in Q3 on a year-over-year basis. But increased 19% sequentially. The year-over-year decrease related to an elevated level of website advertising and page use in the third quarter of 2009 resulting from the government's Cash for Clunkers program. The sequential increase was driven by additional monetization of direct marketing campaigns.

Slide five provides a summary of the quarterly revenue by product line over the last several quarters. Gross margin increased to 36.8% for 2010 third quarter, up from 35.5% from 2009 third quarter, and up from 35% even from the preceding second quarter. The increases are primarily related to a greater mix of internally generated auto purchase requests. There continues to be, however, an element of higher priced, third party sourced purchase requests which we consciously increased in the first half of 2010 to counter certain quality issues. These purchases will continue for the foreseeable future, but the margin drag will be more than offset by the margin enhancements arising from the acquisition. Our current analysis indicates that a result of the acquisition of Cyber Ventures and Autotropolis, gross margin improvement of several hundred basis points could be achieved in the fourth quarter as well as throughout 2011, assuming revenue mix and other factors remain reasonably static.

On slide six you will see the changes to our cost structure and head count over the past two years. Operating expenses increased in the quarter as a result of the strategic investments made to enhance our long term position in the marketplace, including activities related to the acquisition of Cyber Ventures and Autotropolis. Total operating expenses were $7.9 million for the 2010 third quarter, up from $6.2 million from last year's third quarter. In addition to the acquisition expenses, the current quarter included increased personnel costs that were unrelated to the acquisition, as well as additional resources put behind branding and website initiatives as a result of our new association with the marketing firm, Wunderman. We consider the majority of these branding and website initiative expenses to be one-time or temporary in nature. Additionally, Jeff will be discussing approximately $6.3 million in annualized cost reductions that we have targeted. Noncash share base compensation for Q3 2010 was $231,000, compared with $267,000 in Q3 of 2009. Depreciation and amortization was $223,000, versus $358,000, respectively. The net loss for the third quarter totaled $3.1 million, or $0.07 per share, compared with a net loss of $799,000, or $0.02 per share last year. Last year's third quarter net loss included a gain of $642,000 and discontinued operations related to the sale of our ADD business during January of 2008.

Our cash and equivalents balance was $10.3 million at September 30, down from $23.9 million at June 30 and $25.1 million at December 31, 2009. The decrease in cash relates mainly to the purchase of Cyber Ventures and Autotropolis as well as a $1 million investment in DriverSide which Jeff will discuss shortly. As a result of the acquisition, we are now carrying a $5 million note on our balance sheet. This convertible note will pay simple interest at a rate of 6% per annum.

With that, I will now turn the call back over to Jeff.

Thank you, Curt. As is widely known, the auto industry has been quite unsettling over the last few years. However it is expected to more meaningfully recover by 2012 as you can see on slide seven. Although August was a very weak month for new car sales, September was solid and October was surprisingly strong, as well. Along with housing, the automotive sector probably got hit the hardest of any of the major industrial sectors. In fact, as you can see on slide eight, before the summer of 2009, the last time annual US vehicle sales dropped below the 10 million mark was 28 years ago during the severe recession of the early '80s followed by a nice recovery. In addition, the US population is about a third larger today than it was back in 1982. This chart would indicate that the past is prologue for the future, so the good news is that history indicates a relatively strong automotive rebound in the coming years.

This environment has taken a toll on just about everyone in the industry, including Autobytel. However, we have been using this time wisely to better position the Company for an expected industry upturn and to create significant shareholder value. Over the last several months, we have been identifying ways to further improve our effectiveness for auto dealers, auto manufacturing and consumers. The acquisition of Cyber Ventures and Autotropolis helps us in all these areas and is truly a watershed event for Autobytel. While some of our strategic activities, including the acquisition, have resulted in higher expenses this quarter and in Q4, I believe that these decisions have positioned us well. As noted in our press release today, as a result of a reevaluation of our operations in connection with the integration of the acquisition, we have removed approximately $3.2 million of annualized headcount related costs and identified an additional $1.8 million of annualized non headcount related cost. This equates to a reduction of 14%, in our work force. Fourth quarter severance expense related to these actions will be approximately $1 million. Additionally, we have identified approximately $1.3 million in annualized cost of revenue efficiencies in 2011.

Cyber Ventures and Autotropolis combined were the largest and last remaining independent, high volume generators of high quality, ready to buy consumer purchase requests. As a result of the acquisition, Autobytel is now once again the country's largest generator of new car purchase requests. In its early years, Autobytel generated essentially all of its leads internally through our website Autobytel.com. With the advent of Internet search we began buying leads from a new class of lead generator. While this was the right decision for our business at the time, it is now clear that we need to continue our focus on building our web capabilities that allow us to self generate our purchase requests to drive quality, margin enhancement and profitability.

As you can see on slide nine, over the last five quarters, we have made extensive progress in increasing the number of internally generated purchase requests through our network of consumer facing websites which also substantially improved the quality of the purchase requests we are sending to our dealer and OEM customers. In the third quarter of this year, more than 39% of the total purchase requests we delivered were internally generated. This has been a key part of the improvement in our gross margin. The addition of Cyber Ventures and Autotropolis is expected to increase internally generated purchase requests by more than 150% from about 80,000 to over 200,000 per month, and total purchase requests by more than 40% to over 320,000 per month.

As you can see on slide 10, internally generated purchase requests are expected to grow to approximately 65% of our purchase requests in 2011, creating a fundamental shift within our industry which is characterized by relationships where we are simultaneously competitors, suppliers and customers to and of one another. As Curt mentioned, we believe we will see a gross margin improvement of several hundred basis points in Q4 and again throughout 2011, if our revenue mix and other factors remain reasonably static.

So why all this focus on internally generated purchase requests? As I said before, internally generated purchase requests are generally of higher quality and it is this higher quality that is the single most important factor to the dealers and manufacturers that participate in our program and is vital to our ability to retain them and drive improved margins. The growth in our OEM business thus far is indicative of this progress. For some time, we have been discussing the importance of growing our dealer and manufacturer base, but delivering the highest quality purchase requests available. A large and stable customer base provides a foundation from which to deliver innovative products and services and generate new revenues stream. Our new and used dealer count has increased organically for four consecutive quarters. New car dealers have grown by more than 12% and used car dealers are up more than 13% over that same period. With more than 200,000 internally generated purchase requests expected each month as a result of the acquisition, and a host of products that help dealers sell more cars, we believe we have the right combination of compelling offerings to drive additional growth in our dealer base.

Existing dealer products such as Web Lease Plus, iControl, Email Manager and Quality Advantage will be joined by additional high value products that we can begin quickly monetizing. As we have been integrating the Cyber Ventures and Autotropolis teams into our business, we have been extremely impressed with their creativity and knowledge of both the online and automotive markets. Of course, we knew this before the acquisition but we are now beginning to benefit firsthand from this. One of the great things about Cyber Ventures and Autotropolis, is that in addition to having built significant, high quality purchase request generation capabilities, they will also enhance our Internet footprint with more than 2 million additional page views expected each month. Given the work we have been doing to significantly enhance our web properties, we are excited to be immediately reaching a greater number of consumers.

Now that we have successfully addressed past quality traffic issues, and with our click through rates at all time highs, we are now turning our attention to traffic volume. As we've discussed, these enhancements are focused primarily on attracting a broader scale of consumers across all stages of the car shopping and ownership experience. In addition to the JD Powers study we referenced last quarter which shows that 80% of new vehicle buyers who use the Internet visit third party sites like Autobytel, a new study by the same group found that 68% of used vehicle buyers use the internet in their shopping process and that third party sites are more popular than dealer sites for this purpose. We are also developing new, robust content for car owners in order to engage consumers continually throughout the entire vehicle ownership life cycle which will extend our relationship with them beyond their once every three to five year purchase cycle. In addition to strengthening the Autobytel brand and generating repeat visits, attractive monetization opportunities exist at various key points throughout the car ownership like cycle. Although the site advertising has not been a primary focus for us over the last 21 months, there are many ways we can benefit with a greater number of unique visitors and page views across our sites. With current click through rates on our sites at all-time highs, additional visitors should result in stronger ad performance and higher advertiser demand.

Last quarter we announced a long term alliance with DriverSide.com, which provides the industry's leading online vehicle ownership experience, and the most comprehensive customer acquisition and retention program in the auto industry. We also invested $1 million in this exciting company to solidify our long term relationship with them. DriverSide is powering our new My Garage ownership offering which will allow users to receive personalized advice on service and maintenance, auto insurance, financing options, parts and accessories, warranty updates and vehicle equity. My Garage offers insight into OEM maintenance schedules, recalls, repair estimates, as well as Ask An Expert features, cost of vehicle ownership information, service reminders and value alerts that tell consumers when their car is worth a preselected price target. By customizing this type of critical information we are creating a unique consumer proposition and multiple new revenue streams for Autobytel, including a new service request revenue opportunity. We plan to have My Garage integrated into our flagship Autobytel site by the time we launch our fully redesigned and updated site which we have decided to launch in Q2 2011 to take full advantage of the assets and resources that we have gained as a result of the Cyber Ventures and Autotropolis acquisition, as well as through our relationship with Wunderman.

Another exciting venture in the works revolves around the gold mine of end market and tender data we have amassed over the years. A new partnership with Aperture, a Datran Media company, will help us turn this data into an actionable suite of tools that will allow brands to translate actual consumer shopping and media behavior insights into real time campaign optimization. These insights based on real consumer behavior, not self reported intent , has never been before available to auto manufacturers, large dealer groups, advertising agencies and publishers. The initial reception from the OEM community has been very positive. By leveraging the data we already have, we are not only providing increasing value to our manufacture customers, but adding a new high margin opportunity for Autobytel.

I came onboard as CEO in the midst of a very difficult automotive environment, and while Autobytel was certainly not immune to the problems faced by everyone in the industry, we have accomplished many things of which to be proud. We initially reduced expense, refocused our business on internally generated automotive purchase requests and began improving the consumer experience on our network of websites. In addition, we committed to rebuilding revenues and margins to drive toward profitability. The cost efficiency actions announced today amounting to more than $6 million of annualized cost of revenue and operating expense reductions are a meaningful milestone in our turnaround plan. We are taking the strategic actions that will allow us to strengthen our customer and consumer relationships and return the Autobytel brand to a position of prominence throughout the automotive industry. These initiatives are already underway and will continue through the rest of this year and will make us stronger in 2011.

As evidence of progress in regaining our editorial voice with the consumer, General Motors recently included an excerpt from our web site in their IPO road show presentation, one of only three automotive websites quoted. We've included a screen shot of this presentation page as slide 11. As an aside, you can find the entire presentation on RetailRoadShow.com. It is quite an interesting overview of GM and its products which I would encourage you all to view.

In closing, as I have mentioned, we continue to see increasing activity in what we believe is a market ripe for consolidation. Our recent acquisition and the recent transactions announced with Kelley Blue Book, vAuto and Internet Brands just reinforced this. As we move forward, we continue to pursue strategic opportunities that we believe will provide significant benefits for our shareholders. I look forward to keeping you updated on our progress.

Joe, we're ready now to take questions.

Thank you, sir. (Operator Instructions). Our first question is from Steve Dyer with Craig-Hallum.

Thank you, good afternoon. Back when you did the acquisition you indicated the run rate for Autotropolis and Cyber Ventures was $10 million -- actually, not the run rate, 2009 revenue. But some of that obviously was to you guys. How should we think of the amount of revenue that is additive to you going forward?

It is not going to be the full $10 million. It will be something less than that. We were not a major customer of Cyber Ventures and Autotropolis. Of the three majors in our space, we were actually the smallest of the three customers of them, so we will not see a major revenue degradation as a result of that. However, as we position ourselves number one in their purchase request waterfall, we will transfer a price that revenue into our own dealer and OEM buckets. So, there will be some fall off, but we don't expect it to be meaningful. And then it, of course, will improve significantly our gross margin as a result.

Yes. Okay. And Aperture, how meaningful do you expect that revenue to be either Q4 or as you look out into next year?

We currently don't expect any Q4 revenue from that. We would expect it to be seven figure revenue for us in 2011.

Okay. And then with respect to the cost cuts, how would you expect that to be reflected on the various lines of the income statement? Is there one particular area, excluding the severance charge, obviously, is there one particular area that will see the bulk of that benefit?

It will primarily show up in operating expenses.

Any one line or spread out?

Actually, it will be spread out across several lines. The reductions were in various areas of the business as we look at changing our approach to doing certain things.

Okay. And then with respect to consolidation, obviously, it has taken some time but AutoTrader recently bought Kelley. What is your color commentary on where the industry is with that and your role in that, if you wouldn't mind?

I can only give you a supposition. I think once, coming out of the downturn, the M&A market starts opening up generally, things start happening pretty quickly. It would be my expectation that we will see more consolidation in this marketplace and we expect to be in the middle of it, leading as much of it as we possibly can.

Okay. That is it for me. Thanks.

(Operator Instructions) Our next question comes from Brian Horey with Aurelian Management.

Thank you for taking my question. One of the questions was whether you expect to see any revenue impact from the headcount cuts that you are making.

Any negative revenue impact?

Yes.

We do not expect to see any negative revenue impact from that.

Can you give us a sense as to what you think the pro forma burn rate or P&L looks like after you get through the severance expenses and so forth?

We believe based on the actions we have taken, that we would expect to be profitable in 2011.

Okay. And do you have a minimum projection of when you will hit a minimum cash level and when that might be and what level that ought to be at?

There will obviously be some severance in the fourth quarter. There will be some incremental loss in the fourth quarter. We are not really quantifying that currently.

Okay. And then the last question I had was, I realize that there are a lot of things moving around in real time, but there has been some consolidation in the industry, as we've all talked about. Have you seen any manifestation of that in terms of pricing behavior or general competitive dynamic in the business at this point?

I am not sure I follow your question completely.

Has the competitive intensity of the business lessened any? Has the pricing dynamic gotten any better in the wake of some of these acquisitions that have happened?

Do you mean from a day-to-day operations standpoint? Or on the price of a Company standpoint.

No. From the day-to-day operations.

I think we see some upside from a pricing standpoint in our product lines as a result of what is going on.

Okay. All right. Thank you very much.

Our next question comes from the line of Kyle Krueger with Apollo Capital.

Hi, Kyle. My questions were answered, thank you.

Showing no further question, I would now like to turn the conference back to Jeff.

We would like to thank you all for participating today. We are happy to answer any questions on a going forward basis and we look forward very much to talking to you again in 2011. Thank you, Joe.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.