Autoweb Inc (AUTO) 2011 Q3 法說會逐字稿

Good day ladies and gentlemen welcome to Autobytel.com third quarter 2011 conference call. At this time all participants are on listen-only mode. Later we will conduct a question and answer session, with instructions following at that time. (Operator Instructions). As a reminder this conference call is being recorded. I will turn it over to Roger Pondel, Investors Relations for Autobytel. Please begin.

Thanks Tyrone, and hello everyone. Welcome to Autobytel's 2011 third quarter conference call. I am joined today by Jeffrey Coats, President and Chief Executive Officer, and Curt DeWalt, Senior Vice President and Chief Financial Officer.

Before we begin I would 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 Autobytel's future financial performance are covered by the Safe Harbor statements contained in today's press release. The slides accompanying this presentation and the Company's public filings with the SEC. Actual events and results may differ materially from those forward-looking statements.

Specifically please refer to the Company's Form 10-K for the year ended 2010, the Form 10-Q for the quarter ended September 30, 2011, which we filed prior to this call, and other filings with the SEC. These filings identify factors that could cause results to differ materially from those forward-looking statements. Slides are included 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 Autobytel's website at www.autobytel.com. When you are there go to Investor Relations and then click Events and Presentations.

Also please note that during this call we will be discussing adjusted operating expenses, EBITDA, and cash flow, which are non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measure are included in the slides for this call that are posted on the Autobytel website.

And with that I am happy to turn the call over to Jeff.

Thank you Roger. Hello everyone, we are glad you could join us today. On the heels of a positive second quarter report we continued to drive improved financial results for the third quarter. We have generated GAAP net income for two straight quarters, and posted our best quarterly revenue since late 2008.

As a result we have earned back our first quarter loss, and are now profitable for 2011 9-month year-to-date period. We achieved these results even though the auto industry is recovering at a slower pace than most anticipated, as reduced inventory levels continue to dampen new car sells. This dynamic has been most pronounced for the Japanese manufacturers, given the March earthquake and tsunami in that country.

In addition the recent floods in Thailand are expected to further reduce Japanese production, and affect some US auto makers as well, given the volume of automotive parts production in Thailand, thus causing renewed inventory concerns. Although the market originally expected Q4 to be much more robust this year than usual, due to the anticipated surges in manufacturer incentives and advertising, these surges thus far have not meaningfully materialized it due to continuing inventory shortages. Therefore we are anticipating our Q4 revenue to moderate slightly due to the normal seasonality decline. While the third quarter likely represents our highest revenue quarter of the year, we do anticipate that Q4 revenues will come in stronger than Q2.

As I mentioned earlier, we are profitable 9-month year-to-date period, and we currently believe we will be able to generate net income for the full year. Although renewed uncertainties resulted from production related inventory disruptions for the remainder of 2011 could impact our ability to do so. Entering 2011 we detailed a strategic plan for Autobytel that focused on relaunching Autobytel.com our flagship website, further improving our purchase request quality and continuing to contain our operating expenses.

We are very proud of the financial results and improvements we are generating in our core business which have come as a result of our laser focus on our strategic objectives and the successful integration of our Cyber Ventures acquisition. Our plan is working as we have seen improved results in what is undeniably still a difficult and dynamic automotive market. Just as important we believe our strategic path has positioned us well for additional growth opportunities, as the economy and the car markets improve, when Curt is finished with his financial review, I will come back to discuss some of our key initiatives. Curt.

Thanks Jeff, again a reminder the slides we are referring to on today's call can be found on the Autobytel website under Investor Relations, and then Events and Presentations. On slide two you can see the total revenue for the 2011 third quarter increased 26% from last year to $16.3 million from $12.9 million. On a sequential basis revenue grew 7%. The improvement reflects increases in wholesale purchase requests, including those sold directly to auto manufacturers, and are primarily attributable to our September 2010 acquisition of Cyber Ventures.

On slide 4 you will find quarterly revenue by source for the 2011 third quarter total automotive purchase request revenue grew 33% over last year, which included a 75% revenue increase in OEM and other wholesale channels compared with last year's third quarter. On a sequential basis auto purchase request revenue improved 9%, including a 12% increase in OEM and other wholesale revenue. We delivered approximately 1 million automotive purchase requests in the 2011 third quarter, compared with 744,000 for last year's third quarter, and 887,000 for the second quarter of this year.

Finance request revenue rose 16% compared last year, and 7% from the second quarter of this year. We delivered approximately 121,000 finance requests in the current quarter, versus 115,000 in last year's third quarter, and 111,000 from the second quarter of 2011. While prime subprime credit availability is approaching pre recession levels, finance request volume is subject to continued volatility in consumer confidence. Advertising revenue declined 24% versus last year's third quarter, and 21% on a sequential basis as auto manufacturers moderated their ad spending in light of reduced inventory, related to the earthquake and tsunami in Japan.

That said we continue to believe there is opportunity to improve our advertising business, particularly given the ongoing positive evolution of the Autobytel.com website. This evolution which includes new content monetization strategies, positions us well to capitalize on increases in OEM marketing budgets once automobile supply and economic factors improve.

On slide five, our dealer network included 2,410 new car dealers, up 5% from last year, but down 1% on sequential basis. Used car dealers totaled 1,095 up 5% from last year, but down 6% from the second quarter of this year. It is important to note that we have begun to migrate our dealer acquisition and retention strategy to focus on higher revenue accounts, and on dealerships where we can supply an increasing percentage of our internally generated purchase requests. We also had 295 finance dealers in our network at the end of 2011 third quarter up 16% from last year's third quarter but flat on a sequential basis.

Gross profit increased 38% to $6.6 million for the 2011 third quarter, up from $4.8 million last year and $6.4 million in the 2011 second quarter. Gross margin improved to 40.3% versus 36.8% in last year's third quarter, but down somewhat from the 41.7% for the second quarter of 2011.

The year-over-year improvement was driven by a greater number of internally generated purchase requests, the sequential decrease is a mix issue, primarily relating to lower advertising revenue which generally carries a higher margin couple coupled with a higher number of purchase requests sold through wholesale channels which generally carry lower margin. Ongoing improvements in our business should offset any margin decline caused by a greater mix of wholesale purchase requests.

Slide six shows our cost structure on an adjusted basis. Total operating expenses for 2011 third quarter were reduced by 22% to $6.1 million from $7.9 million in last year's third quarter. Total operating expenses were roughly equal to the second quarter of this year. We believe operating expenses are well buttoned down, and we do not currently expect that they will move up significantly in future periods, although we do plan to invest in future growth.

As you will see back on slide three, noncash stock-based compensation for the third quarter was $268,000 versus $231,000 for the third quarter of 2010. Amortization and depreciation was $523,000 for the most recent third quarter, compared with $223,000 in the year ago third quarter. This increase resulted from the amortizing of intangible assets associated with the acquisition of Cyber Ventures. This brings EBITDA for $1 million for the third quarter of 2011 versus an EBITDA loss of $2.8 million in last year, and flat versus $1 million in the second quarter 20611. We generated net income of $446,000, or $0.01 per diluted share for 2011 third quarter, compared with net loss of $3.1 million or $0.07 per share in last year's third quarter.

Net income also improved from the second quarter of this year when we posted a profit of $199,000, or breakeven per share. As Jeff mentioned we are now profitable on a year-to-date basis for 2011. Cash flow used in operations was less than $100,000 for the 2011 third quarter compared with $2.9 million used in operations last year. Cash flow provided by operations was $1.4 million in the second quarter of 2011. The sequential reduction mainly reflects higher Accounts Receivable and working capital resulting from increased revenues in the timing of cash disbursement.

We remain cash flow positive on a year-to-date basis for 2011. During the 2011 third quarter DriverSide Incorporated, a company we had invested was acquired by a third party. As a result we received a cash payment of $823,000, which represented our pro rata share of the initial acquisition consideration. This payment was reported as a reduction in the DriverSide investment on our balance sheet. We are also entitled to pro rata share of amounts payable upon satisfaction of contingent payment milestones by DriverSide.

At the end of September we had $9.2 million in cash and cash equivalents, up from $8.6 million at the end of June and up from $8.8 million at the end of last year. We are carrying a $5 million convertible note from the acquisition which pays simple interest at a rate of 6% a year. You will find our year-to-date results in the press release we distributed earlier and in the Form 10-Q we filed today.

With that I will turn the call back to Jeff.

Thank you Curt. The current auto industry picture while better than it has been in recent years remains mixed. While the natural disaster in Thailand caused additional uncertainty in the automotive sector for balance of 2011, auto makers and analysts still expect vehicle output will rise in 2012 according to Automotive News. Anticipated growths in 2012 is likely to be spurred by pent-up demand, as well as a progressively tighter used car market.

RL Polk reports that the average age of today's car on the road is nearing 11 years, up from 8.8 in the year 2000. This was further echoed by Auto Nation's CEO, Mike Jackson, who recently told investors there is definite pent-up demand genuine replacement need. From the manufacturer side, Ford Senior Economist Jenny Lin has also pegged growth in 2012 to vehicle replacement needs. To achieve more rapid and significant increases in new car sales we continue to believe that the industry will need to create and aggressively market attractive incentives, to accelerate the consumer's path into and through the purchase funnel.

As you can see on slide seven, October SAR was nearly 13.3 million units, up from 13.1 until in September, as compared to 12.1 million in August, and 12.2 million in July. Full year 2011 SAR forecasts currently range from 12.5 million to 12.7 million units. Although some auto executives are calling for flat car sales next year, JD Powers still expects a healthy 9% to 10% increase in car sales from 2011.

Regardless of the industry's vagaries, we are confident that we have correctly positioned Autobytel to take advantage of many opportunities in 2012. Enhanced by acquisition last year as well as improvements in our own purchase request generation, we continue to produce 60% to 7)% of purchase requests from our own websites. This is an important distinction as generating this level of purchase requests internally, helps us improve quality as measured by lead conversion, while reducing costs and driving margin improvement. We are comfortable at this range which allows us to optimize the return on investment from internal resources while supplementing our offerings where appropriate from high quality affiliate suppliers.

Over the last several quarters driven largely by our acquisition last year, we have witnessed another important shift in our business. Purchase requests sold into wholesale channels are growing at a faster clip than those sold into retail channels. Through our strategic search engine marketing and search engine optimization efforts, we have yielded additional high quality purchase requests to meet that demand. We believe this cycle of improved quality resulting in higher demand will continue, and that we will see further growth in this area.

On the retail side as Curt mentioned earlier, we have begun to migrate our dealer acquisition and retention strategy to focus on higher revenue accounts, as well as on dealerships where we can supply an increasing percentage of our purchase requests through internally generated channels. Although total dealership count is down sequentially from Q2 the total number of purchase requests delivered to dealers has increased, as has the number of purchase requests delivered on average to individual dealers. Importantly we have also seen an increase in our average revenue per dealer. Because of these positive developments you can expect to see less emphasis on the reporting of dealer counts as we focus more on the inherent financial benefits from these changes.

I would also like to briefly update you on new Autobytel.com the first phase of which we launched in June. With 4 months of operating history under our belts we are very pleased by what we are seeing. Since launch our page views per visit have increased, and in September and October have already exceeded previous year levels. There has also been substantial progress made with search engine optimization, with page views from SEO already outperforming prelaunch and previous year levels for the same September and October period.

The enhanced online automotive experience at Autobytel.com continues to engage and inform consumers in new and improved ways. Consumers are actively using our expanded original content and shopping tools. As Curt mentioned these and other positive changes have improved advertising performance for our OEMs many of whom have told us Autobytel.com is in factone of the best performing sites in the third-party category.

This early momentum and recognition from key customers is just the beginning of our ongoing multi phased approach to delivering a truly competitive destination for today and tomorrow's automotive shoppers. We are currently in the midst of the advertising upfront season, and thus far we see positive signs related to overall OEM marketing spend in 2012. In addition we have received several advertising spot orders for Q4. We believe that this trend is reflective of the continued positive reception from the manufacturer and advertising communities with regard to the new site. While it is too soon to call definitively,we believe the third quarter may have represented a low point in advertising revenue for us, versus these recent more positive indications from this side of our business.

It is clear that we have made tremendous progress thus far in 2011. The new and improved Autobytel.com is up and running smoothly, internally generated purchase requests are driving improved results, and we have demonstrated our ability to sustain profitability and grow our business. We are also pleased that our focus on cost containment has built a fair amount of leverage into our business model. Given the positive initial results from the first phase of our Autobytel.com relaunch and its expected increased support of our internal lead generation capabilities and advertising results, we are beginning to accelerate our additional phased investment and further enhancements in traffic growth.

As we have stated before, we believe that our strength and position makes Autobytel a key player in the market consolidation that we expect to continue. I want to thank each and every Autobytel employee for their hard work and enthusiastic dedication to continuing to improve our financial results, and our consumer and automotive customer offerings. There is much to look forward to, while we compete in a recovering sector key indicators many of which I shared with you today, cause us to remain optimistic about Autobytel's future performance given the increased strength and vitality of our core business, as well as the solid fundamentals in our business. Operator, we are now ready to take questions.

Thank you. (Operator Instructions). We have a question from Steve Dyer of Craig-Hallum, your line is open.

Good afternoon.

Hi Steve.

As it relates to potential production interruptions related to the Thailand floods, it is sort of my understanding that it doesn't sound like it is going to be a huge deal for North American production, maybe a little bit here and there, but nothing that crimps inventory all that much. Are you hearing something different, or are dealers reacting to it as if it might be?

No, I don't think we are hearing anything any different. It is just I think still a level of uncertainty, even though Toyota has come out recently in the last day or so and made positive noises about getting their production back on track. So it is just another one of those anomalies. I think the biggest issue that is still affecting the auto markets are the fact that inventory levels at dealerships on the ground, so far still have not gotten back to the levels that they need them to.

Okay. And what are you hearing from dealers as it relates to incentives here going into the end of the year?I think a lot of us have been waiting for that to pick up for several months now, and it doesn't seem to and I don't know if this is just kind of the newer more disciplined OEMs, or if they are waiting for the end of the year here?What are you hearing?

We hear a mixed bag. We certainly along with many other people had expected to see more incentives coming into the market sooner. It is our understanding that again that hasn't really occurred thus far, in part because the Japanese manufacturers just don't have sufficient inventory on the ground to really do much heavy advertising and incentives. And the domestics seem to be basically sitting back and not pushing incentives because they don't need to right now. We still would think that there will be some push in December, December is usually a good month. But we are not hearing anything specific right now.

So is your guidance that Q4 will be lighter than Q3 from a revenue standpoint?I think by all accounts the SAR should be better, but is that more based on the fact that the raw numbers not the seasonally adjusted numbers, but the raw numbers will be less?

Yes, usually the fourth quarter in our business and in most of the contingent or contiguous use automotive business fall back in a little bit in the fourth quarter. December is usually pretty good but the other months are a little lighter. We are not seeing anything so far. We didn't see really anything so far in October, and we are not seeing anything so far in November, that would cause us to think that the fourth quarter is going to be anything other than the seasonal fallback that it usually is. But like I said, we think it will be somewhat less than our third quarter revenue, but certainly higher than our second quarter revenue.

Last question from me as it relates to your mix into the wholesale channel, would you expect that is going to be a bigger part of the mix going forward, and therefore your gross margins are going to be closer to 40% as opposed to kind of moving up from here? How do you envision that going forward?

We do see the wholesale mix continuing to grow certainly faster than retail. There has been a new manufacturer program come into the market in the fourth quarter, that we are a large participant in that will have a larger positive impact going forward. We have seen some adjustment in a couple other manufacturer programs that have yielded positive results. So we do expect that mix to continue.

From a gross margin standpoint it does certainly have an impact. I would tend to think that our gross margin is not going to move up to the mid-40s as we had originally anticipated, in part because of this increase in the mix, in part because it is somewhat driven by advertising revenue, and in part it would have been somewhat driven by the data revenue that we still have not meaningfully been able to capture.

I guess I lied, one more question. Speaking of the data revenue, how do you see that playing out going forward?

We still have a lot of irons in the fire. We are working with several different firms. We are generating a small amount of revenue from that. I am in New York next week for some meetings related to some of this. So we are putting some more focus on it to see what we can do.

Our initial foray into this was not really an initiative that we were driving, we were just a data provider, and our other partner was pushing it forward for a variety of mostly understandable reasons. It just didn't get pushed as far as we had hoped it would, but we are kind of regrouping and redoubling our efforts for 2012. We do still think there is a data revenue opportunity for us.

Okay thank you.

Thank you.

Thank you. Our next question is from Jared Schramm of ROTH Capital partners, your line is open.

Good afternoon.

Hi Jared.

With the SAR in October at 13.3 that was the highest since October of 2009, how are you seeing had ads trend just in that month, and is this an opportunity for the domestics to pick up the slack where some of the Japanese manufacturers have left off?

We have seen a bit of a pickup in our advertising revenue. We did get some spot orders for Q4, again largely as a result of the manufacturers liking our new site. So we have seen a pickup there. At each month as the manufacturers announce their results and their increased sales, most of them are doing pretty well. It was against some relatively low numbers for last year, but they are doing pretty well.

I think there is an element of fiscal discipline in the domestic manufacturers that perhaps wasn't there four or five years ago. They don't seem to be pushing any large amount of incentives today, as we understand it from the theory, they don't really need to. There is not a big incentive war going on thus far. So we do expect the domestics to pick up market share this year.

Okay. And you mentioned average revenue per dealer. Could you step back there and give us a figure on what percentage of leads were internally generated in the quarter, and what you are doing to better educate dealers as to the quality of your leads versus your competition?

I am sorry, Jared could you say the last part of that question again?

What percentage of the lead in the quarter were internally generated, and what steps are you taking to better educate dealers as to the quality of your leads versus the competition?

Sure, for the last quarter we generated approximately 65% of our purchase requests internally. We have been doing a lot variety of things. We do weekly or bi-weekly training calls with groups of dealers, where we talk about and help them understand better the process for handling internet leads. We do talk about some of the quality metrics that we see.

The large dealer groups, some of the manufacturers, and various individual dealers report back their close rates to us, and we are still seeing and hearing our close rates continuing to trend up, and it seems to actually be tracking up even a little better than previously. We seem to be tracking 20% to 25% over program averages from several of the people who report to us. So our focus on continuing to improve our quality is certainly yielding dividends for us.

And lastly, could you provide a little color on the climate you are seeing in the acquisition space from your point of view?

There is a lot of activity going on in the auto space. There have been several transactions of one or the other announced, some things moving around, I do expect to see more activity in 2012 in terms of what is going on. There have not really been any large transactions, however, from in the M&A space directly in the space we are affected with recently.

Okay thank you very much.

Thanks Jared.

Thank you next question is from Sameet Sinha of B. Riley, your line is open.

Yes, thank you. You spoke about advertising, if I remember correctly you said that advertising had been sold out for rest of the year seems like it is pretty discretionary, so my question is, do you think it is maybe a structural issue where dealers and OEMs and wholesalers, everyone is looking for more performance based advertising so they are going more towards leads business versus the display advertising?

The second question in terms of CapEx doesn't seem like there was much this quarter is that an anomaly or how should we think about that. Third is following upon that acquisition question, if the situation is the way it is I am sure there are smaller lead generation companies who are probably hurting at this point. Does that surface some potential acquisition candidates for you, you have been pretty cash flow positive, your cash balance is also up. I think those are my three questions. Thank you.

Sure. Let me answer the last one first. There potentially are some opportunities. We talk to a wide variety of people on a regular basis. We would like to participate in some further consolidation in the lead generation end of the market so those possibilities are there.

With regard to your first question, I don't believe I said that we were sold out for the rest of the year. What I said was we expect to see some improvement in our advertising, and had received some Q4 spot buys from some of the manufacturers. I don't know that I could say that the manufacturers are moving more towards performance based advertising, i.e., leads as opposed to advertising. We do see the manufacturers increasing their buys for leads, but at the same time we are also seeing an increase in buys for advertising on our sites.

So we do feel pretty good about 2012. We have seen a nice pickup in the upfront for what we are doing for next year. I think right now the manufacturers are positioning themselves pretty well. Perhaps one could say they are more focused on lead buying as compared to a lot of television advertising, because lead buying is certainly more results oriented than the bigger broad brush television advertising, radio, something like that. And I know there was a third question in there.

Yes, I can take that. Regarding the CapEx, it was off somewhat this quarter from prior quarters, but again we are going at it pretty heavy in the first and second quarters with the rebuild of the website. A lot of now what we are doing is being expensed. We are still $800,000 for the year, and we still have obviously activity for the fourth quarter.

Okay. Is there, I mean just following up with the question about display advertising and lead generation. Have you performed any sort of AB testing, if you used your display advertising in winter, you could push more of the traffic to your lead generation product, I mean does that yield incremental benefits, or do you think you have kind of optimized at this point in any additional inventory given to lead generation would not yield any particularly good improvement?

Well, we constantly try varieties of approaches to this. Some different attempts yield better results than others. But right now, we are pretty well focused on the path that we are going down.

Okay. Thank you.

(Operator Instructions). We have a question from George Santana of Ascendiant Capital your line is open.

Hi, guys thanks for taking my question. First a house cleaning, can you repeat the numbers please for the purchase requests for the quarter?

Sure. The total automotive purchase requests 1 million versus 744,000 in last year's third quarter and 887,000 in the second quarter of this year. Finance, 121,000 in the third quarter versus 115,000 in last year's third quarter, and 111,000 in the second quarter of this year.

Thank you. And of the purchase requests, how much were wholesale versus retail?

It would probably be in the high-60%s, 65%, 70% range.

65%, 70% was wholesale?

Correct.

And how does that.

Automotive, remember, just total automotive.

Right. And how does that compare to historical?

That is up slightly from where we were in the second quarter in year-to-date where we were probably in the mid to upper 50s, so it has gone up to 65% to 70%.

I see. Okay. So it went from upper 50s in Q2 to 65% to 70% in Q3?

Correct.

And that explains most of the margin difference I presume?

Really the bulk of it, there is a contributing factor there but really the drop in the advertising revenue which really carries normally a very high margin was off as you can see, so that is probably the number one candidate for the drop off.

Okay. And the DriverSide, you said there was a sale, was that after the quarter end or before?

No, it was during the quarter.

During the quarter. And you could receive more?

Yes.

Some contingency payments?

Yes it could be a couple hundred thousand or more, depending on what is actually achieved and the contingencies that have been laid out for them.

Is that a 6 month or a 12 month hurdle?What is the time period on that?

18 months.

Okay, 18 months. Great. Great work on the expense side. It is tough to believe you are making money in this kind of an environment, how sloppy it is. At some point do you start to feel a pressure to get out there and do a little bit more advertising of the Autobytel brand, on some of you were websites, or do you think you can just manage fair enough as it is?

Well, we are, that is part of what I was referring to when I said that we are looking at investing in enhancing and traffic related to the new website. For us search engine marketing--

You don't expect it to be.

I am sorry?

We don't expect you to be back on the SuperBowl but--.

Right, well I can't really see in the short term even advertising on television period. We need to build more momentum in terms of doing something. It is just not as efficient for a small company to do that. There are other online ways for us to do that, traffic partnerships with other players. We are very focused on and increasing what we are doing in that regard.

Okay. So that is something that we will begin to see, but I presume you will manage it to the point where you will have some operating profit?

Yes.

Is that a fair assumption?

Yes.

Okay. And then at this expense level and you have been fairly tight it seems for quite a long time almost to the point of perhaps you are counting paper clips over there, but what revenues can you support on this kind of a cost structure?

I think we have really good leverage in our cost structure today. We think we can meaningfully increase revenue without seeing a correspondent increase in operating expenses. There is good leverage there. Most of our operating expenses are fixed. They will are generally head count. We will increase a little bit, we will invest in a few more people related to some of our web development and related areas, as far as increasing traffic, increasing he efficacy of our sites. We still get very, very little benefit from an organic traffic standpoint to help improve page views, to help improve margins from leads generated through SEO, so we do believe there is some pretty significant upside opportunity for us, as we go through the next 24 months from that standpoint.

Okay. Thank you so much.

Sure.

Thank you. There are no further questions at this time, I would like to turn the call over to Mr. Coats for any closing remarks.

Thank you everyone. Q3 was a good quarter for us. We are looking forward to a good Q4. Thank you, we will speak with you soon.

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