Autoweb Inc (AUTO) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Autobytel 2012 Fourth 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) Today's conference is being recorded.

I would now like to turn the call over to Roger Pondel, Investor Relations for Autobytel. Please go ahead, sir.

Thank you, Jamie, and hello, everyone. Welcome to Autobytel's 2012 fourth quarter and full-year conference call. Presenting on today's call are Jeffrey Coats, President and Chief Executive Officers and Curt DeWalt, Senior Vice President and Chief Financial Officer.

Before we begin, I remind you that during today's call, including the question-and-answer session, any projections and forward-looking statements made regarding future events or Autobytel's future financial performance are covered by the Safe Harbor statements contained in today's press release and in slides accompanying this presentation and in 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 December 31, 2012, which was filed earlier today as well as other filings made by Autobytel with the SEC. These filings identify factors that could cause results to differ materially from those forward-looking statements. We've included slides with today's presentation to help illustrate some of the points being made and discussed during the call. These slides can be accessed by clicking on the link in today's press release or by visiting Autobytel's website at www.autobytel.com. When there, go to Investor Relations and click on Events & Presentations.

Also please note that during this call we will be discussing EBITDA, cash flow, cash net income and cash net income per diluted share 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 measures are included in the slides being used on this call and are posted on Autobytel's website.

And with that, I'll turn the call over to Jeff.

Thank you, Roger. Good afternoon, everyone. 2012 was a solid year for Autobytel as we successfully delivered on our objectives while continuing to invest in key areas of our business. Total revenues came in at the high end of our forecast and net income more than tripled over the prior year. Particularly noteworthy was the 18% increase in dealer lead revenue for Q4, and as you will see on slide four, the 10% increase in dealer revenue for the full year of 2012. This is the first time Autobytel's retail revenue has increased since automotive sales began stalling in 2008. In addition, we increased the number of dealers on our retail program by 7.5% during 2012 resulting in our highest year-end dealer count since 2008.

Given our success in 2012 and the improving auto industry, we are continuing to make investments to drive growth. These investments are two-fold. First, in cost of revenue we have added additional headcount, mainly in the area of search engine marketing, to increase our consumer acquisition activities to drive more volume of high-quality leads. Accordingly, we have slightly adjusted our margin targets in order to support further volume increases and revenue growth.

Second, we are increasing the head count by approximately 20% in our retail sales and customer management teams to further grow our retail dealer network. We are strategically devoting resources in these areas to fully capture the opportunities being created by increasing consumer demand for vehicle information and purchase assistance as well as dealer and manufacture demand for the high-quality consumer leads for which Autobytel is now known.

Our ability to deliver consistently both high sales conversion rates for our dealer and manufacturer customers and a meaningful consumer experience at Autobytel.com sets us up nicely for accelerated revenue growth in 2013, especially as the automotive market continues to gain strength.

I'll now turn the call over to Curt for the financial review.

Thank you, Jeff. As Jeff mentioned, 2012 was a solid year for Autobytel. While I plan to focus my remarks on our fourth-quarter results, there are several full-year highlights worth noting. Total revenue increased approximately 5%, gross margin was 39.3% and net income grew to more than three times to $1.4 million. Cash net income increased approximately 26% to $4.5 million for 2012 from $3.5 million last year.

Turning to the quarter, you can see on slide six, revenue increased to $16.9 million from $16.2 million for last year's fourth quarter, representing our highest fourth-quarter revenue since 2007. As expected, the sequential decline in total revenue was due to typical seasonality with the third quarter generally being the strongest revenue quarters of the year.

Total automotive lead revenue grew more than 8% from last year's fourth quarter, as Jeff noted, and retail lead revenue grew 18%. During 2012 fourth quarter, we delivered approximately 1.1 million automotive leads, up 5% year-over-year. 70% of the leads were delivered in the wholesale or OEM channel, with the remaining 30% in the retail channel. Additionally, during the 2012 fourth quarter, we delivered approximately 79,000 finance leads, compared with 91,000 last year.

Finance lead revenue declined 11% year-over-year for the 2012 fourth quarter, as a result of lead supply softness, but only decreased 3% on a sequential basis due to seasonality. Based on our fourth-quarter results and preliminary first-quarter run rates, we believe the lead supply for this business is beginning to stabilize. At the same time, however, supply of high-quality leads from third-party providers remains tight. So we are furthering our efforts to generate more of these leads internally, and we are seeing positive early results from our efforts which we believe will get the business back on track.

Advertising revenue declined to $854,000 for the fourth quarter of 2012 from $1.1 million a year ago with the comparative results primarily reflecting a one-time deferred revenue that was recognized in last year's fourth quarter.

Gross profit totaled $6.4 million, or 37.8% of total revenue for the fourth quarter of 2012, compared with $6.9 million, or 42.5% of total revenue one year ago. Several factors contributed to the decline.

First, as we continue to invest in increasingly high-quality lead revenue -- lead volume, we grew our search engine marketing headcount by 75% from last year's fourth quarter. Second, we are investing in enhancing the consumer experience at Autobytel.com, which will help with internal lead generation efforts. Third, the comparison was impacted by a one-time deferred revenue from last year's fourth quarter. And finally, we generally see overall SEM cost fluctuating regularly, based on volume and competition.

Our long-term gross margin target remains above 40%, but given the continued investment in driving lead revenue growth, gross margin is expected to slightly lower in the near term.

Despite continuing to invest in the future growth, we successfully reduced total operating expenses nearly 6% to $6.1 million for the fourth quarter of 2012 as we maintained our commitment to controlling costs. In fact, we have successfully lowered expenses for the last three consecutive years, even though revenue has increased 30% during the same period. Increasing the top line while keeping a watchful eye on expenses should allow us to drive higher operating margins.

As you'll see on slide seven, non-cash stock-based compensation was $202,000, compared with $254,000 for the 2011 fourth quarter. Depreciation and amortization totaled $536,000 for the most recent fourth quarter versus $508,000 a year ago.

For the 2012 fourth quarter, we generated net income of $351,000 or $0.04 per diluted share, based on 9 million diluted average weighted shares outstanding. Net income for the 2011 fourth quarter was $341,000 or $0.04 per diluted share, based on 9.4 million diluted average weighted shares outstanding. As a reminder, all EPS and share counts reflect the 1 for 5 reverse stock split which became effective on July 11.

Cash provided by operations for the 2012 fourth quarter was $1.4 million versus $2.1 million for Q4 of 2011. Cash net income totaled $1.1 million or $0.12 per diluted share for the fourth quarters of 2012 and 2011. And again, the full year cash net income grew to $4.5 million or $0.48 per diluted share, up from $3.5 million or $0.37 per diluted share for 2011.

At the end of 2012, our cash and cash equivalents balance grew to $15.3 million, up from $11.2 million at the end of 2011. With that, I'll turn the call back to Jeff.

Thank you, Curt. As many of you know, our ongoing commitment to lead quality has resulted in sales conversion rates that we believe are among the highest in the industry, giving us a significant competitive advantage.

As you can see on slide eight, the leads we generate from our flagship Autobytel.com site convert the sales at a rate of approximately 23% as validated by R.L. Polk. That's nearly three times the rate of the estimated industry average. Autobytel is helping establish reliable sales closing rate data that is proving extremely valuable to our customers and it's clearly demonstrating the value of our automotive Leads.

By utilizing the information we provide the customers on a regular basis about where consumers by their vehicles, what vehicles they buy, and when they buy them our dealer and manufacture customers are adapting their marketing efforts messaging and sales processes based up on actual consumer behavior and they're seeing results.

Customers have taken notice of our industry high conversion rates driving increased demand for our leads and increasing our market share. The investments we're making are aimed at ensuring that our higher sales conversion rates are working to the best advantage of our customers and Autobytel.

Interest from dealers across the country remains high. Reports from our sales team are demonstrating that once dealers understand the close rate and competitive data we are providing and that the information is validated by Polk and once they experience themselves how often Autobytel leads are converting into sales, we are very successful in retaining current dealers and attracting new ones.

In fact, the sales conversion rates we're generating are so good that we've stepped up our industry marketing that highlight our capabilities with the dealer focused advertising campaign, both print and digital, to help drive our message about Autobytel's lead quality throughout the marketplace.

The intelligence we are gaining through our work to provide lead quality transparency will continue to be invaluable as we further enhance lead quality and customer relationships. In fact, as you can see on slide nine and as we announced just this morning, a just completed study done in partnership with Polk show that for 2011 and 2012, consumers who submitted leads sold by Autobytel accounted for approximately 824,000 new car sales which is almost 4% of all retail car sale for each of those two years. This study also showed that for several major OEMs these consumers accounted for 5% to 6% of each of those manufactures' retail sales in 2012 alone. This information clearly shows Autobytel's significance in influencing automotive consumer shopping behavior.

Continuing the transformation of Autobytel.com into a preferred destination for car buyers and enthusiasts is another key initiative which will increase lead volume and further improve conversion rates for our dealer customers. We are accomplishing this by adding new functionality, appealing content and enhanced mobile access. As showcased on slide 10, you can see that our YouTube channel has also been a great source of consumer engagement. Now at more than 12.8 million views and populated with 500 unique videos, we are reaching an increasing number of consumers and bringing them to Autobytel.com. We are also attracting consumers to our Facebook page and are strategically using social media to expand our brand recognition.

On slide 11, you'll see the positive trends in page views and page views per visit from our website. And as we continue to enhance the user experience at Autobytel.com, we expect these metrics to continue to grow over time. With a great size and content to showcase and more enhancements on the way, we are in the beginning stages of more aggressively marketing directly to consumers.

While Autobytel holds the distinction of being the first Internet company to advertise during a Super Bowl, back in both 1997 and 1998, we have not advertised directly to consumers in a number of years. Today, with the success we continue to achieve on significantly improving our leads business and building an even better consumer facing website, we believe the time is now right to test the consumer advertising waters. So this year we plan to test small TV and radio campaigns in limited markets. We will keep you posted as to our progress.

Among our key initiatives to improve consumer satisfaction is further enhancing our mobile site. As more and more consumers use devices other than or in addition to their desktops to access information, it is becoming increasingly important for us to offer functionality to fully capture this usage. Our recent survey showed that nearly 40% of consumers use a handheld device to gather information when shopping for a vehicle, a number that increases to nearly two-thirds for younger generation.

We first launched the mobile optimized version of Autobytel.com in the second quarter of 2012. On slide 12, you can see that our mobile offering provides consumers with a variety of research and shopping tools from payment calculators to the ability to easily find locally used car inventory, to vehicle value information, new and used vehicle data and access to Autobytel's unique written and video content, all optimized for whatever device the consumer is using.

Since our initial launch, we have added a dealer locator tool that provides a comprehensive listing of all franchise automotive dealers in the United States along with mapping tools to locate them. Consumers can also get pricing from local dealers and submit dealer ratings for other consumers to view. Future phases of the mobile version of Autobytel.com will offer even more advanced shopping tools and will provide additional ways for consumers to interact with the dealers and Autobytel's network.

Our plans for 2013 also call for growing our retail network of automotive dealerships, which we think will be a key driver of our revenue growth for the year. Our augmented retail sales force, which is now armed with verified data about our sales conversion rate gives Autobytel a greater presence in the field. Combined with ongoing lead quality enhancements and dealer products that help customers turn more leads into car sales, we believe we'll be successful in growing the number of dealers purchasing leads from us and then growing the volume of leads we sell to existing customers.

I'd also like to update you on our advertising and specialty finance businesses. First, our advertising business. Several of our advertisers have increased 2013 upfront commitments with us, with two major OEMs almost doubling their upfront buys, as well as two other majors buying 100% of our mobile inventory for 2013. However, one OEM, which changed advertising agencies in mid-2012, ultimately did not include us in their 2013 upfront buy. As a result, our growth expectations for this business at this time have been [tampered] to the mid-single digits for 2013, although we typically see additional spot buys during the course of the year. We continue to believe that advertising is a long-term, profit-enhancing opportunity for Autobytel, particularly as our mobile site page views and site performance continue to improve.

Second, as Curt mentioned earlier, third-party specialty finance lead supply constraints have begun to stabilize. At the same time, market dynamics and price elasticity are trending positively and we are successfully increasing the price dealers are paying for our finance leads. So we are increasing our focus on generating more of these quality leads internally. This focus should allow us to return to more historical revenue levels for our finance lead business.

We believe the combination of improving automotive market trends, which you can see on slide 13, and the substantial progress we've made in enhancing lead quality and Autobytel.com position us well for a strong 2013 and consistent growth in the years ahead. Slide 14 outlines some of our plans to achieve this growth. As you can see, our primary financial objective for 2013 is to accelerate revenue growth while continuing to improve profitability.

With that, operator, we'll now take questions.

(Operator Instructions) Sameet Sinha, B. Riley Caris.

Yes, thank you very much. Jeff, if you can talk about the advertising business, what sort of -- as you went through the upfront season, what sort of price increases have you been able to get and do you think that there will be chances of prices going up because obviously your website traffic continues to grow?

Secondly, in terms of the Hurricane Sandy and the statistics that we've had is 250,000 damaged autos on the East Coast, do you see that momentum? Did you benefit from that in the fourth quarter and how long do you think that would be a tailwind for you? And then I have a follow-up question. Thank you.

So starting with the advertising, we did see some CPM increases this year which is a result of the fact that our page views are increasing and our click-through rates are really at the high end of the scale for our advertisers.

We would expect to continue to see improvements in CPM over time based upon, as you noted, the continued growth in our page views and page views per visit metrics. So we remain bullish about our advertising business. We did get thrown a curve ball at the last minute from one advertiser very late in the year. We think it was more because of the issues going on on the other side of the table than issues related to us. So we may see some spot buys during the course of the year as a result from that manufacturer. It remains to be seen how that will work.

Your other question on --

Superstorm Hurricane Sandy.

Yes, we did see some pick-up later in the year. I mean, part of issue is, as I am sure you would expect, Sameet, it did take a while once that storm took place at the very end of October for people to just get things go and get filed with their insurance companies, get the cash that they needed to buy new vehicles, et cetera et cetera. So we do think that that did help boost revenue a little bit in the fourth quarter, probably didn't see much of that until after Thanksgiving. However, December was pretty good. And then we rolled into this year very strongly.

So I think in the first quarter, particularly in January and early February, we were seeing some benefits from the replacement of those 250,000 vehicles.

Okay. So do you think that that should benefit you in the first half of the year, I guess, by the time people get their insurance checks or do you think it's just a one-quarter benefit?

We, from speaking with our dealer customers, we understand that there still seems to be some pretty strong pent-up demand out there related to this. So we should continue to see some benefit for at least a few months.

Okay. A final question, in terms of you said that you're expecting increased profitability. Can you help us, I mean, are you indicating that margins are going to be up year-over-year, and how do you balance that with your increasing consumer advertising budget, and if you can peg a number on that that would be helpful?

I really am not in a position to peg a number to that today and I'm not likely to discuss that publicly anyway.

We do believe we're going to increase our profitability. We pretty successfully moved expense money between different areas of the business over the course of the last three year while at the same time bringing down our expenses. I mean, we launched our flagship site without really anybody in the market seeing a blip in our expenses and we're pretty proud of that.

We are looking to primarily shift funds from other areas as part of doing some of the increased marketing and advertising that we will do. We have noted that there will be some additional slide pressure on our gross margin temporarily while we continue to push through some of these things, because in the long run it should more than pay for itself. The investments we've been making in lead quality and now additional investments to drive revenue growth should push through some meaningful additional dollars to the bottom line.

Operating margin, I would say, Sameet, that we will probably see a little bit of softness in the operating margin depending upon how aggressively we ultimately do some of the consumer-related advertising. What we're going to do candidly is test on a few markets around the country to determine what kind of ROI we can achieve from what we're doing in conjunction with digital activities that we will be doing at the same time in many of the same markets.

So we feel pretty good that we will be able to do it on cost-effective basis without meaningfully negatively affecting the P&L and at the same time driving top line growth.

Thank you.

George Santana, Ascendiant.

Thanks for taking my question. I was very encouraged by the tone of your comments. It appears that following several years of

dealing with a very sharp downturn in the macro environment having to cut headcount fairly severely stabilizing the business and finally returning to cash flow, you're repositioning Autobytel back to growth mode. Is that fair to say?

Yes. I'd say that's fair to say, George.

Perhaps you're trying not to give specific guidance for the following year, but you have now a cushion of a fairly good level of cash flow and it seems to be coming in fairly regularly. Is the plan then to use any excess both kind of where you're at in terms of cash flow generation in order to drive the increase investment and the faster revenue growth?

We, obviously, will use some but you will continue to see our cash balance increase at the same time because we will certainly not be spending more, I mean -- because we're generating over $1 million a quarter at this point in cash flow. So I don't really see degrading that meaningfully. Like I said, what we've become pretty good at and what we will continue to do to the at most is shift funds among expense accounts and opportunities in order to drive some of these new initiatives we've discussed.

So when we look at your EBITDA level where you are in the fourth quarter, is that kind of a good gauge going forward that we should expect you or you'd look to see kind of a slow ramp just managing the cash flow very tightly?

I think it's a pretty good gauge.

Okay. Right. And that gives you a fairly growing cash balance is almost as much as your enterprise value after a year or two.

Yes.

Correct, at this level.

Yes.

All right. Again, perhaps avoiding a specific number but directionally what should we expect in the first quarter, including seasonal factors?

I am not following you, George.

So when we look at the fourth quarter, should we expect sequential growth or is the seasonality such that the first quarter is usually a little lower in a normal environment?

No, no, we will definitely see sequential growth in the first quarter.

Okay.

The first quarter and the third quarter are our two strongest quarters every year. We will definitely see sequential growth in the first quarter.

Okay. Great. Thanks a lot, guys.

Thank you, George.

[Fess Trigeon] from First New York Securities.

Hi, guys. Jeff, it's been a while we've spoken, but obviously I had pleasantly been watching the turnaround of the last several years and very proud to be [part of it] and just helping you guys out and watching your labor finally come to fruition. My one question, and it kind of relates to what George just mentioned also. I almost feel like you have an apple problem, you have a real big cash. You are developing such a hoard of cash the market is not appreciating it at all. And I just wonder if it's inefficiently sitting on the balance sheet and can be used in a way to drive shareholder value a little bit. There is a float issue. So I'm not sure buybacks are the best way to use it, although clearly that we believe that the stock is worth materially more than where it is today.

What do you think about a special dividend to just be -- in my opinion, if you give a $0.50 special dividend, which is really the cash flow growing year-over-year, it still leaves you an ample amount of cash. I think the stock wouldn't even go down and it wouldn't be immediately beneficial to all the shareholders. And I feel that you can't really target it as such, but that may drive shareholder value to at least have the investment community appreciate everything that you guys are accomplishing because it seems like right now it's almost the same story as it's been for the last four or five years in terms of falling on deaf ears with the investment community. But there's a real story here to be told. For whatever reason it doesn't click. It might be due to market cap, it might be due to liquidity. But I just wanted your thoughts on that in terms of maybe issuing a special dividend or instituting a dividend, something along those lines, because I don't think the stock would get hurt. I actually think you would benefit from it and you would still have an ample amount of cash to drive all your initiatives, which I think would fruitful also.

First, thank you for the kind words. It is nice to speak to you again.

I've always been around, I've just let Robert handle the heavy workload, but I'm here, anyway.

I know, I know. I hear you. I have to say it feels a little flattering to be mentioned in the same sentence with Apple, so thank you. I mean, as many of you on the phone call will notice, I don't talk about acquisitions anymore. That doesn't mean that we don't think about them. That doesn't mean that there aren't opportunities today. We are, in fact, starting to see a lot of areas in the automotive industry beginning to experience more consolidation.

If I truly believe that there were no opportunities like that for us, we would seriously consider doing something like you're talking about. I think, at least for the time being there, we'd like to see what continues to occur with some of the consolidation opportunities in the marketplace. I do still believe there are some opportunities that could meaningfully make a difference for Autobytel. Having said that, the Board certainly reviews all of these different opportunities. As you know, we did buy back $1.5 million worth of shares last year.

How much stock did you buy in the third quarter and how much stock did you buy in the fourth quarter?

We did not buy a single share in the third quarter or in the fourth quarter.

Got it.

And we did not buy a single share in the third or fourth quarter because I believe and the Board believes that the original $1.5 million buyback that we did really did not accomplish anything for the shareholders.

I agree. That's why I was mentioning it. Essentially you gave, I don't know, liquidity to people that aren't interested in the story, versus really driving shareholder value, because for whatever reason the market is not appreciating and I'm not trying to put the pressure on the sell-side people that are on the call, but I don't know, there is a disconnect between the story, the communication of the story, lack of interest from the buy side, I don't know what it is and we have to figure out a way to enhance the value, because at the end of the day we are a public company and we're in the business of driving returns for our investors.

I agree, I agree. I mean, I've been doing this now for about four years. I can't see doing this for another four years the way we've been doing it and end up with similar results. So, I hear you. The Board understands. We will make progress this year. I do think part of our issue has been that we have not been a growth company. We have not historically articulated a strong growth story.

I do believe today, based upon -- candidly, I mean this partnership we've created with Polk and the studies we're doing, the analysis we're getting out of cross referencing all of our leads against registration data, really is becoming a game changer in the automotive leads business. We are taking market share and I do believe we have in front of us a really strong growth opportunity as we continue to get our message out to the dealers and manufacturers with whom we do business.

The press release that we put out earlier today talking about the fact that our leads accounted for approximately 4% of new car sales in both 2011 and 2012 that's pretty eye opening. And behind that, we have a lot of very detailed data related to exactly how many vehicles from each manufacturer we were involved with from our leads. So we now have the opportunity to take that information and sit down and have meaningful conversations with those manufacturers about we, hey, you know we were involved with helping you sell 5%, 6%, 7% of your total vehicle sold last year, same kind of great conversations we can have with dealers.

The Polk information has given us the ability to sit down and have an adult conversation with our dealer customers for the first time in years, or actually for the first time ever, because we can sit down with them and talk about details. We sold you X number of leads, here is the data verified by Polk, you sold X cars, and consumers in your area bought X plus or X whatever cars in addition. So that kind of information is starting to make a difference, and I really think that we've got a nice growth opportunity in front of us as we get that message out to more and more of our dealer customers and to the manufacturers. Be patient just a little bit longer.

That's fine. Listen, we are big fans of your strategy, of your execution. Anyway that we can help to get the message out, clearly we will do that.

I guess my one point being that if there is an effective use of cash to drive shareholder value through strategic investments over and above the normal course of business, i.e., M&A just like you had done previously which really helped secure your place in the industry and the success you're seeing today, I would strongly recommend.

If you gave back -- if you did a -- if you give back half of the cash, I don't think the stock would trade any lower and I guess is my point because you are getting zero value for the cash in the balance sheet, especially with where interest rates are.

And if you are driving the cash flow the way you are, today, the individual before said, cash flow must be the entire enterprise value and that really only exists for dying businesses [where the a big cash from] where they don't believe that the cash will be sustained at those levels.

Clearly you've entered a growth phase. Cash is growing. And if the market is not going to give you the credit for it, at least give the shareholders that have been here the credit for and I think the story will continue to work.

Right. I hear you, I don't fundamentally disagree with you. Stay tuned.

All right, buddy. Thank you.

Thank you.

Kyle Krueger, Apollo Capitals.

All my questions are answered. Thank you.

Thanks, Kyle.

I am showing no further questions. I would now like to turn the call back over to Jeff.

Thank you. Thanks again, everybody for joining us today. We are upbeat about the year ahead and the Company's long-term outlook and we look forward to reporting to you on our progress as the year unfolds. Thank you.

Ladies and gentleman, that does conclude the conference for today. Again, thank you for your participation, you may now disconnect. Have a good day.