Autoweb Inc (AUTO) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Autobytel announces 2014 first-quarter results conference call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the call over to Lori Berman, investor relations for Autobytel.

Thank you, Nicholas, and hello, everyone. Welcome to Autobytel's 2014 first-quarter conference call. Presenting today are Jeff Coats, President and Chief Operating Officer; and Kurt DeWalt, Senior Vice President and Chief Financial Officer.

Before I introduce Jeff, I would like to 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, the slides accompanying this presentation and the Company's public filings with the SEC. Actual events may differ materially from those forward-looking statements.

Specifically, please refer to the Company's Form 10-Q for the period ended March 31, 2014, which was filed just prior to this call, as well as other filings made from time to time by Autobytel with the SEC. These filings identify factors that could cause results to differ materially from those forward-looking statements.

There are slides included with today's presentation to help illustrate some of the points being made and discussed during the call. The 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 then click on events and presentations.

Please also note that, during this call, management will be discussing EBITDA, adjusted EBITDA and adjusted EBITDA 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 today's press release and in the slides which are posted on the Company's website.

And with that, I will now turn the call over to Jeff.

Thank you, Lori. Good afternoon, everyone. We had a very strong first quarter; 48% growth in total revenues. This success was driven by continued expansion in our core business and the contribution from our recent AutoUSA acquisition. Excluding AutoUSA, revenues grew 25%, solidly outpacing US retail auto sales, which grew only 3.6% during the quarter.

Fleet volume grew 44% for the first quarter, reaching an all-time quarterly high. We also exceeded our previous forecasts on both the top and bottom lines. The team is executing well, as reflected by our quarterly results. Based on our success, we plan to continue along the same path to drive future growth for Autobytel, our customers and our shareholders. After Curt's financial review, I will update you on our ongoing progress.

Thank you, Jeff. On slide 4, you will see that total revenue grew 48% to $27 million for the first quarter of 2014, up from $18.3 million last year. Although we didn't own AutoUSA for a full quarter, they generated $5.3 million of total revenues. We recognized $4.2 million of that amount after eliminations related to intercompany transactions and direct delivery to wholesale channels. Jeff will provide additional details in his comments.

Automotive lead revenues increased 55% from last year's first quarter, with retail channel sales rising 77%, wholesale channel sales growing 38%. Excluding AutoUSA, retail channel sales grew 18% and wholesale channel sales increased 37%.

Moving to slide 5, you can see that we delivered 1.7 million automotive leads during the 2014 first quarter, a 44% increase over last year. 65% of the leads were delivered to wholesale channel customers and the remaining 35% to the retail channel customers.

We delivered 88,000 specialty finance leads during the 2014 first quarter versus 86,000 last year. The increase in volume reflects ongoing efforts to ease supply constraints. Specialty finance lead revenue was $1.6 million for the first quarters of 2014 and 2013. Advertising revenues equaled $673,000 for the first quarter of 2014 versus $715,000 last year.

On slide 6, you will note a 53% improvement in gross profit, which was $10.1 million for the 2014 first quarter versus $6.6 million last year. Gross margin was 37.4% of total revenues for the most recent first quarter, up from 36.1% of total revenues one year ago.

I would like to remind you that as a result of our acquisition of AutoUSA, gross margin will fluctuate in the mid-to high 30% range through the end of this year. Since the historical AutoUSA gross margin was in the 25% to 27% range, we are working to continue expanding margins and volumes.

Total operating expenses were $9.3 million, or 34.6% of total revenues for the 2014 first quarter compared with $6.6 million, or 36.1% of total revenues for the same quarter last year. The expected increase principally related to additional operating expenses associated with AutoUSA, which equaled approximately $1.2 million. In addition, there was nearly $1 million in acquisition-related expenses.

As you'll see on slide 7, non-cash stock-based compensation totaled $286,000 compared with $186,000 for the 2013 first quarter. The increase resulted mainly from higher share price this year versus last year and the related Black-Scholes values used for expensing.

Depreciation and amortization was $527,000 versus $538,000 last year. Net income was $370,000, or $0.04 per diluted share, compared to $334,000, or $0.04 per diluted share for last year's first quarter. Please note there were approximately 13% more diluted weighted average shares outstanding during the 2014 first quarter compared with last year.

The increase in share count related to higher share price and the impact that it had on the acquisition-related warrants being included in the diluted share calculation. The diluted share calculation can also be influenced quarter to quarter by the interplay between net income and interest expense on the acquisition-related convertible debt in determining whether those shares are included.

As discussed last quarter, we now have a higher effective tax rate provision for both purposes than we have in the past. This is the result of the valuation allowance reversal on the deferred tax assets. This increase will not have any impact on our cash, due to the utilization of our NOL tax credits.

We will also be providing some additional information to help investors better understand the business, given the taxes and the level of acquisition expenses this quarter.

On slide 7, you will see that EBITDA was $1.3 million for the first quarter of 2014, up from $1 million even last year. You will also see a two-step calculation for adjusted EBITDA. The first, which is in the middle of the table, adds back non-cash stock-based compensation. The second adds to that -- adjusted -- adds back to that one-time acquisition-related expenses. That brings us to adjusted EBITDA, excluding acquisition expenses, of $2.6 million, or $0.25 per diluted share, which grew from $1.2 million, or $.13 per diluted share, one year ago.

It is important to note that acquisition-related expenses during the 2014 first quarter had a positive impact of $0.10 per diluted share on the adjusted EBITDA, excluding acquisition expenses. Going forward, absent additional acquisitions, this impact will not be nearly as significant in the future.

Cash and cash equivalents balance grew to $19.3 million at March 31, 2014, up from $18.9 million at the end of 2013. Cash provided by operations for the 2014 first quarter was $875,000 compared with cash used in operations of $372,000 for the prior quarter.

Now I will turn the call back to Jeff.

Thanks, Curt. I will start today with a brief update on AutoUSA. The integration is going well. As noted on slide 8, our financial and operating systems were fully integrated on schedule as of last night. I would like to take a moment now to thank the dedicated and hard-working teams of people at Autobytel, AutoUSA and AutoNation, who accomplished this integration on schedule and with no disruption.

We also closed AutoUSA's Fort Lauderdale office on April 25. Of the 37 employees we acquired on January 14, five have been retained, including four field salespeople and AutoUSA's President, Phil Dupree, who now oversees our dealer-facing sales and customer service teams.

Even though we did open several additional, mostly customer service positions here in Irvine, elimination of the overlapping costs, the bulk of which have now been completed, put us on track to surpass the 30% cost elimination target we shared with you in February. The remaining integration items are scheduled for completion by the end of the second quarter, after which we expect to have removed $3.3 million, or 55%, of AutoUSA's $6 million of operating expense.

As we have previously mentioned, AutoUSA had revenues approaching $30 million last year. However, that revenue was declining during the year due to accelerated dealer churn and an annual run rate more indicative of $25 million to $26 million. Accordingly, AutoUSA generated approximately $5.3 million in revenue in the first quarter. And, as Curt discussed, we recognized $4.2 million of that revenue due to the elimination-related intercompany transactions and direct delivery to wholesale channels. You will recall that we were the second-largest supplier of leads to AutoUSA prior to the acquisition and that this revenue number only includes the 11 weeks we owned AutoUSA out of the 13-week quarter.

The approximately $1.1 million in AutoUSA revenues we eliminated is in line with the 20% to 25% elimination forecast we provided in February. And, as I said earlier, we have removed more costs from the business than originally planned and in line with the amount of revenue we expect to retain.

Dealer count, which is shown on slide 9, includes the dealers we acquired through AutoUSA. At the time of the acquisition, we added an incremental 1400 dealers and expanded our relationship with 900 dealers that work with both AutoUSA and Autobytel. We believe we now have one of the largest dealer networks in the country. As of March 31, we had 5035 dealer franchises, down from the 5200 at the time of the acquisition.

As I have deviously noted, AutoUSA's dealer churn is more than 2 times that of Autobytel. Therefore, it will take us a few quarters to implement our successful retention and rewind procedures to reduce and ultimately reverse the current AutoUSA trend. Accordingly, we expect to see some fluctuation in our retail dealer count in revenue during this time.

We are out in the field executing dealers, especially AutoUSA dealers who don't know us as well, about our outstanding lead quality by providing them with the data we receive through our collaborations with IHS Automotive, which purchased R.L. Polk in 2013. We feel very good about opportunities to retain and rewind more of these dealers in the months ahead.

I would like to note that, as a result of the acquisition, AutoNation is no longer one of our largest customers because most of the leads we were selling to them were for sale to AutoUSA member dealers.

To summarize, the acquisition of AutoUSA has given us a significantly larger retail footprint, which helps reinforce our focus on Autobytel's original mission of improving the retail automotive environment for dealers and consumers. This gives us a solid competitive edge, and we believe we should strongly benefit from our increased size and stature within the industry. This exciting and accretive acquisition sets us up very nicely for the future.

As you know, Autobytel was founded by a car dealer, so we have always been somewhat unique in that we focus on bringing dealers and consumers together. Recent feedback from our dealers shows that, in many cases, consumers generated by Autobytel are generally more concerned about their car-buying experience versus getting the absolute lowest price. The end result is a better experience for the consumer and the opportunity for a stronger long-term relationship between dealers and consumers.

Anecdotally, we have also heard that some of Autobytel's dealer customers are seeing higher gross on vehicles sold as a result of our leads versus what they see from some of our competitors.

To better help dealers and manufacturers sell more cars, we are continuing to market our high-quality products to our customers. Autobytel Mobile, which is highlighted on slide 10, is being well accepted in the marketplace is dealers continue to seek the best, the most effective ways to communicate with customers using their preferred method, which is increasingly via mobile.

Our TextShield product, for example, enables dealers to have a two-way text conversation with customers in a centralized, controlled and regulatory-compliant environment. Our mobile dealer websites help convert Web traffic into real-time leads. Send2Phone allows visitors to a dealer's website to send vehicle listing information from their desktop to their cell phone via SMS while allowing the dealer to capture consumers' details as leads.

Another innovative product is SaleMove, which is shown on slide 11. As the exclusive provider of this exciting product to the automotive industry, we are delivering tools to dealers that improve the online car shopping experience. By allowing dealers to interact with consumers using live video, audio, text-based chat or phone, SaleMove moves the dealer's website into a virtual showroom.

As we mentioned last quarter, this is important, as more and more consumers do their shopping online as opposed to visiting a physical dealership. To reiterate what we said on our last quarterly call, the average consumer now physically visits 1.9 automotive dealerships, on average, before purchasing a vehicle. This continues the trend down from the historical average of 3.2 visits. A dealer's website, or virtual showroom, is now more important than ever, and SaleMove makes certain that this virtual showroom is not left unattended. Both products are designed to move us further in the direction of delivering buyers directly to dealers versus simply providing a lead.

We are also continuing to drive traffic through our YouTube channel, which, as shown on slide 12, now includes more than 900 videos and approximately 32 million views. Our original content encompasses interesting and valuable topics including test drives, reviews, sneak previous from major auto shows around the country, interviews with auto designers and car care how-to videos.

Our core auto lease business continues to show strength. As I mentioned, lead volume grew 44% for the quarter compared with last year.

High-converting sales leads remain the staple of our business. As you will see on slide 13, the leads we generate from Autobytel.com currently convert to sales, on average, at a rate of approximately 21%. All leads internally generated by Autobytel currently convert to sales, on average, at a rate of approximately 17%. Again, these figures have been validated by IHS Automotive using actual vehicle registration data and are based on a rolling three-month average which will fluctuate on a month-to-month and quarter-to-quarter basis.

The quality of our leads is evident in the influence Autobytel had again in 2013 on vehicle sales. On slide 14, you can see that consumers submitting leads sold by Autobytel accounted for more than 500,000 new vehicle retail sales, or nearly 4% of all new vehicle retail sales in the United States in 2013. From 2011 through 2013, consumers submitting leads sold by Autobytel accounted for more than 2.7 million new and used vehicle sales.

For many OEMs, as you can see on slide 15, consumers who submitted leads through Autobytel were responsible for 5% or more of total sales per manufacturer. This percentage varies by OEM and is largely a result of the robustness of our direct relationship with each manufacturer. We believe these numbers validate the importance of independent third-party automotive websites for consumers, who rely on unbiased information to help them make better informed car buying choices, and that third-party leads continues to be the main driver of business for dealerships throughout the United States.

I would also like to quickly comment on our advertising business. We believe we will begin to see a meaningful benefit from our relationship with Jumpstart during the second quarter, when all fiscal year ad campaigns are up and running. This agreement is valuable because the revenue we generate through it is 100% margin business. Before working with Jumpstart, our advertising revenue historically generated approximately 80% margins. For 2014, we do expect advertising revenue to grow compared with last year.

The healthy state of the automotive market continues to provide us with opportunities for growth. As you can see on slide 16, April retail seasonally adjusted annual run rate was projected at approximately 13.3 million units, up from 13 million in March, during which retail light US vehicle sales were up 7%.

Based on current business trends, we estimate that 2014 second-quarter revenue growth will be in the range of 47% to 53% as compared with the 2013 second quarter. We also expect earnings per diluted share to be in the range of $0.04 to $0.06 based on 11.5 million diluted weighted average shares outstanding.

Our ongoing business initiatives are summarized on slide 17. As we continue to grow our core leads business, we are also being opportunistic about strategic investments and acquisitions that could further strengthen our Company. However, we currently have no plans for raising additional capital.

Before I close, I want to reiterate something important that Curt also discussed earlier. There is no cash impact from the increase in our effective tax rate provision as a result of our NOL utilization.

We remain upbeat about our business and industry and believe Autobytel's future is bright.

Nicholas, we are now ready to take questions.

(Operator Instructions) Eric Martinuzzi, Lake Street Capital Markets.

I have a question about the -- you talked about the advertising revenue. I was scribbling as fast as I could, but I was wondering if you could pause and go through that again; just how it changes with Jumpstart this year versus how it was last year.

Historically, we have done our own advertising sales, Eric. And obviously, there were costs associated with that. So that ended up resulting in about an 80% gross margin business for us. The relationship with Jumpstart -- Jumpstart provides all of the advertising sales. They bundle us with their other customers. So we would expect our website this year to essentially be sold out as a result of the additional sales that they will generate. They take their cut off the top, so the advertising revenue that we will show in our books will be after they have taken their cut and will basically be 100% margin as a result.

Okay. So starting with 2013 as a frame of reference here, we had advertising revenue of $3.3 million, and that was roughly an 80% gross margin. You are saying whatever we choose to model here for 2014 and beginning with Q1 at roughly $700,000, that revenue this year -- that's 100% gross margin. Correct?

Correct. Okay.

And then shifting over to a line that is not typically talked about on the earnings call -- at least historically we haven't dived into it -- but I'm curious to know -- the other revenue line this quarter was $273,000. That was up from really no value a year ago, and then it was up sequentially from Q4. What are the components of that line? What do you expect from it for the year?

It's primarily revenue from our mobile products, currently.

Okay. So that's TextShield?

Yes. It's all the products we purchased as part of the advance mobile acquisition -- TextShield; Send2Phone; mobile websites; mobile apps.

Okay. And what type of margin does that business have?

It's a 60%-plus margin.

Okay. And then just one housekeeping item for me -- the CapEx for the quarter, and then were there any cash taxes paid in the quarter?

For the quarter, it was about $250,000 of CapEx.

Okay. And then the cash taxes (inaudible)?

Cash taxes were about $20,000.

Okay. All right. Thanks for taking my questions.

Sameet Sinha, B. Riley & Co.

This is Richard Magnuson for Sameet Sinha. I have a few questions. The first one is in terms of AutoNation -- they were a top three customer in 2013. Now I understand that they are not (inaudible) this. But our math indicates that they were -- they now account for $3 million or $4 million of annual revenue. Is that figure in the ballpark?

I'm sorry; you cut out as part of asking the question. I don't think we heard all of it.

Okay. I understand that AutoNation is no longer on the top three customer list.

Correct.

We have an estimate of their current annual revenue as $3 million to $4 million. Is that a correct figure or a correct estimate?

No. I'm not sure where you got that. Most of the lead volume that we have sold to AutoNation for the last several years was actually for delivery to AutoUSA for them to then sell to their member dealers. Now that we have acquired AutoUSA, that volume, of course, no longer goes to AutoNation. I mean, we do continue to do business with AutoNation -- we have a good relationship with them -- but it is now substantially smaller than it was because AutoUSA is now part of Autobytel.

Okay. Also, could you give us a sense of the progress at AutoWeb?

There's probably not a lot that I can talk about with AutoWeb. They have launched their business. It is growing nicely. We were their first publisher and advertiser. We are generating revenue from that relationship. They are in the process of signing up other participants in the third-party business. It's probably not appropriate for me to disclose who else they have signed up. But they are, in fact, signing up most all of the other third-party sites, and the business is growing quite nicely.

Okay. And then just one more question -- according to the data you released this morning about the number of cars sold, we came up with the calculation that it's costing the OEM dealer about $135 per car, is way below the $600 number from NADA, and it's also below their cost per car of $299 for TrueCar. In light of these numbers, how much pricing power do you have? And do you think this will unfold in 2014 or over a two- to three-year period?

You know, that's a tricky question to answer on a public call. We do believe that our customers receive an outstanding benefit from the leads that we sell to them, based on the cost that we sell at as compared to what other people do as part of their business model. Our dealer and manufacturer customers do achieve an outstanding return on those investments. I think everybody recognizes that over time there are adjustments that need to be made due to rising cost of doing business. So we do think we have some ability to make adjustments as appropriate over time, and we certainly look to do that.

Thank you very much. That was all my questions.

(Operator Instructions) Alexander Renker, Sidoti & Company.

Two quick questions from me. The first is on the revenue guidance, what are the legacy AutoUSA churn assumptions that are built into that?

If I understand what you are asking, let me -- their churn is running at about double our churn. So that is incorporated in the revenue guidance.

Okay. So the revenue guidance doesn't assume any kind of drastic improvement in that churn from the legacy AutoUSA network?

The high end assumes that we are starting to get our arms around it. We are beginning to, but we just spent the last 2 1/2 months more working on the integration. Now that we've got that taken care of, we've transferred the customer service relationships out here to our facility in Irvine, out of the AutoUSA office in Fort Lauderdale. We are able to work on them on a little bit more of a focused basis both here with our customer service people and with our field organization.

So we have been very successful historically in getting our churn number down. Churn in our industry historically has been around 5%. Autobytel's churn runs currently between 3% and 3 1/2%, something we are quite proud of. AutoUSA is running about double our current churn level. So we are using the procedures that we have developed over the last few years from a retention and a rewind standpoint so that, even if we get a cancellation notice from a dealer, we can go in, sit down with them, talk to them about the Polk information, the lead quality. And we have been quite successful in being able to rewind dealers as a result of that and, in many cases, keep them from canceling in the first place.

So I would say we are optimistic that we will be able, over time, to implement our processes and procedures throughout the AutoUSA dealer universe and see some good results.

Okay, great. And then the next was, given the increase in retail dealer volume that you guys took on, given the AutoUSA acquisition, have there been any new challenges maintaining lead quality while meeting that additional demand?

No. Not so far. Our Tampa operation is increasing our volume levels. We still work with our trusted outside partners in terms of the amount of leads that we do buy from some of our outside partners. So we feel pretty good about where we are. We are beginning to increase the percentage of our internally generated leads that are going to the AutoUSA dealers, and that will continue to increase over time.

Okay, great. Thank you.

Jared Schramm, ROTH Capital Partners.

One quick one here. Looking at AutoUSA, what are you doing to address those gross margins there? Do you think those can ever get to the level of your core business? Is this a mix issue? Quality? I'm just curious what your thoughts are there.

It is a mix issue. We will get those margins up. It's a function of getting more of our internally generated leads in that mix. And even with some of the outside customer relationships, we were able to buy at a better rate than AutoUSA was, in part because with some of them we were buying larger volumes. So we believe, over time, we will be able to get that up to the level that we needed to. It's pretty straightforward from a mix standpoint.

And then keeping on the AutoUSA theme, what is your approach to getting those dealers back on the platform who have turned off? Is there a time frame, you think, from when they are turning off to when you get them back on?

It's hard to give you a good rule of thumb. It's really all over the place. But we have been very successful in doing that ourselves in our core retail business. We have been able to grow back from having lost a lot of dealers five years ago, when the country went into recession and thousands of dealers went out of business.

It will take us a little bit of time, but we have people that are very experienced; they know what they are doing. And we have been doing it successfully ourselves for the last few years. So we are confident we will be successful.

Thank you.

I'm not showing any further questions in the queue. I would like to turn the call back over to Mr. Jeff Coats for any further remarks.

Thank you, Nicholas. Folks, thanks again for joining us today. As a reminder, Curt and I look forward to speaking with many of you at the upcoming B. Riley conference in California later this month. Thank you. Goodbye.

Ladies and gentlemen, thank you for participating in this conference. This does conclude the program and you may all disconnect. Have a great day, everyone.