Autoweb Inc (AUTO) 2016 Q2 法說會逐字稿

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Autobytel's financial results for the second quarter ended June 30, 2016. Joining us today are Autobytel's President and CEO, Jeff Coats; the Company's CFO, Kimberly Boren; and the Company's outside Investor Relations Advisor, Sean Mansouri, with Liolios Group. Following their results, we'll open the call for your questions.

I would now like to turn the call over to Mr. Mansouri for some introductory comments.

Thank you. Before I introduce Jeff, 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, 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 quarter ended June 30, 2016, which was filed prior to this call, as well as other filings made by Autobytel with the SEC from time to time. 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 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 and/or in the accompanying slides, management will be disclosing non-GAAP income and non-GAAP EPS, 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/or in the slides, which are posted on the Company's website.

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

Thank you, Sean. Good afternoon, everyone. Thank you for joining us today to discuss our second-quarter 2016 results. The momentum from our first quarter has carried into the second quarter. We reported record Q2 revenues driven by the continued ramp in our click revenues, lead program expansion with nearly all of our OEM customers, and full-quarter contribution from Dealix, which we acquired in late May 2015.

Our focus on lead quality continues to produce the intended results, as we once again experienced record demand from our dealer and OEM customers. This has led to greater customer retention and higher ROI for our customers, which we believe is a vital component to consistent growth over the long term.

The integration of AutoWeb remains on track, and its performance continues to exceed our expectations. In fact, click revenues increased 459% year over year, to $3.7 million, and clicks continue to ramp at an accelerating rate. We also continue to expect the launch of our new click-enhanced product solution by the end of the third quarter, along with a beta version of our brand-new UsedCars.com site.

But before commenting further, I'd like to turn the call over to Kim and have her take us through the important details of our financial results. Kim?

Thanks, Jeff, and good afternoon, everyone. For those of you following along with our earnings presentation, on slide 4 you can see our second-quarter revenues increased 19% to a Q2 record $36.1 million compared to $30.4 million in the year-ago quarter. The increase was partially driven by the acquisitions of Dealix and AutoWeb, as well as the expansion of nearly all OEM programs.

Lead revenue from automotive dealers, our retail channel, was roughly flat at $12.9 million compared to last year, while lead revenue from automotive manufacturers and wholesale customers, our wholesale channel, increased 18%, to $16.4 million. The wholesale channel increase was driven by another quarter of record demand from our OEM customers.

It is important to note that the disparity in growth from our retail versus our wholesale channel this quarter was primarily driven by a restructuring of contract with one of our larger OEM customers. We made this accommodation for a valued customer who chose Autobytel to supply their OEM program through one consolidated lead channel. We made this change in April and moved lead volume for 190 of their retail dealers into one comprehensive OEM program, which includes approximately all 800 of this OEM's dealers in the US.

It's worth noting that this OEM program is one of the most progressive in the industry in terms of business rules, dealer participation, pricing structure, and technology. So we decided to accept the OEM's request to expand our relationship. Since then, we have seen our volumes to this OEM increase, and we expect significant increases in the future as they expand this program with all of their dealers.

In addition, they are focused on enhancing the consumer experience in the dealerships, and our participation in this program will allow this OEM's dealers to leverage Autobytel's full suite of products, including traffic from AutoWeb, mobile solutions such as TextShield, and enhanced consumer engagement with SaleMove.

In short, we view this program transition as a positive for Autobytel, as we expect the benefit of higher volumes and cross-sell opportunities to greatly outweigh the reduction in retail dealer count.

Moving on to advertising, our advertising revenues increased 159%, to $5.3 million, compared to $2 million in the year-ago quarter. The increase was both due to growth in display and other advertising, as well as a significant increase in click revenues.

As discussed on our last quarterly call, we will now begin to detail our click revenues to provide even more transparency in this exciting new part of our business. With that said, on slide 5 you'll see click revenue in the second quarter increased 459%, to $3.7 million, compared to $658,000 in the same period last year. The triple-digit year-over-year increase in click revenue was driven by AutoWeb, which we acquired last October. The momentum in our click business is further evidenced by the 42% sequential increase from Q1.

Moving now to slide 6, you'll see that we delivered approximately 2.1 million automotive leads during the second quarter, a 7% increase over last year. Sequentially, lead volumes decreased as a result of Dealix lead-gen methodologies, which we walked away from late in the first quarter. Subsequently, we began to experience a strong recovery in late June as we continued to optimize Dealix's data methodologies and further expanded our own high-quality lead volumes.

Retail new leads were down slightly compared to the prior-year quarter due to the aforementioned transition of retail dealers to a comprehensive OEM program, while used leads slightly increased 1%. 72% of leads were delivered to the wholesale channel, with the remaining 28% to the retail channel. Retail new leads invoiced per dealer was up 15% year over year in the second quarter of 2016, and retail used leads invoiced per dealer was up 19%.

We delivered nearly 88,000 specialty finance leads during the quarter, up 1% from the year-ago period. Specialty finance lead revenue was up 3%, to $1.6 million, reflecting a favorable product mix and successful implementation of price increases.

On slide 7, you'll see dealer count stood at 4,412 as of June 30. Sequentially, the 7% decrease was largely due to the transition of 190 retail dealers to the aforementioned comprehensive OEM wholesale program.

When compared to the year-ago period, it's important to remember that we continue to work through the expected dealer churn from Dealix, which we acquired in May 2015. We've made great strides over the last year to raise the quality of the legacy Dealix business, both from a lead supply and dealer network perspective, and we will continue to focus on quality from Dealix, paring back leads and dealers where necessary.

As you may recall from last quarter, we eliminated between $2 million to $3 million in annualized revenue from Dealix leads that did not meet our quality standards. We began to replace this volume in late Q2 with our internally generated, higher-quality leads and remain committed to quality over volume to ensure that our dealer and OEM customers can continue to rely on Autobytel for high-value in-market consumer leads.

Now moving to slide 8, gross profit during the second quarter increased 18% to $13.9 million, and gross margin was 38.5% compared to 38.7% in the year-ago quarter. The expected decline in gross margin was primarily due to a $296,000 net increase to $315,000 this quarter and the amortization of intangibles resulting from the Dealix and AutoWeb acquisitions. Excluding this amortization, gross margin would have been 39.4%.

Total operating expenses in the second quarter were $13 million compared to $10.1 million in the year-ago quarter. As a percentage of revenues, total operating expenses were 35.9% compared to 33.1% in the second quarter of 2015, with the increase largely due to last year's acquisitions of Dealix and AutoWeb and the corresponding $590,000 increase in amortization of intangibles.

Since making these acquisitions, our overall business has grown considerably. We've added nearly 50% more in headcount to approximately 300 employees and have acquired several new offices, which is largely the driver behind our year-over-year OpEx increase.

On a GAAP basis, net income in the second quarter was $430,000, or $0.03 per diluted share on 13.3 million shares compared to net income of $871,000, or $0.08 per diluted share, on 11.1 million shares in last year's second quarter. We expect our quarterly diluted share count in 2016 to remain around 13.4 million, contingent upon our share price and assuming current outstanding shares, warrants, options, and convertible debt remain constant.

For the second quarter, non-GAAP income, which adds back amortization on acquired intangibles, non-cash stock-based compensation, acquisition costs, severance costs, gain on investment, litigation settlements, and income taxes, was $3.2 million, or $0.24 per diluted share compared to $3.5 million, or $0.31, in the year-ago quarter. Cash provided by operations for the 2016 second quarter improved to $4.6 million compared to $3 million in the prior-year quarter.

On slide 9 you'll see that our cash balance remains strong, with cash and cash equivalents of $27.1 million at June 30, 2016, which represents a 13% increase from December 31, 2015. Total debt at June 30, 2016, was $24.4 million compared to $27 million at the end of 2015.

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

Thank you, Kim. As I mentioned earlier, our second quarter was highlighted by the continued ramp in our click business, lead program expansion with nearly all of our OEM customers, and contribution from last year's acquisition of Dealix. I'll spend some time covering each of these topics, as well as an update on our used car initiatives.

Beginning with our click business, for those of you new to Autobytel, our click business came to us through our acquisition of AutoWeb, which is a pay-per-click programmatic advertising marketplace targeting the auto industry whose platform provides dealers and OEMs with access to some of the highest-intent car shoppers on the Internet and propels Autobytel into the fast-growing pay-per-click market.

As Kim noted earlier, the growth in AutoWeb's click volume continues to accelerate. We have increased volumes with existing clients and have added OEMs, large dealer groups and dealer agencies, all of which are eager to get high-quality traffic to their websites. We've also begun to experience higher demand from Tier I and Tier II advertisers as well as from individual dealers. In fact, we are seeing record levels for click volume revenues and revenue per click, while our Autobytel Direct Traffic product that we market directly to automotive dealers is also continuing to scale with minimal dealer churn thus far.

On the last quarterly update, we discussed the migration of our previously outsourced development resources to our newly acquired in-house Guatemalan operations. Although we have completed the migration, we continue to invest in development resources to further accelerate the growth of our click business, which we view as one of the most exciting and lucrative opportunities in our business. It's important to note that we are still in the very early stages of realizing AutoWeb's full capabilities and remain on track to launch our new click-enhanced product by the end of Q3.

Moving on to our strong lead volumes, during the second quarter, we expanded lead programs with all but one of our OEM customers. OEMs tend to be very selective in their digital marketing spend, and they continue to demonstrate increasing demand for our high-quality leads. During the quarter, several OEMs were purchasing leads at volumes that were 30% to 40% higher than they had historically. We believe this is a direct result of our commitment to quality, which was further reflected by our decision to walk away from Dealix's lead-gen methodologies in Q1 that didn't meet our high quality requirements.

As Kim noted earlier, in late June we began to see a strong recovery in quality lead supply from Dealix, as well as our own internally generated leads, and we expect to continue investing in our core leads business to capitalize on the record level demand from our OEM and dealer customers.

I remind listeners that when you account for leads that we deliver to OEMs, we are actually delivering leads to approximately 22,000 dealer franchises, which includes our retail dealer network. The breadth of our influence on the auto industry is further illustrated on slide 10, where you can see that sales from consumers submitting leads through Autobytel's network accounted for approximately 5% of all new light vehicle retail sales in the United States in 2015.

On slide 11 you'll see that our estimated average buy rate for internally generated leads in the second quarter was 16%. This figure now includes the buy rate from Dealix leads, so we are pleased with our performance in raising the legacy Dealix lead quality thus far up to the low end of our targeted range of the 16% to 24%.

And on slide 12, as derived from IHS Automotive Reports, these estimated buy rates have remained consistently strong since Q1 2011, with Autobytel.com generating an average buy rate of 24% and all Autobytel internally generated leads at about 18%.

Now moving on to our used car business. Used car lead revenue in the second quarter grew 3% year over year, to $3.6 million, primarily due to Dealix. On a sequential basis, used car lead revenue was down as a result of the Dealix lead-gen methodologies we walked away from during the first quarter. However, similar to new car leads, we also began to experience a strong recovery in quality used lead supply from Dealix in late June. Our used car business remains the focal point for growth, and we continue to increase the level of resources dedicated to sales and marketing as well as ramping the investment in our used car platforms for internal lead generation. This includes a special focus on the UsedCars.com site, which we acquired through Dealix last summer and we expect to relaunch by the end of Q3.

As a reminder, retail used car leads still only represent about 8% of our total leads business today and approximately 10% of revenue, even though used car sales in the United States are two to three times that of new car sales by volume. We continue to believe there is a tremendous opportunity in the used car market. Over 37 million used cars were sold in the United States in 2015. And of those 37 million, only about 11 million occurred at franchised dealers, which is the primary end market we've targeted historically.

Our current used car initiatives will enable us to go after the vast market that does not includes franchised dealers, so there's plenty of white space in that market for us to meaningfully build relationships going forward. More information on our used car business can also be found on slide 13.

Moving on to the industry outlook, as you can see on slide 14, LMC Automotive and J.D. Power have the seasonally adjusted annual run rate, or SAARR, for total sales at 18.1 million units for July 2016, up from 17.5 million units one year ago. This is also up from the 16.6 million unit SAARR in June 2016.

Now moving on to our 2016 business outlook, highlighted on slide 15, we continue to expect 2016 revenue to range between $151 million and $155 million, which represents an increase of approximately 13% to 16% from 2015. We also continue to expect non-GAAP diluted EPS to range between $1.39 and $1.43, representing an increase of approximately 14% to 17% from 2015.

I'd like to remind listeners about the seasonality in our business and that historically, Q3 has been our strongest quarter of the year. It's important to note that this will be Autobytel's first full Q3 with AutoWeb. We continue to view this part of our business as a significant growth opportunity, and it will require an increased amount of investment to accelerate the development of new products. This includes the click-enhanced product solution we're launching at the end of the third quarter, as well as a beta version of our new UsedCars.com site, among others.

With several near-term catalysts ahead, as well as expected growth in our core leads business, we intend to carry this momentum and deliver strong growth and profitability in the back half of the year. Most importantly, we intend to continue providing dealers and OEMs with high-intent car buyers, regardless of channel, to ultimately help them sell more cars and trucks.

At this time, we'd like to open up the call for questions.

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

Thanks and congratulations on the good results from Q2. I wanted to talk about the advertising revenue book and (inaudible) there, but I first wanted to talk about the leads business. Obviously, you guys have had some moving parts here. So as I look at that list, I know you're not giving guidance for Q3, but is that a growth line year over year? Because when I look at it a year ago, it was $36.5 million. As I look to your guidance here, it seems to me that that would probably be a decline year on year, and I'm sure in part that's driven by you guys trimming some of the leads that you got with the Dealix acquisition year on year. But is that a correct assumption, that that would be down year on year?

Yes, we had assumed that we would see some decline in the leads business. In Q3 last year, we had the full impact of the Dealix acquisition, and we hadn't materially started trimming back some of that revenue. So you will see that in Q3 of this year when you're looking at comparables.

Okay. And then on the advertising revenue, just terrific results there. That's really a blow-out quarter, certainly versus what I had modeled, and I would assume it was--well, the fact that you guys are highlighting it in the slides and in the press release, it's pleasantly surprised you as well. What is behind that outperformance?

Sure. There was actually a couple of things that really drove it. Our click volumes just continue to grow, and grow beyond expectations. We continue to set daily records with the volumes that we're seeing on the click side. And couple that with revenue per click growth as well, it's scaling nicely. And I know we've had conversations around the exponential growth potential there with both of those things, clicks and revenue per click, coming together. And it's nice to see it come to fruition.

Is this like a Google model, where it's almost a self-leveling auction, where the click volumes are there and then advertisers are coming in, maybe not in real time, but in weekly or monthly campaigns as to what they'll pay for click, or is it different than that?

It's similar. I would absolutely say it's similar from an overall functionality.

Okay. And then back to the expense side of the equation, you did talk about some investments that you had in the front half of the year. I know Jeff talked about those expenses don't necessarily go away because you are still investing in these, like the Guatemala ops, for instance. But what's the expectation for -- is there any relief, or should we model for that -- or relief in the OpEx, perhaps in Q4?

On the OpEx side, it will be -- we'll have a little bit of relief in Q3 and Q4 from Q2, although we will be investing more in development on the click side of the business. So you'll see a little bit of a step down, as Jeff mentioned earlier, that we completed the migration of development resources from our outsourced house to in-house. And so we'll see some relief there.

Okay, thanks for taking my questions, and congrats again.

Gary Prespopino, Barrington Research.

Hey, Kim, when you were talking about this transition to an OEM of 190 retail dealers, right? Then you threw out a number of this OEM has 800 retail dealers. Are they part of the transition? I was writing so fast I couldn't follow what you were saying.

Yes, so we had 190 of their approximate 800 dealers on our retail program.

Okay. And since this is an OEM program, are they going to eventually put the rest of their dealers on this program?

Hi, Gary, it's Jeff. A significant number of their dealers are already on that program, but we're working together to get more of their dealers into that program over time. It's a real plus for us. It's a bit unusual. We've not done anything like this before. But given the really progressive nature of the business rules and the thoughts around how this OEM is managing their program, we thought it made sense to do this.

So we see a lot of upside opportunity for us in this. It's good business rules, good pricing, and the OEM and their outside advisor that manages the program for them will work with us to increase dealer participation and assist us in selling through some of our other products to the dealers in that OEM program.

Are the OEMs giving the dealers any financial incentive, like a co-op advertising chit for joining up?

They're not doing that, to my knowledge, on the lead side of the equation, but there are some other possibilities under consideration.

Okay, that sounds interesting. And then could you maybe just -- not giving specifics, but in general -- as I look at your guidance and look at my model, if the OpEx isn't going to come down, we're going to have to get some expansion in the gross margin. And I'm just wondering, is that coming from the fact that -- will that come from the fact that most of this Dealix prune is about over now? You've had it for a year. And then the advertising and click revenues probably carry a much higher gross margin than the base business. Are those correct assumptions?

Yes, they are. And I just want to make sure I was clear on the OpEx. We will see a step down in Q3 and Q4 as we finish the migration from the development outsource to in-house.

Okay. But my assumptions are correct in that, that click and advertising carries a higher gross margin than the corporate average?

Correct.

All right, okay, thank you.

(Operator Instructions.) John Blackledge, Cowen and Company.

A couple of questions. How many dealers were on the clicks program in 2Q? And then could you discuss the churn profile for dealers on the clicks program since you started it?

Sure. So we are not disclosing at this point in time how many dealers are on yet, on the clicks program. As we continue to ramp that, that's something that we can look at as adding that to our dealer count slide. And I think it makes sense over the long term.

And I think the second question was on churn for the dealers on the click program. The churn has been like nothing we've ever seen before in terms of it being incredibly low. It's not like anything that we've seen from an industry perspective when we've benchmarked industry, nor our leads program. So we're seeing very high retention and very high stick rate on that click program.

Great. Just one follow-up. Facebook mentioned on their second-quarter call that they were experimenting with auto leads. Just wondering, Jeff, how should we think about that, like potential impacts for Autobytel and other leading players in the space?

We are actually in the midst of building a relationship with Facebook. We are involved in some of the automotive activities that they're doing, as I'm sure are some of our competitors. We are not currently familiar with all of the details of what they talked about. But based on what we know, we don't currently view it as a major issue for us for the time being.

Yes, it was really brief. They just mentioned it pretty briefly. But thought it was an interesting call-out from them.

Yes, you never know with someone that big. It's something that we'll definitely follow up on and understand more. But we've struggled with trying to do an implementation there for a while, and I'd say over the last six to nine months, we're seeing a lot more of an opportunity, and we're very excited about some of the work that we've been doing with them very recently.

Thanks so much. Thank you.

At this time, this concludes your question-and-answer session. I would now like to turn the call back over to Mr. Coats for closing remarks.

Thank you. Thank you, everybody, for joining us today. I also want to thank our team of dedicated and extremely hard-working employees. We look forward to speaking with all of you with our investors at the Canaccord conference in Boston next week and at the Liolios Gateway conference in September in San Francisco. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.