Autoweb Inc (AUTO) 2017 Q1 法說會逐字稿

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Autobytel financial results for the first quarter ended March 31, 2017.

Joining us today are Autobytel's President and CEO, Jeff Coats; the company's CFO, Kimberly Boren; and the company's outside Investor Relations Adviser, Sean Mansouri, with Liolios Group.

Following their remarks, we will 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 March 31, 2017, 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 asked by visiting Autobytel's website at 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.

For purposes of the 2017 guidance, we'll be adjusting 2016 revenues, non-GAAP income and non-GAAP EPS to reflect the exclusion of the company's specialty finance leads product that was divested at December 31, 2016.

And for year-over-year comparisons, prior year results with the exception of cash flow from operations for all periods presented are adjusted to exclude the company's specialty finance leads product, which was divested on December 31, 2016.

These 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 first quarter 2017 results.

As a reminder to those of you who are new to Autobytel, we are a pioneer and leading provider of online digital automotive services, connecting end market car buyers with our dealer and manufacturer customers.

We are happy to announce that the momentum we gained from our record 2016 has carried into the first quarter of 2017.

Our results were highlighted by another quarter of triple-digit growth in our clicks business, which is becoming a meaningful contributor to our overall financial performance and continues to strengthen our position as a digital leader in the automotive industry.

In line with expectations, lead revenues for the quarter were down slightly due to the effects of last year's initiative to systematically reduce lower quality leads supply.

It's worth noting that this quality initiative continues to drive increased retention across our customer base while providing us with more control of our high-quality leads supply as we began to rely less and less on third-party suppliers.

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.

As noted in our press release today, for year-over-year comparative purposes, the results for all periods presented and discussed on our call today exclude our specialty finance leads product, which was divested on December 31, 2016.

For those of you following along with our earnings presentation, on Slide 6, you see our first quarter revenues increased 8% to $37.3 million compared to an adjusted $34.6 million in the year-ago quarter.

This was primarily driven by continued strong growth in advertising click revenues, which increased 152% to $6.5 million.

For listeners who have been following our story, you may recall that we historically have broken out our leads business to distinguish between our wholesale channel, which derives revenue through automotive manufacturers for dealers participating in their corporate leads programs, and our retail channel, which comes directly from automotive dealers.

Due to evolving marketplace dynamics in the leads business, such as last year's transition of 190 retail dealers into 1 comprehensive OEM program as well as feedback from our shareholders and covering analysts, we've elected to simplify our story and aggregate the 2 channels as it is no longer appropriate to look at these channel dynamics separately.

With that said, we will continue to break out new versus used car leads given that used cars remains a growth story for Autobytel with a long-term market opportunity.

Jeff will expand on our used car business later in the call.

Moving to Slide 7. You'll see that we delivered approximately $2.2 million automotive leads during the first quarter compared to $2.3 million last year, a slight reduction as we work to replace a meaningful amount of the eliminated low-quality volume with higher-quality leads from our internal lead generation.

And on Slide 8, you'll see that dealer counts stood at 24,930 at March 31, a slight increase from Q4.

The increase was driven by greater demand for high-quality leads from our OEM and wholesale partners.

Similar to our leads breakout described earlier, this dealer count reflects all of the dealers we sell leads to including both the wholesale and retail channels for new cars.

Moving on to advertising, our advertising revenues increased 112% to a record $8 million compared to $3.8 million in the year-ago quarter.

The growth was once again due to a significant increase in click revenues.

On Slide 9, you'll see click revenues increase 152% to $6.5 million compared to $2.6 million in the same period last year.

The increase was driven by the continued strong growth of impressions, click-through rates and effective CPMs.

Now moving to Slide 10, gross profit during the first quarter was $12.9 million compared to an adjusted $13.2 million in the year-ago quarter.

In line with expectations, gross margin was 34.6%.

We continue to expect gross margin to remain in the mid-30% range over the coming quarters as we focus on increasing traffic and investing in technology.

Total operating expenses in the first quarter decreased 18% to $11.7 million compared to an adjusted $14.2 million in the year-ago quarter.

The decrease was driven by nonrecurring expenses in the year-ago quarter including $1.3 million of severance expense as well as business optimization initiatives and lower headcount in the 2017 quarter.

As a percentage of revenues, total operating expenses were 31.3% compared to an adjusted 41.4% for the year-ago quarter.

We expect our OpEx as a percent of revenue to continue in the low 30% range as we increase investments in technology and sales and marketing resources in 2017.

On a GAAP basis, net income for the first quarter was $484,000 or $0.04 per diluted share on 13.3 million shares compared to an adjusted net loss of $749,000 or negative $0.07 per share on 10.5 million shares in the year-ago quarter.

The increase was driven by the aforementioned growth of advertising click revenues and reduced operating expenses.

For the first quarter, non-GAAP income, which adds back amortization on acquired intangibles, noncash stock-based compensation, acquisition costs, severance costs, gain or loss on investment or sale, litigation settlement and income taxes, increased 24% to $3.5 million or $0.26 per diluted share compared to an adjusted $2.8 million or $0.21 per diluted share in the first quarter of 2016.

Cash provided by operations in the first quarter improved to $3.5 million compared to an unadjusted $1.6 million in the prior year quarter.

On Slide 11, you'll see that our cash balance remains strong and continues to grow despite debt paydown with cash and cash equivalents of $39.6 million at March 31, 2017 compared to $38.5 million at December 31, 2016.

Total debt at March 31, 2017 was reduced to $20.4 million compared to $23.1 million at the end of 2016.

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

Thank you, Kim.

As I mentioned earlier, the first quarter of 2017 was highlighted by the strong momentum in our clicks business.

We are continuing to increase click volumes with existing clients and have begun to add OEMs, large dealer groups, dealer agencies and Tier 2 dealer associations.

In fact, one major Asian OEM has recently committed to a low 7-figure marketing spend agreement in 2017 that would send our high-intent traffic to their Tier 1 consumer websites.

As I've mentioned in the past, our strong growth in clicks up to this point has only come from a small number of dealer and OEM customers with approximately 98% retention.

Customer feedback remains very positive.

In Q3 2016, we began heavily investing in traffic acquisition to accelerate the continued growth of both of our high-quality clicks product and our high-quality leads supply.

OEMs typically have very advanced digital marketing capabilities, and their increased demand continues to demonstrate that they understand the high ROI from our high-quality leads and clicks.

We have actually been approached by several OEMs about restructuring our relationships to transition all of their retail dealers on our network into one comprehensive OEM program for each respective OEM, similar to the 190 retail dealer transitions we had with a different OEM last year.

These discussions further reflect the evolving dynamics in our leads business and were the contributing factor in our decision to combine retail and wholesale leads in our track metrics.

We found that these restructured agreements have several benefits to our business.

In addition to the customer service and administrative relief of dealing with one OEM as opposed to hundreds of dealers, the agreement provides us with the opportunity to supply leads to even more dealers from the OEM that weren't previously on our network.

Also, this type of comprehensive relationship allows us to work closer with the OEM field sales force on best practices and provides us with a natural channel to introduce new products and services.

Ultimately, the benefit of this type of OEM program outweighs the loss of the direct dealer relationships.

For instance, the results of last year's OEM program transition have already been very impressive with lead volumes up 20% versus the same period in 2016.

At the end of the third quarter last year, we launched a new version of usedcars.com with fully responsive technology and mobile friendly application.

We remain very excited about the strength of the usedcars domain and will continue to invest in it to make it the premier used vehicle destination for consumers.

Our investments in the used car business have been paying off with our traffic to the usedcars.com site increasing more than 25% since the relaunch.

In addition, our consumer acquisition team has begun launching SEM campaigns to generate used car leads.

This marks our first major push into used car paid search and is built upon the usedcars.com website infrastructure.

This platform takes advantage of proprietary techniques and technology acquired from Dealix and Autotegrity combined with our existing expertise.

In just a short period of time, these SEM campaigns have contributed 17% of our total used car volume.

The opportunity in the used car business will continue to be significant.

The used car market in the United States has historically been 2 to 3x that of new, and growth in this market is projected to outpace new cars for at least the next few years.

That said, our used car business remains a focal point for growth, and we continue to increase the level of resources dedicated to ramping our used car platforms for internal lead generation.

Turning now to our usual industry metrics for the quarter.

On Slide 12, you can see that we estimate sales to consumers submitting new car leads through Autobytel's network increased 23% to approximately 748,000 units in 2016, which is estimated to have accounted for approximately 5% of all new light vehicle retail sales in the United States.

From a used car perspective, we estimate that Autobytel leads accounted for 837,000 unit sales in 2016, a 36% increase over the prior year and approximately 2% of all used car retail sales in the United States.

This compares relatively to flat growth for the industry at large for both new and used car sales.

On Slide 13, you'll see that our estimated average buy rate for internally generated leads in the first quarter was 18%, which remains in our targeted range of 16% to 24%.

Because of our ongoing commitment to lead quality, we are continuing to focus on enhanced methodologies to meaningfully increase the mix of internally generated leads from the current 80% level while only utilizing volume from a small number of trusted suppliers who share our commitment to quality.

As I mentioned earlier, this has resulted in increased retention across our customer base.

On Slide 14, you'll also note that these estimated buy rates have remained consistently strong since Q1 2011 with Autobytel.com generating an average buy rate of 25% and all Autobytel internally generated leads at about 18%.

We are often asked how we compare to other pay-per-sale models in the marketplace.

On Slide 15, you can see that at a conservative 15% to 19% buy rate for leads that we delivered to our dealer customers, the hypothetical pay-per-sale in our model would effectively range between $116 and $147 per car sold.

This cost would of course be even lower with our targeted 16% to 24% buy rates.

Moving on to the industry outlook.

As you can see on Slide 16, Automotive News has a seasonally adjusted annual run rate or SAAR for total sales at 17.5 million units for April 2017, which is flat compared to 1 year ago and up from 16.6 million units in March.

And on Slide 17, you'll see that in April, J.D. Power LLC Automotive forecasted full year 2017 total light vehicle sales of 17.5 million units and retail light vehicle sales at 14.2 million units, both roughly flat from 2016.

Moving now to our 2017 business outlook highlighted on Slide 18.

We continue to expect revenue to range between $156 million and $160 million, representing an increase of approximately 4% to 6% from 2016.

We also expect non-GAAP income to range between $16.8 million and $17.3 million, representing an increase of up to approximately 3% for 2016 with non-GAAP diluted EPS ranging between $1.24 and $1.28 on 13.5 million shares.

Note that for comparative purposes, the foregoing percentage growth calculations and 2016 non-GAAP diluted EPS exclude 2016 revenues, non-GAAP income and non-GAAP EPS related to the company's specialty finance leads product that we divested on December 31, 2016.

2017 remains a year of growth and continued investment for Autobytel.

We will focus on investments in technology including investment in our consumer acquisition technology, the AutoWeb ad platform and our consumer-facing websites, which include car.com, AutoWeb.com, Autobytel.com and usedcars.com.

We are also investing in an enterprise data platform which will combine all of our data into one unified data lake.

This will enable us to continue to optimize the consumer experience, increase efficiency of operations and provide a more personalized experience for our customers.

We also expect to continue to strengthen our U.S. and Guatemalan development teams to further accelerate the growth of our click and core leads products, especially the usedcars.com website.

And we expect these investments to ultimately enhance and simplify the consumer's path to purchase of new or used cars and trucks while providing access to high-intent, end market car buyers for our dealer and OEM customers.

At this time, operator, we're happy to [take questions].

(Operator Instructions) Our first question will come from Sameet Sinha with B. Riley.

A couple of questions here.

So talking about the used car business, you said 17% of your volume is coming through search engine marketing.

Where is the balance of the volume coming from?

And the second question is, if we look at your revenue, the way you maintained full year guidance despite having a very strong Q1.

If you assume kind of a 5% sequential growth in revenue in the second quarter, which is to be expected because of a seasonally strong quarter, you're basically saying the second half, you're expecting flat year-over-year revenue -- adjusted revenue.

Can you talk about that?

Then I have a follow-up.

Sameet, I'll answer your first question, and Kim can answer the second one.

[We -- in] our used car lead volume through partnerships with other firms that we buy the leads from, which is a large portion of our used car volume as well as the pure organic leads that come off of our websites in addition to what we're doing from an SEM standpoint.

But we are continuing to invest additional resources in our SEM capabilities in order to drive a higher volume of that traffic -- of that volume.

And of course, it just takes a little bit of time because we are trying to make sure that we're generating the same kind of quality.

So overall, about 50% of our used leads are organic in nature, and the remainder are leads that we buy from partners on the outside.

And then, Sameet, for your second question regarding revenues.

So one quick misnomer in what you said.

Q2 is typically lower than Q1.

So Q1 and Q3 are typically our stronger quarters whereas Q2 and Q4 are typically our weaker quarters, although we've seen that changing a little bit with the incentives in the markets in Black Friday in the fourth quarter.

And with automotive projections, we'd expect this year to be a little bit choppy.

But in any case, Q2 should be lower than Q1 from a seasonal perspective.

And then I also wonder if you're excluding the specialty finance numbers when you said that there would be little growth quarter -- or year-over-year from a quarterly perspective in the second half.

Okay.

It was the, I guess, the second quarter seasonality which I had not understood properly.

My follow-up question is, can you talk about the dealer count?

SAAR finally started to move up.

What are the trends?

Do you think that's a sustainable trend at this point or something one time happened?

Can you elaborate on that please?

I don't think it's a onetime thing, Sameet.

It's really a function of the dealers that are on our retail program and the dealers that are members of the corporate leads programs of each of the 31 manufacturers or 31 brands that we do business with.

So they have dealers coming in and out of the corporate programs as they fill the volume that each of those respective dealers wants to buy from the program.

So those numbers fluctuate.

We experience something similar, as you know, on the retail side, the churn in the dealer body.

But to some extent, the characteristics are somewhat same -- somewhat the same.

We've come to realize that more dealers move in and out during the course of the year than we've recognized historically, and that's because they're using different products throughout different times of the year.

We would expect to see a better dealer profile, number of dealers with whom we do business as we move forward.

Our next question will come from Gary Prestopino with Barrington Research.

A number of questions here.

Jeff, could you tell us what percentage of your leads and percentage of your revenues were used?

Are you giving out those statistics anymore in the quarter?

And how that shifted year-over-year?

Gary, so we didn't give out revenues, but if you look in the slide presentation, you can see the distribution between new and used leads.

Yes, all right -- but that's kind of -- all right, I can work with that.

The other thing is, Jeff, you've mentioned something about -- I didn't quite catch it.

A thought process of focusing more on the corporate lead programs versus dealers, specific dealers?

And I guess, what happens there is like you say the OEM -- the dealers work with the OEM manufacturer and I guess sign up for a program through the OEM?

Is that how that works?

Yes.

Okay.

So your thought process is possibly moving more resources to that channel of distribution versus having the individual dealer touch points?

Generally, the answer to that question is we plan to focus on it a little more, yes, but not really moving more resources to it per se because it's already very efficiently managed by the people that we have involved.

I mean, we may have to beef that up a little bit over time.

But the manufacturers do a lot of the lifting.

We get one invoice as opposed to hundreds of invoices.

The manufacturer -- dealer -- individual dealers will scrub out leads or return leads to us.

That's not really something that happens in the manufacturer programs.

There are a lot of benefits.

In addition, in the program that took place last year, part of the reason we were willing to do it is they committed to work with us to sell our other products to the dealers as part of their dealer base either by co-op-ing it or just having their field salespeople help with it or whatever.

And so that has really helped us increase the sale of some of our other dealer products in addition.

So we think there's a lot of benefit doing it that way.

I don't necessarily expect that perhaps even a majority of our retail business will evolve in that direction.

But there are several other manufacturers that we know are interested in doing this, and so we'll see on a case-by-case basis whether that makes sense.

The one we've done so far does a lot -- does make a lot of sense, and we would expect some similar benefits in some of the others.

So we'll see.

And in addition, it also positions us much more strongly for our clicks product to have the manufacturers involved, both as a customer of our clicks product and assisting us with encouraging their dealers to sign up for it, if not perhaps have some of that co-op-ed as well.

So there are multiple benefits of this approach.

Okay.

Just a couple more questions, and I'll jump off.

In terms of the AutoWeb business, I believe you had said that you were just kind of testing that out with a small subset of dealers, and the plan is to roll it out throughout 2017.

I mean, if that's a correct statement, when will all of this be -- the ability -- or the AutoWeb product be rolled out to all your customer base?

Well, it will take some time to roll it out to all of the customer base.

We've begun discussions and meetings with various manufacturers and large dealer groups.

As I mentioned in the script, we've already signed the deal with one particular Asian manufacturer that's committed to a 7-figure spend on the clicks product for 2017.

Part of the timing on some of these, particularly with the clicks products, is we have to do some integration work with either the manufacturer or the dealer, dealer agency involved in doing it.

So it takes a little bit of time to actually begin generating revenue.

But we are in the process of beginning to roll it out to a larger number of our customers.

And of course, we're targeting the larger customers first, the manufacturers, the large dealer groups as we get going with it.

(Operator Instructions) Our next question will come from Bruce Goldfarb with Lake Street Capital.

So my first question has to do with just leads and pricing power.

Given sort of a flattish SAAR and some inventory buildup, dealer inventory buildup, have you had any ability or have you guys have been able to increase prices on leads?

Well, we are raising prices on leads and new contracts as we write them.

And as we have opportunities, we are raising prices at the dealer level, yes.

And we've also had some opportunities to do that at the manufacturer level and have done so.

So it's -- we are doing it.

It's not across the board, but we are -- we have been increasing price.

And then sort of the pay-per-click business was up 152%.

For the same reasons, sort of the flattish SAAR, are you seeing a lot more demand and interest in that business?

We are seeing a lot of interest in that business.

And the pricing in it, as I think you know, is currently, we provide clicks to dealers through their agencies for the most part at a flat $3.50 a click.

On the manufacturer side, the wholesale side, it's really more of an auction driven kind of an approach.

We started off originally 1 year or 2 ago, $0.50 per click.

And today, those auctions run between $1 and $2 per click, depending upon the make and the geography.

So we would expect the dynamics of supply and demand to further kick in, and we should see some escalation in those prices as different buyers are interested in buying limited click volume.

And we benefit from that, that -- which is of course the whole reason that the clicks business is on an auction driven basis.

Supply and demand.

And then it sounds like the used -- the traffic on the usedcars.com site is up significantly.

Do you guys have like a timetable when do you want to try to change the mix from organic to purchase in terms of the used car leads?

Well, as I mentioned before, currently, it's about 50% organic, the volume.

We are turning up the flame under the SEM side.

So even though we have to be careful and do it in a quality driven approach, so we don't get too far ahead of ourselves, I would think we'll have more success growing the paid side of the used car volume quicker than we will the organic side.

But candidly, that will actually be kind of interesting and fun to be part of because as I mentioned, we are continuing to invest in the usedcars.com website.

That is the pivot, the center around which we're building our used car business.

That had been historically an incredibly robust site for Dealix back when they were operating it on a very focused basis a few years ago.

And so we are in the process of moving it back to that kind of historical robust approach.

So we remain extremely bullish about the growth opportunities for us in the used car business.

It's still probably less than 10% of our overall revenue.

So there's a big growth opportunity for us there.

At this time, this concludes our question-and-answer session.

I would now like to turn the call back over to Mr. Coats for closing remarks.

Thank you.

Thanks, everyone, for joining the call today.

I also want to thank our team of hardworking and dedicated employees.

We will be presenting at the Barrington, B. Riley and Cowen conferences later this month and in June and hope to catch some of you there.

If not, we look forward to providing you the next update on the Q2 call in August.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

You may now disconnect your lines at this time.

Thank you for your participation.