Autoweb Inc (AUTO) 2017 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, 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'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, 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 accessed 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 its 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.

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 second 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.

As discussed on our First Quarter Earnings Call, 2017 is proving to be a tougher year.

Following robust beginning to the first quarter, we began seeing a softening in the automotive market moving into the second quarter.

While we are still seeing the expected seasonal improvement in the third quarter, the market softness appears to be continuing.

We made significant headway in our objectives for 2017.

We continue to focus on our investments in technology, consumer acquisition, the AutoWeb ad platform, and our consumer-facing sites.

The metrics for usedcars.com have also expanded quickly.

Usedcars.com traffic grew 60% year-over-year in the second quarter with low time -- with site low time improving by 72%, which correspondingly reduced our bounce rate by more than 9% since relaunch.

Despite a softening macro environment in the auto industry, the traffic acquisition issue, noted in our press release today and the normal seasonal step back from Q1, we continued to grow strongly our clicks business in the second quarter.

We continue to qualify and integrate additional new traffic sources to further accelerate growth in our clicks business, which will likewise support our leads business.

The paid search field has become more complex, with many of our paid traffic partners moving towards audience expansion marketing, which is sometimes called similar or look-alike audiences.

During Q2, we identified that some of these audience expansions were not converting to automotive purchases at a range of close rates acceptable to us.

This led us to halt these traffic campaigns in the second quarter.

We are actively working to implement solutions and have already begun to rebuild our original higher-quality traffic stream.

We are also continually looking to expand our methods and sources of traffic generation, for both leads and clicks, and are constantly using close rate date to identify if these new traffic sources are performing to our high-quality standards.

Given the actions we are taking to address these traffic issues, and the widely accepted expectations for auto sales to decline in 2017, we are lowering our 2017 revenue and adjusted EPS outlook.

Over the coming months, we expect to work through these issues and reestablish our revenue and margin profiles.

We have a variety of initiatives in place that are meant to further diversify our traffic acquisition, which we believe should provide a meaningful amount of high-quality traffic to help mitigate the loss of these other traffic campaigns.

Before commenting further, I'd like to turn the call over to Kim and have her take us through the important details of our Q2 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 can see our second quarter revenues were $34.6 million, essentially unchanged compared to the prior year adjusted quarter.

Advertising revenues increased 52% to $8 million, with click revenues up 76% to $6.5 million.

Moving to Slide 7, you'll see that we delivered approximately 2 million automotive leads during the second quarter compared to 2.1 million last year.

A slight reduction resulting primarily from the eliminated traffic discussed earlier.

Note that this lead volume reflects all leads sold to both the retail and the wholesale channel.

As a reminder, the retail channel comprises leads sold directly to dealers whereas our wholesale channel reflects leads sold to OEMs and wholesale partners that are then distributed to dealers.

On Slide 8, you'll see the dealer count stood at 24,464 at June 30, a 2% decrease from Q1, driven primarily by changes at the wholesale level.

Similar to our leads breakout, 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 52% to $8 million compared to $5.3 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 increased 76% to $6.5 million, compared to $3.7 million in the same period last year.

The increase was driven by continued strong customer demand despite the traffic acquisition issue and the usual seasonal step back from Q1.

Now moving to Slide 10.

Gross profit during the second quarter was $10.6 million compared to an adjusted $13.5 million in the year-ago quarter.

Gross margin for the quarter came in lower than expected at 30.7%, compared to an adjusted 39.1%, as a result of the investment in additional traffic acquisition beginning in Q3, '16, combined with the aforementioned traffic issues.

We expect gross margin to continue in the low-30% range as we focus on rebuilding our original high-quality traffic stream and optimizing traffic acquisition costs.

Total operating expenses in the second quarter decreased 80% to $10.4 million compared to an adjusted $12.7 million in the year-ago quarter.

The decrease was driven by the reduction of headcount and related expenses.

As a percentage of revenues, total operating expenses were 30%, compared to an adjusted 36.7% for the year-ago quarter.

We expect our OpEx, as a percentage of revenue, to continue in the low-30% range.

On a GAAP basis, net income in the second quarter was $322,000, or $0.02 per diluted share on 13.3 million shares, compared to adjusted net income of $360,000, or $0.03 per share on 13.3 million shares in the year-ago quarter.

For the second 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 settlements, and income taxes was $2.5 million or $0.19 per diluted share, compared to an adjusted $3 million or $0.23 per diluted share in the second quarter of 2016.

The decrease was primarily driven by market softness and the aforementioned traffic issues.

Cash provided by operations in the second quarter improved to $6.5 million compared to $4.6 million unadjusted in the prior-year quarter.

On Slide 11, you'll see that our cash balance remained strong and continues to grow despite debt paydown, with cash and cash equivalents of $44.6 million at June 30, 2017, compared to $38.5 million at December 31, 2016.

Total debt at June 30, 2017, was reduced to $19.1 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.

Before getting into some of the usual quarterly metrics, I'd like to provide some more color on the traffic issues discussed earlier.

To be more specific, the campaigns we identified were not sustainable from a conversion rate perspective.

This traffic exhibited classic characteristics that indicated a propensity for high-quality, including a strong conversion rate to leads, but ultimately did not convert to automotive purchases and an acceptable range of close rates for the vehicle selected.

The impact of the eliminated traffic and the actions we have taken to address this issue had a negative effect on Q2 revenues, and more so, gross margin.

As I mentioned, we have a variety of net initiatives in place that are meant to diversify our traffic acquisition to help offset the loss of these campaigns.

We continue to believe the advancements we are making in digital automotive marketing will pay dividends in the months and years to come.

Today, most dealers know very little about users visiting their website and the majority of dealers display the same messaging to every single user that visits their site.

Consumers are getting more and more sophisticated regarding digital marketing and the days of one-size-fits-all is becoming a relic of the past.

With Big Data, Machine Learning, and Audience Management, dealers can and should provide a more relevant user experience.

Our technology focus is on pinpointing specific consumer characteristics that are influential in the car buying process to optimize ad spend for car dealers, and make car research and buying easier for consumers.

The technology will expand and meaningfully improve our already extensive process of traffic optimization and will enable us to analyze in-list behavioral and contextual signals from consumers to ensure that we are presenting the right message to the right person at the right time.

We are ultimately developing a more efficient pathway to purchase for consumers, while offering better ROI for dealers and OEMs through highly targeted clicks and leads as opposed to a mass target campaign.

In our clicks business, we are continuing to increase click volumes with existing clients and have added new dealers, OEM's and advertising customers.

As I've mentioned in the past, our strong growth in clicks up to this point, has only come from a small number of customers, so there's plenty of room for ongoing growth.

It should be noted that even though we have seen strong click growth in revenue, this growth has been limited by the elimination of traffic campaigns that we referenced earlier.

Also, as I mentioned earlier, the usedcars.com site is gaining traction.

Q2 traffic is up 60% year-over-year, and after working collaboratively with Google, our engineers have improved site load time by 72%, which is truly an exciting development.

We will continue to work with our Google experts to adopt more adaptive experiences too create an optimal user flow.

As we continue to improve the user experience for our consumers and expand our inventory across usedcars.com, we will accelerate our approach and mission to drive new traffic in the coming quarters.

We have a lot of opportunity to grow here as our paid SEM efforts only represent a fraction of our overall investment, and we have a clear path to get there.

We are creating a mobile-first experience that we believe will allow us to reach all end market consumers with ease.

On Slide 13, you'll see that our estimated average buy rate, for internally generated leads in the second quarter, was 17%, which remains within our targeted range of 16% to 24%.

Because of our ongoing commitment to lead quality, we are continuing to focus on enhanced methodology to meaningful 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.

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 26% and all Autobytel internally generated leads at about 18%.

Moving on to the industry outlook.

As you can see on Slide 15, J.D. Power/LMC Automotive has a seasonally adjusted annual run rate or SAAR for total sales at 17.2 million units for July 2017, which is down 4% compared to one year ago and up from 16.5 million units in June.

In addition, on automation earnings call yesterday, Mike Jackson noted that they expect SAAR, for 2018, to be in the high $16 million to low $17 million unit range.

And on Slide 16, you'll see that J.D. Power/LMC Automotive again reduced the forecasted full year 2017 total light vehicle sales to 17 million units and retail light vehicle sales to 13.8 million units, both down from 2016.

Moving now to our 2017 business outlook highlighted on Slide 17.

As I mentioned earlier, due to the actions we are taking to address traffic issues and the widely accepted expectation for auto sales to decline in 2017, we now expect revenue to range between $144 million and $148 million, which compares to our previous guidance range of $156 million to $160 million.

We also expect non-GAAP income to range between $10.5 million and $11.1 million, which compares to our previous guidance range of $16.8 million to $17.3 million, and expect non-GAAP diluted EPS to range between $0.78 and $0.82 on 13.5 million shares compared to our previous guidance of $1.24 to $1.28.

So our near-term focus will be placed on resolving the traffic and related margin issues.

We have not lost sight of our core growth objectives and remain committed to expanding our used car leads and clicks businesses.

The key will be to personalize the consumer experience on our websites, landing pages and display networks to ensure we are delivering the right message to the right audience with optimal timing.

We will also renew our focus on operating efficiencies and have begun to further improve our internal data analytics capabilities and related reporting to ensure that we can better, and more quickly, detect any potential disruptions in traffic quality down the road.

Given the expectation for auto sales to decline in 2017, we believe that our delivery of high-intent car buyers will be all the more important to our dealer and OEM customers.

Operator, at this time, we'll take questions.

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

A couple of questions.

So talking about the revenue side of the equation, you mentioned that there was some changes at our wholesale program, can you elaborate on that?

And secondly, if you can also talk about -- are you seeing just overall dealers reducing the number of leads thereby?

Or is it just number of dealers who are churning out of the program?

And then I have a second question about the traffic issue.

Okay.

The wholesale issue that you referenced, it really is more a typical kind of function of what happens at the wholesale level, as they reduce coverage for us with different dealers.

In this particular case, the reduction probably had more to do with some of the quality concerns that we were seeing.

This all started in the last few months of 2016.

We began working to diagnose and understand where it was coming from.

As you know, we were looking at a lot of different and optimizing for a lot of new traffic sources, so it took us a little while to get through everything and ultimately identify the primary issues.

And during that period of time, some of our wholesale customers were the first ones to notice the decline in quality, and we were hearing from them.

So that reaction was a little bit of function of that.

In regard to the second question, Sameet, we actually increased our leads per dealer in the second quarter from a year-over-year perspective, so we are not seeing a decline in the number of leads per dealer.

On the leads side, it's not really a demand issue.

It's a supply issue related to the traffic issue.

We still have seen and continued to see pretty strong demand at both the dealer and the wholesale level.

Candidly, the reduction in our guidance for the rest of the year is totally a supply issue.

It's -- we are beginning to build back our traffic flow.

We are beginning to have some of our accounts relearned.

And as that process continues, we'll have a much better idea of how quickly we should be able to get back to a more normal kind of situation.

Okay, second question regarding the traffic issue, and I think you alluded to it that some of it is also going to impact the AutoWeb business.

Can you talk to us about how it was interplayed.

I know there some traffic was being diverted towards AutoWeb.

How are you trying to fix the situation, the core business?

And how much should we -- if you can talk about how much of your full year guidance reduction or second half reduction is a reduction in the lead business versus AutoWeb -- autoclicks, sorry.

Okay.

It's really...

Sure -- so in -- moving back to the first question.

About 70% of the click volume comes from our internal traffic generation and probably about 70% of that comes from the lead traffic, or I should say, initiates with the leads traffic.

So we saw some softness with that.

There it did impact the clicks business in the second quarter.

We would have expected it to probably be at least 10% higher had that not happened.

So I would say, the majority of the revenues declined in guidance, as a result of the lead revenue, with a small component being on the clicks side.

Our next question is from Ed Woo with Ascendiant Capital.

I know you mentioned a little bit about the timing about how you noticed some of the quality issues right at the end of last year.

Just curiosity, how did it seem to have accelerated a lot in the second quarter?

And how quickly do you think you're going to get this, I guess, stabilize and back on track?

The second part of your question, we are -- as I said, finally fully diagnosed everything relatively late in the second quarter.

We have been working hard in order to figure out the timing on that.

We've already seen the beginnings of a recovery so far during the month of July, as we moved into the stronger third quarter period of the year.

So candidly we just need a couple of more months of what's going on with our accounts and really getting through this period in order to figure out what it should look like.

So we would anticipate we can give a much more definitive answer to that question on the third quarter earnings call a much better feel for a true time line on that.

We began hearing from some of our OEM customers, like I mentioned, in 2016.

We had a lot of different traffic programs going with several people.

We had started trying to do some new stuff ourselves.

So we began working through the programs that we would have expected might have yielded the lower quality first.

Some of the new stuff we were trying as well as we looked into perhaps some of our outside suppliers having an issue in some of the stuff they were sending to us.

As we turn these things off and back on over the course of those months, it took us a while to finally get to the area where we had the primary issue, which again was pretty deep into 2017, which is one of the reasons I said we are absolutely already beginning to significantly upgrade our analytics and reporting capabilities.

Our new clicks business and the traffic acquisition we do as part of that is much more sophisticated than our older data analytics capabilities could support.

And so we are -- we're a little behind on getting all of that development work done, but it is in process.

We are getting that done.

It's not so much that it picked up and was more pronounced in the second quarter as once we understood what was going on.

We had been buying this particular traffic source for a period of time and had optimized around it for quite significantly in a number of our accounts.

And really, we had really no choice but to just almost immediately turn if off.

It was really just generating some pretty poor quality.

And when we start hearing loud issues at the manufacturer level, it has really gone too far.

So we're addressing that.

We're working with all of our customers to make sure they understand.

We are working with our traffic suppliers and supplier, in particular, in order to improve the situation.

Yet our regular traffic stream is back on track in order to begin generating the higher volumes.

We don't have all of the answers today.

We've been working hard to try to figure that out.

I think, fortunately, we are working through this during a pretty robust period, which is actually a good period of time to really dig into it and understand it better, because we should normally see some lift and some pretty strong abilities this quarter.

So we are working through it as quickly as we can.

It really is an "all hands on deck" kind of a situation.

I think you have previously mentioned that's the majority of the decline in revenue guidance is more of a supply issue as opposed to demand issue.

So is it as simple as you can't get the good quality leads, so you can't sell it?

It's that we can't get the good quality traffic to generate the leads and traffic related to that at margin levels that we can stomach.

You can already see the effect on our gross margin in the second quarter, the beginning of dealing with this as we begun paying up for traffic.

So we just have to work through this.

Again, it'll take a little bit of time as we work through this, but we should be able to further improve our margin for the remainder of this year, and as I said, we would think, by the third quarter earnings call, we should be able to give you guys some more definitive answers on timing and the future opportunity.

We are still bullish about the business.

The usedcars.com situation is extremely exciting.

We have a very good brand there.

Our partners at Google are working with us to optimize that site.

We are very bullish about that.

Unfortunately, it becomes -- this other issue comes in the middle of a lot of that, and it really kind of throws off some of our momentum.

The clicks business is still a strong business.

As Kim mentioned earlier, it has mostly been driven by the abandonment traffic from our lead firms thus far, which has always historically been very high volume, very high quality.

We are qualifying additional traffic sources, and as we get everything back on track, we would expect to see strong growth in our clicks business again as well.

So we have those 2 strong growth opportunities still in front of us, and we feel very bullish about them.

(Operator Instructions) Our next question is from Bruce Goldfarb with Lake Street Capital Markets.

So a couple of questions.

First, are OEMs behaving differently amongst each other with in regard to their appetite for leads?

No, we are not seeing anything any different.

If anything, in the last few months, we are seeing stronger demand for leads on the OEM side.

Okay.

and then is your lead volume being more impacted by -- I should add, if they are by unit declines or dealer churn?

Or is it more just a supply issue?

It's predominantly the supply problem.

It's the traffic, which we then generate the leads.

That's the primary problem.

Dealer churn does affect, it's a little bit, but it's certainly a much smaller impact, significantly smaller impact than what's going on on the supply side.

We're still seeing good dealer demand and good wholesale.

That was my next question, because I think you've mentioned in the past that when demand moderates -- I mean, when the SAAR kind of moderates a little bit, the demand can pick up because dealers will get more aggressive in terms of marketing trying to move inventory?

We have historically expected to see that.

I would say, some of what's been going on in the last few months is some of our quality issues have affected that what was normally be some counter-cyclicality.

Right now, we've got plenty of demand.

We are just not able to meet it with supply, certainly, not at margin levels that are tolerable.

I mean, we -- the gross margin we posted for the second quarter is not a margin that we are pleased with, and we are working strongly to bring that back around.

And part of also, at the same time, rebuilding our overall traffic volume and working with our customers to make sure that they are getting a high-quality leads that they demand.

And clicks.

And then just in terms of at least for July activity, it sounds like things were kind of turning more positive, you indicated earlier?

Yes.

Actually, we knew -- we were seeing some softness in the industry moving into Q2.

April was a little softer than usual.

May looked okay, but we didn't really see the surge in June that we would normally expect to see.

I mean, we still posted decent numbers for the quarter on both the top and the bottom line, but we would have expected to be able to do, I would say, meaningfully better than that, as we've seen our normal surge beginning in June moving into July.

We didn't really see the June surge.

We did start seeing more of that in July.

But even the improvement that we saw in July was not as pronounced as we would normally see.

Some of this probably has to do with consumers and consumer sentiment.

I don't know if it's affected by the economic concerns or the concerns with Washington or whatever.

We certainly don't have a new tax regime in place, so that may affect how something we will look at.

But we think that it's still likely to be a pretty good year.

We are beginning to recover from taking back large amount of traffic out of our mix.

So it just takes a little bit of time, but as I said, we still have very strong growth attributes in used and clicks in front of us.

And we have a very strong -- historically a very strong new car business as well.

So we'll work through this, and we should be in a much more knowledgeable position by the third quarter earnings call to give everybody much more succinct answers on what we think the future is going to hold for us as we finish this year and roll into 2018.

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

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

Thank you.

Thanks, everybody, for joining us today.

I also want to thank our team of hard-working and dedicated employees.

We look forward to speaking with all of you in the weeks and months ahead.

We will be at the Liolios Gateway Conference in September in San Francisco.

If we don't see you in the interim, then we will be speaking with you on the third quarter earnings call in November.

Thank you, everybody.

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

You may now disconnect your lines at this time.

Thank you for your participation.