Autoweb Inc (AUTO) 2017 Q3 法說會逐字稿

Good afternoon, everyone, and thank you for participating in today's conference call to discuss AutoWeb's financial results for the third quarter ended September 30, 2017.

Joining us today are AutoWeb'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.

As a reminder, this conference call is being recorded.

Following their remarks, we'll open the call up 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 AutoWeb'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 September 30, 2017, which was filed prior to this call as well as other filings made by AutoWeb with the SEC from time-to-time.

These filings identify factors that can 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 AutoWeb's website at autoweb.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 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 third quarter 2017 results.

As a reminder to those of you who are new to AutoWeb, we were founded 22 years ago in 1995 as Autobytel, the original pioneer and leading provider of digital online automotive marketing services connecting in-market car buyers with our dealer and manufacturer customers.

We recently initiated the corporate rebranding and renamed the company AutoWeb as we believe this name better aligns with today's corporate strategy and operations.

Our third quarter was highlighted by the continued strong growth of our clicks business, which was up more than 15% from Q2 and 35% from the year ago quarter for record revenues of $7.4 million.

During the quarter, we also made progress, implementing solutions to improve our traffic acquisition as we work to continue to rebuild our original high-quality traffic streams from quarters passed.

Each subsequent month, we're seeing improvements to margin and conversion rates as our systems continuously relearn and build upon the previous months bid optimization processes.

During the quarter, we also purchased the usedtrucks.com, URL and have begun investing in the development of the site.

We expect this strong domain to be a key part of accelerating growth in our used product, moving forward.

As you may recall this builds upon 2 of our key stated initiatives for 2017 by expanding our used vehicles business and enhancing consumer-facing properties.

Subsequent to the quarter, we licensed the ROiQ audience creation and management platform from DealerX.

ROiQ utilizes a proprietary platform and technology for targeted online marketing to end market car buyers.

This platform employees extensive machine learning to determine when and what content to show our consumer across multiple devices.

This audience intelligence will enable us to generate highly targeted clicks and leads for our dealer and OEM customers while building upon our initiatives to diversify and expand our sources of high-quality traffic.

Before commenting further on these exciting developments, I would like to turn the call over to Kim and have us take us through the important details of our Q3 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 4, you can see that our third quarter revenue came in at $36.9 million, down from $42.2 million in the adjusted year ago quarter.

The expected decline was largely driven by the effect of eliminated lower quality traffic campaigns that we discussed last quarter.

This was partially offset by the continued strong growth in advertising revenues, which increased 21% to $8.9 million.

Moving to Slide 5. You'll see that we delivered approximately $2.1 million automotive leads during the third quarter compared to $2.6 million last year.

A reduction resulting primarily from the eliminated traffic.

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

As a reminder, the retail channel comprises leads sold directly to dealers whereas our wholesale channel primarily reflects leads sold to OEMs that are then distributed to dealers and their corporate leads program at the OEMs discretion.

And on Slide 6, you'll see that dealer count stood at 24,191 at September 30, a 1% decrease from Q2.

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.

It's worth noting that we saw slight headwinds to both revenue and lead and click volumes in the third quarter as a result of the hurricanes in both Houston and Florida.

In fact, parts of Florida, we're without power.

And therefore, Internet connectivity for an extended period of time leading into mid-September.

We have since seen recovery and expect to see a slight uptick in volumes in Houston in the coming months as consumers begin to replace their damaged vehicles.

It goes without saying that our thoughts are with all of those who were affected in regions impacted by natural disasters.

Moving on to advertising.

As mentioned earlier, our advertising revenues increased 21% to $8.9 million compared to $7.4 million in the year ago quarter.

The growth was due to a significant increased input revenue.

On Slide 7, you'll see click revenues increased 35% to a record $7.4 million compared to $5.5 million in the same period last year.

The increase was driven by continued strong customer demand, partially offset by the eliminated traffic.

Now moving to Slide 8. Gross profit during the third quarter was $11.1 million compared to an adjusted $15.3 million in the year ago quarter with the gross margin coming in at 30.1% compared to an adjusted 36.2%.

The decline was driven by the investment in additional traffic acquisition beginning in late Q3, 2016.

Investments in our used vehicle business and the aforementioned eliminated traffic campaign.

We expect gross margin to remain in the low 30% range as we focus on the optimization of traffic acquisition costs and used vehicles' investments.

Total operating expenses in the third quarter decreased to $10.8 million compared to an adjusted $11.2 million in the year ago quarter.

As a percentage of revenues, total operating expenses were 29.4% compared to an adjusted 26.5% for the year ago quarter.

We expect operating expenses as the percentage of revenues to be in the low 30% range as we increase investments in technology and sales and marketing resources over the next year.

On a GAAP basis, net income in the third quarter was $69,000 or $0.01 per diluted share on 13.2 million shares compared to adjusted net income of $2.6 million or $0.20 per share on 13.3 million shares in the year ago quarter.

For the third 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 $2.4 million or $0.18 per diluted share compared to an adjusted $6.3 million or $0.47 per diluted share in the third quarter of 2016.

The decline was primarily driven by lower revenue in gross margins, resulting from the aforementioned eliminated traffic and used vehicle investments.

Cash provided by operations in the third quarter was $2.5 million compared to $5.9 million unadjusted in the prior year quarter.

We also repurchased $1.2 million of stock during the third quarter and have an additional $3 million authorized, of which up to $1.8 million maybe used in 2017.

On Slide 9, you'll see that our cash balance remain strong despite debt pay down, stock repurchases and the usedtrucks.com URL purchase.

With cash and cash equivalents of $44.7 million at September 30, 2017, compared to $38.5 million at December 31, 2016.

Total debt at September 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 DealerX.

First, the transaction structure.

As you can see on Slide 10, we paid $8 million upfront to DealerX to license its technology in perpetuity.

During the initial 5-year period, we will receive tech development and support from their team, including product upgrades, new product development and audience expansion.

During this initial period, DealerX has the contingent right to receive approximately 711,000 shares of our AutoWeb common stock, if our market capitalization reaches $225 million and maintains that level for 90 consecutive days.

Or if there is a change in control of AutoWeb that reflects the market capitalization of $225 million or more.

If these shares are issued to DealerX, its obligation to provide platform operation and support will continue in perpetuity.

It's also worth noting that we have the option upon the occurrence of certain events to make a lump sum payment of $12.5 million to expand DealerX's platform support obligations in perpetuity, at which point their right to receive any AutoWeb stock is terminated.

With that out of the way, I'd like to expand on the DealerX platform a bit.

DealerX has created a unique all-in-one automotive online marketing platform that is a truly end-to-end operation from data collection and activation to analytics and attribution.

The technology records countless consumer driven behavioral events online and scores them in real time to determine what content to show a consumer with optimal location and timing.

We plan to utilize this technology to support both our clicks and leads products as we can target the right consumer and monetize the event in multiple ways.

As you can see on Slide 11, DealerX has comprehensive dashboards that provide analytics to show multi-pronged attribution.

The data showcased in these dashboards will allow us to demonstrate to our dealer and OEM customers, the significant value we are providing with this high-quality traffic and leads in helping them sell more cars and trucks.

In addition to the monetary benefits, the DealerX platform will provide us with an entirely new source of traffic, which builds upon our strategy to diversify our consumer acquisition partners.

We've been testing the technology for several months and both the conversion rates and margin profile have been very impressive.

This was the critical factor in our decision to license the technology as we remain committed to only providing the highest quality consumer leads and clicks to our dealer and OEM customers.

Now moving back to the third quarter.

In our clicks business, we continue to increase click volumes with existing clients and have added new dealers, OEMs 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 is still plenty of room for ongoing growth.

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

We continue to make progress on recovering the lost traffic from these eliminated campaigns and improving our bid optimization strategies with our traffic partners.

As I mentioned earlier, each subsequent month, we're seeing improvements to margin and conversion rates as our systems continuously relearn and build upon the previous month bid optimization processes.

We expect this rebuilding to continue into 2018.

Moving onto our used vehicle business.

The usedcars.com site continues to gain traction.

Q3 traffic is up 120% year-over-year, and our engineers have continued to improve site load time.

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

As I mentioned earlier, we purchased the usedtrucks.com URL during the third quarter.

Trucks and SUVs continue to be among the bestselling new and used vehicles for our dealer and manufacturer customers.

And they generally also carry the highest margins for them.

Accordingly, we are very excited to have acquired this strong domain to further boost our used product.

In its current form the temporary site has very limited functionality but also has click listings monetization.

We expect to launch a more robust version of the site in the second half of 2018.

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

We have a lot of opportunity to grow here with 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 12, you'll see that our estimated average buy rate for internally generated leads in the third quarter was 18%, which remains within our targeted range of 16% to 24%.

And on Slide 13, you'll note that these estimated buy rates have remained consistently strong since Q1 2011, with Autobytel.com generating an average buy rate of 27%, and all Autobytel internally generated leads at about 18%.

Note that we have relaunched autoweb.com to now be our corporate site, and we plan to keep the Autobytel's.com site active along with our other consumer-facing sites, car.com usedcars.com and usedtrucks.com, as they remain strong consumer-facing sites and continue to generate high margin, meaningful advertising revenue for us.

On Slide 14, you'll see that J.D. Power LMC Automotive is holding their forecast for full year 2017, total light-vehicle sales at 17.1 million units and retail light vehicle sales at 13.9 million units, both down slightly from 2016.

For 2018, J.D. Power LMC Automotive forecast total light vehicle sales to be 17 million units with retail light vehicles at $13.8 million.

Moving now to our 2017 business outlook, highlighted on Slide 15.

We are maintaining our previously issued guidance and expect revenue to range between $144 million and $148 million compared to an adjusted $150.4 million in 2016.

We also continue to expect non-GAAP EPS to range between $0.78 and $0.82 on 13.3 million shares.

Though 2017 fell short of our financial expectations due to extenuating circumstances with our traffic acquisition, we made solid progress on our stated goals that were laid out to start the year.

We've enhanced our consumer-facing websites and expanded our used vehicles business with investments in usedcars.com and usedtrucks.com.

And have diversified our sources of traffic by licensing the ROiQ platform from DealerX.

Looking ahead, we intend to continue to execute on these initiatives and work with our traffic partners to rebuild our high-quality traffic streams, while restoring our revenue and margin profiles.

We also plan to accelerate our clicks business by expanding the offerings to more dealer and OEM customers, while utilizing the new sources of traffic from DealerX to increase click volumes.

We expect the incremental sources of traffic to equally support our new and used vehicles leads business.

With multiple initiatives and products in place, we will continue to serve our dealers and OEMs with highly targeted clicks and leads, while developing a more efficient pathway to purchase for consumers.

At this time, Andrew, we are ready to open the call for questions.

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

A couple of questions.

If you look at guidance in the implied fourth quarter, it indicates that the height of guidance could be flat sequentially.

How realistic is that expectation?

And is that a function of what you indicated earlier about the hurricanes benefiting mostly in fourth quarter?

Secondly, Kim, you talked -- you spoke about tech investments in technology and sales and marketing, can you elaborate on where exactly you're investing.

I guess, I have a better sense of sales and marketing investments, but technology would also be helpful.

And last question would be just if you can talk about the demand dynamics in the clicks business?

If I remember correctly last year, you had about 200 partners from a demand side?

And if you can talk about how much have that -- how much has that number expanded or increased?

Hi, Sameet.

I start with the guidance question first, around our range -- the lower end of the ranges assumes the current run rate as is.

The higher end of the range assumes the spike for the used vehicles in the fourth quarter and a spike for seasonally adjusted numbers as we head into the holiday season.

So it's consistent with the models that you guys have put out.

The second question is regarding investment in technology and sales and marketing.

With the branding change, we're going to continue to invest in getting the AutoWeb name out there, so you'll see a significant uptick in what we're spending right now.

It's not significant in material as in numbers, but it's more than we are currently spending today from a marketing perspective.

And in addition, we're adding sales and customer service headcount.

With regards to technology, we are continuing to invest, as Jeff mentioned, in used trucks, used cars, and our other URLS as well as the ads server and other things that we've talked about throughout the year.

Jeff, I don't know if you want to go into the demand dynamics on the clicks?

On the demand side Sameet, for the clicks business we have a significant amount of demand.

We have added some new customers.

Mostly around agencies that represent dealers as well as a couple of OEMs.

But given some of the volume and quality problems we had during the first half of the year that caused us to pull the bad traffic out of our campaign, we were kind of slow walking the clicks product a little bit until we fully diagnosed from where the equality problems were coming.

So now that we've got that behind us, we are beginning to push it -- we have already begun to push it, again, and we're seeing continued sign of -- and I feel we have pretty strong demand for it.

The click product is very well received by our OEM customers as well as the agencies that represent dealers as well as some that represent OEMs.

So it's quite positive.

Our next question is from Ed Woo with Ascendiant Capital.

A clarifying question in terms of the guidance you gave earlier came about gross margin in the 30% range and operating expense in the 30% range as well.

Is that just for the fourth quarter or is it for the next couple of quarters?

That's R&O for the fourth quarter and moving into the next period in 2018.

Although, we'd expect that the OpEx, as a percentage, would be lower than gross margin in those periods.

Okay.

This one leads me to my next question is, now that you're making these investments and I know you're not going to be giving specific guidance for 2018.

But is there leverage in the model?

And where do you think the opportunity to really get back to those profit profiles that you previously had?

That's a good question, Ed.

So right now, we're actually going through the process of budgeting for 2018.

I wish I could provide you more guidance at this point in time.

But we are a little ways out until nailing down where we're ready to the guide for 2018.

So I would expect that on our next call.

Ed, this is Jeff.

I would also point out the leverage in our P&L is certainly more pronounced at the higher revenue level that we had to back off of from a traffic standpoint.

So there is still leverage in our product lines and in our approach.

But we've got to rebuild our traffic campaigns to get our revenue back in line in order to really demonstrate it.

I guess, more just a qualitative high-level view, Jeff.

Obviously, when you guys made acquisition of AutoWeb last year, you guys had a lot of expectations and whatnot.

Has anything changed in the past year to really get you guys to change your expectations on a long-term basis in the current business?

No, I wouldn't say that anything has changed from a long-term or even medium-term standpoint with the product.

I mean we are continuing to see really strong growth.

We had a flat quarter-over-quarter and year in the second quarter.

But that's in part because we were really slow walking some stuff related to some of the quality concerns for a while.

We are continuing to find up customers for -- we have taken a little bit slower approach, we would be further along.

But as we talked about on the second quarter call, we started identifying some quality problems late last year.

And they rolled over into this year.

And that's really caused us to just expand that product a little bit more slowly until we got the quality steps straightened out.

I mean, the last thing we want to do was potentially screw up, a great new product by pushing poor quality traffic to some new customers.

Our next question comes from Tom Cullum with Lake Street.

Just a few questions in some are follow-ups to some of it that have already been asked.

But curious about the expectation in the fourth quarter for OEM incentives or other potential tools to increase demand around the holidays and Black Friday?

Also wondering about your relationships, have they improved or changed in any way with some of the search partners since the Q2 traffic issues?

And then, if you could just expand a little on your growth expectations for pay per click in 2018?

And also if the traction for the used car leads business is as you saw on plan just where you are in that process?

Let me -- you might have to remind me on some of those as we go through it.

So the first one, we do think there will be increased incentives.

Good, Kim wrote them down.

Thank you, Kim.

Going through the fourth quarter, we do believe there will be increased incentives, you may have noticed that over the last 2, 3 years or 3 years, I guess, a lot of the manufacturers have started doing Black Friday advertising right after Thanksgiving and that has really changed the profile of Q4 for us over these years.

It was very successful for General Motors and some of the others, but GM in particular last year and a couple of years before that it's our understanding that they are planning to do the same thing again this year.

It was -- they kind of started in '14, expanded it in '15, a lot of other guys started jumping in a little bit in '15 and '16.

And so we would expect to see more this year.

In addition, to my -- to our understanding, incentives have been pretty much at an all-time high this year.

Particularly, during the summer.

So the manufacturers have been pushing very hard to move metal, particularly, in the second half of this year.

I assume in part to get their own inventories in line as they approach the end of their fiscal years in December.

I would say, our partner relationships remain very strong, across all of our search partners.

We have a very strong relationship and even though we've had some issues, we continue to work very closely with those partners in order to diagnose and take care of the issues.

So if anything, the relationships are probably stronger now than ever.

Click growth in 2018, we would expect it to continue to grow in double digits next year.

It will be -- how strongly that is a function of our leads traffic to some extent, but also now, the DealerX traffic partnership that we have begun developing.

It operates on a day-to-day basis, somewhat like relationships with our search partners.

And that we opened accounts with them and do campaigns, somewhat similarly, in order to buy traffic.

And so we would expect that to continue to support both sides of the business.

But again, we expect the clicks business to grow double digits next year.

Used cars, I would acknowledge used cars has grown a little more slowly than we would have liked.

We have been adding resources to it.

We have been expanding and improving the usedcars.com website with more functionality.

We've been also adding more dealers to the program and getting their inventory posted.

We need to do better.

And we are in fact, doing that.

We're adding more sales resources as well to what we are doing.

So we are a little behind where we'd hoped to be by this point in time.

But we do expect to accelerate in 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 closing remarks.

Thanks, Andrew.

Thanks, everybody, for joining us today.

I'd also like to, as always, to thank our team of hard working and dedicated employees.

We look forward to meeting with all of our current and perspective shareholders, I think, next in December at the LD Micro Conference in Los Angeles and through our periodic nondeal roadshows.

If we don't see before, we will be doing our Q4 call in early March.

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.