Autoweb Inc (AUTO) 2018 Q1 法說會逐字稿

Good afternoon, everyone, thank you for participating in today's conference call to discuss AutoWeb's financial results for the first quarter ended March 31, 2018.

Joining us today are AutoWeb's CEO, Jared Rowe; the company's interim CFO, Wes Ozima; and the company's outside Investor Relations Adviser, Sean Mansouri, with Liolios Group. Following the 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. You may begin.

Thank you. Before I introduce Jared, I remind you that during today's call, including the question-and-answer session, statements that are not historical facts, including any projections, statements regarding future events or future financial performance or statements of intent or belief are forward-looking statements and are covered by the safe harbor disclaimers contained in today's press release and the company's public filings with the SEC. Actual outcomes and results may differ materially from what is expressed in or implied by these forward-looking statements. Specifically, please refer to the company's Form 10-Q for the first quarter ended March 31, 2018, 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 could cause results to differ materially from those forward-looking statements.

Please also note that during the today's call, management will be disclosing non-GAAP loss or non-GAAP income and non-GAAP EPS. 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, which is posted on the company's website.

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

Thanks, Sean, and good afternoon, everybody. It's an honor and privilege to rejoin the AutoWeb team since kicking off my digital marketing career at the company nearly 20 years ago. Over the years, AutoWeb has established itself as a premier provider of measured media advertising solutions for all major OEMs and dealers across the company. But the more specifically, AutoWeb is specialized in providing clients with high-quality performance-managed campaigns that include detailed attribution.

Now this enables our clients to understand the value of our ROI of our services which we think is absolutely critical. Now over the past 18 months, AutoWeb has not performed up to its full potential, and the company's results have been disappointing to everybody. However, our OEM and dealer clients continue to rely upon us for cost-efficient marketing solutions, which, I believe, speaks to the power of our platform and the need for the types of products and services that we provide.

Since joining the company a little less than a month ago, I spent my time focused on better understanding our organizational capabilities and how we are performing in terms of client value delivery. While it's still early in my time here, and I still have much to review, I am excited to report that we've already identified several ways for us to improve our operational efficiency and our product effectiveness. And we have a solid foundation from which to build with advanced technology, a talented team and clients that rely upon our products.

I can tell you that we are committed to making the changes necessary to get AutoWeb back to growth and profitability. But before commenting further on our plans, I'd like to turn the call over to Wes to walk us through the details of our Q1 results. Wes?

Thank you, Jared, and good afternoon, everyone. First quarter revenue came in at $32.3 million, down from $37.3 million in the year-ago quarter. The decline in revenue was primarily due to less efficient traffic acquisition and lower retail dealer count and lead volumes. However, our advertising revenues increased to $8.1 million compared to $8 million in the year-ago quarter, primarily driven by increased click revenues, which were up 3% to $6.7 million compared to $6.5 million in the same period last year. The increase in click revenues was driven by higher click volumes into our wholesale channel.

Now moving to gross profit. During the first quarter, gross profit was $7.7 million compared to $12.9 million in the year-ago quarter, with gross margin coming in at 23.8% compared to 34.6% for the year-ago quarter. The decline was primarily driven by the aforementioned less efficient traffic acquisition.

Total operating expenses in the first quarter were $18 million compared to $11.7 million last year. The increase was primarily driven by a goodwill impairment charge of $5.1 million associated with a decrease in our market value compared to book value as well as severance-related costs associated with our previously announced headcount realignment in February 2018 and the exit of our previous CEO.

Regarding the headcount realignment, in February, the company took action to better align our cost structure and mitigate the challenges to profitability.

On a GAAP basis, net loss in the first quarter was $10.3 million or negative $0.81 per share on 12.6 million shares compared to net income of $0.5 million or $0.04 per share on 13.3 million shares in the year-ago quarter. The decrease was primarily driven by the aforementioned goodwill impairment charge as well as severance costs and lower revenues.

For the first quarter, non-GAAP loss/income, which adds back amortization of acquired intangibles, noncash base stock -- I'm sorry, noncash stock-based compensation, severance costs, litigation settlements, goodwill impairment and income taxes, was negative $0.9 million or negative $0.07 per share compared to $3.5 million or $0.26 per share in the first quarter of 2017. The decline was primarily driven by the aforementioned lower revenue and gross margins.

Cash used in operations in the first quarter was $1.7 million compared to cash provided by operations of $3.5 million in the prior year quarter. At March 31, 2018, cash and cash equivalents stood at $15.2 million compared to $25 million at December 31, 2017, with the decrease driven by a repayment of an $8 million revolving line of credit. As a result, total debt at March 31, 2018, was reduced to $1 million compared to $9 million at the end of 2017.

Moving on to some other operating metrics. We delivered approximately 1.8 million automotive leads during the first quarter compared to 2.2 million in the year-ago period, a reduction resulting primarily from less efficient traffic acquisition. Note that this lead volume reflects all leads sold to both the retail and wholesale channels for new and used vehicles. As a reminder, the retail channel comprises leads sold directly to dealers, whereas as the wholesale channel primarily reflects leads sold to OEMs that are then distributed to dealers and their corporate leads program at the OEMs discretion.

Dealer count stood at 23,886 on March 31, down from 24,242 at the end of Q4. The 1% decrease was primarily driven by the aforementioned decline in retail dealers.

Similar to our leads breakout, this dealer count reflects all the dealers we sold new vehicle leads to, including both the wholesale and retail channels. Buy rates for the quarter remain strong with Autobytel.com, generating an average estimated buy rate of 30% and all AutoWeb internally generated leads estimated at about 18%. This compares to an estimated 25% for Autobytel.com and an estimated 18% for all AutoWeb internally generated leads in the first quarter of 2017.

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

Thanks, Wes. As I mentioned earlier, I've been meeting with key constituents over the last month to better understand our current opportunities and constraints. We remain in the early stages of developing and deploying very various initiative to acquire traffic more efficiently, improve our overall quality and ultimately, make the AutoWeb platform more effective for our clients.

Now over the several months, we will be finalizing a new strategic growth plan, and I very much look forward to sharing that with you. I believe there are opportunities to be more efficient with the existing resources we have today and to compete more effectively for our clients' marketing spend. We will be implementing a redesigned operating model that is focused on velocity of output and measurability of the value of our work.

Every dollar we put to work inside of AutoWeb should either be used to make our business more efficient and cost effective or it should be a driver of revenue. Now going forward, every one of our initiatives will fall into one of those 2 categories and will be measured with a high level of scrutiny to ensure our resources and capital are being utilized as best as possible.

AutoWeb stands as one of the largest and highest quality lead providers in the automotive category. Further, we remain confident that our click technology is a source of continued growth. We will maintain our focus to deliver on -- to focused to deliver on being the highest quality lead and click provider in the industry. Marketing efficiency is critical in the automotive industry, and we aim to continue to be on the forefront of helping our clients achieve their goals.

Now on the surface, this may appear to be an extension of what the company has been doing for last several years. But we're going to be doing it quite a bit differently. And it starts with modifying and optimizing our traffic acquisition strategy. While I can't provide too much detail on that today, know that we plan to evolve how we gather demand and quality signals in a way that differs from how we have historically worked so that we can better optimize our acquisition methods. We also intend to move away from the commodity matching of buyers and sellers, and we're going to begin to look at more data-informed signals so that we can connect a specific targeted buyer with a specific targeted seller. We believe this can help us differentiate in the market over the long-term. Now this approach will close -- applies to both our main product category, the lead and clicks, and will help us to improve both the margin and volume characteristics of our business.

I believe that we can build upon our current foundation to reposition AutoWeb for its next evolution of growth by becoming more operationally efficient, more operationally focused and evolving the product with an eye towards quality and enhanced buyer and seller matching. Now we understand their concerns about the auto cycle having already peaked. But from my experience, when you deliver a quality product that your clients need, you can succeed in any business climate.

So in closing, I'd like to reiterate 2 key points: one, we believe we've a great set of assets and capabilities in place; and two, we plan to become more efficient with the resources we have, and we're going to focus on the quality of our product to drive volumes. I'm very excited to be -- about the opportunities ahead and look forward to updating you on our progress along the way.

With that, we'll open up it up -- we'll open the call for questions.

(Operator Instructions) And our first question will come from the line of Sameet Sinha from B. Riley FBR.

I had several questions, of course, but I can understand that you are still in the process of kind of evolving your strategy and operational focus here. So I guess, my question would be from a cash perspective over the next few quarters, obviously, we know that visibility is low and you have a different way of -- that you're planning to run the business. But what's your goal from a cash perspective? Are you trying to run the business in a cash flow neutral basis? That's, I guess, the first part. And the second thing is, if you can help us think about, you mentioned traffic acquisition and have you're going to change that. The legacy historical way has been such a new marketing and other such purchases unless focus on search engine optimization and other such more efficient means from a dollar perspective of acquiring traffic. Can you talk about that? And then I have a couple of follow-ups?

Sure. Good to meet you as well, Sameet. So from a cash flow perspective, it is too early to tell. Ultimately, we do want to run this business cash flow neutral to cash flow positive and start building the balance sheet back up. But really that's going to be determined by how we think about our strategic plans over the short, medium and the long-term. We do intend to get this business back to growth, and we do intend to get this business back to profitability. And where we'll walk everyone through our plans later in the year when we have it. And we'll be more than happy to lay that out in detail for you. In terms of traffic acquisition, there are some things that we can do short term. And then candidly, there are some things that we've already started to do. Without going into too much detail, really what we started to do is modernize and contemporize our approach as it relates to the traffic acquisition and arbitrage. We hadn't necessarily been a deploying, what I consider to be, some of the cutting edge approaches that other folks who are -- who do similar things to us and other retail categories are doing, and so we're really starting to bring some of that to bear. So we do think that there is opportunity for us to get more efficient and effective with our current traffic sources. We also believe that there are some other untapped traffic sources that we have not aggressively pursued, but we intend to over the short to medium term.

Fair enough. I guess, my next question is clearly what you are telling us is that from a technology perspective, operational, traffic acquisition, a lot of work needs to be done at Autobytel. In this sort of competitive environment, where there are several large players and, of course, many small players. And given the large players are still trying to figure out the dealing with dealer -- a large number of dealers and increasing traffic acquisition costs, increasing marketing spend, but they have much better scale than you do. So in that sort of an environment, how are you thinking about competing pretty much for the same things that those guys are looking to get?

That's a great question. It really is because, to your point, they do have scale and ways that we don't. However, we have assets and capabilities that, I believe, are unique. And it's not only -- is about having the biggest marketing spend, it's actually about being as efficient and effective as you can be. It's also while really understanding the needs of your clients and the needs of the consumers and matching them more effectively. When you look at the automotive space overall, it really is a commodity marketplace. And most of the players still operate in that mode. But what we know is we know the car sales are not commodity transactions. They're considered transactions. So there's lots of elements that go into it. We believe that we can effectively compete in that space by being more effective and a bit more efficient than some of the current competitors who are in the space. And we -- again, we do like our scale. We definitely want to grow the retail dealer count because that's going back backwards, quarter-over-quarter, and that's never a good sign. However, we do have scale on the OEM side. So I'm less concerned about distribution scale. I'm more focused on how we drive unique value delivery to our clients because when you do that, you can drive the growth of the distribution side that you need.

One final question. You mentioned that you have unique assets. For us, who are looking at this -- have been looking at this for a while, obviously, last 2 quarters have been troubling and so can you help us kind of list 2 or 3 unique assets that you have that can help us kind of figure out the value still embedded in the company?

Sure. Sure. So when I look at this, one of the things that I get excited about in particular on the new car side of the business. It really is the platform that we built with the leads, the clicks send then the e-mail remarketing campaign. We've got a unique opportunity to integrate those 3 components so that we can deliver value to our clients in integrated multitier campaign manner. There are folks out there who have pieces of this. However, nobody has kind of the complete set that we do. And there is some work to be done to make sure that they are integrated and sharing information back and forth between the elements. But I do think that, that represents a unique opportunity for us to deliver leads, clicks and e-mail remarketing campaigns to drive the kinds of engagement that our clients ultimately want, which really is efficient engagement with the right consumer. The consumers who are naturally predisposed to buy from them in the way that they build product as well as the way that they sell product.

And our next question comes from the line of Eric Martinuzzi from LSCC (sic) [Lake Street Capital Markets].

Congratulations on the opportunity and workflow that you've inherited here, Jared. I have a question for you regarding the strategy. You're obviously working on a plan and there's no way you can reveal the plan before you've got the plan, but I'm just interested in the scope of the strategic review that we're looking at. Are we talking about potential asset divestitures here, potential acquisitions, further headcount realignments? What's the scope?

Thank you and good to meet you, and I appreciate the -- I appreciate your kind words. The scope is complete. We're looking at the business end-to-end. So as we think about that it's about repositioning this business for long-term growth and long-term profitability. And so all of the things that you have laid out as well as a couple others are on the table and will be reviewed. Because as we think about this, we do think about this from the standpoint of how do we drive short-term value and how do we position ourselves then for the medium and long term to really transition with the market overall. And as we all know, the market is going through quite a few different evolutions. And we need to be prepared to actually meet the future needs of this business. So when we think about the strategic assessment of the business, everything you mentioned is absolutely on the table.

Okay. And then with regard to your [only] team, your direct reports, your -- and you're less than a month here, but as far as that process midstream. Is it still -- we're looking at a 6 months to assemble your team. What's the thinking there?

The team -- so thinking is this that the team we have in place is fully engaged and working on this plan. And so we're going to work through the plan, and we will be moving as quickly as possible. We do know, and we appreciate the fact that, that urgency is important. So don't think of this as a sequential approach, where we're going to make dramatic changes to the leadership team and then deploy a new strategic plan. We've got a team in place, we're working on this, and we are going to optimize as we go.

Okay. Obviously, we've got some -- there's ebbs and flows here, there is a seasonal nature of the business. I want to ask a question about the margins. With the contraction in the top line and the efficiency and the effectiveness that you talked about. And maybe it's a question for Wes, but the gross margins in Q1 23.8%, that's bumping along the bottom, I can't recall. I have -- I think you have acquired some businesses that (inaudible) over the years, but this 23.8% is obviously a tough place to see the company. As remodeling for the remainder of 2018, you guys aren't giving us any guidance on the top line. But at least as far as the gross margins of a business for whatever revenue we choose to put in, is that what's the right way to think about gross margins going forward?

So this is Wes. Yes, obviously, we are expecting with the new plan that things are always going to change. I mean, we can't give you any guidance from a Q1 perspective. If you wanted to use that kind of all in, and, I guess, it's not unreasonable to run rate Q1. I should say and then take out some of the onetime items like goodwill impairment, but that would probably be all that I could provide at this point in time.

Okay. And the improvement...

In our recommendation -- well, I'm sorry, our recommendation would be to do that across the board.

Okay. When you say across the board, you're talking about the expense category or the gross margin?

Across the -- everything.

Okay. All right. And then lastly the -- obviously, you've got a situation here, where you paid out some debt. I'm curious to know, was that the banks coming after you saying, "hey, based on future profitability for (inaudible), we're going to need to rework this," and you guys are saying, "we're not going to dig around it. We'll pay it off and be done with." And then I have another question on the cash.

So we talk to the banks while renegotiating, what found is we found it was just easier for us to move on. So that's what we did. We paid it down, and we're moving on. And we were in a good cash position. We believe from a balance sheet perspective for what we need to do, short to medium term. And, again, we need to put our strategy in place so that we really understand what the capital needs of the business are going to be longer term. And so we view that as a kind of a later phase of this process.

Okay. And again, not looking for full year guidance here, but just as I think about this business' ability to thrive is one thing, but survive is another. We just had a quarter where we've run through, I think, the cash usage was $1.7 million. And I know Q1 is seasonally a challenging quarter even in good times. I also know you had the restructure in February as well as some of the former CEO-related costs. Is this a cash flow positive business, by a way of rewiring the car at 55 miles an hour?

So as we think about it, we think we've got a good cash position to do what we need to do in terms of resetting the strategic direction. And once we've reset the strategic direction, we'll take a look at just overall the -- how much capital we need and how we plan on driving the business ahead. So unfortunately, without having the strategic plan in place, it is difficult for me to answer that question. So that's kind of the best I can answer it as we sit right now.

And our next question comes from the line of Gary Prestopino from Barrington Research.

Jared, a couple of questions here. First of all, in your career, various order-related businesses, have you ever undertaken a turnaround like you got to undertake at AutoWeb?

Yes, I have, actually. I have. Most of my opportunities have been put in front of me and what they normally are, they are businesses that are need of being modernized and contemporized in some form or fashion where the common theme of taking current assets and capabilities, driving growth out of the core business and then extending the business to really position it for longer-term growth. So this pattern in terms of this opportunity, is very similar to what I have done in a few instances.

And I assume that that's really what attracted you here?

It is. It is. It's that plus, it's that plus -- I view AutoWeb as a business that has really unfulfilled potential. We've a product set that is interesting to our clients, it's needed. Marketing efficiency is something that this industry needs overall. I think we're well positioned to drive it. And I think with some focus, some execution and revised strategic plan, I really think we can get this business growing, again, and get it moving in the right direction and do some good for the clients.

So I know you got to get the strategic plan going, but this company has kind of been put together via acquisitions. Is part of the strategic plan a reengineering of your technology platform?

Integration work is going to be some of the work, I will tell you that. And again, that's a common theme in my past lives as well. When I took take a look at the pieces of the business, integrating them and getting to a place where we have a more efficient and effective execution model, technology as well as nontechnology related is absolutely an opportunity for us.

Okay. And then I may have missed it but, when are you due to come out with this strategic plan? Or did you give a date?

No, we haven't given a date. We haven't given a date. We're going to do it as soon as seemingly possible. And so because we know sooner is rather better than later. But we also want to be thoughtful about putting it together. So as we sit right now, Gary, my apologies. I wish I can give you a date, but we're going to do it as soon as we can.

No. No. No. That's fine. And then lastly, I think you also mentioned that you had -- you met with some dealer customers, is that correct?

I met with a whole slew of constituents, all different forms.

Okay. Just as you're talking with the dealer customers, they are the most important. What's the puts and takes there? I mean, what do they like about AutoWeb? What have they? What don't they like about AutoWeb?

So I'll dig into my full past here because I've competed with AutoWeb as well or companies like AutoWeb. And what I'll tell you is from a dealer's perspective, at least, in my experience, they like measurability, right. They like folks who're willing to put skin in the game and are willing to actually prove the value that they deliver on a daily, weekly or monthly basis. And so when you look at our core product offering, the core new car platform we have with clicks, leads and e-mail campaigns that are following up, that really is a performance-measured media platform. And then that's what I like about this opportunity, and to be candid with you, the reason I like it is because that's one of the things I've heard over and over again in my career from dealers is, you help me sell cars and if you can prove you help me sell cars, we'll buy all you can sell us. The one thing that you hear about the leads businesses in general, is there are some volatility in terms of quality. And so that's one of the reasons why you're hearing me talk so much about client value delivery, and to be candid with you, that's one of the places that I tend to live. Because I believe very strongly that if you deliver a quality product to your client relentlessly -- good market, bad market, up cycle, down cycle, you can still grow, and you can still put together a nice business. So we're going to focus on that, Gary, making sure that we are delivering the highest quality products and services that we can and making certain that we are driving and marketing (inaudible).

(Operator Instructions) And our next question comes from the line of Ed Woo from Ascendiant Capital.

My question is more of a industry view. I know you mentioned that, if you are able to deliver the right products at a right value to your end customers, you could thrive in any environment. But as you're talking to your constituents and the dealers out there, how concerned are they with industry sales right now? It seems to be holding up relatively well, and people are seem to be buying up the big profitable trucks. But are there legitimate concerns that the party may sharply end soon?

I don't know -- good to meet you, by the way, and thank you. Thank you for the question. I don't know how sharply it will end. If you look at the market overall, right, we still got healthy sign on the new car side, call it $17 million. We still got a healthy sign on the used car side, call it $39 million, $40 million. But your point, we are starting to see some stressing going on inside the business, right. Incentives are up, right, call it 10%, 11% of the average transaction price is now incentives. And that's up from a year ago and depending on whose numbers you believe from last year's 6% to 7%. So you've seen a pretty significant jump there. We also are in an environment, where interest rates are starting to rise, that's never good for the car business. On top of that, you're seeing the loans get longer, right. And I think the average is now close to 70 months for an average loan, which is up from just last year and a year ago. We're also seeing transaction prices continue to go up, which means monthly payments are going up and as you know this is a business that thrives on monthly payments. So while I say all that and I do see that there is some stressing of the business, we still do continue to plot along here. And the nice thing about what I think has gone on over the last, call it, 10 years from an industry perspective is, I think, we have learned how to sustain these positive cycles much longer than we used to be able to. So I'm still optimistic about our ability. There's an industry to continue on this path. I do think that we're going to have to become more efficient. And when, again, when you look at dealers and the kind of money they're spending on a per unit basis, call it, north of $650 a car to sell a car, I think that's the opportunity for somebody like us to really help them make certain that they can measure the value of each and every one of those marketing dollars. So it's an industry that continues to plug along, if you are seeing some kind of stresses inside of it. But, again, I'm pretty bullish on the next year to 2 years.

Thank you. And at this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Rowe for closing remarks.

Well, thank you, everybody. We really appreciate you joining the call. And I also just want to thank my team. They've done an awful lot of good work to really pull all this information together and make this happen. So thank you to the team as well. And we really do look forward to meeting with you over the next several months. And if we don't have a chance to meet with you personally before we get to the next call, I do look forward to talking to you on the next call as well. So thank you for everything. And hopefully, we'll talk soon.

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