Autoweb Inc (AUTO) 2019 Q2 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 second quarter ending June 30, 2019.

Joining us today are AutoWeb's CEO, Jared Rowe; the company's CFO; J.P. Hannan; and the company's outside Investor Relations Adviser, Sean Mansouri with Gateway Investor Relations.

Following their remarks, we will 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 Jared, I'll 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 that 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 second quarter ended June 30, 2019, 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 this call, management will be disclosing adjusted EBITDA.

This is a non-GAAP financial measure as defined by SEC Regulation G. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure is 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.

Thank you, Sean, and good afternoon, everyone.

We continued to execute on our turnaround strategy during the second quarter and have made great progress on several key initiatives.

First, our consistent focus on pricing optimization and retail distribution channels has led to our second consecutive quarter of gross margin expansion.

This was also aided by our improvements to traffic acquisition as we have continued to modify and optimize our search campaigns and the overall mix of our traffic sources.

During the quarter, we rolled out another update to the click algorithm that was -- that has improved our click-through and delivery rates.

This is encouraging as we've experienced immediate improvements in CTR without having to tune the algorithm post-release.

Typically, when a new algorithm is deployed, you'll see an initial step back before we tune it to improve performance and ultimately meet our performance goals.

In this case, the new algorithm almost immediately performed well.

So we're very excited to further refine the algorithm to improve our clicks' performance.

From a distribution perspective, we made strides this quarter with leads, clicks, e-mails and even bundled solutions.

From a clicks' perspective, we increased the delivery rate for retail dealers and optimized our wholesale accounts, which led to our first increase in revenue per click since we introduced the metric last year.

Also, we made progress with some of our strategic partners.

As I have mentioned on previous calls, I was disappointed with our lack of penetration of the top 150 dealer groups over the last year.

However, with the newest strategic accounts team in place, we have recently launched pilot programs with some of our strategic partners that include integrative marketing solutions of leads, clicks and email campaigns, along with our highly relevant first-party data.

I can't stress enough the importance of delivering value to our customers as a strategic partner and not just a seller of products.

We're striving to help them deliver strong and relevant experiences with high conversion amongst a very targeted audience of car buyers.

But before commenting further on the progress, I'd first like to turn it over to J.P. to walk through the details of our Q2 results.

J.P.?

Thank you, Jared, and good afternoon, everyone.

Now jumping right into our results.

Second quarter revenue came in at $27.1 million compared to $31.6 million in Q1 of 2019 and $29.3 million in Q2 of 2018.

Advertising revenues were $5.4 million compared to $5.9 million in Q1 of 2019 and $6.9 million in Q2 2018.

With click revenues of $4.5 million in Q2 of 2019 compared to $5.1 million in Q1 2019 and $5.8 million in Q2 2018.

These declines are primarily due to the lower lead in click volumes as we optimize our traffic acquisition spend for profitability and higher-margin growth.

Gross profit during the second quarter was $5.4 million compared to $5.8 million in Q1 of 2019 and $5.5 million in the year-ago quarter with gross margin coming in at 19.8% compared to 18.2% in Q1 of '19 and 18.9% in Q2 of 2018.

So this is now our second quarter in a row of sequential margin expansion after having consistent declines in -- since 2016, which reflects our better control of margins and outcomes within our product suite.

Total operating expenses in the second quarter were $10.4 million compared to $11.2 million in Q1 of 2019 and $10.9 million in Q2 2018.

On a GAAP basis, net loss in the second quarter was $5 million or $0.38 per share on 13.1 million shares.

This compares to a net loss of $5.4 million or $0.41 per share on 13.1 million shares in Q1 of 2019.

And a net loss of $5.2 million or $0.41 per share on 12.9 million shares in the year-ago quarter.

Adjusted EBITDA in the second quarter was a loss of $2.1 million compared to a loss of $3 million in Q1 of 2019 and a loss of $2.1 million in Q2 2018.

This sequential improvement has been driven by our improved gross margins and our expense management.

Cash used by operations in the second quarter was $5.6 million compared to $2.1 million in Q1 of 2019 and cash generation of $1.3 million in Q2 2018.

As I mentioned on our last call, we expected incremental cash burn in the first half of 2019 as we invested in our people, our products and our technology.

With our intention to return to growth and profitability for the year, we expect cash burn to reduce in the third quarter before turning cash flow positive into the fourth quarter.

At June 30, 2019, our cash, cash equivalents and restricted cash stood at $6.4 million compared to $13.6 million at December 31, 2018.

We are also debt-free as of June 30, 2019 with no outstanding amount on our $25 million secured revolving credit facility at the end of the quarter.

This compares to $1 million of debt at the end of 2018 as we paid off our former convertible note in January of 2019.

Now moving on to our key operating metrics, which are defined in the footnotes of our press release issued earlier today.

But please note, this quarter, we have added and removed certain website properties from our tracking metrics as we continue to refine our site portfolio and our approach to tagging with the goal of making these figures as relevant as possible for investors to gauge how we are trending.

These changes were made in the prior periods as well for comparative purposes.

Lead traffic was 33.1 million visits during the second quarter compared to 43.2 million in Q1 of 2019 and 34 million in Q2 of 2018.

The sequential decrease is primarily driven by our decision to reduce volume to certain less productive sales and distribution channels.

Our lead volume in the second quarter was approximately $1.8 million compared to $2.1 million in Q1 of 2019 and $1.7 million in the year-ago period.

This decrease was driven by a lower traffic and our proactive reduction of traffic acquisition spend as we're optimizing for profitability.

Our retail dealer count was 2,510 compared to 2,360 in Q1 of 2019 and 2,550 in Q2 of 2018.

We continue to expect choppiness in our dealer count and capacity as we're working through implementing new sales teams, marketing initiatives to better present our value proposition to our dealers and our OEMs.

Now retail lead capacity for the second quarter was 142,000 lead targets compared to 138,000 in Q1 of 2019 and 147,000 in Q2 of 2018.

You'll notice these figures are lower than the target counts we've previously provided as we're now reporting this metric at a point in time at the end of the quarter as opposed to the sum of the lead targets for each month.

This is similar to the way we would present a balance sheet metric.

We believe this is more effective -- a more effective approach to gauge variances in our lead capacity.

As we mentioned on our last call, it's important to note that our lead capacity in dealer count do not necessarily have to increase for us to deliver revenue growth because we don't always deliver leads to our full capacity.

Thus, we can still grow revenue by increasing our delivery rate with individual dealers despite dealer count capacity retracting.

And we're still highly focused on returning to dealer count and capacity growth through better sales and marketing and continued product enhancements.

Click traffic in the second quarter was 13.2 million visits compared to 16 million in Q1 2019 and 12.8 million in the year-ago quarter.

The sequential decrease was primarily driven by lower lead traffic and investments in traffic acquisition.

We were highly focused on improving margins, and we will not chase lower-margin sales for the sake of growth.

Click volume in the second quarter was 5.3 million clicks compared to 6.2 million in Q1 2019 or 4.7 million in Q2 2018.

The sequential decline was driven by lower click traffic.

Revenue per click during the quarter was up to $0.75 compared to $0.72 in Q1 2019 and $0.82 in Q2 2018.

This is our first quarter of generating sequential increase in revenue per click since we introduced the metric last year, which reflects our commitment to higher-margin distribution channels and improved pricing.

So with that, that concludes my prepared remarks, and I will turn the call back over to Jared.

Thank you, J.P. As I mentioned earlier, we're highly focused on margins and profitability as well as delivering strategic value to our clients.

Although some of the volumes have come down for both leads and clicks.

This is a result of our profitability initiatives as we will not grow for the sake of growth without proper margins.

Despite the lower top line, as J.P. mentioned, we improved both gross margins and adjusted EBITDA compared to the first quarter.

We're also keenly focused on restructuring our fixed operating model to run a leaner and more efficient organization.

On the last call, we discussed our efforts to migrate some of the company's functions and operations from our office in California to our offices in Tampa and Guatemala City.

Now in addition to lower real estate costs, we believe we can more -- we could be more competitive in hiring top personnel in these markets.

And we plan to maintain our presence in California.

However, we will have a smaller and more efficient footprint going forward.

And in recognition of these changes, we are announcing that our office in Tampa has been designated as the company's principal executive office going forward.

As mentioned a few months ago, we've had work to do with our click distribution as we have been selling far too many clicks to nonendemic advertisers, which naturally pay less per click than endemic buyers.

I'm pleased to report that during the quarter, we made good progress in selling clicks to near-endemic advertisers as well as improving the delivery rate for endemic advertisers.

This is immediately evident in the revenue per click.

Now we expect to continue improving this dynamic over the course of the year as we further optimize our channel mix and benefit from bundling of our products.

As J.P. mentioned earlier, we've become more efficient with the dealers and capacity we have by improving delivery rate.

For a perspective, almost 60% of our retail dealers consumed a 100% of their click budgets that were allocated to us in June, which has nearly doubled the delivery rate at the start of the year.

There's still room to improve, but the progress has been very encouraging.

Well, I'm also pleased with the progress we made to break into the top 150 dealer groups.

There's still work to be done in better presenting AutoWeb as a strategic partner to our clients and selling value to retail dealers.

If our client is realizing value as a whole by our bundled solutions it becomes a very different conversation with them in terms of individual product performance and pricing.

It's also important that we realigned the structure of our relationships with dealers so that we are delivering on the specifically defined KPI set by the dealers.

From there, we can continue to partner with them and establish the proper framework for our integrated and bundled solutions.

So in summary, we continue to execute on our various strategic initiatives, and we're realizing the early benefits to click-through rates and delivery rates which improved both gross margin and profitability.

There's still work to be done, but we're tracking to achieve our goal of generating revenue growth and profitability in 2019 as we reach our inflection point later this year.

So with that, we'll now open up the call to questions.

(Operator Instructions) And our first question comes from Gary Prestopino with Barrington Research.

Jarred, the growth in the retail dealer count, does that directly correlate with the pilot programs that you're doing with the dealer groups?

I mean are you counting that in there?

I mean that does get picked up in there, but that isn't driving the change there.

That change is really a mix of some of the things that we talked about in the last call of shifting some of the dealers out of wholesale into retail as well as just some of the good work that we've done from a retail perspective.

Again, the J.P.'s earlier point, and I'm just going to keep hammering this one home, is we do expect some choppiness.

So we'll get some momentum.

We'll learn something.

We'll start to move it in the right direction, and then we'll take a little bit of a step back because we're really rebuilding our approach, our go-to-market approach from the ground up.

So we feel good about the progress we made last quarter, but it's definitely not all because of the pilot programs, Gary.

No.

Okay.

So just in general, with what's going on in the industry right now, sluggish new car sales.

And the revamp of your sales force, is it -- are there indications that there's more of an appetite for a pay-per-lead model more so than there maybe was 1 or 2 years ago versus the subscription-based model out there in the market?

I've always liked the direct attribution associated with the lead model.

And I do think it helps with the conversations with the clients.

When we're aligned with their outcomes, it just helps us quite a bit as we go to market.

So I don't know if it's more or less, Gary, but I can tell you that with a decline, we like our position in the market, and we like being aligned with our clients, their outcome.

Okay.

And then just to be clear here, you're looking for a less -- much less of a cash burn in Q3 versus what you had in -- combined in Q1 and 2. And then you are still looking at positive adjusted EBITDA in Q4.

Yes, you have that right.

And our next question comes from Ed Woo with Ascendiant Capital.

Touching further on the industry trends that you're seeing, what are you seeing and hearing from your customers about the outlook for the rest of this year and into next year?

We're definitely seeing the slowing, and we're definitely seeing the -- seeing inventories continue to pick up.

There still is some bullishness in terms of where we're going to land at the end of this year.

The mix of fleet in retail is shifting little bit more towards fleet.

It's just not quite priced as low as we've seen in some of the fleet sales in the past.

But overall, we do see our clients continuing to focus on their profitability and really try to deal with a bit of a slowdown in some of the cost increases.

But again, I would tell you that we're pretty bullish because of our economic model, and we're pretty bullish because, at the end of the day, we know that the retailers are going to have to figure out how to sell these cars.

And if we can help them do it efficiently, then we think they'll do business with us.

I'm showing no further questions at this time.

I'd like to turn the call back to Mr. Jared Rowe for any closing remarks.

Well, thank you, everybody.

We very much appreciate you joining the call today.

I also wanted to really thank the AutoWeb team.

We've been doing an awful lot of a good hard work here over the last year.

And we're very, very excited to really push this over the end line here and get to the inflection point that we've been talking about because we do intend to get back to growth and profitability this year.

Also, just a reminder, J.P. and I are going to be at the Gateway Conference in San Francisco in September.

And hopefully, we'll see some of you there.

So thanks again for your time.

We appreciate it, and we'll talk again soon.

Thanks.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may all disconnect.

Everyone, have a great day.