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Autobytel (NASDAQ:ABTL)

Q2 2006 Earnings Conference Call

August 9, 2006, 5:00 p.m. EST

Executives:

Jennifer Klein, Investor Relations

James Riesenbach, President and CEO

Michael Schmidt, Executive Vice President and CFO

Analysts:

Christa Quarles, Thomas Weisel Partners

Operator

Good afternoon. My name is April and I will be your conference operator today. At this time, I would like to welcome everyone to the Autobytel Second Quarter 2006 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question during this time simply press * then the number 1 on you telephone keypad. If you would like to withdraw your question press * then the number 2 on your telephone keypad. Thank you. I would now like to turn the call over to Jennifer Klein, Vice President of Investor Relations for Autobytel; please go ahead ma’am.

Jennifer Klein, Investor Relations

Thank you, April, and welcome to everyone on the line. Before we start the call today, I would like to make some comments on forward-looking statements. Today’s conference call including the question and answer period, projections or other forward-looking statements regarding future events and the future financial performance of the Company are all covered by the Safe Harbor statements contained in our public filings. We would like to caution you that actual events or results may differ materially from those forward-looking statements. We refer you to the documents the Company has filed with the SEC, including the Form 10-Q for the quarter ended June 30, 2006. These documents identify the principle factors that could cause results to differ materially from those forward-looking statements. With that, I’d like to turn the call over to Autobytel’s CEO, Jim Riesenbach. Jim…

James Riesenbach, Chief Executive Officer, President

Thanks, Jennifer. Hello everyone and welcome to Autobytel’s Second Quarter 2006 Earnings Conference Call. Six weeks ago we hosted a conference call to outline the Company’s strategic vision and to provide some visibility into our expectations for 2006 and 2007. On that call I detailed our top near-term priorities as we put the pieces in place that I believe will reinvigorate the Company and move us forward toward a long-term growth trajectory.

The initial focus over this quarter has been to take a number of essential steps to stabilize the foundation of our business. Those steps include focused efforts to reduce turn and to recapture growth among the dealer base, initial cost reduction and containment efforts, as well as initiatives to deeply integrate our sales products and operational efforts across our business units.

I’m happy to report that over the second quarter Autobytel has made significant progress towards stabilization and that a number of the strategies and tactics we’ve initiated are beginning to pay off. We continue to stress the importance of reducing turn in our dealer relationships, partially by improving the quality or conversion rates of purchase requests that we provide to our network. We closed the second quarter with 5570 retail dealer relationships. This is the first time in seven quarters that we’ve seen a net gain in the number of retail dealer relationships. This is also the first time in the year and a half that we’ve seen improvement in our cost of revenues line as well as the first time since the fourth quarter of 2004 that revenues have improved from the prior quarter. While admittedly modest, these early results are signs that the stabilization of the business is well underway.

Mike Schmidt is going to review the financials for you before I continue with my comments. Following Mike’s report I’ll discuss the quarter and the business going forward, and we’ll conclude the call with a question and answer session. Now, I’ll turn the call over to Mike for a review of the financials. Mike…

Michael Schmidt, CFO, Executive Vice President

Thank you, Jim. Revenue for the second quarter of 2006 totaled $29.4 million, an increase of $300,000 or 1% from the first quarter 2006 and a decrease of $2 million or 6% from the second quarter of 2005. Our revenue mix for the second quarter of 2006 was 60% leads, 22% CRM, 15% advertising, and 3% data applications and other revenues.

Revenue from lead fees for the second quarter of 2006 totaled approximately $17.8 million, down $200,000 from the first quarter of 2006 and a decline of $1.9 million or 10% from the second quarter of 2005.

Average revenue per purchase request in the second quarter of 2006 was $18.51 compared to $17.61 and $19.09 for the first quarter of 2006 and the second quarter of 2005 respectively. In the second quarter 2006, we delivered approximately 800,000 purchase requests compared to approximately 900,000 purchase requests in each of the first quarter of 2006 and the second quarter of 2005. Approximately, 500,000 purchase requests were delivered to retail dealers and approximately 300,000 purchase requests were delivered to enterprise dealers in the second quarter of 2006. Additionally, we delivered approximately 200,000 finance requests in the second quarter of 2006.

Average revenue per finance lead in the second quarter was $14.37 compared to $13.38 and $11.80 for the first quarter of 2006 and the second quarter of 2005 respectively. Our lead referral dealer relationships represent domestic and imported mix of vehicles and light trucks sold in the United States. As of June 30, 2006, we had approximately 5570 retail dealer relationships, 760 enterprise dealer relationships with major dealer groups, and 10 direct relationships encompassing 20 brands with automotive manufacturers for their automotive buying services affiliates, which represented up to approximately 21,350 enterprise dealer relationships. As of June 30, 2006, approximately 660 retail dealers had more than one retail lead referral relationship with us.

Our finance leads business grew from the first quarter of 2006 in terms of number of dealers, leads delivered, and average revenue per finance lead. As of June 30, 2006, we had approximately 370 retail finance lead customers, an increase of 21% from one year ago.

Advertising revenue was approximately $4.3 million in the second quarter of 2006, an increase of 14% from the previous quarter and a decline of 4% from the second quarter of 2005. Advertising page views in the second quarter of 2006 were approximately $115 million compared to $119 million and $90 million for the first quarter of 2006 and the second quarter of 2005 respectively. CPM per ad page view for the second quarter of 2006 was $32.32. This compares to a CPM per ad page view of $28.02 and $44.23 for the first quarter of 2006 and the second quarter of 2005 respectively.

Revenue from CRM services for the second quarter of 2006 was approximately $6.3 million, flat with the first quarter of 2006 and a net increase of approximately $300,000 from the second quarter of 2005. Revenues from data, applications, and others for the second quarter of 2006 were approximately $1 million, effectively flat with the previous quarter.

Now, on to expenses. Cost of revenues, which includes traffic acquisition costs or TAC for the second quarter of 2006, totaled $14.4 million. As a percentage of revenues, cost of revenues was 49%. This compares to 51% in the first quarter of 2006 and 40% in the second quarter of 2005. Cost of revenues declined from the previous quarter, partially a result of improved efficiencies in our search engine marketing initiatives.

Sales and marketing expenses include cost for developing our brand equity and personnel and other costs associated with dealer sales, CRM sales, website advertising sales, and dealer training and support. Sales and marketing expense was $7.3 million or 25% of total revenue in the second quarter of 2006, compared to $7.5 million and $7 million for the first quarter of 2006 and the second quarter of 2005 respectively.

Second quarter 2006 product and technology development expense was $6.2 million or 21% of total revenues. This compares to $5.6 million and $6.3 million for the first quarter of 2006 and the second quarter of 2005 respectively. Sequentially, product and technology development expense increased by approximately $600,000, driven primarily by increased software costs, severance costs associated with the recent realignment of our workforce, and higher consulting and depreciation costs.

General and administrative expense was $9.5 million. This compares to $9.7 million and $8.5 million for the first quarter of 2006 and the second quarter of 2005 respectively. Net loss for the second quarter of 2006 was $7.9 million or $0.19 per fully diluted share. As of June 30, 2006, the Company had $38.1 million in domestic cash, cash equivalents, and short-term investments. Day sales outstanding or DSO was 58 days during the second quarter of 2006, an improvement of 4 days from 62 days in the previous quarter.

With regard to costs in the second quarter of 2006, the costs incurred included stock-based compensation due to the adoption of FAS 123R, legal costs for enforcement of our patent, and additional severance costs associated with the recent realignment of our workforce as well as for former officer of the company.

During the second quarter, the Company incurred $1.2 million of costs associated with stock-based compensation. We also spent approximately $3 million in the second quarter for legal costs enforcing our patent and roughly $800,000 for severance costs.

During the second quarter of 2006, the Company also received a $400,000 reimbursement from our insurance carrier for previously incurred legal costs. Included in the $800,000 of severance is the realignment of the Company’s workforce we announced in June, which included a reduction of our workforce by approximately 10% or 46 employees. As a result, the Company recorded a $299,000 charge consisting of severance costs during the period ended June 30, 2006. This charge was included in sales and marketing expenses, product and technology expenses, and general and administrative expenses of $102,000, $138,000, and $59,000 respectively.

The company paid $197,000 of severance costs during the three months ended June 30, 2006. As of June 30, 2006, the remaining accrued liability related to this realignment was $102,000. The Company expects the remaining accrued liability to be paid in the third quarter of 2006.

Now, I will turn the call over back to Jim. Jim…

James Riesenbach, Chief Executive Officer, President

Thanks Mike. It’s only been a few weeks since we last spoke and I’m very encouraged by the progress that we’re making. As I’ve previously said, my top three near-term priorities are: first, to transition the Company toward a media centric business model, second to provide high value internet marketing services for our dealer and manufacturer customers, and third to capture integration and growth opportunities between our businesses. Making these priorities a reality requires that we enhance our operating leadership team in key areas whilst tightly managing our operating expenses to allow for investments in the strategic growth areas that we believe will drive our long-term turn around and the road back to profitability.

The key focus of the second quarter of 2006, my first quarter as CEO, was the stabilization of the business whilst implementing the necessary changes that should set the foundation for future growth. I’m pleased to say that we’ve made significant progress towards accomplishing these goals. During the quarter we reduced head count, realigned our operations, and hired key management talent. Operationally, we’re seeing signs of forward momentum. For the first time in seven quarter we’ve experienced growth in our retail dealer customer base. Sequentially total revenues increased modestly. However, despite increasing the number of dealers in our network, revenues from purchase requests dipped as our focus initiatives was to improve lead quality and caused us to ratchet back the number of purchase requests that we distributed to our retail dealers. As a result, we did a better job of monetizing the leads that we delivered and the average revenue for purchase requests increased to $18.51 from $17.61 in the previous quarter.

Advertising revenues rebounded from the first quarter as we improved our sell through capabilities and implemented initial efforts in inventory optimization. While a number of our OEM advertisers have increased their spending with us in 2006, we’re continuing to work actively to improve our performance with some of our larger advertisers. As the migration of automotive advertising to the internet continues, these improvements validate the efforts we’re doing to reinvigorate our consumer effacing offerings with the objective of growing both our lead base and our advertising revenues.

Our major constraint on advertising growth today is the availability of predictable and sustainable advertising inventories. As we reinvigorate our web offerings, I fully expect that we will see growth in ad page views and advertising revenues, ultimately driving advertising up as a percentage of revenues. This process will take sometime, though our expectation is that we will see advertising positively impacted as we move forward with our media centric strategic in 2007.

CPMs for the quarter were $32.32 on ad page views of $115 million, an improvement from the CPM in the first quarter of 2006 of $28.02. We implemented our efforts in the second quarter primarily in search marketing to improve efficiency in the traffic acquisition to generate our page views. These efforts led to the improvement in average CPM for the quarter.

On the previous call I addressed the need to reduce cost associated with running our business. I’m pleased that we reduced the cost of revenue on both an absolute basis and as a percentage of total revenues. In the quarter, we worked aggressively to become efficient and analytical in our search engine marketing efforts, and we expect continued improvement on this front. We’ll continue to actively address the cross side of our business with the utmost of urgency and responsibility.

I’d like to quickly review and reiterate the guidance that we provided on our previous conference call. For the full year 2006, we expect that revenue for the leads in advertising with decline between approximately 4% to 7% from fiscal year 2005. CRM revenues are expected to increase an estimated 10% to 12% for 2006 versus 2005. Cost of revenue is expected to be approximately between 48% and 50% as a percentage of total revenue for the year. Operating expenses excluding cost of revenues are expected to increase 6% to 8% from 2005, not including the previously outlined investments required to implement our growth initiatives. Total expenses include approximately $5 million of stock-based compensation expense due to the implementation of FAS 123R and approximately $8 million related to defending our patent.

As I’ve said previously, Autobytel has a legacy of leadership and innovation. I’m optimistic that the initiatives that we’re putting in place will once again establish our Company as the industry leader. Let me reiterate the four major areas of focus that will be at the core of our corporate mission. We’ll be very busy throughout the end of 2006. First, we expect the goal of launching powerful new internet marketing services through dealers with initial products in search marketing that will complement and enhance the purchase requests dealers receive through Autobytel. We plan to leverage our extensive dealer network and relationships to become full service internet marketing specialists to our dealer base.

In my continued visits with dealers I regularly hear that dealers plan to move of their marketing budgets to the internet, and they need qualified and expert assistance to do so. I believe Autobytel is well positioned to provide that service as an extension of our existing business.

Second, we plan to re-launch our consumer website around the end of this year. We expect that a series of innovations in our next-generation site will significantly improve our research and buying experience for consumers by integrating a number of capabilities, including better and more focused search, local information in advertising, enhanced pricing and statistical data, expanded editorial and video content, user-generated content, and personalization. Ultimately, we expect this new website will be a significant source of both page view and revenue growth for the Company, both through advertising and through organic purchase requests.

Third, during this past quarter, we took initial steps to realign our business units and to ship from silos to integrated operations. We already made good progress in these areas and with further activity planned through the remainder of this year and for 2007. As of August 1st, we have for the first time started actively selling our web control CRM products throughout our entire dealer network utilizing our in-market retail sales force. Over half of our retail lead customers don’t current utilize web control and over half of our current web control customers are not currently retail lead customers for Autobytel, though we see extensive cross-selling and growth opportunities in this area. In the coming quarters I expect to implement further integration efforts across our business units which should ultimately lead to greater operational efficiency as well as potential cost reduction opportunities. Our team is excited to complete the task we have on hand and expect the benefits on the outstanding opportunities that exists for the internet automotive verticals, which is showing strong industry wide growth.

I’m looking forward to providing more details as our plans progress. However, we do exist in a highly competitive environment and it would not benefit for us to disclose details specific to our future plans on today’s call. Going forward, we will continue to develop and innovate new products, services, and partnerships that are designed to bring the power of the internet to our dealer customers and a superior research and buying experience for active and prospective car buyers. I am committed to managing expenses and bringing them under control across the board. Once again, I’m focused on driving Autobytel forward on the road to profitability. We still have a lot of work to do, but each stage will be completed with the mission of creating shareholder value.

With that, I’d like to turn the call over for questions.

Question-and-Answer Session

Operator

At this time, I would like to remind everyone, if you would like ask a question, press * then the number 1 on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Christa Quarles with Thomas Weisel.

Christa Quarles, Thomas Weisel Partners

Hi, a couple of questions. First, have you guys thought anymore about brand consolidation and I guess the splits you’re generally thinking there?

James Riesenbach, Chief Executive Officer, President

Hi, Christa and thanks for the question. Yes, we spent quite a bit of time evaluating our core brand and Company name as well as other brands in our portfolio, and we’re continuing through that evaluation. As we reintroduce our consumer site later on in the year, we’re certainly going to have some key decisions to make. Obviously, the brand Autobytel has been out in the market place and has been aggressively marketed for a number of years. At the same time, it hasn’t been as focused in the market place in its messaging over the recent years. So, we’re evaluating our opportunities, we do believe that there are some key decisions that we need to make. I’m not really prepared to talk at length about where they’re going, but I do think that we need to focus our efforts, as I’ve said before, and having a portfolio of brands that are all fighting for consumer attention, probably is not going to be the most productive way for us to manage the business in the long haul.

Christa Quarles, Thomas Weisel Partners

And just staying on the marketing side, can you quantify how much you’re spending in search marketing this year and if not, can you just give some sense of the magnitude of growth on a year-over-year basis, and then how you’re measuring the ROI on that near term and I guess kind of longer term?

James Riesenbach, Chief Executive Officer, President

I’m going to ask Mike to check and see where the numbers are so I can be fully accurate. At the same time, what I will tell you is that — and I talked about this on our last quarterly call — we’ve put a lot of focus around making sure that we are buying our search efficiently out in the market place and reducing the spend where we can’t buy efficiently. Now, buying efficiently today and tomorrow probably means something different than it has in the past, because what we have done in the past has been to focus on getting the traffic for leads through search and we haven’t really been as focused on using that for advertising revenue, and hence the problems we had last quarter where we had a bunch of page views show up that we couldn’t effectively monetize for advertising purposes. So, what we’ve done is we’ve put in a lot of effort in the recent months to manage those processes, to understand and track the efficiency of everything that we do, and to make sure that as we buy search that we’re optimizing both the lead and the advertising revenue stream. So, to look at the CTC and CTA spends that we’ve had, we spent about $3.6 million approximately in the first quarter and a little bit less than that in the second quarter, about $3.5 million.

Christa Quarles, Thomas Weisel Partners

Okay, just the last question, if you look at the free cash flow loss in the quarter, obviously you’re spending a lot in legal costs this year. I guess it’s a combined question in terms of when did the legal costs begin to ebb? Also, when you get through that and through the patent defense, are you much better prepared also given the fact that you have the severance this quarter to be in a cash flow production situation?

James Riesenbach, Chief Executive Officer, President

There are a couple of questions there. The first question is when do we anticipate the expenses to ebb on the legal side. I would say that at this point we are moving forward and the patent cases are scheduled to go to trial in the November timeframe, and we’re moving forward with that and remain confident that we’re on the right track with it. However, we’re continuing on an ongoing basis to analyze where we’re going with that and assert that in the long run we will either move forward because we believe that it’s the right thing to do and generate a positive momentum for where we believe the company needs to go, or alternatively we will look at other paths. But for right now we’re on that path and we think it’s the right way to go.

Now, the second question, could you repeat it?

Christa Quarles, Thomas Weisel Partners

Just in terms of moving ahead, could you be free cash flow positive?

James Riesenbach, Chief Executive Officer, President

Yes, I would say that our path is that in 2006 we’re probably not going to be cash flow positive as evidence by the guidance that we’ve talked about. I would expect that we’ll see a path back to profitability during 2007; it’s hard to say exactly when that will be.

Christa Quarles, Thomas Weisel Partners

Okay, thanks.

Operator

As a reminder, if you would like to ask a question please press * then the number 1 on your telephone keypad. At this time, there are no further questions. Mr. Riesenbach, are there any closing remarks?

James Riesenbach, Chief Executive Officer, President

I just want to say thank you again for calling in today. We’re very optimistic about the future. I want to thank again our investors, our employees, and our customers, and I think that we have a bright future ahead of us. Thank you again.

Operator

This concludes today’s Autobytel Second Quarter 2006 Earnings Conference Call. You may now disconnect.

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Source: Autobytel Q2 2006 Earnings Conference Call Transcript (ABTL)

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