Autobytel's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 7.13 | About: Autobytel Inc. (ABTL)

Autobytel Inc. (NASDAQ:ABTL)

Q3 2013 Earnings Call

November 7, 2013 5:00 PM ET

Executives

Roger Pondel – IR

Jeffrey Coats – President and CEO

Curt DeWalt – SVP and CFO

Analysts

Eric Martinuzzi – Lake Street

George Santana – Ascendiant

Operator

Good day ladies and gentlemen and welcome to the Autobytel 2013 Third Quarter Financial Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded.

I would now like to turn the call over to Mr. Roger Pondel, Investor Relations of Autobytel. Mr. Pondel you may begin.

Roger Pondel

Thank you Bridget and good afternoon everyone. Welcome to Autobytel’s 2013 third quarter conference call. Presenting today are Jeffrey Coats, President and Chief Executive Officer; and Curt DeWalt, Senior Vice President and Chief Financial Officer.

Before we begin, I’d like to remind you that during today’s call, including the question-and-answer session, any projections and forward-looking statements made regarding future events or Autobytel’s future financial performance are covered by the Safe Harbor Statements contained in today’s press release, the slides accompanying this presentation and in 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-K for the year ended December 31, 2012 and the Form 10-Q for the quarter ended September 30, 2013, which was filed prior to this call, as well as other filings made by Autobytel with the SEC. These filings identify factors that could cause results to differ materially from those forward-looking statements.

We have included slides with today’s presentation to help illustrate some of the points being made and discussed during the call. These slides can be accessed by clicking on the link in today’s press release or by visiting Autobytel’s website at www.autobytel.com, when there go to Investor Relations, and then click on Events and Presentations.

Also and lastly, please note that during this call we will be discussing EBITDA, cash net income, cash net income per diluted share, and cash flow which 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 the slides being used on this call and are posted on the company’s website.

And with that, I will turn the call over to Jeff.

Jeffrey Coats

Thank you, Roger. Welcome everyone. We had a fantastic third quarter, revenue grew 24% reaching $21.6 million, while net income more than doubled to $1.3 million. This brings year-to-date net income to $2 million. Clearly our focus on internal lead generation and consistent delivery of high quality leads is paying off in the form of increased demand from dealers and manufacturers.

Retail revenues grew by 10% in Q3 and wholesale revenues increased by 39%, another record for us. We also strengthened our business further in several ways, through a strategic investment and a new pay-per-click automotive marketplace called AutoWeb through the acquisition of Advanced Mobile which will allow us to better provide innovative mobile capabilities to our dealer and manufacturer customers. And by teaming with SaleMove to provide dealers and manufacturers with new ways to enhance the online shopping experience for their consumers.

These steps combined with our ongoing ability to successfully execute against our business plan and the growing automotive markets increased our optimism about Autobytel’s prospects. After Curt provides the financial review of the quarter I will discuss our new initiatives, provide color on the progress we’re making and talk about our business outlook. Curt?

Curt DeWalt

Thank you, Jeff. On slide four you will see as Jeff mentioned, the total revenues increased 24% to $21.6 million for the third quarter of 2013 up from $17.5 million last year. This revenue milestone represented our highest quarterly sales in six years. Automotive lead revenues grew 26% over last year representing our strongest quarter since Q2 of ‘05. To reiterate retail channel sales grew 10%, while wholesale channel sales improved by 39%.

Moving on to slide 5, we delivered approximately 1.4 million automotive leads during the third quarter of 2013 were 31% more than last year. 75% of the leads we delivered were sold to the wholesale channel customers, with the remaining sold to retail channel customers. We delivered 88,000 specialty finance leads during 2013 third quarter, up from 83,000 last year.

Specialty finance lead revenues grew 12% compared with the same quarter last year. As we are beginning to see real success in generating specialty leads, finance leads internally which are helping mitigate ongoing marketplace supply and cost issues. Advertising revenues rose to $956,000 for the 2013 third quarter, up from $884,000 last year. We currently expect advertising revenues will be flat for 2013 versus 2012.

On slide 6 you can see the gross profit continues to improve, advancing to $8.8 million for the 2013 third quarter, up from $6.7 million last year. Gross margin was 40.7% of total revenues for the most recent third quarter versus 38.5% total revenues a year ago. Gross margin also improved by 160 basis points on a sequential basis. Our gross margin target remains above 40%.

Total operating expenses were $7.4 million or 34.3% of total revenues for the most recent third quarter versus $6.1 million or 34.9% of total revenues last year. During the 2013 third quarter we incurred approximately $250,000 worth of costs related to the acquisition of Advanced Mobile. A significant portion of the year-over-year increase in operating expenses resulted from higher costs related to ongoing branding campaigns with YouTube, Google, Yahoo and others to enhance Autobytel’s visibility among consumers.

As you’ll see on slide 7, non-cash stock based compensation totaled $182,000 compared with $209,000 for the 2012 third quarter. Depreciation and amortization was $467,000 versus $607,000 last year.

Net income more than doubled for the 2013 third quarter to $1.3 million or $0.13 per diluted share from $551,000 or $0.06 per diluted share for last year’s third quarter.

EBITDA grew approximately 50% for the third quarter of 2013 to $2.0 million, up from $1.3 million last year. Cash net income increased to $1.9 million or $0.18 per diluted share for the most recent quarter, up from $1.4 million or $0.14 per diluted share for last year’s third quarter. At September 30th, 2013 our cash and cash equivalents balance grew to $17.4 million up from $15.8 million at the end of 2013 second quarter and from 15.3 million at the end of 2012.

During the third quarter we made a strategic investment in AutoWeb, through a $2.5 million contribution to the new joint venture, with a new venture and assigned our rights to AutoWeb trademarks and domain name, valued by the parties at $1.5 million, in exchange for 16% increase interest in AutoWeb. We also obtained an option to contribute an additional $2.5 million at the same valuation as our original investment which will bring our total ownership to 26% based on AutoWeb’s current outstanding shares.

During the quarter we also made an investment in SaleMove in plan to support the company’s on SaleMove’s ongoing development of its innovative technology for enhanced automotive consumer communications. Effective October 1st we acquired Advanced Mobile for an initial consideration of $2.5 million, Advanced Mobile can earn up to an additional $1.5 million in contingent payments based on acquired businesses revenue and gross profit performance over a three-year period, beginning January 1st, 2014.

Cash provided by operations for the 2013 third quarter was $1.8 million versus $1.5 million for the third quarter of 2012. Detailed nine months year-to-date financial results can be found in our press release we issued this afternoon.

With that I will turn the call back to Jeff.

Jeffrey Coats

Thanks Curt. I’ll start off today with a brief discussion about AutoWeb, SaleMove and Advanced Mobile, who they are? And why they are important. AutoWeb is pay-per-click or PPC option driven automotive advertising marketplace that will help automotive content publishers monetize traffic that has previously been under-monetized.

Autobytel will be the first publisher to benefit from this platform which is expected to launch in early 2014 providing us with a better mousetrap for capturing a new revenue stream from our existing traffic. We believe the market opportunity for PPC automotive advertising is quite large. According to research from Borrell Associates online spend by auto manufacturers and dealers should reach $20 billion by 2018, up from $14 billion this year.

Currently online advertising accounts for more than 40% of the $33 billion spent overall on automotive advertising. For Autobytel specifically the revenue opportunity over the next several years could be in the seven figures. When we first met the AutoWeb team led by the same people who built BrokersWeb into a huge success in the insurance industry, we were intrigued by their ideas to bring the same dedication and focus to the automotive industry.

The investment we made signifies our ongoing commitment to deliver serious end market car buyers to our dealer and manufacturer customers and a personalized online experience to consumers, while helping drive Autobytel’s revenue growth. Shortly after we completed our investment in AutoWeb, we acquired Advanced Mobile, now known as Autobytel Mobile, a company that provides the auto industry with a robust suite of mobile technologies.

Our services, which you can see on slide 8, help facilitate communication between dealers and car buyers through smartphones and tablets at the time, place and in a manner preferred by consumers. We plan to use these technologies as a core of a wide collection of mobile services that we will offer to our dealer and manufacturer customers as well as to consumers through our own websites.

Mobile usage is rampant with more than 2 trillion text messages sent during 2012. Expansion of smartphone and tablet usage represents a significant opportunity for Autobytel to innovate in the automotive mobile communication space. Our experience and conversations with customers has been at the auto industry is looking for a way to safely utilize mobile technologies for communicating with consumers.

Autobytel Mobile’s tech shield product provides a web-based portal that allows dealers to centrally manage text communications. This tool includes world based permissions, a global opt-out feature and the ability to monitor all text communications between dealership employees and consumers. By assisting a dealership with compliance issues surrounding text, this tool opens a wide array of text-based marketing options for dealers.

We now believe we have the capabilities required to meet this growing need while strengthening our ability to help manufacturers and dealers sell more cars in the most efficient ways possible.

As Curt mentioned earlier, during the quarter we made an investment in a company called SaleMove. We are now the exclusive provider to the auto industry of SaleMove’s products for enhancing communications with consumers. Their patent pending technology allows auto dealers and manufacturers to improve the online shopping experience by interacting with consumers in real time using the method most comfortable to the consumer be it live video, audio, text-based chat or phone.

At the same time dealers can utilize SaleMove’s technology to browse their website along with the consumer creating a virtual extension of the dealer’s physical showroom. This is yet another way Autobytel is innovating our industry by giving dealers and manufacturers better tools to sell more cars.

Now I’ll provide you with an update on our core auto leads business which is performing exceptionally well. Lead volume is very strong during the third quarter in both the retail and wholesale channels growing more than 30% over the corresponding prior year period.

We generally see a seasonal down shift in September but this year it was not as pronounced as in prior years and in fact, October lead volume was also stronger than usual. We believe this is the result of the success we’re having in generating higher click through conversion rates through Google’s enhanced campaigns, as well as a strong auto market. Volume also improved as the result of the major OEM that recently began elite purchasing program for which Autobytel is now a major supplier.

As shown on slide 9, dealer count grew year-over-year although the number of retail dealers in our network was slightly down from the second quarter, the seasonal sequential decline was much smaller than we usually see.

As you’ll see on slide 10 the leads we generate from autobytel.com currently convert to sales on average at a rate of approximately 23% as validated our R. L. Polk an independent research organization. All leads internally generated by Autobytel currently convert to sales on average at a rate of approximately 18%.

I remind you that this data represents a rolling three month average and will fluctuate on a month-to-month basis, the fact that our leads continue to convert to sales at three times the estimated industry average is one of the principle reasons that our business has been so successful over the last several quarters.

I’ll conclude by discussing our specialty finance and advertising businesses both of which show promise. As Curt describe our efforts to generate more specialty finance leads is helping alleviate marketplace supply and cost issues. We have made considerable progress and now internally generate about 20% of all specialty finance leads we deliver. This is up from the low single-digits at the beginning of 2013.

We expect this trend to continue as we get smarter and more efficient with our lead generation initiatives. Our efforts which include dedicating additional resources to our specialty finance lead generation activity are having a meaning impact on the revenue we generate from these leads which was up 12% this quarter compared with last year and up 3% on a sequential basis. We are very pleased with the enhanced quality and increased volume of the leads we’re now generating. However the margin on these leads is not yet where we’d like it to be providing some nice potential upside as we work to increase those margins.

Moving now to our advertising business you may have seen the press release we issued last week about our new relationship with Jumpstart Automotive Group a subsidiary of Hearst. This relationship should help us mine greater value from Autobytel’s website advertising business by outsourcing our ad sales and operations functions. Not only will this allow us to focus even more intently on our leads business but will provide us with the resources that are highly regarded automotive marketing and advertising leader that has strong widespread relationships throughout the industry.

Jumpstart now works with every major auto manufacturer across its portfolio of digital publishers which also include US News’s Automotive section, Car and Driver and J.D. Power autos among others. With our split metrics continually improving we believe Autobytel has a great offering for automotive advertisers.

Now we have powerful resources behind us to successfully leverage the opportunity. Please note that our relationship just recently became effective so we had no benefit, the advertising revenue or expenses for the third quarter. We expect to see the impact starting in the first quarter of 2014.

Contributing to the growing traffic up to our site is our successful YouTube channel which now includes more than 700 videos and more than 23.5 million views which you can see on slide 11. Viewership is increasing at a healthy and steady pace each month validating the usefulness of our original and unique automotive content.

Videos and articles from our Auto Extras series which provide car ownership tips and our diverse top 10 lists are just a few examples of the ways in which we are reaching more consumers more frequently. We continue to feel great about where Autobytel stands and believe ample opportunities remain for future growth especially against the backdrop of a healthy and growing automotive market.

On slide 12, you can see this improvement which continues to help support demand for our leads. October SAAR was still strong despite the government shutdown which did have an effect on car sales early in the month. Based on our current business trends we estimate 2013 fourth quarter revenues in the range of $19 million to $20 million which represents solid year-over-year growth and the usual expected seasonal softening. And we anticipate gross margin of 40%. Our business initiatives are summarized on slide 13. We look to the future with optimism as we continue to focus on further accelerating our revenue and profit growth.

Operator we’re now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Eric Martinuzzi from Lake Street. Your line is open please go ahead with your question.

Eric Martinuzzi – Lake Street

Thanks and congratulations on a real strong quarter. I had a question about the revenue I know you did some transactions in September and I was just curious to know on the top line was that all organic or was there any contribution from the acquisitions in Q3. And then rolling that into Q4 as there are contribution in Q4 on the top line?

Jeffrey Coats

The third quarter Eric was all organic there was really no benefit in revenue line. We will see some benefit in the fourth quarter in the revenue line.

Eric Martinuzzi – Lake Street

Do you care to quantify?

Jeffrey Coats

It’ll probably be something in the neighborhood of a couple of $100,000. Okay?

Eric Martinuzzi – Lake Street

And then the major OEM obviously tremendous boost to your wholesale leads program there. Is this, did we get a full quarter’s worth of participation from this major OEM or did, was it kind of a halfway in other words is there potential even bigger contribution from that partner percentage wise in Q4?

Jeffrey Coats

The quarter was not at full run rate the program is still scaling up it only began in June. So really was not the full run rate. We should be more or we should be closer to the full run rate in the fourth quarter.

Eric Martinuzzi – Lake Street

Okay and then housekeeping item CapEx in the quarter and what do you expect it for Q4?

Jeffrey Coats

A similar amount, we’re running about a 1 million a year on average.

Eric Martinuzzi – Lake Street

Okay congrats again on the quarter that’s it for me.

Jeffrey Coats

Thanks Eric.

Operator

Thank you. And our next question is from George Santana with the company Ascendiant. Your line is open. Please proceed with your question.

George Santana – Ascendiant

Thank you for taking my question. Hey great job jobs guys it’s just been absolutely fabulous to see all the progress over these quarters.

Jeffrey Coats

Thank you George.

George Santana – Ascendiant

Yeah so I remember some years ago you guys had really when you came in kind of unwound that strategy of trying to be eyeballs and trying to be a platform technology provider to the auto dealers. And now we see that you are extending a little bit in trying to broaden your solution and capabilities with these dealership. So it really kind of a demand pull from then are you foreseeing opportunities there or is the competition just dying up and creating, creating the opening for you.

Jeffrey Coats

Well I guess I’m not exactly sure how to respond to that George we are moving largely in the mobile direction because the whole world is going mobile. We believe our end or the automotive industry is the tip of that sphere so that consumers more and more are accessing information about vehicles, while they are actually out looking at vehicles. And they want to communicate with dealers in the way that they communicate with other people in their lives as well. So we move strongly in that direction in order to help facilitate those communications. We think it’s a real plus for our own website business as well as our revenues and our relations with the dealers and manufacturers.

George Santana – Ascendiant

This should help, you brought up that in the past this whole so concept churn and certainly lengthening the duration of your relationships with your auto dealers and from what you said Polk has just been tremendous in that. So some of these new capabilities, are they more for deepening those relationships or really kind of another arrow in your quiver when you go to sign up new dealers or both?

Jeffrey Coats

I would say, the answer to that would be both. They certainly are longer term type of products. And it certainly, and we did get, we did hear, and I think you and I discussed this historically. We have heard quite loudly from many manufacturers and many dealers bring us mobile capabilities. We need to move in that direction, other industries are moving in that direction. I think Automotive is a touch behind and so that’s why we’re bringing these products into the market, we’re very excited about this.

George Santana – Ascendiant

That’s fantastic, could you give us some idea of how we should model our operating expenses, from this point forward with the three new investments?

Jeffrey Coats

Not on this call, no.

George Santana – Ascendiant

Okay but there are a number of people that have joined Autobytel or has it been mostly technology?

Jeffrey Coats

There are a handful of people that have joined Autobytel as part of the acquisition.

George Santana – Ascendiant

Okay, alright. Thank you guys great job.

Jeffrey Coats

Sure.

Operator

[Operator Instructions] I’m not showing any further questions at this time Mr. Coats please proceed with any further remarks.

Jeffrey Coats

Thank you. Thanks folks for joining us today, we’re pleased with our progress. We’re very updated [ph] about the future and Curt and I look forward to speaking with you in the days and weeks ahead, thank you goodbye.

Operator

Ladies and gentlemen thank you for participating on today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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