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Autobytel, Inc. (NASDAQ:ABTL)

Q4 2007 Earnings Call

March 17, 2008 5:00 pm ET

Executives

James Riesenbach - Chief Executive Officer

Monty Houdeshell - Chief Financial Officer

Analysts

Steve Denault - Northland Securities

George Grose - American Capital

Operator

Welcome to the Autobytel’s fourth quarter end fiscal year 2007 financial results. (Operator Instructions). I would now turn the conference over to Mr. Brogan. Sir, you may begin your conference.

Larry Brogan

Thank you, good afternoon and welcome to Autobytel’s 2007 fourth quarter and year-end conference call. With us on the line today are Jim Riesenbach, Autobytel’s President and Chief Executive Officer, and Monty Houdeshell, the company’s Chief Financial Officer.

Before we begin, I’d like to remind you that during today’s call including the Q&A session, any projections and forward-looking statements made regarding future events and the future financial performance of the company are covered by the Safe Harbor Statement contained in today’s press release and in the company’s public filings with the Securities and Exchange Commission.

Please note that actual events or results may differ materially from those forward-looking statements. Specifically, please refer to the company’s Form 10-K for the year ended December 31, 2007. This filing identifies the principal factors that could cause results to differ materially from those forward-looking statements. Now I would like to turn the call over to Jim.

James Riesenbach

Thank you Larry and thanks everyone for joining us today. After a few brief comments, I’ll turn the call over to Monty for a detailed discussion of our fourth quarter financial results.

As you know the sale of our AVV business in January represented the culmination of an almost two-year strategic process during which we have transformed Autobytel into a highly focused company, one that we believe is well-positioned to capture the many high growth opportunities that exist today in the automotive internet category.

During that time we established a new leadership team. We developed and refined our business strategy and focus. We divested non-core businesses. We launched our new consumer website, MyRide.com. We produced multiple value-added products and services to our dealer and manufacturer network. We took major actions to create a more stable, flexible and scalable infrastructure. And we outlined what we believe is a clear path to profitability. While we are still in the midst of what I consider a marathon and not a sprint, I want to acknowledge the hard work of the entire Autobytel team for bringing us to this important point in our evolution. We’ve made significant progress. I’m proud of what we’ve accomplished to date. At the same time, there is still much work to be done to complete the turnaround and to position the company for long-term sustainable growth and profitability. Although our operational achievements thus far have been substantial, I will be the first to state that we’re still far from where we want to be with our financial results.

During the second half of 2007, as we continue to accept our long-term goals and opportunities, we felt it prudent to make an important strategic decision, primarily implemented in the fourth quarter that has caused what we believe is a temporary setback to our advertising revenue and will likely take a couple of more quarters to work through before we’re able to restore meaningful ad revenue growth.

Our decision was based upon our reassessment of the internet automotive ad market place and Autobytel’s position in that market during the 2008 upfronts. Our assessment, as well as direct feedback from our clients made it clear that similar to the way the leads this business is about, advertising quality is measured by a number of key performance indicators has become the key determinant of spending growth and CPMs for the top automotive ads spenders.

Unfortunately, over recent years Autobytel’s performance has declined primarily due to increases in a mix of lower quality third party traffic sources that were part of the network’s ad delivery. While we continue to strongly believe that MyRide will generate increasing levels of high quality traffic without the need to source large amounts of third party traffic, given this trend and feedback, we made the decision to eliminate virtually all of the lower quality inventory and to place our focus on improving performance as the critical path to long-term growth. As a result, we currently anticipate relatively flat advertising revenue in the first quarter of this year, and we believe the majority of our advertising growth will be realized later in 2008.

Most importantly, we believe these actions, while difficult, have laid the foundation to allow strong long-term growth and expansion in our advertising business. In addition, despite the industry pessimism for resale new car sales, we remain cautiously optimistic for modest growth of lead revenue in the first quarter of 2008. Importantly, we also remain committed to our long-standing goal of reaching cash flow breakeven before working capital and CapEx requirements before the end of the second quarter of this year.

Although with the recent divestiture of AVV, it is unlikely we will achieve this measure of positive cash flow for the second quarter as a whole. And although visibility into the second half of the year is somewhat limited given the macro economic on certainties and the inherent difficulty in predicting website traffic, we are also continuing to strive to reach GAAP profitability by the end 2008.

I’d now like to turn the call over to Monty to provide specific details about our fourth quarter financial results and then I’ll come back to update you on our major top line growth initiatives as well as our efforts to further streamline our operations. Monty.

Monty Houdeshell

Thank you, Jim. Before I begin, I would like to briefly discuss the restatement of our consolidated financial statements that appears in the 2007 Form 10-K that we filed today. The restatement covers the fiscal quarter as ended March 31st, June 30th and September 30th 2007. In prior filings with the SEC, we disclosed that we have been responding to comments from the Securities and Exchange Commission regarding the accounting treatment or the patent litigation settlement with Dealix Corporation. We are happy to have now come to resolution on this matter.

The company has revised its accounting for the quarter ended March 31, 2007 by recognizing a net increase of $2.1 million in the recorded settlement. This had previously been deferred. In addition, for the quarters ended June 30 and September 30, 2007, the company has revised its accounting by reversing approximately $300,000 in each period related to the previously recorded amortization of deferred liability and discount on future payment and by reversing the previously recorded receivable and related deferred liability. Please note that this restatement and the change in accounting treatment does not change any terms or economics relating to the original settlement with Dealix Corporation.

More information about the restatement is detailed in Note 13 of our consolidated financial statements in the 10-K as well as Form 8-K that we filed today. Additionally, before I discuss our results please remember that for purposes of our financial reporting, revenues and expenses associated with our retention performance marketing and AIC businesses which we sold in 2007, and our AVV business which we sold in January of this year have been reported as discontinued operation.

As Jim noted, our fourth quarter revenue came in on the low side of our expectations because of our initiative to improve advertising traffic quality across Autobytel’s network.

Revenue of $18.9 million in the 2007 fourth quarter was down approximately 8% from $20.4 million in the 2006 fourth quarter and down approximately 14% compared with $21.9 million in the third quarter of 2007. Revenue from lead referral was up slightly year-over-year offset by a 43% decrease in advertising revenue. Approximately 84% of revenue came from lead referral in the fourth quarter of 2007 with 15% generated from advertising. By comparison, leads represented 75% of fourth quarter 2006 revenues while advertising represented 25%.

Over the next three to five years, we expect advertising to surpass lead fees as our majority source of revenue. Both lead and advertising revenue were sequentially weaker in the fourth quarter of 2007 as a result of anticipated normal seasonality in the automotive category. In addition with the reduction of our advertising page view and impressions related to the quality initiative previously discussed, advertising was down substantially.

We delivered approximately 723,000 purchase requests in the fourth quarter of 2007 up from 626,000 in the same period last year but down from 825,000 in the third quarter of this year. The increase from last year is primarily attributable to our new multiple lead distribution technology while the sequential decrease resulted from expected seasonality.

In the fourth quarter of 2007 approximately 61% of these purchase requests were delivered to retail dealers compared with 70% one year ago. Thirty nine percent of these purchase requests were delivered to enterprise dealers and auto manufacturers in the fourth quarter of 2007, versus 30% in the fourth quarter of last year.

Average revenue for purchase requests came in at $18.30 in the fourth quarter of 2007 compared with $19.92 in last year’s fourth quarter and up from $17.65 in the preceding 2007 third quarter. This year-over-year decline primarily reflects an increase in the mix of wholesale purchase requests that typically generate a lower average price. On a sequential quarter over quarter basis, the mix was skewed in the other direction towards retail.

Finance leads declined this quarter as a result of lower availability of total leads in the market place and some disruption to the supply of affiliate leads by auction-based models. At this time, it is unclear whether these lead exchange models will continue to grow and will take hold.

We drove 148,000 finance leads in the fourth quarter of 2007 compared with 179,000 in last year’s fourth quarter and 180,000 in the third quarter of this year. Although the number of finance leads declined the average revenue for finance lead grew for the fourth consecutive quarter to $18.14 from $15.68 in the 2006 fourth quarter and $16.74 in the third quarter of 2007. The sequential increase relates primarily to the mix of retail versus wholesale placement. As a result, finance lead revenue was $2.7 million in the 2007 fourth quarter versus $2.8 million in the 2006 fourth quarter and $3 million in the third quarter of 2007. Page views during the 2007 fourth quarter were 70.8 million down 32% from last year’s fourth quarter and down 29% from the third quarter of 2007.

The yearover-year decline and ad page view during the quarter was primarily the result of the aforementioned elimination of low-quality third party traffic. Revenue for a thousand page views was $36.87 in the fourth quarter of 2007 versus $43.79 in the fourth quarter of 2006 and $41.15 in the third quarter of 2007. This primarily relates to lower advertising rates or CPMs from our existing advertising clients as well as traffic increases in certain lower CPM areas of our site.

As Jim previously mentioned, due to the low quality traffic provided by certain traffic acquisition sources, the ad performance across our network has been declining. In turn, this generated increasing pressure from advertisers to reduce advertising rates and improve performance. As a result, we made the decision to completely eliminate these low quality traffic sources. Since then, our ad performance has improved substantially. While we have received positive feedback from our advertisers, it will likely take a few quarters to recover our CPM rate.

Moving on to our expense items, cost of revenue which includes lead and traffic acquisition cost, totaled $13 million or 69% of revenue in the fourth quarter of 2007 compared with $10.7 million or 52% of revenue in last year’s fourth quarter and $15 million or 68% of revenue in the third quarter of 2007. We spent approximately $2.9 million in Q4 for marketing, acquiring and attracting traffic and search based leads to MyRide and the Autobytel legacy site. With the elimination of the low quality traffic sources, certain traffic acquisition strategy became more expensive during the quarter. Specifically, approximately $1 million was invested in Q4 on display ad campaigns for initial programs to market MyRide.com. These initial tactics were less effective than we had hoped and the spending risk curtailed during the quarter in order to further refine and test the marketing program. Approximately $1.3 million was spent in Q4 on search engine marketing predominantly to drive page views and leads from our legacy site. While we are continuing the extensive technical work necessary to migrate most of our SEM spend to the MyRide site, only a small percentage of our investment in SEM was directed to MyRide during the fourth quarter.

Cost of revenue as a percentage of total revenue helped relatively steady on a sequential basis but was higher than in the prior year as we continued to source a larger number of third party leads to meet dealer and OEM demand. At the same time, the cost of acquiring the best quality third party leads continued to rise. Additionally, depreciation and amortization costs related to MyRide added approximately $700,000 to cost of revenue in the 2007 fourth quarter. It is also important to remember that the mix between higher margin advertising revenue and lower margin lead revenue skewed towards lead revenue this quarter, while lower margin leads sold to OEMs outpaced leads sold at retail.

Total operating expenses in the 2007 fourth quarter declined by 14% from last year’s fourth quarter. We were up 7% from the third quarter of 2007. The year-over-year reduction in operating expenses primarily reflected lower general and administrative costs related to our cost management initiative and lower legal and consulting expenses. This sequential increase related principally to approximately $900,000 in severance and related costs that resulted from headcount reduction made in the fourth quarter of 2007. Our loss from continuing operations was $6.3 million in the fourth quarter of 2007 and included a $4 million benefit related to the sale of interest in Autobytel Japan. This compared with a $9.1 million loss from continuing operation in the year-ago period.

Our net loss from the fourth quarter of 2007 was $4.4 million or $0.10 per share. In the fourth quarter of 2006, our net loss was $7.3 million or $0.17 per share. Non-cash share-based compensation in the fourth quarters of 2000 and 2006 amounted to $1.0 million and $1.4 million respectively.

Total capital spending in the quarter was approximately $400,000 principally related to infrastructure projects. There were minimal capital expenditures related to MyRide. As we described last quarter, MyRide spending is now primarily focused on marketing the site to consumers.

Before moving on to our balance sheet, I’ll provide a very quick recap of our result for the full year. Revenue of $84.4 million was down slightly from with $85.1 million in 2006, primarily as the result of reduced advertising revenues in the fourth quarter of 2007. Our loss from continuing operations was $17.3 million in 2007, a marked improvement over our loss from continuing operations of $37.3 million in 2006. Our net loss for 2007 was also reduced sharply to $5.4 million or $0.12 per share from $31.5 million or $0.74 per share in 2006. The 2007 net loss benefitted from the gain on sale of discontinued operations, the sale of our interest in Autobytel Japan and patent litigation settlement.

Autobytel’s balance sheet remains healthy. We finished the year with approximately $28.3 million in cash, cash equivalents and short-term investments. And in January of this year, we received cash proceeds of $21.9 million from the sale of AVV. As such, we are extremely comfortable with our ability to fully fund and implement our growth initiatives.

Now, I’ll turn the call back to Jim for an update on our recent activities, Jim?

James Riesenbach

Thanks, Monty. I’d like to use this segment of this call to bring you up-to-date on the three major revenue growth opportunities we discussed last quarter and then I’ll review our cost savings initiatives. From there, we’ll open up the call to your questions.

First as you’re aware the used car market is an important growth segment for us. And we are expanding our efforts in this market as an advantageous time. Not only is the total used car market larger in size than the new car market, but dealers typically make more money on the sale of a used car versus the sale of a new car. For this reason when a consumer enters a dealership with a budget and the intention of purchasing a new vehicle, approximately one-third of the time may actually leave the lot with a used vehicle. In 2007, new car sales hit their lowest annual levels in the past nine years, while used car sales actually increased by more than 6% in December 2007 over the prior December.

We believe the current US economic environment is playing a major role in this trend, which will likely continue for the foreseeable future. In fact, our most recent internal data shows that when landing on the MyRide homepage, one of the top consumer activities has become searching for used vehicles. Our used car listings on MyRide now total approximately 3.7 million compiled from across the internet. Our premiere listings which occupy the top spots on our used car listing are supplied by dealers who pay us for leads on a performance basis, paying only for the leads they actually receive.

These listings utilize dedicated trackable phone numbers so the consumers can contact the dealer directly which is the preferred method for used car shoppers. We’re now working to rapidly increase the number of partner dealers who provide their used car inventories to our network in MyRide as these dealers realize the significant benefits of our innovative pay-per-call model. We believe that MyRide and our innovative dealer programs have successfully positioned Autobytel as a growing force in the used car market place and that over time, used cars can grow to represent well over a third of our lead business up from less than 10% in 2007.

The second revenue growth driver we’ve discussed focuses on diversifying and expanding our mix of advertisers. Principally into Tier 2 and Tier 3 automotive markets, that is the regional dealer associations and the local dealers. We understand the automotive business and the economics of auto dealerships and we know that in addition to providing them with high quality leads, we need to be on the cutting edge of providing products and services that make it easier for them to sell more cars more efficiently. Our extensive and growing dealer network is one of Autobytel’s greatest assets when we plant the leverage by continually providing dealers with new and innovative programs that help them to most efficiently sell more cars and services, while also creating new and growing revenue streams for Autobytel. For instance, we’ve recently launched our new local advertising product called Local Connect and we’ve been pleased with the initial reception among the dealer community.

Regional dealer association or Tier 2 advertising is another fast growing area of internet spending. The regional associations cumulously spent almost $7 billion on all media and are rapidly moving their dollars online. And in number of cases, being driven and supported by the manufacturers themselves. Autobytel and MyRide are now well positioned to tap into those opportunities supported by our expanded capabilities to locally target all of our ad inventory. We already have several initial Tier 2 ad size in place and we expect more over the course of 2008. In addition to expanding our Tier 2 and Tier 3 advertising base, we’re working to expand horizontally to gain advertising penetration into aftermarket categories such as parts, accessories and service as well as finance and insurance. While we expect this type of spending and growth to be slower to move to the web than Tier 2 and 3, we believe that the broad range of content and consumer experiences on MyRide will create an excellent environment for these advertisers.

One of the most exciting new projects we’ve launched recently is the Auto Reach Ad Network which brings together advertisers and third party web publishers visited by millions of inmarket automotive consumers. Advertising spending on the internet among auto marketers continues to grow and we believe Auto Reach will provide them with an additional supply of high-quality ad inventory, while giving our participating network publishers the ability to generate revenue by better monetizing their traffic. Already sites like Overstock.com and AutoMall.com had joined the network while a number of the country’s major automotive manufacturers and top insurance agencies are currently advertising across the network to take advantage of the ability to target in-market and perspective car buyers. This ad network was made possible by our ability to leverage our relationships with major automotive advertisers and a highly scalable infrastructure we created for MyRide which is now capable of serving and tracking thousands of ad campaigns across multiple sites.

Finally, our core growth opportunity is to grow traffic and ad impressions on our owned and operated sites. In this short-term, as we’ve already described, page views of this quarters were negatively impacted by our decision to eliminate our low quality traffic to improve the performance of our advertising. This is very similar to the process we went through in our leads business during the second half of 2006 and early 2007. You may recall that prior to that time the company has been continually losing dealers because of the continuing decline in the quality of our leads. As a result, we made a decision to eliminate dozens of lower quality lead sources which had the expected effect of temporarily lowering our lead revenue. But we believe this decision has benefited the company as today we are delivering high-quality leads to a growing dealing base and we’ve significantly improved our opportunity and ability to sell more products and services into our dealer network. We are following the same strategy in our advertising business. Such is the nature of this turnaround that we’ll sometimes find it necessary to sacrifice short term results to build long term value. We believe these steps are necessary to ensure that our advertisers obtain the greatest possible performance and ROI on their marketing spend with us.

As we said late quarter, our internal monitoring suggests that we made the right decision and we’ll need to be a bit more patient as our network page views and ad impressions begin to ramp back up. To that end, our focus over the next several quarters will be on driving increased traffic to our sites, getting consumers to initiate trial of MyRide.com, enhancing consumer engagements, and entering and visiting traffic from the Autobytel’s legacy sites to MyRide.com. Although the MyRide traffic is still on its infancy, we have seen significant and steady improvement in our engagement metrics. We’ve gone from a standing start to daily average page views per visit that are on par with our legacy sites. Our goal of course is to see significantly greater engagement and we believe the trend supports our ability to do that. In fact our largest co-brand distributor ESPN currently averages over 12 page views per visit as a result of driving traffic to specific areas of MyRide. When we built the MyRide platform, we incorporated a sophisticated business intelligence infrastructure that allows us to understand how people are using the various elements of the site with an eye towards continuous improvement of the consumer experience as well as more effective revenue optimization. We plan to continue improving and enhancing MyRide.com as we drive towards making it the internet site of choice for automotive consumers and car lovers.

In the last month or so based on usage metrics and consumer feedback, we revised the homepage to add greater utility and to increase the engagement. Over the coming months, we plan to significantly enhance the auto buying experience on MyRide to facilitate better and deeper navigations through the research and buying funnel as well as simplifying crossover navigation between related car makes and models with the expected result of increasing engagement and page views on these high value advertising areas of the site.

Following closely on the heels of our buying experience improvements, we expect to take a major step forward to improve our search experience. We believe the vertical search is the cornerstone of the unique MyRide.com consumer proposition and as such, we are focusing resources on features that will further enhance the automotive search experience on the site.

Finally, we plan to expand our community platform with better and more integrated capabilities to provide a deeper and more rewarding experience to our community of users and to make MyRide a more attractive environment to the thousands of automotive bloggers that populate the web. We will continue our consumer marketing campaign to ensure that the growing base of users are becoming familiar with initiating trial on MyRide.com and we’ll continue to take steps to make our marketing and SEM spend much more effective. We’ve engaged a topnotch search marketing firm to help manage our purchase of key words, transitions off of our legacy in-house at the end platform and to advise us on modifications to the site to make that spend more efficient.

We are currently employing an integrated campaign of search engine marketing, banner ads and e-mail marketing to bring first time users to the site. Thus far, e-mail campaigns have been our most successful marketing efforts, generating strong click throughs and engagement levels from our base of over 9 million active consumers. We’re continuing to evaluate ways to expand these activities and we’re fine tuning our marketing efforts based upon rigorous performance in ROI analysis of the various programs enabled by our new business intelligence infrastructure.

I’ll finish with an update on our expense management and business process improvement activities. As noted in today’s earnings release, we’ve already taken actions to remove approximately $10 million in annual cost from the organization primarily in the form of headcount reductions bringing us more in line with similar companies of our size and scope. All in all, we expect to see about $15 million leaner on in annual basis by end of this year. Much of this has been made possible by the streamlining and simplifying of our business which has occurred over the past year particularly the divestiture of our noncore businesses. Further supporting our operational efficiency has been the ongoing implementation of automation in a number of areas. For instance, we recently completed the first phase of the new ad inventory and traffic system and completed the implementations of our multi lead distribution system and our pay-per-call system.

We’re continuing our work on the infrastructure making additional business process changes and updating those systems that are currently inefficient or obsolete. All of these activities are aimed at increasing our operational efficiency and bringing needed scalability to our business. As I have said often and earlier on these call, this turnaround is truly a marathon, not a sprint. We face many challenges in executing on the turnaround of the company, but I’m convinced we’re on the right path.

As we faced up to the challenges and the difficult decisions and their short-term impacts, we strongly believe that our actions have positioned the company for long-term growth and profitability. We have numerous opportunities before us in a high growth and a high opportunity category, and we plan to take full advantage of those opportunities as we continue our efforts to improve efficiencies, grow MyRide.com into a top tier automotive website, further develope and enhance the products and services that will serve our strong and growing dealer, manufacturer and advertiser base and as we work diligently to enhance shareholder value.

That concludes my comments. Operator, we’re ready to take questions now.

Question-and-Answer Session

Operator

Your first question comes from the line of the Steve Denault of Northland Securities.

Steve Denault - Northland Securities

You provided a little bit, in a way, of color regarding the first quarter, I think you had mentioned we should anticipate ad revenue to be flat relative to the fourth quarter, and then the lead revenue up modestly which is seasonally related I would imagine. Let me ask this, I mean, how many new car dealerships were there in the quarter, was there any significant change on a sequential basis?

James Riesenbach

Steve, you know the answer is that we are relatively flat in fourth quarter relative to third quarter. Fourth quarter is typically the weakest quarter from a seasonal basis and we pretty much maintained our dealer base during that period. As far as your questions, yes, I would say that on the advertising side, we would expect that this quarter will be relatively flat, that the lead base is modestly improving and some of that is seasonal, but we are also seeing some continued improvements from our multi lead distribution system that we implemented during 2007.

Steve Denault - Northland Securities

Okay. Should we anticipate continued softness in the finance leads?

James Riesenbach

I would say that we were basically watching that very, very closely. I would say that we don’t see any signs that would point the significant change over the next couple of quarters.

Steve Denault - Northland Securities

Okay. I missed your comment about the page views, what were the page views in the quarter?

James Riesenbach

$17.8 million.

Steve Denault - Northland Securities

Okay. Where do we stand from an employee count exiting the fourth quarter?

James Riesenbach

We exited the quarter at about 250 employees.

Steve Denault - Northland Securities

So what was the – what was realized in terms of – if you have to sort of try to assess it in a vacuum the cost savings realized the quarter, how should we think about operating expenses heading into the first quarter versus fourth quarter?

Monty Houdeshell

We would expect to see some continuous improvement over the year quarter to quarter, although there will still be some noise in the fourth quarter, we’ll have some additional severance related costs in the first quarter and it’s probably not until the second quarter that we see the significant change in operating expenses. And then we have additional – come into additional costs reductions in the balance of the year after the second quarter.

Steve Denault - Northland Securities

Okay.

James Riesenbach

I just want to add. I just gave you a number of 250 for our headcount that was net of the AVV folks that actually exited right after the start of the year.

Steve Denault - Northland Securities

Okay. You made reference a little bit in a way of traffic spend associated with MyRide and it sounds like maybe it wasn’t quite as productive as you had hoped. What do you see there and how are you going to go about trying to create that awareness that is so important for MyRide?

James Riesenbach

Well, we basically – one thing that we started with was we built a pretty sophisticated business intelligence infrastructure so we could see what was performing and what was not performing. And we went out to market with a number of campaigns that we ran across a wide variety of networks and we found that those banner campaigns were less effective than we would have hoped, but what we found is that there were a couple of pieces of creative – on a couple of networks that performs very well. So what we did was we recrunched and we took a strategy that’s more inline with some of the direct marketing sites that have been very effective online like LowerMyBills.com and Lendingtree that has basically taken approach of developing a high volume of creative approaches and basically testing them all out there and measuring it. So we basically hold back and now we have a slightly different approach which is that we – we’re developing dozens and dozens of different creatives, running them on different networks and we’re testing them and refining them around the campaigns that we actually see in real time to be most effective. And we believe that that’s going to be a better model for us than to try to do something more akin to more – more traditional brands.

Steve Denault - Northland Securities

Okay. I’m going to switch gears real briefly here. Can you remind me what the page views for the company were in the fourth quarter of 2006?

Monty Houdeshell

I can tell you that the $17.8 million that we had in the 2007 fourth quarter were down 32% from last year’s fourth quarter. I’ll give you the absolute number in just a second. It was $104.8 million.

Steve Denault - Northland Securities

What would you attribute most of the weakness in the quarter to from a purely page view standpoint? Is it – what would you attribute it to?

James Riesenbach

Basically what we saw was that, and I said this earlier on the call, as we started to look at the market place during our upfronts where we go out and talk to our manufacturers and we started to look at our performance, we saw that Autobytel’s performance had been continuously trending downward and these are performance system manufacturer’s primary measure according their own set of KPIs or key performance indicators. Once we saw that, we really came to terms with this fact that some of the page views and inventory that we have been generating using third parties was fundamentally weak and that was basically pulling down our performance to a point that we didn’t feel it was going to be sustainable or provide us the right long-term opportunity to grow our business, grow our relationships, and grow our CPMs with the manufacturers and our other clients. So we made an intentional decision to pull back that low performing inquiry out of our network and we recognized that there would be a top line impact but that it was going to be important to building that long-term business opportunity to grow our ad business. And our performance has improved very significantly since we had pulled out that inventory.

Steve Denault - Northland Securities

Okay. Thank you.

Operator

The next question comes from the line of George Grose with American Capital.

George Grose - American Capital

Good afternoon. If you can backtrack a little bit in terms of your, I guess, your cash flow guidance and the GAAP EPS guidance which is if I understand it correctly relatively unchanged from last quarter, now that you’re getting less revenues on the advertising side what are you doing to compensate, to be able to maintain that guidance?

Monty Houdeshell

Right, as you said, George, our targets are cash flow break even in the second quarter and GAAP by the end of the second quarter and GAAP profitability by the end of the year. Those are the targets that management set some time ago and that we’re striving diligently to achieve. The first one, cash flow break even is a function of the cost reduction initiative that we have already implemented that were part of our $15 million cost reduction plan. And our ability to accelerate perhaps some of those or identifying new ones that we have not yet implemented yet and our ability to spend more effectively on SEMs to ramp our advertising revenue back up as we go through the year.

George Grose - American Capital

Okay. So I guess it looks like a combination of those and you’re looking to maybe cut cost a little deeper there.

Monty Houdeshell

Well, as you say, it’s a combination of cost reduction and more effective marketing spend to put our advertising revenue back on track.

George Grose - American Capital

Okay. How much of your traffic comes from paid search, did you give that out or -?

James Riesenbach

No, we haven’t given that that specifically but it is a significant piece and we’re in the midst of a major transformation on our paid search model where we – we’ve engaged with an agency so that we will – we plan to move off of our – the legacy platform that has been utilized here for search marketing. And we believe in the long run to be much more effective with that search marketing as we complete this transition over the coming month or so.

George Grose - American Capital

And what would say it as a target? Is it like 20%? Would that be a target or -?

James Riesenbach

We really look at it on ROI basis and we have a number factors that go into that ROI including the advertising page views,

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quality of those page views and we have the number factors that go into that ROI including the advertising page views the quality of those page views and the leads that are generated of those page views. So, if we can acquire page views at a positive ROI we would continue to do that.

George Grose - American Capital

Okay and when do you plan on – like when do you plan on see kind of pick up in your, I guess, used car leads? I mean, I think you think about talked about the 90-10 mix or so, when do plan on getting more used car leads because I think that that would help with traffic there?

James Riesenbach

Yes. There is a couple of factors there, George, one is that as MyRide grows in its traffic, that’s where we have the full used implementation and as MyRide grows in its traffic, we expect that to grow. At the same time, we are looking to work with some of our affiliates that we purchase new car leads from to purchase used car leads over the course of this year. So we do expect that we’re going to see a gradual ramp up. I don’t expect that it is going to be an overnight turnaround. I do expect that as the percentage of out total leads that we’re going to see an improvement in used over the next few quarters.

George Grose - American Capital

Okay. And I guess on the revenue side here, the – looking at your two segments, one on the advertising side, is the reduction in your revenues and also your – sort of your guidance going forward, is that just really mainly due to, maybe you’re using more effective search or does that have any – the economy of – does that have anything to do with the slowing of the economy?

James Riesenbach

Quite frankly, we’re not seeing a significant impact from the economy. The way we had envisioned this rolling out was that as we pulled back on some of our lower performing inventory in the fourth quarter, we had hoped that we are going to see more effectiveness in our marketing efforts to build to build MyRide as an offset. We had some challenges in the initial phase of getting MyRide traffic built and so what’s happened is we’ve taken what we believe is a temporary setback in our traffic that which as we said will probably continue through this quarter. So - but we don’t believe that there is a lot of ancillary elements to this that are outside of our control. We do think that it’s very critical for us to show our clients primarily the OEMs which are the dominant advertising revenue stream right now, that we are able to deliver consistent, high-quality performance in our advertising and that’s by comparison in their metrics to our competitors and against their existing KPIs which we understand and are working to improve and we believe we are improving.

George Grose - American Capital

Okay. Last question, the impact of the economy on your leads business?

James Riesenbach

Well, at this point, we’ve been watching very, very carefully. New car leads as a whole are slightly down, they’re not down even to, at this point, to the degree that new car sales have decreased in January or February, but we’re watching it very, very cautiously. At the same time we have some advantages in that we have launched this multilead distribution system which is allowing us to sell the same lead more effectively, more times than we had before and that’s offset. But it also changes some of the dynamics of the business in that are mixed is going to look different and already does look different than it did at this time last year and that we have more wholesale leads that we’re selling which is causing a reduction in our AST. But we do believe that given the market place, given our move into used that sort of anything unforeseen on the macro economic front that we’ll probably see reasonable stability in this business.

George Grose - American Capital

Okay. Thank you.

Operator

There are no audio questions at this time.

James Riesenbach

Thank you, everyone. We’ll be back with you at the end of this quarter to talk about our 2008 results first quarter and we’re looking forward to briefing you as we have more information. Thank you again.

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