Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Autobytel Inc. (NASDAQ:ABTL)

Year-End 2005 Earnings Conference Call

March 16th 2006, 6:00 PM.

Executives:

Jennifer Klein, Investor Relations

Richard Post, Chief Executive Officer, President

Michael Schmidt, Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts:

Frank Gristina, Avondale Partners

Richard Fetyko, Merriman Curhan Ford

Clint Coghill, Coghill capital management

Jacqueline Spring, Thomas Weisel Partners

Peter Schneider, Pennsylvania Capital Management

Justin Stein, Miami (phonetic) Capital

Kelly Darin, Coghill Capital Management

Robert Setrakian, Helios Partners

Justin Cable, B. Riley Company

Operator

Good afternoon. My name is Miles and I will be your conference operator today. At this time I would like to welcome everyone to the Autobytel Fiscal Year 2005 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. Operator Instructions Ms. Klein, you may begin your conference.

Jennifer Klein, Investor Relations

Thank you, Miles. 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 statement contained in our public filing. 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 Form 10-K for the year ended December 31, 2005. These documents identify the principle factors that could cause results to differ materially from those forward-looking statements. With that I would like the turn the call over to Autobytel's CEO, Rick Post. Rick?

Richard Post, Chief Executive Officer, President

Thanks, Jennifer. I am pleased to be speaking with you to report on our fiscal year ended December 31, 2005 results. Mike Schmidt will go through the financials, after which I will review the fiscal year operating results. Then we will conclude the call with a question and answer session. Now, I will turn the call over to Mike for a review of the financials. Mike.

Michael Schmidt, Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Thank you, Rick. Let me begin by reviewing the income statement.

Revenue for the fiscal year 2005 totaled 125.3 million, an increase of 3.1 million or 3% from 2004 revenue of 122.2 million. The revenue increase was primarily due to growth in revenue from advertising and CRM services. Our revenue mix was 62% leads, 19% CRM, 15% advertising, and 4% data application and other revenue. For comparison, our revenue mix for the fiscal year 2004 was 69% leads, 16% CRM's, 11% advertising and 4% data applications and other revenue.

Lead fees revenues for 2005 totaled $77.5 million, a decrease of $7.3 million or 9% from 2004. The decrease in lead fee revenue was due to a decline in the average number of purchase requests delivered to our retail and enterprise dealers as well as decline in the number of dealers in our network. In 2005, we delivered approximately 3.5 million purchase requests versus 4.2 million in 2004. Approximately, 2.2 million retails and 1.3 million enterprise purchase requests were delivered in 2005. Representing a decrease of 500,000 and 200,000 respectively from 2004.

Additionally, we delivered approximately 821,000 finance requests in 2005, an increase of 300,000 from 2004. Average revenue per purchase request delivered was $19.05 versus $18.72 in 2004. Average revenue per finance lead increased to $12.27 in 2005 from $10.99 in 2004. Advertising revenue increased by $5.5 million or 40% to $19.2 million in 2005, compared to $13.7 million in 2004.

Revenue from CRM services increased by $5.1 million or 27% to $24.1 million in 2005, compared to $19 million in 2004. CRM growth came from both the RPM and AVV products. Revenues from data, applications and other decreased by $300,000 or 7% to $4.4 million in 2005, compared to $4.8 million in 2004. Cost of revenues, which includes traffic acquisition costs or TAC for 2005 totaled $52.2 million, an increase of $1.6 million from 2004. As a percentage of revenues, costs of revenues was 42% comparable to 2004.

Other operating expenses, including sales and marketing, product and technology development, general and administrative and the amortization of acquired intangible assets for 2005 totaled $81.9 million, compared to $66 million in 2004. This increase was primarily driven by an increase in general and administrative costs. General and administrative costs consisted of executive, financial and legal, personnel expenses and costs related to being a public company.

G&A expense increased by $11.2 million or 59% to $30 million in 2005, compared to $18.8 million in 2004. This represented 24% and 15% of total revenues for 2005 and 2004 respectively. The increase were primarily due to increased costs associated with the internal review, restatements and audits of our consolidated financial statements. This represented $5.9 million of the increase. An increase in legal fees of $3.6 million, of which 1.8 million was associated with enforcing our intellectual property rights, $700,000 was associated with defending purported class action and derivative lawsuits filed against us, and $1.1 million related to other legal matters. Increase in temporary personnel costs of $1.5 million accounted for the majority of the other increase.

Sales and marketing expense includes 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 increased by $1.4 million or 5% to $27.3 million in 2005 compared to $25.9 million in 2004. This represents 22% and 21% of total revenues for 2005 and 2004 respectively.

Products and technology development expenses includes personnel costs related to developing a product, enhancing the features, content and functionality of our websites, and our internet based communications platform costs associated with our telecommunications and computer infrastructure as well as costs related to data and technology development. Product and technology development expense increased by $2.9 million or 15% to $23.1 million in 2005 compared to $20.2 million in 2004. This represented 18% and 17% of total revenues for 2005 and 2004 respectively. Net loss for 2005 was $6.3 million or $0.15 per fully diluted share. This compares to net income of $5.8 million or $0.13 per share per fully diluted share for 2004.

Now, let me summarize the balance sheet. As of December 31, 2005, the Company had $48.4 million in domestic cash, cash equivalents and short-term and long-term investments. On December 15, 2005 the owners of Autobytel Europe agreed to dissolve the Company. As a result of such agreement, we received a cash distribution from Autobytel Europe of approximately $3.9 million. This amount was part of the amount that was previously classified, previously reflected on our consolidated balance sheet as restricted international cash and cash equivalents.

The remaining part of such restricted international cash and cash equivalents was distributed to the other owner of Autobytel Europe. The distribution excludes $200,000 placed in an escrow account and reflected on our consolidated balance sheet as restricted international cash and cash equivalents. Net cash used in operating activities was $6 million in 2005, compared to net cash provided by operating activities of $7.6 million in 2004.

Net cash used in operating activities in 2005 resulted from the net loss of $6.2 million for the period, a $4.8 million of increase in accounts receivable, $700,000 decrease in accounts payable and accrued expenses, a $400,000 decrease in other current liabilities and $100,000 increase in prepaid expenses and other current assets, which were partially offset by non-cash charges. We may continue to use cash for operations in 2006.

Day sales outstanding or DSO, increased from 57 days during the year ended December 31, 2004 to 59 days the year ended December 31, 2005. Now, I will turn the call back over to Rick. Rick?

Richard Post, Chief Executive Officer, President

Thanks, Mike. Clearly, our operating results and financial condition in 2005 were impacted by a long list of expenses that are not related to our core business. Including increasing costs associated with Sarbanes-Oxley compliance, the restatements of our financial statements, the internal review relating to the restatements, and the remediation of identified weaknesses in our internal controls. These issues required resources to be tapped from all areas of our business. And that is reflected in our results for the year.

Despite these challenges, we persevered and experienced growth in many key areas of our business. In 2005 advertising revenues increased by 40% from the previous year. During 2005, advertising page views increased to approximately 410 million from approximately 349 million in 2004. The CPM per page for 2005 was $40.17, compared to $37.86 in 2004.

As we've talked about before, automotive advertising is one of the fastest growing categories on the internet. Industry experts expect the auto category to grow from 893 million in 2004 to 2.67 billion in 2007. We've benefited from this trend. We saw strong interest in advertising programs and capabilities in 2005 as well as throughout the fourth quarter of last year. We had over 27 active OEM advertisers in Q4 and a number of non-OEM advertisers also were on the site.

New innovative Rich Media products and video, such as CarTV, contributed to the excitement around Autobytel's media offerings. CarTV served nearly 370,000 hours of video programming in 2005 via Autobytel's network of vehicle research buying sites and other venues including iTunes and video podcasting. CRM has been another consistent source of growth and opportunity for Autobytel. We saw net dealer adds for both RPM and Web Control in 2005. As of December 31, 2005, CRM customer relationships consisted of 2,980 Web Control relationships and 820 RPM relationships.

Our Web Control product continues to benefit our dealer customers. Car shoppers today have nearly unlimited opportunities to research vehicle information online. As a result, today's dealers are getting Internet leads funded to them from Autobytel and a multitude of other sources. The leads need quick and careful attention. As is often it is most responsive for dealers with the best communication process that are able to more easily turn prospects into buyers.

According to an Autobytel case study, the Asbury Automotive Group, one of the largest automotive retail and service companies in the US operates 94 retail auto stores encompassing 129 franchises for the sale and servicing of 33 different brands of American, European and Asian automobiles. They were looking for standardized company-wide system for more efficient lead management, process automation and corporate reporting. Asbury turned to Web Control systems, Autobytel's lead management tool to resolve these problems.

Using Web Control technology, Asbury salespeople are able to close at a much higher number of leads than they could in the past, giving the organization the potential for a much higher ROI on their overall customer acquisition costs. According to the Director of Business Development for the entire Asbury Group, their dealers handle approximately 75 leads a month. And with Web Control their closing ratios often reach 20% or more, far above the industry average.

During 2005 Web Control added approximately 190 relationships. According to new research from the University of Maryland, Robert H. Smith School of Business, auto dealerships using customer management systems are performing 15% better than their competitors. Dealers need our CRM products, this is clear. Part of the reason that lead management software is so critical is that dealers are getting purchase request leads from a wide variety of sources which imply that the competition for our core purchase request leads business is out there and aggressive.

The competitive environment in the fourth quarter continued to put pressure on our core lead business. Following record sales, spurred on by the employee pricing in the third quarter, automotive sales took a significant downturn in the fourth quarter. Many dealers pulled back their overall marketing spend during the fourth quarter, as the effects of a post promotion hangover were accentuated by typical seasonality. Our lead referral dealer relationships represent domestic and imported makes of vehicle and light trucks sold in the United States. As of December 31, 2005, we had approximately 5,570 retail dealer relationships. 740 enterprise dealer relationship with major dealer groups and 8 direct relationships, encompassing 18 brands with automotive manufacturers or their automotive buying service affiliates, which represented an additional 22,000 enterprise dealer relationships.

As of December 31, 2005, approximately 740 retail dealers had more than one retail lead referral relationship with us. From time to time, we sign up major dealer groups such as Asbury or Sonic to receive purchase requests. Dealers that are part of such groups may have been previously accounted as part of our retail dealer relationships. When the dealer group is added to our enterprise dealer relationship, there may be a reduction in the number of retail dealers that we reclassify. In 2005, we experienced a net reduction of approximately 670 retail dealer relationships. Approximately 120 or 18% of these dealers were transferred to the enterprise dealer relationship group in connection with signing major deals with these entities.

Although our purchase request business was under significant competitive pressure during 2005, we saw the benefit of having owned Car.com for a full year. Our finance league business, which was acquired as part of our Car.com acquisition, saw 30% growth in dealer relationships and revenue grew to $10 million. Average net revenue per finance lead increased to $12.27 in 2005 from $10.99 in 2004. As of December 31, 2005, our finance lead referral network included approximately 340 relationships with retail dealers, finance request intermediaries and automotive finance companies who participate in our Car.com financial referral network.

As Mike mentioned we delivered approximately 3.5 million purchase request leads in 2005. Although the total number of purchase requests delivered to dealers declined from 2004, the net revenue per purchase request increased to $19.2 from $18.72. Correspondingly, our quality initiatives began to show results as our internally measured close ratios improved over the course of 2005.

Autobytel strives to provide dealers and OEM's with the most innovative marketing services solutions. Our Black Condor search engine technology benefits Autobytel's nationwide network of dealers by sending them end market car shoppers at a fraction of the cost of traditional advertising. One of the many advantages of this technology is having the ability to determine the return on investment of each keyword relative to or combined value of the page views and vehicle purchase requests.

Black Condor, coupled with our natural search initiatives, resulted in 175 million page search page views in 2005, which is both natural and paid search combined. This is a 45% increase from the previous year. In 2005, Autobytel's search engine marketing generated an estimated 1.4 billion in gross revenue from member dealers across the US. According to J.D. Power and Associates, in 2005, 53% of our new car buyers indicated that the internet impacted their make model purchase decision.

According to Jupiter Media Corporation, by 2009, 33% of all new car sales will be internet generated, up from 24% in 2005. Studies from major third party research companies indicate that consumers prefer independent multi-brand websites for product reviews, comparisons and pricing information. The automotive internet is a growing opportunity that's tracking a multitude of competitors. It is therefore critical that Autobytel remains innovative and ahead of the competitive curve in this rapidly changing marketplace.

We believe that we have the products and programs to provide value, efficiencies and strong ROI for dealers and OEM's throughout the customer lifecycle, from customer generation to customer retention. 2005 was a tough year for Autobytel. Despite that, we focused on growth, on providing dealers and OEM's and consumers with innovative solutions. Autobytel's focus remains on helping dealers and manufacturers sell cars and market products while providing consumers with ever increasing information to help them with their car buying experience.

When I stepped in as CEO in April of 2005 it was clear that we needed to investigate all of our options on how we should grow the company. We are committed to growing the company and to being a leader in the very competitive automotive marketing services arena by innovating the highest quality products and services for our dealers and OEM customers as well as for the millions of consumers who use our network. When we engage Merrill Lynch last October to help us explore a wide variety of strategic alternatives we looked at a full spectrum of options.

We also conducted a search for a CEO who we believe had this experience qualifications and personality to take Autobytel to the next level. Jim will be joining the company on March 20th, and I encourage you to listen to his introductory conference call next Monday March 20th. With that, operator, I would like to open the call to questions.

Question-and-Answer Session

Operator

Operator Instructions We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Frank Gristina with Avondale Partners.

Q - Frank Gristina

Thanks for taking my questions, guys. Question, I guess with regard to the ad revenue. That seems to continue to grow pretty well and I was just curious if you guys, how your sell-through is going if this is a function of increased inventory or still kind of pricing, a little bit of both? Do you have comments on that?

A - Richard Post

Yes, I would say that for 2005 particularly in the fourth quarter it was a combination of both. It was high advertising in the fourth quarter in particular as manufacturers are looking to stimulate sales in what was obviously early in the quarter very, very weak quarter. So we benefited from that significantly in the fourth quarter.

Q - Frank Gristina

Are you selling out of inventory?

A - Richard Post

Certainly in the year, and we typically don't totally presell our inventory, we sell a part of it. We're experiencing close to the same presell that we've had the last few years, but advertising is always dependent on when you get creative and when you get the creative end from the OEM's, when you can start the program, when you can run and so. All of those things come into exactly how the revenues will hit during the year when they run certain promotions. It is not as predictable as we would like.

Q - Frank Gristina

Okay. And then in terms of the page views, I think you gave some full year numbers. What were the page views in the fourth quarter?

A - Mike Schmidt

The fourth quarter, Frank, this is Mike. It was 110 million. Same as Q3.

Q - Frank Gristina

So, it seems like there is if you could start to increase that, then obviously do you have a lot more capacity to sell-through on the advertising?

A - Richard Post

Yes, just to be clear, Frank, that was advertising page views as well, not total page views.

Q - Frank Gristina

Just ad page views.

A - Mike Schmidt

Correct.

Q - Frank Gristina

And then you had mentioned something about search page views, and I haven't really heard you talk about that in the past, and that was 175 million for the year, and those are searches that are conducted on an Autobytel search engine or?

A - Richard Post

No, that would be as a result of paid search initiatives.

Q - Frank Gristina

Okay.

A - Richard Post

And what we've concluded, Frank, and I think we talked about this in previous conference calls is we are obviously interested in driving more traffic direct to site, and driving TRs and end page views that way as opposed to we also have a network of affiliates that we deal with that are while they're very valuable to us, we would like to control that customer experience, so as a part of this Black Condor technology as we refined it and gotten it more and more enhanced and better operationally, and we've increased that driving of traffic, and again I think this is an area that Jim Reisenbach is one of the leaders in his space at AOL dealing with Google and all of the major players. He runs the local search efforts there, so as we've done okay, I think we've done a nice job in 2005. I am excited about Jim coming in and taking a fresh look at what we do in that area.

Q - Frank Gristina

Great. And then two more questions in terms of the enterprise customers, it looks like you added a lot sequentially. Was that a function of just bringing in another manufacturer and that brought in a number of dealers?

A - Richard Post

Yeah Frank, one of the things that we've been also focused on in 2005, the chief parts come together slower and at times and quicker at times. In 2005 what we concluded was we needed to have national contracts with as many of the OEM's as we can to improve the fulfillment for the consumer. So, if we don't have in our local network a dealer for a brand that the consumer wants, and we don't have also an ultimate relationship with a manufacturer, it can be a poor experience. So yeah, in the quarter we brought on three large OEM's: Honda, Subaru and Suzuki.

Q - Frank Gristina

It didn't translate into more leads being sold and I guess that’s I am wondering if there is an inventory issue right now? Are you not giving or you commit, or you selling out your leads and you don't have enough consumers generating leads or is it just a function of the enterprises and the dealers not buying the leads to generate?

A - Richard Post

In Q4 it was a very soft quarter in the industry. Consumers were not actively out as they had been and plus there was some seasonality. We also have over the course of the year made a proactive decision to pull back on a number of affiliates, reduce the number of affiliates and reduce volume in order to drive quality up and hopefully stimulate demand with certain of the OEM's who were looking at various quality measures. So it is a combination of things that kind of hit us in the fourth quarter that was that all came together in a negative way.

Q - Frank Gristina

I guess that's responsible for the increase in the tack in the quarter as well, trying to stimulate consumers to generate leads, it seems like it jumped to 56%, up 400 basis points sequentially?

A - Richard Post

Frank, I don't have that number. We may have to get back to you on that.

Q - Frank Gristina

Not a problem. Thanks very much, guys.

A - Richard Post

All right, thank you.

Operator

Your next question comes from the line of Richard Fetyko with Merriman Curhan Ford.

Q - Richard Fetyko

Hi guys thanks for taking my question.

A

Yeah.

Q - Richard Fetyko

Looking at fourth quarter pricing trends. I sort of backed into it from the yearend numbers; just want to make sure that I am looking at it right. It looks like the price per lead in the fourth quarter on the automotive leads was about flat quarter over quarter and the price per lead on the finance side down somewhat?

A - Michael Schmidt

Frank, this is Mike. The price per purchase request from Q3 to Q4 was, you're correct, that is flat. The finance side was actually from Q3 to Q4 is actually up.

Q - Richard Fetyko

Can you tell us what it was, I guess?

A - Michael Schmidt

Yeah, Q3 was at 1,255 and Q4 was at 1,320.

Q - Richard Fetyko

Okay. Thanks. And the next question is more of a strategy question as we hear more and more about automotive dealers and OEM's spending more dollars on online advertising and your sort of pure online advertising revenues and business is doing quite well, I mean would it make sense to deemphasize the lead generation business altogether and just focus on the online advertising opportunity? You have pretty decent content out there, great content out there I should say, decent amount of users, now with Condor technology it can drive traffic to this site hopefully at a low cost. I mean it seems like the online advertising opportunity just a pure advertising as opposed to lead generation appears to be a lot more attractive business model and one that you already succeeded with even without that much focus on it, so I am just trying to figure out what the strategy, this lead generation business continues to be very competitive, you continue to refine the quality, but it continues to decline in terms of revenues, does it make sense to completely focus on online advertising, have lower revenue base but much higher margins?

A - Richard Post

Frank, that's something that there are a lot of scenarios that we have looked at and we will continue to look at. When Jim is fully on board here, we'll give him at least two or three days to look at this but, we'll be working with Jim to give him our views of the world. We have today concluded that those businesses are pretty interrelated in terms of driving traffic and relevant fulfilling the consumer need to be able to get to a dealer, so right now at least we - at least for the last year we concluded that we need to improve quality, which we've been working on and it is a drop in volume but improve quality, get our arms around there, need to improve driving traffic to the site, which we're making progress on. And then we believe that the additional relevance of consumers coming to the site and then the advertising dollars will tie to that. Is there a different business model that could be looked at? Sure, and I think as Jim gets familiar with exactly what we're doing, he obviously will have some views on that.

Q - Richard Fetyko

All right. And this couple of more here when I look at the RPM number of dealers increased from 780 to 820 and the revenues were flat, I was just wondering if there is a lag in terms of revenue growth on that?

A - Richard Post

On the CRM piece?

Q - Richard Fetyko

Yeah. And the CRM revenues were flat at 6.2 million while the dealership count increased. I was wondering how that correlates?

A - Richard Post

Well, part of it is customer mix on this. There is a lag. It depends on the CRM business. It can be anywhere from 60 to 90 days on a signup with revenue related, generally but part of it also is a revenue mix on that in terms of size of customer and we also have promotions that we will run with the dealers that you individual mailers, overall for the year we were at 24 million versus 18 million in prior year on CRM so, but yeah the quarter over quarter, there is a bit of lag and there is a mix issue.

Q - Richard Fetyko

Okay. And then last one on the competition could you just give us an idea where it is having an impact, is it on the retail dealer retention side, is it on the cost of the lead side? And who the competitors are, if you don't want to mention them, what are they doing to be more competitive with you?

A - Richard Post

Well, I would say that on the pricing side, we had seen pretty significant pricing pressure in the first half of the year. That seems to have stabilized. We continue to add a lot of dealers every quarter. We have not fully solved the issue of churn. We're working on some programs there. One of the things that we believe and start to take effect or should take effect is the improvement in quality. Also we run across a lot of dealers that will move off of our program and try something new like local search. That's been a big issue in the last six months, six to nine months and they come back so. We've experienced a lot of churn. We're trying to figure out some programs that will create more loyalty, loyalty programs and other things to retain the dealers. If we can bring that churn number down, we'll have a terrific trajectory because our ads continue to be, we are pleased to add a lot of dealers every month because we are losing too many and a lot of times they'll leave and come back. So again, that's an area that we're focused on and we already talked with Jim about some ideas where we can improve that. The best thing for us is that we could do is supplement back to the other question; supplement our lead product with other relevant products that tie into it. So, our lead products can also tie in with a local, we believe a local search product for the dealer. So we're fulfilling all of their needs, not just one aspect of driving traffic to their dealership.

Q - Richard Fetyko

Thank you.

Operator

Your next question comes from Clint Coghill with Coghill Capital Management.

Q - Clint Coghill

Hey Rick, couple of quick questions for you here. Can you kind of run through the, in your mind sort of the most significant assets that Autobytel has and the place where you have the biggest lead over the competition?

A - Richard Post

Well, I think we have the great, the largest reach in terms of driving traffic with affiliates. We have a diverse business model and have the ability; we've expanded across the lifecycle in the dealerships. So, from when the customer first comes in to look at a car to the service side and the retention side of the business. So, the consumer sites are also well-known in the industry and to consumers. So, I think there’s a variety of strong assets that we have that are leveraged off each other.

Q - Clint Coghill

The second question is just, what seems to be the hang up with getting more dealers to purchase? And the reason I ask is because we used to call a number of different dealers and it sounds like with, let's say, if you're selling a lead for $20 or so and they have a 13% closing ratio on those leads, they're selling, on average the gross margin that a dealer would make on a car would be anywhere from $700 to $4,500 for a higher end car. And so the ROI would be really significant. And so, it is hard to understand exactly what's causing them to not use this channel more effectively?

A - Richard Post

Well, it is a great question, Clint, and one we're continuing to try to understand and solve. We're continuing to be do surveys with dealers, try to understand. Part of the churn that occurs with dealers is there is just a natural level of churn that a dealership goes through and whether they're sold, whether the brand is scaled down. There is turnover in the internet department, I think we've talked about that in the past, that can cause a dealer to dramatically reduce the number of lead providers they might be dealing with during a period. But the other side of it is, there are a lot of lead providers out there right now. And there aren't a lot of lead providers that have a national footprint that have the brand. So, I think we're well positioned; we have to take better advantage of it going forward.

Q - Clint Coghill

Then I guess with regard to the -- I know that you guys take the intellectual property and there is a Markman hearings that I think occurred toward the end of last year. Can you kind of comment on how that has gone to this point? What specific patents that is over?

A - Richard Post

Sure. Well the hearing is in the Eastern District Court of Federal Court in Texas. So, that in the Markman hearing and the actual document would be available through the, it is filed and it's available through the Court. I am not sure if there is a small fee to access that, maybe, Clint. It is not something that they let you just go out and reproduce and publish, but it is available through the Court.

Q - Clint Coghill

Yeah we read it.

A - Richard Post

Okay.

Q - Clint Coghill

And, I just wanted to get your interpretation of the Markman hearing.

A - Richard Post

Well, I can't give you my interpretation because we're in litigation. My lawyers would advise me that that would be a really bad idea, so I can't comment. You've read it. I think you can draw conclusions around how that came out for us. Let's just say that we believe that we're in a good position to continue that. That we're in a good position to make our arguments. And this trial is scheduled at the moment for later part of August.

Q - Clint Coghill

At least our interpretation overall it looks very favorable, to you guys have a deal extend, would these trials - what could be sort of the ramifications if you were to win?

A - Richard Post

Well, we're pursuing it because we think the return if we win would be very good based upon the investment. We're making significant investments, as you know, millions of dollars in the costs of the legal battle. So, the potential there is for a very good return to us, including being able to deal more effectively with competition that is using our technology. So, I don't want to get into speculating how it would play out. But it can be a, either a very good result for us or it could be one where there is nothing at the end of the day. It is all, at some point in the hands of a jury.

Q - Clint Coghill

Got you. Last question from me for at least a little bit. Can you comment on the industry trends in January and February and how that is impacting your business?

A - Richard Post

Well, if I did that, I would start making, I would have to go through the entire business because I don't want to leave a misperception on just one aspect of the business. We're not doing forward-looking statements at the moment. The car industry as a whole has seen improved sales obviously over Q4. But that's the industry and I really can't get into speculating at the moment on our quarter.

Q - Clint Coghill

We'll get back in line here for a little bit. Thanks.

A - Richard Post

Thank you.

Operator

Your next question comes from the line of Jacqueline Spring with Thomas Weisel Partners.

Q - Jacqueline Spring

Hi thanks. I am in for Christa Quarles. I have a couple of questions. In the 10-K, I saw that there was a little bit of guidance. And going back to the advertising revenue growth, I think you guys had said that it would be flat for the year. And I am wondering given how robust it was in '05 and the trends you're seeing across the automotive space, is that more of a reflection of what you think is going to happen in terms of your volume or is that pricing trends?

A - Richard Post

Well, we are required to make a forward-looking statement around each of the areas of the business. And because we don't have presold and absolute known revenues for the full year, we can't make up, we can't give guidance off of such a high growth number that would be other than; we believe we will be at least at where we were last year.

Q - Jacqueline Spring

Okay. I am also going to see if you can update us at all on any of the partnerships you've had? I know you had some with Bank Rate and ESPN. Have you seen any impact to your traffic or leads related to these?

A - Richard Post

We've seen good traffic related to the ESPN relationship in particular. We continue to look at co-brands. We would like to do co-brands that have a tie-in to the demographics that are typical on our site. So, there is a science to the type of person that utilize the Internet, ESPN fits that. And we also did an arrangement with Cablevision that we announced recently, where they are selling our CarTV video on video-on-demand. So, we continue to look at those kinds of co-branded relationships. Some work really well, some; there is just not enough traffic to make them worthwhile. And we're sorting -- we're learning as we sort through and do these different transactions.

Q - Jacqueline Spring

Okay. And my last question, I know in the past and on this call you've talked a lot about improving the quality of your leads. I am wondering if you can give us any sort of metrics around that that you have seen thus far?

A - Richard Post

We haven't. And the reason we don't -- we measure it internally. We send out surveys, we do internally generate surveys. They are just statistically not something that I would feel comfortable. We use them directionally in the Company, so they're consistent period over period. So, they're directionally correct. Precision would be one that I would be uncomfortable quoting just because I don't think there is enough math behind it that would be statistically validated probably.

Q - Jacqueline Spring

Okay. Thanks.

Operator

Your next question comes from the line of Peter Schneider with Pennsylvania Capital Management.

Q - Peter Schneider

Hi. I am curious about a couple of things. One, is about a $2 million other income item in the quarter as far as I can tell, what was that from?

A - Michael Schmidt

Peter, this is Mike. That's basically, on the liquidation of Autobytel Europe, there was some currency translation that's obviously we are seeing in comprehensive income. And as those funds were liquidated then, that CTA became an exchange gain.

Q - Peter Schneider

So, that's actually --?

A - Michael Schmidt

So, about 1.6 million -- Pardon. Say again.

Q - Peter Schneider

I am sorry. That's not really a cash item. It is more of a reversal of a previous--?

A - Michael Schmidt

It's a cumulative translation adjustment on the net assets of the entity.

A - Richard Post

The actual distribution from Europe was about 3.9 million.

Q - Peter Schneider

Okay. And if you were to look, Mike, if you look at your operating expenses specifically G&A, on a go-forward basis, or at least on a non-2005 penalizing basis; are you going to be at the same kind of $30 million rate? Or does that come down with all the expenses; you have almost 6 million in auto expenses and all of that?

A - Michael Schmidt

Peter, I guess -- we're not giving guidance. I can't speak it directly. But I think if you looked at what happened full year '05 versus '04, I mean roughly, there's $6 million related to the restatement, the internal review and the audit, which was an increase of '05 versus '04. There was 2.5 million of legal fees related to the patent and the derivative and class action suits and obviously those may or may not continue. And so, I can't directionally give you. But to give you an indicator, obviously there was some unusual costs that occurred in '05 versus '04.

Q - Peter Schneider

Your audit expenses, are they pretty much pro rata every quarter, that 6 million is amortized over all the quarters?

A - Michael Schmidt

No. Audit expenses are basically as the services are delivered you incur the expense. So, obviously, typically -- and you have to remember in '05 with regards to our audit fees that went through the P&L, the heavy part of the restatement probably occurred from the latter part of '04 through the main period of '05 when we actually filed. On a normal basis obviously, there is a bit more heavy testing and a bit more time spent by the auditors as you get closer to year end than on the quarters.

Q - Peter Schneider

Alright. Then on the lead generation business, do you see the opportunity for pricing to stay where it is, or do you expect per lead pricing to drop through this year?

A - Richard Post

We're not anticipating any significant change in pricing, Pete. We've seen it stabilize in the recent months. There has been a variety of changes in the industry, while it's still very competitive, some of the folks who were building dealer networks have exited. Some others are trying to start up. So, it continues to morph out there. But pricing has been generally fairly stable. We obviously, always look at our model to see if in fact our model is the right one in terms of level of service, high touch point. Do we need to be the low cost provider? Should we create more services and increase price? So, we're constantly looking at that. But the base, underlying business, I would say the pricing is fairly stable for the moment.

Q - Peter Schneider

All right. And then finally just out of curiosity, do you think that there is going to be a focus by the Board on the cost in the business? Because if you had a normalized G&A cost, you would have been clearly a profitable business in '05?

A - Richard Post

Yes, Pete, absolutely. '05 was one of -- when I came in it was, just make sure we got through the restatements, we had the financials accurate. We spent a lot of effort and time stabilizing the business after that. There was a lot of disruption related to that. So, yeah, costs are certainly one that we need to focus on. And we have the opportunity like transition with Jim to go through the business. And he has some ideas on how the business should look. And, I guess he believes that we can grow revenue significantly if we can, some of the one-time items coming out, and the cost basis to grow revenues should be there to cover that.

Q - Peter Schneider

Great. Alright, thanks very much.

Operator

Your next question is from Justin Stein, with Miami (phonetic) Capital.

Q - Justin Stein

Hi guys, thanks for taking my question. Given the article in the New York Times on Monday the 13th, regarding the convergence of traditional media with the Internet, and with no sale of the Company, at least at this time, it is surprising that no one has asked about this yet. But can you comment on the interest that you guys receive throughout the process, were large Internet players like Google or Yahoo involved, were newspaper companies involved?

A - Richard Post

I can't comment. We would have signed and we have confidentiality agreements. We can't speculate. We looked at a variety of activities and options. I would say that you're right, we believe you're right, that the Internet and traditional media are going to come together. We think we have a platform to take advantage of that. We also believe that bringing Jim in is someone who has firsthand in the heart of what's going on in this area with -- he has the key relationship from AOL with Google, better search engines. He was driving their online local search activities, driving their content and media. So yes, we believe you're correct that this merging offers us an opportunity to take our platform and advantage ourselves certainly with partnering and products and we just have to execute.

Q - Justin Stein

Thank you for your time.

Operator

Your next question comes from Richard Fetyko with Merriman Curhan Ford.

Q - Richard Fetyko

Yeah, I just wanted to -- on the previous calls talking about the expenses. And I was wondering if you could specifically talk about the fourth quarter, if there were any sort of one-time legal expenses, any other sort of one-time or transitional type of expenses in the fourth quarter?

A - Michael Schmidt

Well, there were certainly legal expenses related to patent that -- pursue the patent litigation continues to be an expensive quarterly event. Maybe that quarter held the Markman hearing in preparation for that. So, that was fairly expensive. And I would say that the Sarbanes-Oxley related costs getting ready for the audit, going through our first - well I would say our first full complete in-depth Sarbanes testing coming out of the remediation, it was very extensive; the testing, the processes that we had to go through with the auditors to be in compliance. So, there are a lot of costs in there. Are they all just one-time? There's some of that Sarbanes is going to be with us for a while. So, I don't have a breakdown on that. Some of it is embedded into the Company as we are working through these issues and do the testing and document the 404 controls. It is a very involved lengthy process.

Q - Richard Fetyko

And those legal expenses? Do you have an estimate on those in the fourth quarter?

A - Michael Schmidt

Yeah, it probably would have been a couple of hundred thousand dollars to $0.5 million.

Q - Richard Fetyko

Okay. Thanks.

Operator

Your next question is from Clint Coghill with Coghill Capital Management.

Q - Kelly Darin

Hey guys, it's actually Kelly Darin instead of Clint Coghill. Just wanted to expand a little bit about -- you had commented that your auditors, some of that work had actually tapped resources across the firm. And I am just wondering if you can give us a little bit of a feel for how deep within the organization that distraction went and maybe some examples? For instance, was your sales team impacted by that?

A - Michael Schmidt

Well, make sure I articulated that correctly. The 404 process itself, it goes across every aspect of the business. So, as we do the reviews for the year and do the testing that has to occur for all of our controls and all of our processes, it touches every aspect of the business. Because of the significant items we had identified last year that needed remediation, the testing was extensive. And maybe I would say probably more so than a normal circumstance. So, that's what I was alluding to there. But it does touch across the entire organization when you're going through the Sarbanes internal reviews.

A - Richard Post

And it is not SarBox, so it is not just the auditors process. It's the company's and management's responsibility to test those, all the controls in place and come up with their opinion as to how effective the control environment is.

Q - Kelly Darin

Okay. And I guess the other thing that I would love to touch on is, it does sound like there has been a lot of talk within the Internet players about how hot the automotive sector is right now. And I know there has been some M&A in the space. And I am wondering if you can talk a little bit about maybe some of the examples that you're seeing out there? And I know I will throw one out. I know Automotive.com was recently acquired by Primedia. And it looks like they paid a pretty hefty evaluation, about 90 million for the business. And I think the latest data point that's out there is sort of 26 million in '04 sales. For instance, how similar or dissimilar is that business to Autobytel, just to kind of get a sense on a comparable basis?

A - Richard Post

Kelly, we do business with Automotive and they've been a terrific partner of ours for a long time. They have -- I don't know that their business model is very similar to ours. They -- while they're in the same space and they are in the leads business, they don't have the large dealer network that we have. I don't know what their OEM -- direct OEM relationship is. I don't know that they have a lot of advertising. I think they've been privately held. So, I don't have a lot of data specifically other than I can say they've been a very good large partner of ours for the last few years.

Q - Kelly Darin

Okay. Any other I guess examples of companies that you're seeing in the space go through a merger or a sale or be acquisitive?

A - Richard Post

No. A lot of the players in the space are private, so when transactions do occur, oftentimes they're private to private. We don't get a lot of in-depth information. The Primedia, Primedia was public and so they disclosed quite a bit on that acquisition of automotive. But as I said, a lot of the players in our space are private. There is one that tangentially in our space, DealerTrack who just went public. But other than that, there just aren't a lot of public companies in this automotive Internet marketing space at the moment.

Q - Kelly Darin

Okay, thanks a lot.

A - Richard Post

Yeah.

Operator

Your next question is from the line of Robert Setrakian with Helios Partners.

Q - Robert Setrakian

Hi, guys. I was happy to hear that you're going to have a conference call on the 20th with Jim. Has he had enough time to study the business to give us his vision and action plan on that call or is he going to need a little bit of more time for that?

A - Richard Post

Well, since he hasn't started yet, I think we are going to give him a little bit more time. But seriously, Jim knows the overall space very well. With, he's running at AOL, is one of their largest divisions in the Internet area. And had terrific knowledge of the Internet space, of local search. So I don't expect Jim to be on to give his strategy and his view of exactly how he is going to operate with Autobytel. But I do think you'll get a sense of -- on this call of Jim's knowledge of the space and Jim's knowledge of products in the space. A little bit about who he is. And I think you're going to find him very impressive.

Q - Robert Setrakian

Good, and realistically speaking in terms of dealing with the investors, perspective investors and the analyst world, is that going to be an area of emphasis going forward? And how long before we see that effort being emphasized?

A - Richard Post

Well, I don't want to speak for Jim. That would put him in a bad box, but one of the things that Jim and I have talked about is, is certainly, as he develops the going forward strategy off of the strategy we have; I don't think that the strategy, the basic framework of what Autobytel is changes overnight. I think it gets improved, it gets enhanced, we're looking to innovate products. The last year has been tough because we've really been in a situation where product innovation has had to take a bit of a back seat to financial statements and other activities in the business. We also would like to be much more open and proactive with investors but we've been in so many quiet periods between the lengthy restatement we had and then the strategic process that the Board felt we needed to look at and evaluate. And when we made that public it really put us again into a position where we just really couldn't go out and communicate much with investors. So, we've been in a tough situation in terms of being able to communicate more information to you. I think when Jim gets on board, I know when talking with him he's anxious to meet with investors, relay his vision and his strategy. But I think we need to give him at least 90 days, 90 to 100 days to fully develop that and articulate it. He obviously has great ideas in the space and that's why I am so excited about. And I think you will hear some of that on Monday.

Q - Robert Setrakian

Good. Just a couple of other questions. When you put up your press release on the strategic alternatives process, a lot of people focused on no sale at this time idea. To me that means that meant you didn't get a price that you thought reflected the value of the Company. And I focus more on the strategic partnerships line that you had in there. And knowing a little bit about Jim's background at AOL, the recent transaction there with Google in terms of a strategic partnership. Am I right to focus on that?

A - Richard Post

I think you're right to focus on that Jim has a history of, at AOL, of building businesses by both doing smart acquisitions and smart partnering relationships. So, Jim is in the heart of the Internet space. And Jim is in the heart of all the players. And he will bring great contact and skill to that area, a great skill set. So I think we have to let Jim get in here. But certainly, one of the areas he's been successful with at AOL has been partnerships and some very strategic acquisitions.

Q - Robert Setrakian

And last but not least, something that's very near and dear to me as an investor also having been on management side. In terms of the Board deciding not to pursue sale at this time, feeling that probably the offer is going to adequately reflect the Company's value; should we expect Board members and perhaps some members of management purchasing shares into open markets to show their confidence in the Company, to show their confidence in the new vision of the new CEO that's coming in? Should we expect that?

A - Richard Post

I can't tell you what to expect or not to expect. That really would be inappropriate for me to speculate.

Q - Robert Setrakian

Or do you think it is a good idea?

A - Richard Post

I think it's always a great idea for management to own shares in the Company. I can't speculate on what individuals will do or what the situation around what they currently own versus options and other things that may have them invested in the Company. So I don't have a speculation on that.

Q - Robert Setrakian

Okay thanks. We look forward to the conference call on the 20th.

Operator

Your final question comes from the line of Justin Cable with B. Riley Company.

Q - Justin Cable

Thanks. I think most of my questions have been answered. But one question I am surprised hasn't come up is; can you explain why you didn't put Q4 results in your press release?

A - Richard Post

I don't have an answer for that. We didn't put them in. I think it's typically the way we've released it. The detail breakout is not in the K either the way the financial statements are required to be filed.

Q - Justin Cable

Okay. Just as an analyst covering the stock and I think I speak for a lot of shareholders as well as investors, that it certainly is displeasing not to see quarterly results in a Q4 announcement. Having to back out the numbers from the end result is completely ridiculous. Especially, when we have less than eighteen hours to address -- go through the numbers and figure out what the quarterly trends are. So, I just wanted to make that comment. Thanks.

A - Richard Post

Okay. I note it and I appreciate your comment. Thank you, Justin.

Operator

And at this time there are no further questions. I turn the call back to management for closing remarks.

Rick Post, Chief Executive Officer, President

Operator, I want to thank everybody on the call today and we'll have a call with Jim Reisenbach on Monday. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, we do appreciate your joining us this evening. This does conclude our conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Autobytel Inc. Year-End 2005 Earnings Conference Call Transcript (ABTL)
This Transcript
All Transcripts