AutoWeb, Inc.
Q2 2018 Earnings Call Transcript

Published: 3 Aug 2018

[Operator:]

Good afternoon, everyone, and thank you for participating in today's conference call to discuss AutoWeb's Financial Results for Second Quarter Ending June 30, 2018. Joining us today are AutoWeb's CEO, Jared Rowe; and the company's Interim CFO, Wes Ozima; and the company's outside Investor Relations Advisor, Sean Mansouri, with Liolios Group. Following their remarks, we will open the call for your questions. I would now like to turn the call over to Mr. Mansouri for some introductory comments.

[Sean Mansouri:]

Thank you, Brian. Before I introduce Jared, I remind you that during today's call, including the question-and-answer session, statements that are not historical facts including any projections, statements regarding future events or future financial performance or statements of intent or belief are forward-looking statements and are covered by the Safe Harbor disclaimers contained in today's press release and the company's public filings with the SEC. Actual outcomes and results may differ materially from what is expressed in or implied by these forward-looking statements. Specifically, please refer to the company's Form 10-Q for the second quarter ended June 30, 2018, which was filed prior to this call, as well as other filings made by AutoWeb with the SEC from time-to-time. These filings identify factors that could cause results to differ materially from those forward-looking statements. Please also note that during this call, management will be disclosing non-GAAP loss or income and non-GAAP EPS. These are non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in today's press release, which is posted on the company's website. And with that, I'll turn the call over to Jared.

[Jared Rowe:]

Thanks, Sean. Good afternoon, everybody. During the second quarter, we made great progress in working towards the completion of our operating review and the development of our new strategic plan. This included a comprehensive review of our products, our traffic acquisition strategies, our pricing policies, our distribution channel approaches and our organizational capabilities and structure. Although, we're still engaged in our strategic review, we've already begun to redevelop and invest in the key pillars of our business, which will continue to impact short-term profitability, particularly as we invest in new product development and test new traffic acquisition strategies to improve quality and consumer targeting. In an effort to improve our consumer-to-advertiser matching, we are also investing to enhance our click algorithm, which we expect to complete and deploy later this year. Further, we plan to restructure our organization to better align with our revised strategic imperatives, which could [Technical Difficulty] restructuring cost later this year. With just three months at AutoWeb, I'm very encouraged by the progress our team has made to evolve our market approach. However, there is still much work to be done to determine the proper new to use car targeting mix, our channel mix, our product mix, and some other strategic decisions. But before commenting further on our plans, I'd like to turn the call over to Wes, to walk us through the details of our Q2 results.

[Wesley Ozima:]

Thank you, Jared, and good afternoon, everyone. Second quarter revenue came in at $29.3 million, down from $34.6 million in the year-ago quarter. Our advertising revenues were $6.9 million, compared to $8 million in the year-ago quarter. The click revenues of $5.8 million compared to $6.5 million. The declines are primarily due to lower retail lower retail dealer count and lower lead and click volumes. Gross profit during the second quarter was $5.5 million compared to $10.6 million in the year-ago quarter, with gross margin coming in at 18.9% compared to 30.7%. The decline was primarily driven by investments in new traffic acquisition strategies that increased the total cost of revenues. Normally, cost of revenues will be expected to decrease proportionately with total revenues. Total operating expenses in the second quarter were $10.9 million compared to $10.4 million last year. As Jared mentioned earlier, we plan to better align our organizational structure based on some of the new strategic initiatives under way, which will be followed by reinvestment to ensure that we have the proper capabilities in place to execute our strategy. On a GAAP basis, net loss in the second quarter was $5.2 million or negative $0.41 per share on 12.7 million shares, compared to net income of $0.3 million or $0.02 per share on 13.3 million shares in the year-ago quarter. For the second quarter, non-GAAP loss, which adds back amortization on acquired intangibles, non-cash stock based compensation, severance cost gain or loss on investment or sale, litigation settlements, goodwill impairment and income taxes was negative $2.8 million or negative $0.22 per share [Technical Difficulty] income of [Technical Difficulty] or $0.19 per share in the second quarter of 2017. The decline was primarily driven by the [Technical Difficulty] lower revenue and gross profit resulting from traffic [Technical Difficulty] investments, lower retail dealer count and lower lead and click volumes. Cash provided by operations in the second quarter was $2.9 million compared to cash provided by operations of $6.5 million in the prior year quarter. At June 30, 2018, cash and cash equivalents stood at $18.3 million compared to $15.2 million at March 31 and $25 million at December 31, 2017. The year-over-year decrease was driven by our repayment of an $8 million revolving line [Technical Difficulty] debt at June 30, 2018 was $1 million compared to [Technical Difficulty] at the end of 2017. Moving on to some of our other operating metrics, we delivered approximately $1.7 million automotive leads during the second quarter compared to $2 million in the year ago period, a reduction resulting primarily from lower retail dealer count and less effective traffic acquisition. Note that this lead volume reflects all leads sold to both the retail and OEM channels for new and used vehicles. As a reminder, the retail channel comprises leads sold directly to dealers, whereas our OEM channel primarily reflects leads sold to OEMs that are then distributed to dealers and their corporate leads program at the OEM's discretion. Dealer count stood at 23,546 at June 30, down 1% from 23,886 at the end of Q1. The decrease was primarily driven by the aforementioned decline in retail dealers. Subsequent to the quarter, we Maserati to our OEM leads program and expect this new program to be activated in the third quarter. I remind listeners that our dealer count reflects all dealers to which we sell new vehicle leads, including both the OEM and retail channels. It's also worth noting that our dealer count represents approximately 73% of all franchise dealers in the U.S. Buy rates for the quarter remain strong with Autobytel.com, generating an average estimated buy rate of 29% and all AutoWeb internally generated leads estimated at about 17%. This compares to an estimated 30% for Autobytel.com and an estimated 17% for all AutoWeb internally generated leads in the second quarter of 2017. Our traffic mix for the quarter also remain steady with 79% of leads being internally generated and the other 21% of leads coming from third party lead providers. This compares to 77% internally generate last quarter and 80% in the year-ago quarter. With that, I'll now turn the call back over to Jared.

[Jared Rowe:]

Thanks, Wes. As I mentioned earlier, we've gone through an extensive review of our current assets and capabilities over the last few months and have made great progress on the development of our new strategic plan. Now, during our product review, one thing we realized and we'll seek to improve the integration of our products of the unified solution. Just over simplify this concept, previously our leads were not effectively speaking to our clicks nor were they effectively speaking to our e-mail marketing campaigns. These three key products should be working together with the ultimate goal [Technical Difficulty] monetizing every ad impression we generate across each product. This will provide us with an opportunity to maximize our clients' marketing dollars by [Technical Difficulty] reach and frequency to contact their target audience of end-market consumers. Now, as I mentioned earlier, we are also investing to enhance our click algorithm to improve consumer and advertising metric. This algorithm will be more equipped to take advantage of the mass amounts of consumer data we collect every single day. Ultimately, if we enhance the match, we believe we can enhance both consumer and advertiser value, which is what we ultimately monetize. We've also thoroughly reviewed our distribution capabilities, which is a reference to our sales channel mix of OEM and retail dealers. While our OEM business has historically been very strong, our retail business has been in steady decline for some time now. Although, we are still working in terms of the proper channel mix, we expect to enhance our retail business through more effective market segmentation. Today, we are under penetrating the retail segments that we believe to be the most attractive and can benefit most from our products. This segmentation approach will include pricing rationalization. For competitive reason, we can't give you too much detail here, but know that we are undertaking an extensive review to find the right balance of pricing margin to maximize volume for both OEM [Technical Difficulty] retail channels. Regarding our traffic acquisition [Technical Difficulty] during the second quarter, we begin to invest a new strategy to [Technical Difficulty] targeting and the quality of our leads. Frankly, I believe some [Technical Difficulty] strategies we are contemporary and we are not aligned to really focused on the buying signals of the consumer. As I mentioned our last conference call, our goal is to move away from commodity matching of buyers and sellers and begin to looking at more data-driven approaches to connect to a specific targeted buyer with a specific targeted seller. We believe this could help us differentiate to the market, as well as improved both margin and volume characteristic of our business. We expect these investments to continue over the near-term, as we worked to optimize our traffic acquisition methods and return to growth. In closing, I'd like to reiterate few key points. In the short-term that I've been back with AutoWeb, [Technical Difficulty] progress we've made and the steps we've taken to address the challenges. I [Technical Difficulty] opportunities for us to be more efficient with our existing resource and to more effectively compete for our [Technical Difficulty] spend. Marketing efficiency is critical in the automotive industry and we aim to continue to be on the forefront of helping our clients achieve their goals. We will also maintain our focus to deliver on being the highest [Technical Difficulty] click provider in the industry and have already begun to alter our [Technical Difficulty]. It will take some time and organizational restructure [Technical Difficulty] to get where we need to be. But I remain confident in our long-term prospects. I'm very excited about the opportunities ahead and look forward to updating you on the progress along the way, as well as rolling out our new strategic plan later this year. So with that, we'll open the call for questions.

[Operator:]

Thank you, sir. [Operator Instructions] And our first question will come from the line of Sameet Sinha with B. Riley FBR. Your line is now open.

[Lee Krowl:]

Hey, guys. Thanks for taking my question. This is Lee Krowl filling in for Sameet. Couple of questions. First, I'm just trying to get a sense of - during the quarter what impacts the current restructuring had on current results and what essentially was the product of kind of the competitive dynamics in the marketplace? Just trying to get a sense of what you guys have a control over and kind of what the market has caused or impacted your business.

[Jared Rowe:]

Yeah, hey, Lee. Thanks for the question. The restructuring costs really haven't hit just yet. What you're seeing in terms of the cost side of the business is really about some things that we found during the quarter that needed a bit of shoring up in a bit more aggressive way than I initially thought when I first showed up. So [Technical Difficulty] heavily in traffic acquisition [Technical Difficulty] our approach and rethinking some of the ways that we actually structure those campaigns. Like I said earlier, [Technical Difficulty] comments, some of the strategies that we're employing were not what I would consider to be contemporary. And so, we've been investing heavily into that. When we think about the competitive dynamic and the competitive landscape, in particular, when we think about marketing spend, inflation, we're less concerned about that quite frankly. We're more concerned about how we generate the right impressions and then what we do from a conversion rate perspective, and quite candidly, those things are within our control. And really what you're seeing from an expense perspective is us investing in bolstering those [Technical Difficulty] so that we can build long-term value and get this business [Technical Difficulty] profitability.

[Lee Krowl:]

Got it. And then, just kind of on the pricing and, I guess, rationalization and better segmentation, I guess, can you may just talk about - obviously, no two dealers are the same and bigger ones warrant different pricing than smaller ones. But, I guess, as you go into that is there a margin implication to that as well?

[Jared Rowe:]

That's a fair question. And as we think about the business, it's all rate volume. And so, one of the things that we're thinking about is how do we actually grow our overall margin profile in the business by maybe not on a per unit basis, but overall. And so, when you look at our retail business in particular, right, it's been in decline for several quarters now. We think by better targeting the [Technical Difficulty] segments of the dealer population that are [Technical Difficulty] to really get the benefit of our products and services, and then pricing appropriately, we actually think we can get some of that share back. As we think about the business, we do think about it that simply, as we want to have the best margin characteristic we can on a per unit basis for as many units as humanly possible. And again, this isn't just about rate. This is also about volume for us.

[Lee Krowl:]

Got it. And then, just jumping out to the balance sheet quick, it seems like you guys have ample cash. Obviously, the changes you're making are going to cause temporary disruptions. So is the balance sheet a gating factor to being able to move faster or with the current flexibility of the balance sheet, do you think you can kind of execute your turnaround plan on a pace or a schedule that you would like?

[Jared Rowe:]

We feel good with where we're at right now from a balance sheet perspective. And we don't think that it's going to inhibit our progress. And to be candid with you, if we get to a point where [Technical Difficulty] it will really be the planning process for the new strategic plan [Technical Difficulty] tend to roll out later this year, which would mean [Technical Difficulty] we thought that we could move faster with a slightly different approach then we would actually include that in the plan and we'd go execute against that. So, again, as we sit today, I feel really good about the balance sheet. It's not going to inhibit our turnaround. And if we get to a point where we think we can actually move faster by figuring out a different way to manage the balance sheet, we will absolutely avail ourselves of those opportunities.

[Lee Krowl:]

Got it. Thanks.

[Jared Rowe:]

Thank you.

[Operator:]

Thank you. And our next question will come from Ed Woo with Ascendiant. Your line is now open.

[Edward Woo:]

Yeah, thank you for taking my question. What's your outlook for the auto industry in the U.S., I know, July was a little bit of pickup, and how does that impact in your business and how you guys are going through your structural plan?

[Jared Rowe:]

Yeah, thanks for the question. That's a fair question. We didn't get off to a real good start here in the second half from an automotive perspective, right, I think the SAR total was, what, 16.73, which was down a little bit sequentially, but we still feel good about the industry overall. We are still seeing that big kind of structural shift away from cars and SUVs and trucks. And we still do see some of the core drivers of the industry starting to heat up whether it be increases in interest rates, so whether it be the extension of loan terms, those sorts of things. But I guess, from our business, we look at it this way, which is we're relatively small percentage of our overall clients marketing spend. We also are measured media. Whereas lot of the ways that dealers and OEMs are spending money, they just don't have the ability to prove the value, the way that we do. We believe very strongly that if you focus on delivering quality to real value to the end buyer of your product, and you do it in a way that is demonstrable that we're going to be able to effectively compete in an up or a down market. This doesn't mean we're cyclical, this doesn't mean we're counter cyclical. It just means that we are relatively small percentage of the overall spend. We are measurable, and we are very tangible from a media spend perspective, which I think helps us grow in an up market and I think it really helps us manage the business in a market that is in decline.

[Edward Woo:]

Right. And then the other question I have is, have you seen any possible disruption from your customers, either the OEMs or the dealers, in terms of some of these discussions about the potential auto tariff? Is that putting anybody's spending on marketing or plans just on hold or is there no real impact yet?

[Jared Rowe:]

Nothing for us. We haven't seen any associated with that result.

[Edward Woo:]

Great. Well, thank you and good luck.

[Jared Rowe:]

Thank you.

[Operator:]

Thank you. And our next question will come from Peter DelGado with Global Value Research & Company. Your line is now open.

[Peter DelGado:]

Yeah, hey, Jared, again Peter DelGado from Global Value Research Company. I know you only been there kind of the short-time, I'm curious if you could maybe give us a little more color on how long you think the company might need to complete its strategy review?

[Jared Rowe:]

Hi, Peter. We do intend to present our strategic review later this year. I think, it's reasonable that we will do either at next earnings call or maybe even prior to the next earnings call. But I think, we will be in good shape to talk with everybody about in that kind of timeframe. We have made a really good progress, the operating review has gone very, very well. As I mentioned earlier, we're already starting to make some investments, to make some progress to get the business back in the kind of shape we think it needs to be, to really make the extension of the platform and really the turn. So that would be the timeline I'd give you as we said right now.

[Peter DelGado:]

Got you. Very good. Understood. I guess, just second question here, did see obviously the margin drop due to your rather strategic - making some strategic investments across the broad there, kind of curious, do you anticipate seeing them down here in that range, before they go back up to your historically high level, around high 20%s, 30%?

[Jared Rowe:]

Yeah, I guess the way I would answer that question in this way, Peter, which we are not providing guidance as we said right now. We do intend to continue to make the kinds of investment that you're [Technical Difficulty] for the foreseeable future. We really [Technical Difficulty] the capabilities and build the foundation of this business. We have a fundamental belief here that, we make the right investments now, and we build the right capabilities now. It's going to position us very well to create real value over the medium to long term. So that would be the way that I'd answer that question.

[Peter DelGado:]

Okay. Understood. Thanks, guys.

[Jared Rowe:]

Thank you.

[Operator:]

Thank you. At this time, this concludes our question-and-answer session. I'd now like to turn the call back to Mr. Rowe for closing remarks.

[Jared Rowe:]

Well, thank you everybody. I [Technical Difficulty] time, and joining the call. I also want to [Technical Difficulty] team here at AutoWeb [Technical Difficulty] good work in a very brief period of time. And I'd [Technical Difficulty] just how exited we are about the future. I know, we've got a lot of hard work ahead of us. And we're not where we want to be, but we are committed to get there. So, thank you to everybody and [Technical Difficulty] talk soon, okay. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may disconnect. Everybody have a wonderful day.