Q2 2020 Autoweb Inc Earnings Call
Good morning, everyone and thanks for participating in today's conference call to discuss idle its financial results for the second quarter ended June Thirtyth 2020.
Joining us today or web CEO, Jerry Brown, the company's CFO, JP Hannan and the companies outside Investor Relations adviser, Sean I'm, sorry, but gateway Investor Relations.
<unk> remarks, well open the call for your question.
I'd now like to turn to called originally I mean, sorry.
For some introductory comments.
Thank you Dimitris 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.
<unk> looking statements and are covered by the Safe Harbor disclaimers contained in todays press release, and the company's public filings with the FCC.
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 quarter ended June Thirtyth 2020, addressing other filings made by all the what would the FCC 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 adjusted EBITDA.
This is a non-GAAP financial measure as defined by FCC regulation G., a reconciliation of non-GAAP financial measure to the most directly comparable GAAP measure and that statement disclosing the reasons why company management believes that adjusted EBITDA provides useful information to investors regarding the Companys financial condition and results of operations are included in todays.
Press release, which is posted on the company's website.
With that I'll turn the call over to Jared.
Thanks, Sean good afternoon, everybody so.
And our business continues to navigate the a the effects of the crowbar scan data like we've made.
Strong progress in our in our travel around here.
During the second quarter, we generate are strongest level of gross margin since 2016.
We reduced our net loss, so sequentially and year over year and we.
We achieved a crucial milestone and turning adjusted EBITDA positive. So these results would not have been possible without our team's commitment to.
Improving the efficiency of the business and the overall effectiveness of our operations not just over the past quarter, but it really over the last two years of though of the turnaround.
Overall workforce transition over the past couple of years are also really positioned us well for this remote work environment, we'd already shifted our workforce geographically.
We top graded an awful lot of our talent and we did realign the organizational structure all of which helped us transition far more smoothly than than we initially anticipated.
It allowed us to lean and as we push to achieve but to a adjusted EBITDA pot profitability.
No keeping our team intact and healthy during the pandemic kids is really remains one of our top priorities.
We work diligently to maintain job continuity across our business even during the lowest points for the pandemic and in mid April we ensured that the few team members who work for a load.
And continued access to health benefits, that's hard work and the adaptability of our team has been incredible.
And they really haven't shirt, our ability to continue serving our retail dealer and OEM customers. During this important time for for their recovery.
I had for the broader automotive industry or the operating environment remains largely on certain.
You got high unemployment rate, which do continue to affect consumer confidence second quarter, U.S.G.P. thought steepest decline to more than 70 years financing availability has begun to tighten in the wake up a wide spread loan and delinquency forgiveness.
And in addition to all that you want your contending with challenges in their inventory make sense.
Cars that are in high demand not yet been fully repaid <unk> replenished.
You know North American auto production only started to pick back up in July earn June really.
After reaching all time lows in April and May.
And it really does remain well below pre cobot levels and largely out of sync with consumer demand patterns.
We cannot predict how these market forces will evolve in the coming months or how they will shape, our customers businesses and affect your own.
That said our focus in the second quarter was going forward is on the Irrs of the business that we can control and in those areas. We've stayed well ahead of our expectation.
Our consistent focus on running a lean operationally effective organization that's focused on the needs of our customers really continues to benefit us in this challenging environment.
We've been incredibly efficient with our traffic acquisition tactics as reflected by the fact that a revenue declined in line with the decline in vehicle sales, but our gross profit increased compared to the prior year.
We intentionally scaled back our media spend to better match lead volume with our dealers diminish cell capacity, which is a real testament to our team's ability to shift our approach to better align with our customers.
This approach ensured that we were offering our customers really the right mix of traffic and lead during the system during the market disruption.
We could have driven more lead volume if we'd wanted to because there was traffic available, but but it really would not have been an effective outcome for outcome for our customers given given how difficult we knew it would be for them to actually monetize the traffic that we were sending them.
This was one of our key strategic decisions this quarter to to preserve value for our customers as we resisted the industry right trend.
Across the board product discounting and instead, NASCAR customer marketing spend and lead volumes are projected industry selling right.
That's a problem. This approach allowed us to align more closely with true consumer demand in the market and deliver lead submitted by action minded car buyers, both for new and used vehicle rather than lead sourced from passive shoppers or deeply discounted search traffic.
To further improve consumers engagement with our media this quarter, we started to roll out a new more contemporary lead funnel experience for our larger mobile audience campaign.
In both the initial phases in Q1, and our first deployments in Q2 the experience produced in improvement.
Over 50% in lead conversion.
So while this solution was targeted towards mobile campaigns or converged optimization efforts that have consistently yielded material benefits for desktop campaigns as well, we're really pleased with these new conversion level.
In order to continue to optimize and deploy additional developments in this area.
The success of our operational and product improvements demonstrates that our so I'd be really is working on the efficiencies we've driven in our customer acquisition are proving to not just the market based rather materially reflective of our constant work to enhance the services we provide.
As the Pandemics impacts to our industry a broader consumer behavior continues to change leveraging quality in our paid search offerings will warming crucial.
We will continue to be flexible and value oriented and how we respond to this operating environment, but for Burley worst stay firm in the high quality service, we offer our customers.
I'll have more to discuss about our recent trends and market conditions, but before commenting further I'd like to turn it over to JP to walk through our our Q2 results GP.
Great. Thanks, Jared and good afternoon, everyone, so jumping right into our results.
Total revenue in the second quarter came in at $17 million.
She is down about 7 million from last quarter and down about 10 million from the year ago quarter for digital advertising revenues, which primarily consist of our click revenue.
2.8 million, which is about half of where we were last quarter and a year ago quarter.
No. This expected decline in total revenue stems from the six continued challenges in the automotive industry and a proactive reduced marketing spend to better align the leading click volumes with that market demand.
The success of this strategy has reflected at the gross profit line as gross profit was up 11% quarter over quarter and year over year to $6 million.
Second quarter gross margin was also up significantly to 35.5%.
These sequential and year over year improvements.
Driven by improved traffic acquisition and lower cost per lead as well as our continued focus on selling more through our higher margin retail distribution channel.
We also significantly reduced operating expenses in the quarter, which were down 30% year over year to $7.3 million.
Our net loss in the second quarter of 2020 improved to $1.4 million or a loss of 10 cents per share that compares with net loss of 4.1 million were 31 cents per share.
In Q1 of 2020, and a net loss of $5 million were 38 cents per share.
In Q2 2019.
Adjusted EBITDA from the second quarter improved significantly to $400000, which is up from a loss of 1.7 million last quarter and a loss of about 2 million in a year ago quarter.
As Jordan mentioned earlier the work we've put in over the last two years is truly what's enabled us to reaches milestone.
And we believe we can continue to operate at positive adjusted EBITDA levels for the second half a 2020 in this current environment going forward.
As of June Thirtyth, 2020, or cash cash equivalents unrestricted cash were eight and a half a million dollars and that compares to 5.9 million at December 30, Onest 2019.
As of June Thirtyth 2020, we had an outstanding balance of $7.2 million on our revolving credit facility with C.G. Northridge capital.
And we had another two and a half million available to us on that revolver.
Our previous actions to bolster liquidity and reduce cost position us well, whether this changing mortgage environment.
Present trends hold as they have through July we remain comfortable with our balance sheet and our liquidity for the next 12 months.
Lastly, I'll provide a brief overview of our operating metrics.
Quick traffic for the second quarter came in at 23 million visits which was down by about 9 million visits last quarter.
About 4 million visits year over year.
Click volume totaled five and a half million clicks, which was down about 400000 clicks from last year 3 million clicks from last quarter.
Our lead traffic was also down by about 9 million visits compared to last quarter.
About 15 million visits year over year.
So these decreases are largely reflective of the industry wide impacts of the pandemic on the auto industry.
As well as our proactive reduced marketing spend to better align with the true customer purchase demand as Jerry mentioned earlier.
Retail lead capacity and net revenue per click were both down sequentially and year over year.
Well, we drove a slight increase in our quarter over quarter dealer count as more dealers have come back online for our leads to drive their car sales.
So overall, we plan to continue building on a gross margin and profitability momentum and we'll continue to operate flexibly into the second half of 2020, as we continue to adapt to market dynamics.
So that concludes my prepared remarks, and I'll turn the call back over to Jeremy.
Thanks JP.
You know our click product traffic in volumes have been performing in line with traditional forms of media advertising with which we experienced some of the largest impacts from the pandemic related disruption to automotive advertising budget.
By extension is performance has been further reflective of consumer demand disruption with financing and consumer confidence concerns affecting the typical demand volumes in the automotive buying cycle.
As a market recovers over time and consumers and dealers continue adjusting to the new normal.
We do expect to see a corresponding improvement in our clicks business in line with broader traditional media advertising.
Moving onto our lead product, we have gained critical momentum in efficiencies over the past few months. Although some of this progress has been market driven our operational investments have a lot of to stay ahead of expectations and generating valuable leads for our customers. We've been able to generate leads that are lower cost at our customers and I'm leads are really a crucial part.
Out of their sales recovery strategy, which has enabled us to maintain lead pricing.
Our history demonstrates that dealers and Oems turned to lead during periods of market uncertainty.
Because leaves can be attributed and.
More effectively valued and other forms of traditional advertising.
Our leads reflect consumer to already know they want to purchase a vehicle and who often know what type of vehicle they'd they'd like to purchase.
They truly are lower funnel in market consumers.
We recently confirmed this trend during a email survey of our users which found that over 70% of our respondents had no plans to delay there could there automotive purchases as a result of the pandemic. These results demonstrate that all web leads are coming from committed active car buyers.
Their intention to purchase a vehicle has not diminished relative to their pre kobin position.
Which is not the case more broadly given you a vehicle sales decline now within this context, our strategy appears to be working and delivering prime support to our dealers during this difficult time.
As he mentioned our strategy has been further validated by our modest improvement dealer count along with significant improvements in our current retail dealer suspends data.
On the latter point our revenue in suspend status is now down more than 75% from its peak in mid April.
Given the industry wide operating environment, we expect that our dealer count remained somewhat choppy over the next few months as the market works towards stability. However, the quarter over quarter improvement from Q1 tells us we're trending the right direction.
Now through July we have continued to optimize our volumes and sustain our operational and financial performance from June.
Which we believe gives us a strong foundation for Q3.
As we look ahead to the second half of 2020, if current market trends hold we believe we can continue to operate adjusted EBITDA breakeven to positive levels, and we will continue to manage costs and drive efficiencies across our business. Accordingly simply put the work we put in over the past few years has positioned autoweb tool currently operate effectively in both good time.
Dan times, like now, which which are not particularly good.
So although we still work so although we still have work to do to fully achieve our turnaround and demonstrate the true potential of our operating model I'm really proud of the steps that we've taken to navigate this environment and.
I'm, especially proud of our team members for their response and commitment to really get us to this point our journey.
So with that we'll now open the call for up for questions. Operator can you please take over.
Thank you Sir.
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And our first question.
Gary Prestopino with Barrington you May proceed.
Hey, guys good afternoon.
Series of questions here.
Yes, great.
Progress on the gross margin I guess, the first thing that would come to my mind. Jared is as you move on through this turnaround is that level a sustainable level or is that just really reflective of the fact that you know because of the pandemic you guys could pull back a lot of marketing spend them and.
So if you could elaborate on that a little bit.
Yeah, Yeah, Gary absolutely and thanks for the questions a couple of things.
Number one is there is some market there is a little bit of market in there and that we know that overall automotive add search spend is down I think the number was 32% E. Marketer thought it was going to be down this year year over year from from 20 to 19. So we are seeing a little less competition in the off.
And then we historically have seen.
However, we deployed a whole series of tactics.
We may not have have really had the courage to deploy in certain ways and they're not been a global pandemic that old adage of making the lemonade out 11 tier and so some of the new tactics that weve deployed from the Sir.
I have actually driven some incremental efficiency for us that I believe is durable.
On top of that Gary the third pieces is we've deployed some changes to our search experiences that I referenced in the in the prepared remark.
That are driving some real material conversion rate improvement.
On the mobile side in particular like I said, you know for those large campaigns, we basically have doubled our conversion rate.
For those mobile campaigns and I will tell you what that's that's durable that's sustainable that that's product change.
So it's really interesting Gary I'll stop in the second here I know, it's turned into a long answer, but if you look at the trend on the mobile buy side, we pulled impressions out of mobile more aggressively than we did have desktop on the search spend side.
At the same time, we deployed these conversion improvements, which means we actually drove more lead volume because our conversion rate went up on mobile. So again, you know that stuff the tactics and and the product improvements listen that'll last beyond the market disruption.
Okay.
And then it's good to see the retail dealer suspense that status improved.
And I guess is that really the biggest issue there to them in terms of the way that your your your dealers increased sequentially I mean deal to start to going to suspend in late March and then they started coming back or is this is truly where you think that the dealer count may have bottomed here.
No we actually grew dealer Calgary, So we didn't pull the suspend stead dealer out of the out of the.
The numbers, we had last quarter, we talked about it or the mid quarter review either because they still were on the program. They just.
Weren't a work actively participating but they still had active contract so what you're seeing quarter over quarter in terms of dealer count as actual dealer count growth.
Some of the margin improvement so is coming from dealers coming off of suspend status because as you know the retail side of our business has a better margin characteristics, none the less than the wholesale side. So as these dealers came back online.
It actually enhance the margin for both the click the but also mainly the lead product.
Okay and that was going to lead me to my other question I remember in the list last quarter, you said a.
Oh, we have not had about 3% of your revenues opted out of will lead program. So you're selling to the dealers of this OEM and you must be.
At least getting some early success there.
We are we are you know it was interesting because.
We started reaching out to those dealers right prior to the a pandemic hitting that we're getting some traction then and then you know the pandemic hitting Ernest slowed our efforts down but as we come back out the other side here and as dealers have started losses suspense data, yes, we've had some really nice progress in picking up those dealers on the.
Tail side to that that once participated on the OEM side, what we're not all the way back to where we where we were prior in terms of total lead volume, but we're making really good progress theory.
And again as you know you know every lead we pick up on the on the retail side. It is vastly more more valuable to US then that a lead on the on the wholesale side.
Yes good.
Okay I'll, let somebody else go and then I've got a couple other questions.
Thank you.
And our next question comes from the call with B. Riley FBR.
May proceed.
Great. Thanks for taking my questions guys one of the start out on the clicks business.
Yes, we facing pressures, but not universally specific to the quick business, but just overall as an industry wanted to see do you expect a sequential growth in that business and do you have the visibility to say that you know that rebound in that business can be sustained.
Throughout the quarter when is that pretty touching go from a visibility standpoint.
Really.
You know clicks is it's been interesting 'cause click got hit pretty hard with the rest of kind of the traditional media side of the business right. They tended to get hit a little bit harder than than the lead side with the pullback.
We've done some good optimization work and we really attack the distribution side, there and so we're starting to bring that back and we've seen some good progress on that over the last two or three months.
And so some of the trends that we saw at the end of the quarter with its starting to come back.
We're carrying through here through through July as well I wouldn't expect for it to have a quick rebound.
But I do think we can grind away at it and I think it'll be.
Flat to slightly up ish.
And again were down 40, 50% on that thing.
And I think we'll grind out of it slowly as as you know the media spend comes back in but but I wouldn't expect a quick rebound on that but I do think that we can.
Continued to make.
Incremental improvements throughout the next quarter's a couple of quarters I do.
Got it and then my second question.
Kind of more of a high level one but.
It's been clear that with the this spike in demand in June and through July that inventory is becoming an issue both could use them and new Oems are trying to get capacity online.
Does that in any way manifest as a headwind for you guys who are is there enough demand out there excluding inventory that that's not an issue.
Yeah, you know it's been interesting lead because we've had while we're down 75% in terms of our total suspense data.
What I can tell you is anecdotally, we've had dealer on and off that lift a couple of time some of them and the reason is it because theres theres two challenges that dealers are happening right. Now number one is inventory to your point some the hot or vehicles are more in demand vehicles or just more difficult to to get their hands on.
The Oems are ramping back production and vehicles are starting to flow again, we hear that anecdotally from the dealer, but they're not they don't have as many if they'd like.
So that's one of the challenges of dealers have had and why they bounce back and forth between on and off the suspense as the other is is some sales. So you know dealers.
Optimized to two to a new kind of demand level.
And Theyre, just starting to bring some of their sales people back on more Ernest and opening up capacity in their bdcs and their sales side. So.
You know is a bit of a headwind Lee. It is I think it's going to be overcome mobile I do believe that over the next 60 to 90 days.
That's that's a very conservative estimate I think that Oems are going to replenish and leaning and push on the new car side. So.
It's something we keep or very close eye on we wish we didnt have to worry about it but I do think it's going to get itself sorted out here over the next.
Couple of months.
Got it thanks for taking my questions guys.
Thanks Lee.
And our next question comes from Ed Woo.
Ascend capital.
You May proceed.
Yeah. Congratulations on the signs of improvement. My question is have you noticed any differences as you know some of the Sunbelt states have seen spikes in a co bid we occurring.
Hey, Ed.
No we haven't.
We havent seen decline in either lead volume or specifically in in dealer count in those areas and I'll tell you. What are working theory is here can we talk about this internally are working theories. This is that when you look at April right April and May.
That was about as bad as you could get from an industry perspective, because we weren't prepared for the disruption.
Since that time, the dealers have really harden their operations and they've evolved of that.
And so as we've seen spike in a in an infection rate.
And some disruption in some of the other industries in those markets. So we see you know bars being closed down restaurant being closed out again, we're not seeing the same thing in automotive because essentially the dealers are now operating in this new manner, which appears to be a bit more.
Manageable for us for us.
For the environment that we're operating at so Ed for what it's worth we haven't seen that we thought we might.
But the dealers are terribly terribly resilient and their plugging along even though we're seeing some spikes from an infection rate perspective across the country.
Great to hear and then all my other question as you know you guys did a very good job of getting your operating costs.
Down to right size for the business, how much leverage revenue upside can you grow with existing business or as revenue comes back when you have to wrap up your operating expenses again.
Yes, typically once you take that one.
Sure.
As you know we've been optimizing on the expense line freely for two years and then when.
As we entered into the pandemic, we did another round accelerated a bunch of cost cuts, which we announced would be about 1.7 million inside of calendar year 2020.
Think about those cost cuts as we did everything possible to stay away from cutting people and so it was a lot of fixed costs and overhead expenses.
So we won't have to add back in people now as things start to expand and grow again, so one way of saying I don't think were going up down a lot of cost back in at all if any.
To move forward from here.
Well, that's definitely great to hear well. Thank you again and I wish you guys. Good luck. Thank you.
Thanks.
And our next question, we have a follow up from Gary Prestopino, but the Barrington.
You May proceed.
JP I just got a quick question on on the cash.
You had 8.5 million this quarter 7.9 million at the end of Q 20.
Yes.
First I thought you may be generating some positive cash flow, but then I will looked at it looked like you're you're you pulled some money on your line.
That is about equal to what the cash grew is that am I reading that right.
Yeah, we have a requirement under the new facility that we have to carry higher levels of.
Debt. So we have a minimum balance that we have to borrow and so that's what it what we borrowed.
Okay.
Yeah. So that's the increase in cash.
Okay now that said I will say towards we on the cash flow, we actually saw operating cash flow swing positive in the month of June.
Where's that have been negative earlier in the quarters.
Okay.
And then I think that in your narrative you said that you feel somewhat confidence that you'll have positive adjusted EBITDA in the back half of the year Q3 in Q4 did I hear that correctly, because I think I think quite yet are.
Good I mean breakeven to positive and then at some level of positive.
EBITDA.
Okay breakeven to positive because I think Jared so more or less breakeven. Okay. That's what I wanted to clarify.
We don't always I don't always read well, Gary we do we believed that we can generate some level of positive adjusted EBITDA going forward.
Okay I just wanted to make sure I had all right. Thank you know we're now we weren't hedging their we weren't hedging we believe that we've gotten to a point where were to be slightly positive I'm going forward. We just don't want to you know it's been a tough two years and we don't necessarily want to make at too. Many bold predictions are promises in the what would the market environment being the way it is but I can tell you we.
We feel good about last quarter.
And like we mentioned in our narrative.
July is off to a good start there I'm sorry delight wasn't good was wasn't good start in August is looking pretty good too. So you know what we saw in Q2 at the end, we find enough and changes in goes go sideways honest from a market perspective, and we feel pretty good about second half.
Well, that's great it's always good to under promise and over deliver so.
Ryan.
At this time to temper that question answer session I would now like to turn the call back over to Mr. ROE for any closing remarks.
Well.
Thank you very much I really appreciate.
Everybody's hard work.
Our team has.
Really done a lot of.
Like your ROIC things over the last couple of months to transition that business as effectively as as we transition to it. So you know I just want to say thank you to the team they've done a great job.
We're excited about the second half the year and so thank you for joining the call.
We look forward to talking again soon and stay safe everybody. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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