Q3 2020 Autoweb Inc Earnings Call
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I'm good afternoon, everybody during the third quarter, we continue to execute on a plan.
T operational improvements throughout the entirety of the business.
Which led to our highest level so quarterly gross profit margins. Since 2017. Despite continued COVID-19 related challenges throughout the automotive market Ah Ah Ah progress across key financial metrics reflects the success of our overall operational discipline and and also flexibility.
Members of leads and.
And we didn't Q3, however, much of this traffic what would have been difficult for our for our customers to monetize for for the reasons that I mentioned earlier.
Instead by by strategically taken volume out of our business, we are preserving value for our customers by providing them with high quality higher margin leads instead of delivering a larger discounted set of leads that that may not result in in the near term vehicle sales.
I am pleased to report that in Q3, we were able to maintain those gains while deploying an even larger number of mobile audience is against the these new experiences.
Thanks, Gerry and good afternoon, everyone told.
Total revenue for the third quarter increased 5% sequentially to $17.8 million. This was down from 28.6 million in the year ago quarter.
Our digital advertising revenues increased 11% sequentially.
Q3 improved to $1 million, which more than doubled from Q2 and was up 21% from last year.
We're very encouraged by this growth as it continues to validate the resilience of our turnaround.
I'm looking ahead, we don't anticipate a straight line of growth from here <unk>.
Given there is seasonality in our business you know Q4 in Q1 are typically the slowest quarters in our business due to the holidays and the model year and fell down dynamics.
And as such our goal is to operate in your break to breakeven levels from an adjusted EBITDA perspective, before then ramping back up to a stronger portion of 2021.
Thanks, you too.
So as I mentioned earlier, our our traffic and and volumes overall I would continue to be impacted by COVID-19 related disruption to bolt consumer demand an automotive advertising budget.
This pattern is consistent with overall automotive media search spend Nevertheless, we're still working to optimize our revenue mix by Ah remaining efficient with the tools. We we have an leveraging new initiatives took the modernize our products, we see plenty of opportunity had to have her aleve and click products in the automotive market recovers.
That's making approaches if the intention of embedding more retail ready components in our conversion funnel such as trade it in in finance enablement.
One of your guys mentioned something about you know the goal is to operated breakeven levels of EBITA and I mean, you know you. You you you started a really you know come into the into the black here and it is that because as we go forward, there's gonna be more uplifts on the investment and what you're doing.
To kind of transform the company.
When the you don't have these government transfer payments out in the market.
Yeah. It does I'm on our consumer base is really Middle America. HM you know when you look at when you look at the education level when you look at the.
When you look at the earnings levels are the folks who use our services. These are folks who 10 15 20 Bucks a month really really matters to him for a payment perspective, and these are the people who have been hit hardest.
By what's going on with with Covidien and the unemployment and just some of the general economic downturn. So yes that that is that is that a fair statement Gary is that our users aren't aren't as affluent as maybe you see some of the other some of the other sites out there.
But but again, we like our user base because.
We do believe very strongly that when you're talking about.
Middle American car buyers there is a lot of those folks out there and so we deliver real value to two very large segment of the body population.
Okay, and then can we just talk about this new contemporary lead funnel experience that you rolled out.
Yes could we could we just go into that a little bit more just kind of simplify that for for me.
The gear I will tell you that theres no.
Probably hundreds of optimization cycles, and small tweaks that we've made over an extended period of time that got us to the point, where you could start to see the benefit in Q2 and then it carried through in Q3.
Again, we're just getting started on this optimization process. So that's the best way to describe it hopefully that was helpful.
How much is your of your traffic right now is mobile versus north of 60% North is a really good okay. Thank you.
Yes, Thanks, Eric.
I'm sorry. Your next question from Eric Mike in R&D of E C.
Sir you May proceed.
You talked a little bit about investing in the business typically this people that capex I just wanted to know.
As we look at Q3, the operating expense of 6.7 million, where does that go next quarter.
You know I think that goes up.
Flat to up slightly but I think we're just talking more about is as we go into next year and some of the to develop software development things, we do Ah, that's where there will be some additional cost most of that will be capitalized on any new products.
It's really the what we're facing most immediately the Gerry mentioned the sort of the seasonal downturn for Q4 and Q1.
[noise] Yeah Erika.
And if I could just expand upon that a little bit in where you'll see some of the one of the reasons, we talk about it the way we do in terms of the investment as you know anytime we build a new experience or are new approach, which we tend to lose efficiency right click through rate efficiency conversion rate efficiency monetization efficiency and so.
Inventory on the new car side, and then on the used car side until they pulled back in and what they did was they they harvested that profitability and so.
We did see a little bit of a pullback. The nice thing is and the good thing is the capacity went up which means the dealers who stayed on took more but we did lose some dealers and like we've been talking about Eric you know the the dealer side of it and the retail side of it wrong, we're confident in our ability to to rebuild it over time.
We've got some work to do on the selling motion Uhm, we it it's really choppy. The results are and we continue to have these choppy results were one quarter, while I'm a good quarter next quarter will go backwards, but I am confident that we're doing the right things and we're heading in the right direction, but but that would be my response P around what we saw.
A lot of dealers pulling back so that they could harvest profitability in queue and Q3.
Don't blame him quite frankly.
Yeah.
Historically, there has been a correlation between.
Lee traffic and click traffic.
So those metrics again, I'm talking sequentially, or but we sort of those going in different directions, pleat traffic click traffic down with find that.
Yeah. So the cook traffic is interesting cause the clip traffic click product is he has he seen in Q2, two three got hit harder than the lead tired of the business and it's come back a little slower and so.
From a from a traffic perspective, we generate traffic off of for the lead to the cliffs product not just off of our S. M traffic, but we also have some publishers network automotive sites high quality traffic, but we essentially have deployed our technology on their sites and so you know you've always got this <unk>.
Drifting dynamic of winter.
When our STM spend goes up Arkalyk traffic goes up on the rest of them spend goes down and clicked. If it goes down and then you've also got these other dynamics were sometimes if one of our publisher sites pushes traffic or pulls back on traffic you could have an impact on us as well.
The real interesting thing around cute three I think Q2 and Q3 is the traffic story is is important but also the revenue per query.
Or the revenue per click and I look at it both ways. So I apologize then I flip back and forth between my internal metrics in my external metric, but but that revenue per click and revenue for query number has gone down and it's starting to recover and so that's a good sign in my mind, because you know again this got hit hard.
Then the lead side because this is a search like product. So when you see people pulling back on search spend like we saw in Q2 Q3 and it projected for a period of time out.
It has more of a direct impact on the click product at the revenue per click or revenue per query line than it does on the on the on the lead side. So those are the dynamics at play inside to collect business, we didn't get a little bit more fishing on a conversion we feel good about it starting to recover.
Some of the some of the strengthening that you've seen is carrying through but we've got a long way to go on that click product cause you know and it's and it's lowest that click product and cute too I want to stay on a monthly basis was.
He was about half of what it was pretty covid levels, but we're we're taking our way out of it.
Uh-huh.
I I didn't want to take it for granted but obviously you guys.
I'm doing good work gross profit and the gross margins here.
The 36.1% for Q3 up sequentially from cute too I realize we're facing seasonal pressures here in queue for in Q1, but what's a good assumption to use for gross margin what are you targeting.
Well I think in this mid 30% range is.
We're targeting I think what's interesting this quarter's you saw.
Revenue went up and we still were able to expand on the margin and so.
I think we can hold a good part of that even with a little revenue decline.
Yeah, [laughter], yeah, and and and the important part there is some of the efficiency, we're driving like and and that's one of the reasons I would talk about the mobile stuff you know those sorts of durable process improvement will give us some confidence and holding these these these gross margin levels and again you know we've said this before we we.
To get to these gross margin levels, we just got there quicker quite frankly than we initially anticipated and so you know we feel pretty good about the the tools we have available to us to continue to just to hold those numbers, what we're gonna be or would be very focused on those lines. We know we need to make some investments we know we need to transform the.
Good stuff.
Where we want to go with this matchmaker approach and we think our take on the matchmaker approach, we think will.
We'll alter the trajectory of the business longer term.
But we over the short term there are some things we can do to continue to optimize the core business. We just don't want to get out ahead of ourselves here and so you know mid to low thirtys as kind of it's kind of where we where we think we can live from a gross margin perspective, right now, while we invest in the business and and really try and turn the screw to wear.
That next that next phase of.
The work, we're doing here, which once again, we think is exciting.
Got it that makes sense.
You guys kind of talked about this.
The seasonal component to.
To your outlook.
Fully respecting that the industry is definitely seasonal and that we have that pullback.
I kind of wanted to just kind of dissect the impact of used inventory or excuse me new inventory, obviously I'm kind of in a headwind since we've seen a recovery across the industry up until just recently so.
Do you expect an improvement in new inventory to help partially offset.
Some folks pocket, so that they've got a little bit more disposable income a little bit more confidence in their in their financial outlook and they want to use some of that money on buying cars.
I don't know if that answered your question directly or not leave it but that is that that's our hope and if all that hits then yes, you listen Q4, Q1 can be better than expected I just.
I just can't I, just can't I, just cant bank on that as we sit right now.
Got it that makes sense and definitely help pull to kind of frame the outlook.
Last question, you guys kind of put out a press release about a quinstreet relationship.
Maybe just talk about the opportunity in evolution of that relationship kind of near term and long term.
Yeah, No I think those [noise] so.
So a couple of things one is.
We talk about in particular, our traffic products what are you.
You talk about selling those clicks to endemic near endemic and then Onyx Demick buyers.
I think Quinstreet a great example of a near endemic buyer, who sees real value in our audience.
We know that there's more of those out there.
It is a business development opportunity and it's one that when we find someone like or Quinstreet, who as you know scale distribution in automotive finance, it's really interesting strategic partnership that didn't allow us to optimize over time. So we think there's more of those opportunities ultimately endemic in near endemic side.
You know I've been very open about the fact that we sell more of our clicks to non endemic buyers than I would like.
So this is just a really nice example of us finding someone who values our traffic who delivers real value also into our consumer base. Most consumers don't think about transitioning their auto insurance until they.
They are thinking about buying a car. So it's just a nice strategic fit.
I think theres more opportunities out there like that.
Going to see us continue to try and to try and take advantage of our traffic to the benefit of our consumers and then also the benefit of some of these near endemic partners, who who again getting access to a very targeted lower funnel.
Audience like ours, it it's uniquely valuable to them as well.
Okay. One thing I would say lead to one thing I would say too is.
No listen ethanol right finance and insurance right big part of dealers back and gross profit.
What I would say, though is most dealers don't sell car insurance and so as we think about these things to.
We're not in the business a competing with our clients.
We're in the business of helping our clients and so as we think about these things just understand where we're going to focus on him in a very.
Client friendly way and so Thats, where this made all the sense in the world and again, we think its a nice relationship that we can optimize and grow over time.
Got it yes that makes sense. Thank you for taking my questions guys.
Thanks.
And Sir our next question from Ed Woo.
You then have to though.
Yes. Thank you.
Yes. Thanks for taking my question I know it might be a little early to look into 2021, but what do you think the car industry sales will look like how do you think the used car business will yes.
Yes change over the next six months.
Yeah I had.
Hi, I wish I had a better answer for you I I'm I'm, a little nervous about what's going on right now just from a macro economic perspective, so I mean, we're tracking it call. It 15 to 16 million Saar as we sit right now.
15, and a half I guess the number was less.
It'll be interesting to see if we can carry that momentum through 2021, I'm not so certain that we can but I'd like us to.
And on the used car side.
We continue to see strength there I think some of that's going to have to do with.
With how the Oems react from an incentive perspective listen that the affordability of new vehicles is something that's been creeping up for a couple of years several years now.
And in an environment, where maybe the economy isn't quite as strong as it once was and consumers aren't quite as competent in their in their financial outlook as they once were going to put pressure on that trade off decision around do I buy a new car guy or do I buy a used car.
Because of the pricing differential so I wish I had a better answer for you add I do think you're going to continue to see just just more innovation around you know digitally enabling the transaction, which is going to allow consumers have access to.
To this trade off between new and used in an even more fluid way than the than we can today, but.
But you know I I wish I could be a little bit more bullish there are optimistic about the about 20.
2021, as we sit here today I, just there's too many too many unknowns forming in too many variables, which is which is why you're seeing us kind of the a bit conservative in our approach right now just because we want to see how that plays out over the next couple of quarters.
Because we think we'll know a lot more come the end of from the end of Q1 next year.
Well, it's definitely understand bowl. Thank you for taking my questions. Thanks, Good luck.
Thank you.
Okay.
And Sir we do have a follow up question, Sam Gary Prestopino banking.
Banking. These huge please go ahead.
Just a quick question here do you have what the click revenue was I guess display revenue was how that breaks out among the advertising revenue.
Hey, we capex in yes, it's in the 10-Q it after I don't really care, okay to the numbers broken out there.
And Gary what else too.
And what I'll tell you is the vast majority is click revenue.
Okay I'll find it in the queue I just thought you might have thank you.
Okay, now and Gary just to add on to that so the display AD revenue like we've talked about in past periods.
It's been a bit in decline because of all the kind of the trend and in display and it's not a core area.
Clearly a focus for us right and so the bulk of it is the quick side.
Okay. Thank you.
And Sir at this time. This concludes our question and answer session I would now like to turn the call over to Mr. well for closing remarks.
Okay, well I just want to say thank you I appreciate everybody joining the call.
Appreciate your continued interest in the business we continue.
Appreciate your support of the business I also just want to thank the team.
This is the last couple of quarters have been pretty rough on the on the team just overall because of all the uncertainty out there whether it'd be marketing certainty, what's going on at home, what's going on in just in the <unk> and the economy overall and I couldn't be more proud of the work that.
The Autoweb team has done in a very challenging environment. So I just want to make certain I say, thank you to all of them for all your great work because this is your work so thank you.
Other than that we just look forward to speaking again on the next earnings call and looking.
Looking forward to talking about Q4 and full year 2020 results. So thank you for your time and we'll talk again soon.
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