Q3 2021 Autoweb Inc Earnings Call
I just can't believe said adjusted EBITDA provides a useful information to investors regarding the company's financial condition results of operations are included in today's press release that is posted on the company's website and with that I will now turn the call over Jerry.
[noise] Thanks Cody.
You know everybody. So we continued to make some really solid progress on a business transformation during the third quarter. Despite some significant headwind some supply constraints throughout the automotive industry.
Which really did diminished new vehicle inventory and production levels, which which tended to offset our seasonal strength that we typically experienced are in Q3, but like year over year growth trends in our click metrics demonstrate to at the.
The consumer demand remains robust among our intent car buyers.
We continue to swiftly integrate the and scale causes which is our new vehicle acquisition and resale a product or said, Nick Michael talk more about that.
To help address this this.
Just demand and established a foothold within the used vehicle acquisition business now we believe that the customer acquisition efficiency even platform enhancement. We've built have given us a strong foundation for growing our vehicle acquisition business and driving completed used vehicle transactions from start to finish.
Now before we discuss this transformation named our performance during the quarter in greater depth. Let me first provide some additional contact sandy state and evolution of today's vehicle buying dynamics reach.
A retail dealers and Oems continued to be challenged by widespread pandemic related shortage supply shortages, including the ongoing semiconductor and microchip retorted.
These disruptions are still constricting, new car production levels and overall vehicle available availability with with Bloomberg intelligence to estimating the number of use of new cars on dealership locked fell by a third of last year's levels.
Individual dealers millions have limited visibility and control over their supply chain conditions, which likely will not normalize for for several period.
Even when supply chain constraints do begin to ease this doesn't mean that new card inventory levels will immediately Serge.
Rebounding demand along among in market.
The vehicle software size creative backlogs for specific vehicle models at the dealership level. So once the vehicle supply chain normalizing dealers will need to first of all the orders of customers, who have already put down deposits or signed up for weightless.
For the they fully replenish replenish their lot.
Conversely, the market conditions that have hampered new vehicle transactions that have spurred the growth in Argentina cause they I gotcha.
The consumers that we can support through the entire transaction face from disposing of their current vehicle do evaluated in acquiring a new one having this capability positions us to both fulfill consumer demand directly and provide retail and wholesale dealers with additional sources of inventory. Furthermore, transforms us into a first party participant in the us.
Car transaction process, allowing us to both leveraged the current advantageous.
Advantageous dynamics in that market and emerged from the challenges in the new car market with a stronger foundation and a more comprehensive value proposition. This third party audience efficiency matched with with first party monetization is a very important point that it's something that that you're going to hear us talk an awful lot about over the next several period.
It.
But most of additional media companies will will always stay media company. However, that's not in the past that that we've chosen.
The total of vegetable market for automotive digital advertising, it's about $15 billion. According to E marketer.
By contrast, our business transformation allows us to address a far larger markets and we would by simply focusing on our legs legacy marketing offerings.
We believe that our platform offers a more tailored final approach to acquiring traffic and consumer leaves than what larger media only players can provide which gives us greater flexibility do evolve our business beyond the media roots.
In fact in September Research, a research report from from Brian Pass Enterprises.
And then a clip traffic generation product alone drives greater level of quality value and shopper interactions and broader dealer funded Google at T. M campaign. The reason is is that these dealer funded Google at the M campaign tend to capture more consumers seeking basic service and administrative functions for their vehicles then.
The vehicle shoppers.
With our concentrated approach, we have acquired an expansive and growing audience of active.
<unk> minded car buyers to leverage as we entered the vehicle acquisition business, which is estimated to have a total addressable market approximately $230 billion, but as you can see we've.
We've expanded our total addressable market substantially.
Supply constraints across the automotive industry.
And as Jared mentioned these supply challenges have kept new vehicle inventory levels low and of course, many manufacturers to drastically reduce production levels in.
And these overwriting offset the seasonal benefits, we typically see in our financial performance for Q3.
The industry challenges, primarily impacted our automotive digital marketing segment.
For Q3 totaled $15 6 million in revenue down from $18 7 million in last quarter, and $10 8 million in the year ago quarter.
Our used vehicle acquisition and resale segment totaled $1 $6 million in revenue in Q3.
As this is a new offering for auto web. This is the first quarter in which we have this revenue stream and therefore, there is not a historical comparable.
Within the automotive digital marketing segment are leading in Q3 total 12.0 million.
Which is down compared to <unk>, $15 2 million last quarter, and $14 8 million in the year ago quarter.
While lead traffic and volume were also down both year over year and sequentially, we're able to maintain our retail lead capacity overall on a year over year basis.
Which we believe is a testament to the value of our subscribing dealers CNR solution.
Total retail dealer count for Q3 came in at 1617 dealers down slightly from 1665 in Q2 and down from 1707 in the year ago quarter.
Now moving to our digital advertising revenues within the automotive digital marketing segment in the third quarter digital advertising came in at $3 five.
Remaining flat compared to Q2, but representing a 15% increase from $3 1 million in the year ago quarter.
Within digital advertising, the clicks product delivered $3 zero million revenue compared to $2 8 million in Q2, and $2 4 million in the year ago quarter, showing good growth in both sequential and year over year revenue.
The positive click revenue was a result of both overall click traffic and click volumes growing on a year over year basis by 17% and 7% respectively.
The growth we are generating across our click metrics indicates to us that we're seeing that our clients are seeing the benefit of.
All of our solutions and they are expanding their click programs with us.
And.
We're able to drive consumer demand and consumer demand remains robust among our target audiences of active car shoppers.
Now turning to the gross profit line, our consolidated third quarter gross profit was $4 4 million, which was down from about $6 6 million last quarter and $6 4 million in the year ago quarter.
Cost of $3 1 million or negative <unk> 23 per share compared to a net loss of <unk> 3 million or negative <unk> <unk> per share last quarter.
And a net loss of <unk> 4 million or negative <unk> <unk> per share in the year ago quarter.
Adjusted EBITDA in the third quarter was a loss of $1 7 million compared to a positive $1 1 million last quarter and in the year ago quarter decrease primarily driven by the lower gross profit levels I discussed earlier.
At September 32021, cash cash equivalents and restricted cash stood at $14 2 million compared to $15 1 million at December 31, 2020.
At September 32021, we have an ending balance of 10.0 million on our 20.0 million revolving credit facility with CIT Northbridge credit.
In Q3, we completed amendments to our credit facility that enabled the utilization of up to $3 million.
Of our credit facility to acquire inventory with the intent of resale among other changes.
As noted earlier in this call the growth of our used vehicle acquisition and resale segment may not expand our gross margin percentages, but we believe it will help us maximize our gross profit dollars over the past three years, we've proven our operational efficiency and commitment to diligent cost management as we've navigated our company through both the strategic turnaround and append.
That continues to challenge in the automotive industry, we and our customers operate.
Each of metrics that I, just shared which we believe validates our our strategy.
So similar to what we've done with our legacy marketing business, we refocus cause this is marketing spend.
Quality not quantity.
Really focused on the the main base in San Antonio, Texas, I'm kind of taking things up a little bit to really pinpoint the most relevant high quality leads with the strongest likelihood of leading to Ah completed vehicle transaction.
Now this may seem a bit counterintuitive in that we've tightened up the funnel a bit but but really what it did was this allowed us to drive more operational efficiency and marketing spend efficiency, which is which is really critical to this business.
We have improved our lead to purchase conversion rate from 5% in September two 9.1% in October. This represents a 410 basis points increase in and really shows we think some of the operating leverage that that exists in this business.
No October results are preliminary and unaudited at this stage I do want to share.
What that operational focus on lead to purchase conversion means for our business in terms of potential financial impact. So during October the number of vehicles, we purchase increased approximately 40% month over month. So we bought a little just over 90 vehicles and we sold approximately 80 of those vehicles in the same period, which is really on the higher end of the <unk>.
<unk> that we provided the last quarter.
Well these vehicles sold at an average retail price for approximately $18000.
And with a gross profit margin percentage well within our previously provided range of 7% to 10%.
We're gonna continue to seek more volume of units.
Going to focus on reasonable margin percentages.
But ultimately like we've talked about what we're really focused on generate gross margin dollars. We we think that the.
Vehicle acquisition and resale product line for US is really attractive in that again it helps us drive top line revenue, but more importantly helps us drive.
Real gross margin dollar generation.
But the work we've already done to transform our legacy marketing business has improved the efficiency of our operations and the comprehensiveness of overall platform.
Yeah, one of the only market places out there that have that collection of attribute.
So while we're still in the early days of this vision I'm extremely proud of what we have accomplished today. Our team is committed to optimizing the value that we provide for our customers and shareholders as we strengthen the scale as we strengthen the scale and capabilities of automotive matchmaking platforms and again, we believe that when the inventory returns and the market normally.
Is is that we will not just be well positioned to.
Improve the performance of our core marketing business, but we think we're gonna be reposition and it really interesting and exciting way because we will have the first party monetization associated with your used vehicle buying and resale product grown and and far more mature, which we think is going to allow us.
In Texas, you start thinking about Dallas, you start thinking about Houston those are far larger market.
With with a real opportunity and those are just two of the bigger ones. There's other smaller markets, which would support this kind of business as well so absolutely we intend to be growth oriented.
With this side of the business, we intend to stay reasonably focused on Texas right now, but we think there is a lot of opportunity just within the state of Texas.
Diet that's helpful and my last question for me here last quarter, you talked about it quite I too have you fully integrated that into your platform at this point and then what sort of puts and takes have you seen in terms of customer engagement.
With credit IQ and your platform yeah.
Yeah. So what is up and running we've got an integrated where we have overlap with some some of our retail dealers engaged.
Engagement metrics have been good.
Candidly, we've got to put a little bit more a little bit more energy behind that one <unk>.
Decline in the dealer count are you <unk>.
Our dealers.
[noise] that are one to two point.
Dealerships the ones that are are basically turning off the product right now just because they like inventory or or is it just really across the board with with nothing specific you can point too.
Yeah, it's across the board Gary.
The appetite for new car leads the discount.
We jumped into October with one of 23, 25 day supply 7 million units.
The lowest I've ever seen in my lifetime, and so what you're seeing is as we've talked about right dealer just continue to harvest profitability.
Because what they're doing the right as those those increased asp's are offsetting the the lower overall volumes, which is allowing them to at least for the past couple of hearings past experience outperform on the growth on the gross margin line listen if if if inventory doesn't come back they're gonna really struggled to continue to do that so your point, what we're seeing is we're seeing dealers across the board.
Just spend less on advertising.
And we're caught up in that now we feel pretty good about the fact that we've hit the physician from our capacity for a second one hell we're.
We're not seeing mass attrition and our network.
It's just a tough environment right now to sell digital media to dealers because.
They're selling everything they have furniture from north of MSRP in most instances.
Quickly.
Can can keep me honest here, but I believe the last time I looked at the numbers are by the sale.
South of a week or.
So we're buying the cars and we're selling them almost immediately we also don't refurbished the vehicles. So what we're doing is we're just buying them on the wholesale market.
Buying them directly from consumers I'm, sorry, and then selling them in the wholesale market. So we are not really in the business of predicting future value. We're in the business of us predicting current value and then turning that car as fast as possible ideally and we want to turn the money two and three times a month.
For each one of the cars right. So we don't want to sit on the car, we don't want to hold the car and that's a fundamental difference between us and what Zillow is doing we're not in the refurbishing business, we're not in predicting future value. We're just predicting current value and then harvesting that value as fast as humanly possible in the wholesale channel.
Great well that stuff on a very good explanation. So you.
You tend to flip these cards within a couple of days.
Yes, Mike wondering what do we currently do.
Yes, it's several week in between the buy and sell and we're collecting in on average less than two weeks.
So yes, that's the various alternatives as collection on the on the cash turn as well.
To John's point that allows us to reuse that cash multiple times in a period.
Yes.
The question of the prices is it just a.
Big box or is it actual people who make judgment calls.
So we've got a team down in San Antonio that doesn't it make judgment calls on it.
We also as you can imagine this team has a lot of experience in algorithmic approaches to vehicle pricing.
Are there any challenges in gaining audience with the used car sellers.
Now you think that now Bruce good to chat with you know that's what we think gives us the right to win in this market is we've got the audience right. So we've got.
They'll generating.
100000, new car leads a month.
Over 70% of those consumers have a vehicle that trade.
A lot of those consumers are actually looking for an alternative method unbundle the transaction, they're being taught to unbundle the transaction by the industry overall and what we do is we offer them an opportunity to do it in a very very consumer friendly way.
Couple of things that differentiate us from some of the other competitors number one is we are appointment base.
Meaning that we will get you in and out in a lot of period of time, and that's something we pride ourselves on the convenience of coming in and getting your vehicle inspected. The second thing. We do is you can walk out with a check that Dave that's different than a lot of the competitors out there.
You may have to wait for your money. So we like the audience. We have we like the fact that we can leverage it for this purpose.
And we like our position in the market being very consumer centric and being very focused on meeting their specific needs, which are give me and get me out in a reasonable amount of time help me understand what this process is going to look like and when I leave without my car keys, and I'm going to leave with a check and in our world the answer to that is yes.
Yeah.
Great and Youre talking about decoupling it with the with a new car purchase right.
But you are talking about China, yes, it's decoupled from the transaction overall right. There's been a school of thought for years about a consumer will have more leverage in a vehicle transaction if they if they uncouple the components of the vehicle sale.
Carmax Carvana room dealers some dealers out there who have been fairly focused on this as well dealers still.
<unk> don't get most of their used car inventory, it's up 10% of their inventory they acquired directly from consumers.
And so this whole concept of.
Unbundling, the transaction is very well or now.
We actually are just kind of.
Hailing along with that win and very focused on the consumer interaction.
Setting expectations appropriately getting them in and out and having them leave with a check which again.
Different than some of our competitors.
And have you gotten any it sounds like Theres. Other people also doing this but if you got any.
Pushback from dealers.
What happened with a lot of those folks as they hit a ceiling from a cost of acquisition perspective.
Which makes it more difficult for them to enter new markets.
That's our secret sauce, we've got the audience and as long as we keep turning the turn them the money fast.
Anything that risk model right you are always going to breakage in your portfolio managing that breakage, effectively which we're pretty good at and we're already shown that we can do now we think access to capital is going to be going to be.
It's not going to be a challenge.
Great and this this.
I Love this and it looks it sounds like.
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