Q1 2022 Autoweb Inc Earnings Call
Good afternoon, everyone and thank you for participating in today's conference call to discuss <unk>.
Results for the first quarter ended March 31, 2022 joining us today.
President and CEO , Jerry Brown, the company C S L Carlton handler.
The company's outside Investor Relations advisor Cody Cree.
Makes sense.
Following their remarks, we'll open the call for questions.
Now like to turn the call over to Mr. <unk> for some introductory comments.
Thank you <unk> 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 period ended March 31, 2022, as well as other filings made by auto web with the SEC from time to time.
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 SEC's regulation G. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure and statement disclosing the reasons why company management believes that adjusted EBITDA provides useful information to investors.
The company's financial condition and results of operations are included in today's press release that is posted on the company's website.
I will now turn the call over to Jerry geared towards yours.
Thank you Cody and good afternoon, everyone and before addressing the going concern.
Our review of strategic alternatives that was announced today I want to provide context, the overall macro environment and high level or be it the quarter.
The automotive market has continued to face severe headwind, we're seeing industry wide low consumer sentiment rising interest rates high inflation.
Overall, just an uncertain economy Thats all U S GDP contract by one 4% in the first quarter.
In past calls I have mentioned several key metrics that gauge the automotive industry's performance one of them being the seasonally adjusted annualized rate of new car, new vehicle sales or sorry.
Called in the industry.
These numbers are tracked by several sources, we tend to focus on the one that's tracked by the federal reserve, while we saw a slight recovery in January so it.
Quickly retracted back too.
The low levels that we've seen that we've seen since Q3.
Of last year during during February and March So again, while we got a little bit about bump in January or February Saar in March saw a return to work.
What were fairly low levels for an industry.
While consumers are still in the market 13 per vehicle. It is taking them twice as long to make a purchase decision.
Impaired your pre pandemic conditions as a result of lower available inventory for new vehicles higher used vehicle prices and an increase in interest rates.
With prices continuing to rise as we all know inflation hit a 40 year high in January According to data gathered by the Bureau of Labor statistics and looking at it.
When looking at data tracked by the University of Michigan, We've we've seen overall buying conditions for vehicles having reached.
50 year low.
Simply put the automotive market has continued to face significant challenges.
Yeah.
Reviewing what we were able to accomplish this quarter within the core business. We did see some minor improvement in market conditions in January like I stated earlier, however, with macroeconomic events unfolding in February and March we landed software at the end of the quarter compared to how we started.
By capitalizing on some of that favorable early quarter momentum, we saw sequential growth in retail dealer count as well as our lead traffic.
While maintaining reduced media spend.
But we've we've really focused on two to operate in line with the overall macro environment.
There are several bright spots within our digital media segment, including year over year increases in digital AD revenue.
Click traffic and click volume.
Now in terms of the used vehicle acquisition side of the business.
To make good progress refining our funnel conversion rates in <unk>.
Optimizing our marketing efficiency, which led to a significant decrease in our overall cost per lead.
That momentum carried into this quarter with us purchasing more vehicles in April that we had in any prior months since owning this asset.
Despite the progress we've made with expansion and the optimization within used vehicle acquisition as well as the long term potential we still see in this segment, but I think that's really important we see a tremendous amount of long term potential listing segment.
We have made the very difficult decision to suspend our cars use operations.
So now let's address the going concern and the review of the strategic alternatives that we have disclosed in our Form 10-Q, which was filed with the FCC earlier today.
We've been talking for a while now on these calls about the economic headwinds we've been facing over the last couple of years and Unfortunately, there are no current indicators signaling a recovery in automotive market conditions anytime soon.
We've experienced continued losses and worked through our cash supply and at a faster rate than and quite frankly, we anticipated.
These factors resulted in the disclosure found in today's press release and Form 10-Q, and our management team has substantial doubt.
About the company's ability to continue as a going concern and.
In addition to the going concern our board has established a special committee that has been tasked with evaluating strategic alternatives.
As I just mentioned these factors resulted in our decision to suspend car Zeus operation.
And first of all our employees within this segment.
This was not a decision we made lightly.
I remain steadfast in my belief that auto web has the potential to drive long term value as an automotive matchmaking platform.
But suspending cars. These operations was necessary to support the viability of our core lead and click operation.
As we move forward with this process, we will work tire tirelessly to guide auto web through these difficult times, while being incredibly mindful of our cost structure to conserve cash.
I will return to discuss.
How we view our path forward, but I'm going to pass it over to Karl to walk us through the first quarter financial results in a bit more detail Carlton over to you.
Thank you Jared and good afternoon, everyone, let's jump right into our first quarter results.
Total revenue in the first quarter increased 7% to $19 1 million.
From $17 8 million last quarter and from $17 9 million in the year ago quarter.
The increase was primarily the result of the incremental revenue generated through the company's used vehicle acquisition business.
Set by lower volume in our leads business.
Industry challenges continue to impact our automotive digital marketing segment.
Which for the first quarter totaled $14 7 million.
Up from $14 1 million in the last quarter and down from $17 9 million in the year ago quarter.
Within the automotive digital marketing segment, our leads revenue in the first quarter totaled $10 6 million.
Which is down compared to about $10 7 million in the last quarter and $14 2 million.
In the year ago quarter.
Total retail dealer count for the first quarter came in at 599 dealers up slightly from 581 in Q4.
And down from seven to 877 in the year ago quarter.
Moving to our digital advertising revenues, primarily click revenue within the automotive digital marketing segment.
In the first quarter digital advertising grew to $4 1 million, an increase of 21% from $3 4 million in the fourth quarter and 12% from $3 7 million in the year ago quarter.
Turning to the gross profit line, our consolidated first quarter gross profit was $3 9 million, which was up from $3 5 million last quarter and down from $5 8 million in the year ago quarter.
First quarter gross margin came in at 25%, which was up from 19, 8% last quarter and down from 32, 5% in the year.
A year ago quarter.
The decrease compared to the year ago quarter.
Driven by an increase attributable attributed to revenue from our used vehicle acquisition business, which inherently comes in at lower margins.
Margins in this business were compressed this quarter due to staffing challenges and as we refined our overall operating process.
Consolidated operating expenses for the first quarter were $7 8 million compared to $5 9 million in the fourth quarter and $6 9 million in the year ago quarter.
The increased spending was due to the timing of expense adjustments for the company's discretionary annual incentive compensation plan.
As well as additional personnel costs, primarily in the used vehicle acquisition business.
Consolidated net loss in the first quarter was $4 three.
<unk> 3 million or <unk> 32 per share compared to a net loss of $2 6 million or <unk> 20 per share last quarter and net income.
Recent $3 million $300 excuse me 300000.
<unk> per share in the year ago quarter.
The decrease was driven by the aforementioned decline in gross profit and increase in operating expenses, along with the $1 $4 million benefit related to the forgiveness of the Companys PPP loan included in the prior year period.
Adjusted EBITDA in the first quarter was a loss of $2 8 million compared to a loss of $1 3 million last quarter and a gain of 200000 in the year ago quarter.
At March 31, 2022, cash and cash equivalents and restricted cash stood at $8 1 million compared to $11 6 million at December 31, 2021.
Our cash and cash equivalents net of restricted cash stood at $3 8 million at March 31 2022.
Down from down $3 5 million from December 31, 2021.
At March 31, 2022, we had an outstanding balance of $9 1 million on our revolving credit facility with CIT northbridge credit compared to $10 million at December 31, 2021.
As Joe had mentioned earlier the board of Directors established a special committee to explore strategic alternatives for the company.
As we have previously disclosed our credit facility with CIT Northbridge credit.
Expires in March of 2023.
We plan to work to extend that agreement.
We're also experiencing cash burn in <unk>.
<unk> of what we had originally planned.
As a result without an infusion of capital or some other transaction. The company may not have the cash needed to continue operations.
To this end we have included disclosures around going concern in our 10-Q.
The Special Committee will consider a full range of operational financial and other strategic alternatives in their process.
While we cannot assure that this work will result in a successful outcome.
We have committed to a diligent cost management structure and remain focused on operating in a lean and efficient manner as we move forward.
That concludes my remarks, I'm going to pass the call back to Jerry to provide commentary on our strategic efforts and path forward.
Thanks Carlin.
Alright, so what happens next Broadway.
With our special committee beginning the evaluation process, they will consider a full range of strategic alternatives.
In fact, the special Committee has already retained Houlihan lokey capital as our financial advisor.
To assist in this process all options are currently on the table, including attempting to obtain debt for equity financing.
Flooring, the sale or divestiture of the business evaluating potential partnership or licensing transactions or the restructuring of our debt in the operation.
But we don't have a definitive timeline or anticipated completion date for this process. The special committee is proceeding in a timely manner given the current financial constraints on our operations.
As the special Committee moves forward in its strategic alternative with its strategic alternative review, we plan to keep a watchful eye on our cash position, while operating our leads and clicks business in line with overall market conditions.
The identity of our core business has not changed auto web plans to continue providing high quality consumer leads and clicks to help connect dealers too motivated car buyers well our used vehicle operations will remain suspended until further notice.
I want to reiterate that we believe there is substantial value in the assets and capabilities of Ottawa.
Our highly efficient audience generation capabilities, our large distribution channel, our dedicated and talented team and our proven ability to acquire used vehicles directly from consumers.
We're optimistic that the strategic review will result in a positive outcome.
Okay.
This is obviously not where we envisioned we'd be when we embarked on our transformation strategy, but as I.
I said before in past calls, we can't control the markets, we can't control the rate of inflation interest rates or supply chain or new vehicle inventories. What we can do is continue to put our head down and run this business as efficiently as possible from a cash and expense perspective, while continuing to provide our customer base with high quality leads and clicks.
Okay.
We still firmly believe in the underlying long term value of our technology assets and capabilities along with the utility we provide the automotive market in the digital age. We are confident that consumers will continue to adopt and leverage digital media tools as they go through the lifecycle of buying and selling vehicles and we still believe that <unk> platform is capable of capitalizing on the intersection of.
Vehicle buyers and sellers.
We have a resilient and nimble team that is working diligently to sustain our core operations with the hopes that we will be able to return to executing our transformation and ultimately recognize the untapped potential of Ottawa.
I'd like to sincerely, thank all of our dedicated employees.
And our long term stakeholders, who have provided unwavering support during these exceptionally.
<unk> and trying times.
With that we'll now open it up for questions operator.
Thank you Sir.
Asked a question you will need to press star one on your telephone. Thank you would like to enjoy your question.
<unk>.
Please standby, while we compile the Q&A roster.
For our first question we have Eric.
<unk> from the Street, Eric Your line is open.
Okay.
My first question is regarding the going concern.
Given the cash at $3 8 million in the revolver at $9 one just.
Curious to know what are we talking about here, obviously less than 12 months, but.
Given the moves that you've made what are we looking at how many quarters here before we need to get something.
Yes.
John on the risk.
Balance sheet.
Eric.
Thank you for your question by the way.
Difficult question to answer all of them quite frankly because.
It all depends on how well, we're able to operate and execute with our existing customer base.
No when you file a going concern it can create risk from an employee perspective and from a customer perspective.
And so while we have several contingencies.
We aren't prepared to provide that level of guidance at this particular moment.
But we are committed as a team to making certain that we give the strategic.
Option.
The strategic review plenty of time for us to achieve a positive outcome.
Okay, and then regarding cars as I feel like we were well it feels like we just had the Q4 call.
Recently.
At what point, if we decide to.
Suspend the cars whose operations.
So that was very recently so it was very recently as you can imagine we've been working through this.
For a while now we actually were very close to two.
Putting in place bridge financing Unfortunately, the bridge financing.
Through for no reason.
Of our control.
Which forced us into a position where we had to make these sorts of very difficult decisions. So we.
We did not make a decision to suspend cars. These operations until very recently like I said matter of fact last quarter last month in April these are operational numbers, if not GAAP numbers, but.
But we bought.
North of 110 cars, which was by far the best month that we've had and we're on a similar trajectory this month.
The fundamental issue is that it's just a fairly high.
High intensity consumer of cash.
Which is why we have to suspend operations and furloughed those team members. So we can focus on to leads and clicks business until we find a positive outcome and then hopefully.
Reestablish operations in vehicle used vehicle acquisition.
Okay, and then what should we as.
As far as a run rate operating expense, obviously, we've got duplicative costs here in the second quarter, but.
Maybe it's a question for Carl.
Great.
So post restructuring operating expense.
Yes, I mean, we can't give guidance to that level.
We are going through and looking at.
The various spend categories that we can reduce.
Two two.
To accomplish the goals that were set out.
The strategic.
Alternatives in the community.
Okay.
As you said it was not all bad news in the quarter.
It seems strange to me that your lead traffic was up but your lead volumes were flat sequentially, what's behind that.
Mhm.
We've been making several changes to who.
Who actually how we.
How do we optimize the funnel and that is one of the things that are going to be masked by by this this call is yes.
Yes, there are several green shoots inside the business one of them being that our conversion rate was up.
Yes.
Well the current quarter.
30%.
And so we were making modifications throughout the quarter in terms of how we actually structure the operating team who buys our traffic how they manage their campaigns and introducing some new funnel optimization approaches that.
Took a little bit of time, but are now yielding some some real material benefits.
But it was a bunch of changes being made on that side of the business. I think you recall is that we've recently hired someone new over on that side.
Having a positive impact on that side of the business, but he.
He is making quite a few changes that.
And puts and takes why exactly positive for us.
But did mask some of the some of the goodness in the quarter.
Okay.
Good luck on the.
Pivot here in the.
Strategic alternatives review process.
Thanks, Eric.
For our next question, we have Gary <unk>.
Pina from Barrington Research Gary Your line is open.
Yes.
Jared.
To hear from you a couple of questions here. Please.
First of all is the gross margin degradation in the quarter versus.
Q1, 'twenty one is that all due to the impact of car Zeus.
I also want to take that one.
It's not all due to <unk>.
It is significantly due to <unk>.
There was also.
Regulation and the core business as well.
Okay.
Alright, I don't know we saw book Im sorry to interrupt we saw a bit of a exploring some of them are clock in Q3, and Q4 of last year.
Early in Q1, it was elevated as well.
Low levels to Q3 and Q4.
We've been manageable down sandstone, so you've got a bit of a mixed bag in the quarter of our consumer acquisition cost, which good part.
The gross margin on a per unit basis for the leads business, but like I said for what it's worth.
End of the quarter, we finished on a positive note.
And into this quarter, we're doing a really nice job of managing it but do you have a bit of inflation there in January and February and half of March.
Okay could Carl could you explain what did I'm sorry, I didn't get this what is the restricted cash on the balance sheet, what's that held for.
Does that car Zeus.
So there is there is $4 3 million and restricted cash on the balance sheet.
Approximately $4 million of it at this point is used as collateral within the CIP alone.
So direct collateral that supports the loan balance.
Okay.
So have you did you have you trip was there are there any covenants or things that you've tripped under this revolving credit facility at this point.
There are not.
Okay. So then the covenants that we approve.
Okay.
So if you've got you've got restricted cash as collateral.
$4 three that would be applied directly to the borrowing that could be applied directly to the borrowings under the revolving credit facility. If you were to get some new.
Financing.
Richard Yes, 300, Okay. There's two security critical routes great Alright. So the last question I would have is this.
This tax preservation plan, you've got $110 million of Nols, which on a per share basis is about $7 87.
I don't understand all of this language here the risk ownership under section 382 of the IRS code, but.
What you've done there does that pertain to anybody.
Trying to take a 5% stake in your company without the board agreeing to it.
Yes, yes, the threshold for the NOL plan is roughly four 9% nobody can require more than us.
So.
If the board agreed to somebody coming in and buying more of that that NOL is still applicable if theres a change of control clause in there is that correct.
Yes, it's a little bit more complex Mec area essentially your Nols will get reset I guess, here's the way I would answer it is reset on the transaction value Here's the way I would say it is we've got $110 million of NOL value inside the business.
That is something that should be attractive even if it doesn't even if all of it doesn't make the transition through a through a change of control transaction. There still is real value there.
And so as we think about the strategic alternatives.
It is all the things that I mentioned in terms of the core operations, but to your point. There is also NOL planned value there.
For somebody else, who would be looking to merge with us or do something like that.
Okay.
Okay, and then you start to get into a whole bunch of taxes, you know as to how much they could use but.
I used to say that there is value and if your board of directors, so chooses to exercise or get rid of that.
That.
Four 9% threshold.
Thats about that there is inherent value there I mean, because your equity value of your company your market.
Your enterprise value of the company is like $35 million or something like that.
Yeah, Okay, Yeah, no absolutely absolutely and again, we had a conversation as you can imagine we pick up with Houlihan, lokey and and Thats one of the things that they pointed out as well as there is real value in this asset real value in this business and we're optimistic that we're going to be able to find somebody.
Who wants to either invest or.
Figure out a way to emerging into their platform.
I understand that that's why I was this is the first thing I looked at when I saw this they said okay. You have got this NOL. There is some value here. Besides the base business and then just just very briefly so I can understand it again.
To get.
Get a handle on this when you're talking about your CAC.
Your customer acquisition costs.
Diminishes your margins, that's going up because it's such a competitive environment right now or are you having to discount your leads to get your leads taken by the auto retailers.
Great question, Gary now at.
There's a couple of things at play.
We've talked about one is we had elevated expense levels in Q3 Q4 and early Q1.
Because of the competitive nature of the of the of the market and also because.
Some some execution issues that we've sent result.
Now on the revenue side.
Our revenue is somewhat diminished right now because we have talked revenue per unit based on what you meant is because as we've talked about.
We still do have.
A material number of retail dealers, who are in suspense status.
And as you know right the difference between selling a lead wholesale and retail as material in this business.
And so youre seeing some downward pressure, that's not new downward pressure, we've had that months now because of the ongoing and then making an inventory shortages.
And so what we've been able to manage the expense side.
On the lead side from a cost perspective and call. It at the end of the quarter and into this quarter and we've gotten back to rates that we saw when we were cash flow positive and adjusted EBITDA profitable.
Mid last year, and so we've been able to manage it back and still hold on to our quality.
We haven't given up a little bit of volume.
But on a pure gross margin basis.
We're actually seeing positive trends again, it's just not enough fast enough for the inventory related headwinds that we're continuing to experience.
Yes, it's a tough environment no doubt thank you so much.
Thank you.
And for our next question, we have from Edison Capital. Your line is open.
Yeah, you mentioned that January was relatively better about February and March <unk>.
Deteriorated.
April and May so far.
So from a pure just vehicle sales perspective.
They're not much better quite frankly.
But from an operating execution perspective, they've been better.
Like I said, the one of the most frustrating parts of all of this that is there are green shoots in the quarter.
And we're seeing green shoots in this quarter.
But.
<unk>.
Not enough to overcome the headwinds that we're seeing so we're SAR perspective, we're seeing similar numbers, but what we've been able to do in the first couple of months here a month month and a half here is we have seen that our gross margin dollars generated for leads.
<unk> has been better than up.
But again, you're talking about substantial declines when you compare it to Q2 and Q1 of last year.
Because the Saar was so much more elevated than it is today, so even though we're doing better on a per unit basis from our leads and click perspective.
Just in total it's still down.
Alright, and then looking at cars as I know you guys are suspend operations, but it looks like gross margin for the first quarter was down is there anything to read into that.
Just operational execution issues like Charlton said, we.
We had some rolling COVID-19 issues, where we had to shut the op is down a little bit.
We were doing some hiring as well.
And thats, a different kind of hiring than we historically have done and so we're working our way through that.
And just some operational execution issues as we push to ramp up volume.
Where we saw margin per unit decline.
But again for what it's worth in the month of April we saw that bounce back a bit and we're making good positive progress just not fast enough.
Alright, well thanks for answering my questions that I wish you guys. Good luck with our strategic review.
Thank you.
Thanks, Ed. Thank you and again I just want to reiterate we feel really strongly about the car buying side of the business. It's attractive it's interesting we prove that it works within our environment again, we just had had.
We had work to do on that so okay.
Operator any other questions.
We don't have any further questions. At this time. This concludes our question and answer session I'm going to like to turn the call over back to you Mr. Brown.
My closing remarks.
Okay.
And I just want to thank everybody when the cocoa stakeholders want to thank our employees.
As I mentioned earlier.
We believe strongly in the valuable SASSA, we believe strongly.
The ability for this business to positively impact the automotive ecosystem.
Thank you for all your support we appreciate it and we look forward to speaking with you again soon okay. Thanks, everybody.
Ladies and gentlemen. This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation.
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