ex99-2
Exhibit 99.2
Call Participants
EXECUTIVES
Jared R. Rowe
CEO, President & Director
Joseph Patrick Hannan
Executive VP & CFO
ANALYSTS
Edward Moon Woo
Ascendiant Capital Markets LLC, Research Division
Gary Frank Prestopino
Barrington Research Associates, Inc., Research
Division
Lee T. Krowl
B. Riley FBR, Inc.,
Research Division
ATTENDEES
Sean Mansouri
Gateway Group, Inc.
Presentation
Operator
Good morning, everyone, and thank you for participating in today's
conference call to discuss AutoWeb's financial results for the
second quarter ended June 30, 2020. Joining us today are AutoWeb's
CEO, Jared Rowe; the company's CFO, J.P. Hannan; and the company's
outside Investor Relations Adviser, Sean Mansouri, with Gateway
Investor Relations. Following their remarks, we'll open the call
for your questions.
I would now like to turn the call over to Mr. Mansouri for some
introductory comments.
Sean Mansouri
Gateway Group, Inc.
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 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
quarter ended June 30, 2020, as well as other filings made by
AutoWeb with the SEC from time to time. These filings identify
factors that could cause results to differ materially from those
forward-looking statements.
Please also note that during this call, management will be
disclosing adjusted EBITDA. This is a non-GAAP financial measure as
defined by SEC Regulation G. A reconciliation of this non-GAAP
financial measure to the most directly comparable GAAP measure and
a statement disclosing the reasons why company management believes
that adjusted EBITDA provides useful information to investors
regarding the company's financial condition and results of
operations are included in today's press release, which is posted
on the company's website.
With that, I'll turn the call over to Jared.
Jared R. Rowe
CEO, President & Director
Thanks, Sean, and good afternoon, everybody. So as our business
continues to navigate the effects of the coronavirus pandemic,
we've made really strong progress in our turnaround here. During
the second quarter, we generated our strongest level of gross
margin since 2016. We reduced our net loss, both sequentially and
year-over-year. And we achieved a crucial milestone in turning
adjusted EBITDA positive. 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 really over the last 2 years of
the turnaround.
Our overall workforce transition over the past couple of years 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
we initially anticipated and allowed us to lean in as we push to
achieve to adjusted EBITDA profitability. Now keeping our team
intact and healthy during the pandemic has really remained one of
our top priorities. We work diligently to maintain job continuity
across our business, even during the lowest points of the pandemic
in mid-April. And we ensured that the few team members who were
furloughed had continued access to health benefits. This hard work
and the adaptability of our team has been incredible. And they
really have ensured our ability to continue serving our retail
dealer and OEM customers during this important time for their
recovery.
As for the broader automotive industry, the operating environment
remains largely uncertain. You've got high unemployment rates,
which do continue to affect consumer confidence. Second quarter
U.S. GDP saw its steepest decline in more than 70 years. Financing
availability has begun to tighten in the wake of widespread loan
and delinquency forgiveness. And in addition to all that, dealers
are contending with challenges in their inventory mix as cars that
are in high demand, have not yet been fully replenished. North
American auto production only started to pick back up in June
really. After reaching all-time lows in April and May, and it
really does remain below pre-COVID 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 in fact, our own, that said, our focus
in the second quarter was -- and going forward is on the areas of
the business that we can control. And in those areas, we've stayed
well ahead of our expectations. 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 our 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 sales
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 leads during the market disruption. We could have
driven more lead volume if we'd wanted to because there was traffic
available, but it really would not have been an effective outcome
for outcome for our customers, 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
preserve value for our customers.
As we resisted the industry right trend, of across the board
product discounting and instead matched our customer marketing
spend and lead volume to projected industry selling rates. This
approach allowed us to align more closely with true consumer demand
in the market and deliver leads submitted by action minded car
buyers, both for new and used vehicles 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 test phases, in Q1 and our first deployment in Q2, the
experience produced an improvement of over 50% in lead conversion.
So, while this solution was targeted towards mobile campaigns, our
conversion optimization efforts have consistently yielded material
benefits for desktop campaigns as well. We're really pleased with
these new conversion models. And we're going to continue to
optimize and deploy additional developments in this
area.
The success of our operational and product improvement demonstrates
that our strategy really is working. The efficiencies we've driven
in our customer acquisition are proving to not just be market
based, but rather materially reflective of our constant work to
enhance the services we provide. As the pandemic's impact to our
industry and broader consumer behavior continues to change,
leveraging quality in our paid search offerings will remain
crucial. We will continue to be flexible and value-oriented in how
we respond to this operating environment. But really, we're going
to 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 J.P. to walk through our Q2 results. J.P.?
Joseph Patrick Hannan
Executive VP & CFO
Great. Well, thanks, Jared, and good afternoon, everyone. So,
jumping right into our results. Total revenue in the second quarter
came in at $17 million, which is down about $7 million from last
quarter and down about $10 million from the year ago quarter. Our
digital advertising revenues, which primarily consists of our click
revenue, were $2.8 million, which is about half of where we were
last quarter and the year ago quarter. Now this expected decline in
total revenue stems from these 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 is 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 were 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
$0.10 per share, and that compares to a net loss of $4.1 million or
$0.31 per share in Q1 of 2020 and a net loss of $5 million or $0.38
per share in Q2 2019. Adjusted EBITDA from the second quarter
improved significantly to $400,000, which is up from a loss of $1.7
million last quarter and a loss of about $2 million in the year ago
quarter.
As Jared mentioned earlier, the work we've put in over the last 2
years is truly what's enabled us to reach this milestone. And we
believe we can continue to operate at positive adjusted EBITDA
levels for the second half of 2020 in this current environment
going forward. As of June 30, 2020, our cash, cash equivalents and
restricted cash were $8.5 million, and that compares to $5.9
million at December 31, 2019. As of June 30, 2020, we had an
outstanding balance of $7.2 million on our revolving credit
facility with CIT Northridge Capital, and we had another $2.5
million available to us on that revolver. Our previous actions to
bolster liquidity and reduce costs position us well to weather this
changing market environment. If present trends hold as they have
through July, we remain comfortable with our balance sheet and our
liquidity for the next 12 months.
Now lastly, I'll provide a brief overview of our operating metrics.
Click traffic for the second quarter came in at 23 million visits,
which was down by about 9 million visits last quarter and about 4
million visits year-over-year. Click volume totaled 5.5 million
clicks, which was down about 400,000 clicks from last year, and 3
million clicks from last quarter. Our lead traffic was also down by
about 9 million visits compared to last quarter and by about 15
million visits year-over-year. So these decreases are largely
reflective of the industry-wide impact 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 Jared mentioned
earlier.
Retail lead capacity and net revenue per click were both down
sequentially and year-over-year. But 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 our 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 Jared.
Jared R. Rowe
CEO, President & Director
Thanks, J.P., our click product traffic and volumes have been
performing in line with traditional forms of media advertising,
which have experienced some of the largest impacts from the
pandemic-related disruption to automotive advertising budgets. By
extension, its 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 the 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 on to our leads product. We have gained critical momentum
and efficiencies over the past few months, although some of this
progress has been market-driven. Our operational investments have
allowed us to stay ahead of expectations and generating valuable
leads for our customers. We've been able to generate leads at a
lower cost and our customers and leads are really a crucial part of
their sales recovery strategy, which has enabled us to maintain
lead pricing. Our history demonstrates that dealers and OEMs turn
to lead during periods of market uncertainty because leads can be
attributed and more effectively valued than other forms of
traditional advertising.
Our leads reflect consumers who already know they want to purchase
a vehicle and they often know what type of vehicle they'd like to
purchase. They truly are lower funnel end market consumers. We
recently confirmed this trend during an e-mail survey of our users,
which found that over 70% of our respondents had no plans to delay
their automotive purchases as a result of the pandemic. These
results demonstrate that AutoWeb's leads are coming from committed
active car buyers. Their intention to purchase a vehicle is not
diminished relative to their pre-COVID position, which is not the
case more broadly given U.S. 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 J.P. mentioned, our strategy has been further validated by our
modest improvement in dealer count, along with significant
improvements in our current retail dealers suspend status. 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 remains somewhat
choppy over the next few months as the market works towards
stability. However, the quarter-over-quarter improvement from Q1
tells us that we're trending in 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 an 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 2 years has positioned
AutoWeb to really operate effectively in both good times and times
like now, which are not particularly good. So, although we still
were -- 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 in our
journey.
So, with that, we'll now open the call up for questions. Operator,
can you please take over?
Question and Answer
Operator
[Operator Instructions] And our first question we'll come from Gary
Prestopino with Barrington.
Gary Frank Prestopino
Barrington Research Associates, Inc., Research
Division
A series of questions here. Great progress on the gross margin. I
guess the first thing that would come to my mind, Jared, as you
move on through this turnaround. Is that level a sustainable level?
Or is that just really reflective of the fact that because of the
pandemic, you guys pulled back a lot of marketing spend. And so, if
you could elaborate on that a little bit?
Jared R. Rowe
CEO, President & Director
Yes. Gary, absolutely. And thanks for the questions. A couple of
things. Number one there is some market in there. There is a little
bit of market in there and that we know that overall automotive ads
spend is down. I think the number was 32%. eMarketer thought it was
going to be down this year, year-over-year from '20 to '19. So, we
are seeing a little less competition in the auction than we
historically have seen. However, we deployed a whole series of
tactics that we may not have really had the courage to deploy in
certain ways, had there not been a global pandemic. It's an old
adage of making lemonade out of lemons here. And some of the new
tactics that we've deployed from the search have actually driven
some incremental efficiency for us that I believe is
durable.
On top of that, Gary, the third piece is we've deployed some
changes to our search experiences that I referenced in the prepared
remarks that are driving some real material conversion rate
improvement on the mobile side, in particular, like I said, for
those large campaigns, we basically have doubled our conversion
rate, for those mobile campaigns. And I will tell you what, that's
durable. That's sustainable. That's product change. So, what's
really interesting, Gary, and I'll stop in a second here, so let's
turn this 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 a 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, that stuff, the tactics and the product
improvements listen, that will last beyond the market
disruption.
Gary Frank Prestopino
Barrington Research Associates, Inc., Research
Division
Okay. And then it's good to see the retail dealer suspended status
improved. And I guess, is that really the biggest issue there that
in terms of the way that your dealers increase sequentially? I mean
did dealers start to go into suspended 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?
Jared R. Rowe
CEO, President & Director
Yes. No, we actually grew dealer count, Gary. So, we didn't pull
the suspended status dealers out of the numbers we had last quarter
when we talked about it or the mid-quarter review either because
they still were on the program. They just weren't actively
participating, but they still had active contract. So, what you're
seeing quarter-over-quarter in terms of dealer count is actual
dealer count growth. Some of the margin improvement, though, is
coming from dealers coming off of suspended status because as you
know, the retail side of our business has a better margin
characteristic than the wholesale side. So as these dealers came
back online, it actually enhanced the margin for both the clicks,
but also mainly the lead product.
Gary Frank Prestopino
Barrington Research Associates, Inc., Research
Division
Okay. And that was going to lead me to my other question. I
remember in the last quarter, you said OEM that had about 3% of
your revenues opted out of the lead program. So, you're selling to
the dealers of this OEM, and you must be at least getting some
early success there?
Jared R. Rowe
CEO, President & Director
We are. We are. It was interesting because we started reaching out
to those dealers right prior to the pandemic hitting, and we were
getting some traction. Then the pandemic hit in earnest, slowed our
efforts down. But as we come back out the other side here and as
dealers have started to loss of suspended status, yes, we've had
some really nice progress in picking up those dealers on the retail
side that once participated on the OEM side. We're not all the way
back to where we were prior in terms of total lead volume, but
we're making really good progress, Gary. And again, as you know,
every lead we pick up on the retail side is vastly more valuable to
us than a lead on the wholesale side or OEM side.
Operator
And our next question comes from Lee Krowl with B. Riley
FBR.
Lee T. Krowl
B. Riley FBR, Inc., Research Division
Wanted to start out on the clicks business. Obviously facing
pressures, but not universally specific to the clicks business, but
just overall as an industry. Wanted to see, do you expect
sequential growth in that business and do you have the visibility
to say that the rebound in that business can be sustained
throughout the quarter? Or is it pretty touch and go from a
visibility standpoint?
Jared R. Rowe
CEO, President & Director
Lee, clicks has been interesting because 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
the lead side with the pullback. We've done some good optimization
work, and we've really attacked 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 2 or 3 months. And so, some of the
trends that we saw at the end of the quarter with it starting to
come back we're carrying through here 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 will be flat to slightly
up-ish. Again, we're down 40%, 50% on that thing. And I think we'll
grind out of it slowly as the media spend comes back in, but I
wouldn't expect a quick rebound on that. But I do think that we can
continue to make incremental improvements throughout the next
quarters, a couple of quarters. I do.
Lee T. Krowl
B. Riley FBR, Inc., Research Division
Got it. And then my second question, kind of more of a high level
one, but it's been clear that with the spike in demand in June and
through July, that inventory is becoming an issue both in used and
new as OEMs are trying to get capacity online. Does that in any way
manifest as a headwind for you guys? Or is there enough demand out
there, excluding inventory that, that's not an issue?
Jared R. Rowe
CEO, President & Director
Yes. It's been interesting, Lee, because we've had -- well --
while, we're down 75% in terms of our total suspense status. What I
can tell you, anecdotally, we've had dealers on and off that list a
couple of times, some of them. And the reason is, is because
there's 2 challenges that dealers are having right now. Number one,
is inventory, to your point, some of the hotter vehicles or more
in-demand vehicles are just more difficult to get their hands on.
The OEMs are ramping back production and vehicles are starting to
flow again. We hear that anecdotally from the dealers, but they're
not -- they don't have as many as they'd like. So that's one of the
challenges the dealers have had and why they bounced back and forth
between on and off the suspense as. The other is sales staff. So,
dealers optimize to a new kind of demand level and are just
starting to bring some of their salespeople back on in more earnest
and opening up capacity in their BDCs and their sales side. So, it
is a bit of a headwind. Lee, it is. I think it's going to be
overcomeable, I do believe that over the next 60 to 90 days. And I
think that's a very conservative estimate. I think the OEMs are
going to replenish and lean in and push on the new car side. So
yes, it's something we keep a very close eye on. We wish we didn't
have to worry about it. But I do think it's going to get itself
sorted out here over the next couple of months.
Operator
And our next question comes from Ed Woo with Ascendiant
Capital.
Edward Moon Woo
Ascendiant Capital Markets LLC, Research Division
Congratulations on the signs of improvement. My question is have
you noticed any differences as some of the Sun Belt states have
seen spikes in COVID reoccurring?
Jared R. Rowe
CEO, President & Director
Ed, we haven't. We haven't seen a decline in either lead volume or
specifically in dealer count in those areas. And I'll tell you what
our working theory is here because we talk about this internally.
Our working theory is 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 hardened their
operations and they've evolved a bit. And so, as we've seen spike
in infection rate, and some disruption in some of the other
industries in those markets, we see bars being closed down and
restaurants being closed down 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 the environment that we're operating in. So as for
what it's worth, we haven't seen that. We thought we might. But the
dealers are terribly, terribly resilient, and they're plugging
along, even though we're seeing some spikes from an infection rate
perspective across the country.
Edward Moon Woo
Ascendiant Capital Markets LLC, Research Division
Great to hear. And then my other question is, 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 the
existing business? Or as revenue comes back, will you have to ramp
up our operating expenses again?
Jared R. Rowe
CEO, President & Director
Yes. J.P., why don't you take that one?
Joseph Patrick Hannan
Executive VP & CFO
Sure. I mean, as you know, we've been optimizing on the expense
line, really for 2 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. And so, the thing about those cost cuts is we did
everything possible to stay away from cutting people. And so, it
was a lot of fixed cost and overhead expenses. So, we won't have to
add back in people now as things start to expand and grow again.
So, it's a long way of saying I don't think we're going to have to
add a lot of cost back in at all, if any, to move forward from
here.
Operator
And our next question, is a follow-up from Gary Prestopino with
Barrington.
Gary Frank Prestopino
Barrington Research Associates, Inc., Research
Division
Yes. J.P., I just had a quick question on the cash. You had $8.5
million this quarter, $7.9 million at the end of Q '20. And first,
I thought you may be generating some positive cash flow. But then I
looked at it, it looked like you pulled some money on your line
that is about equal to what the cash grew. Is that -- am I reading
that right?
Joseph Patrick Hannan
Executive VP & CFO
Yes. 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 sort of what we borrowed up to the
amount. So that's the increase in cash. That said, I will say,
towards -- on the cash flow, we actually saw operating cash flow
swing positive in the month of June whereas it had been negative
earlier in the quarter.
Gary Frank Prestopino
Barrington Research Associates, Inc., Research
Division
Okay. And then I think that in your narrative, you said that you
feel somewhat confident that you'll have positive adjusted EBITDA
in the back half of the year, Q3 and Q4. Did I hear that correctly?
Because I think you -- go ahead.
Joseph Patrick Hannan
Executive VP & CFO
Yes. I mean breakeven to positive. I mean there's some level of
positive EBITDA.
Gary Frank Prestopino
Barrington Research Associates, Inc., Research
Division
Okay. Breakeven a positive because I think Jared said more or less
breakeven. Okay. That's what I wanted to clarify.
Jared R. Rowe
CEO, President & Director
We don't always -- I don't always read well, Gary. We do -- we
believe that we can generate some level of positive adjusted EBITDA
going forward.
Gary Frank Prestopino
Barrington Research Associates, Inc., Research
Division
Okay. I just wanted to make sure I had it right.
Jared R. Rowe
CEO, President & Director
No, we weren't hedging there. We weren't hedging. We believe that
we've gotten to a point where we're going to be slightly positive
going forward. We just don't want to -- it's been a tough 2 years,
and we don't necessarily want to make too many bold predictions or
promises in the -- with the market environment being the way it is.
But I can tell you, we feel -- feel good about last quarter. And
like we mentioned in our narrative, July is off to a good start
here -- I'm sorry, July was a good start. And August is looking
pretty good, too. So, what we saw in Q2 at the end, we nothing
changes and go sideways on us from a market perspective, we feel
pretty good about the second half.
Gary Frank Prestopino
Barrington Research Associates, Inc., Research
Division
Yes. Well, that's great. It's always good to under-promise in order
to deliver. So...
Jared R. Rowe
CEO, President & Director
We're trying.
Operator
At this time, this concludes our question-and-answer session. I
would now like to turn the call back over to Mr. Rowe for any
closing remarks.
Jared R. Rowe
CEO, President & Director
Well, thank you very much. I really appreciate everybody's hard
work. Our team has really done a lot of really heroic things over
the last couple of months to transition this business as
effectively as we transitioned it. So, I just want to say thank you
to the team. They've done a great job, and we're excited about the
second half of the year. And so, thank you for joining the call. We
look forward to talking again soon, and stay safe, everybody. Thank
you.
Operator
Ladies and gentlemen, this does conclude today's teleconference.
You may disconnect your lines at this time. Thank you for your
participation.
