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AUTOBYTEL INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "anticipates," "estimates," "expects," "projects," "intends," "plans," "believes" and words of similar substance used in connection with any discussion of future operations or financial performance identify forward-looking statements. In particular, statements regarding expectations and opportunities, industry trends, new product expectations and capabilities, and our outlook regarding our performance and growth are forward-looking statements. This Quarterly Report on Form 10-Q also contains statements regarding plans, goals and objectives. There is no assurance that we will be able to carry out our plans or achieve our goals and objectives or that we will be able to do so successfully on a profitable basis. These forward-looking statements are just predictions and involve risks and uncertainties, many of which are beyond our control, and actual results may differ materially from these statements. Factors that could cause actual results to differ materially from those reflected in forward-looking statements include, but are not limited to, those discussed in this Item 2 and under the heading "Risk Factors" in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2010. Investors are urged not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date on which they were made. Except as may be required by law, we do not undertake any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained herein are qualified in their entirety by the foregoing cautionary statements. You should read the following discussion of our results of operations and financial condition in conjunction with our unaudited consolidated condensed financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the notes thereto in Autobytel's Annual Report on Form 10-K for the year ended December 31, 2010. Our corporate website is located at www.autobytel.com. Information on our website is not incorporated by reference in this Quarterly Report. At or through the Investor Relations section of our website we make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports as soon as practicable after that material is electronically filed with or furnished to the SEC. Our Code of Conduct and Ethics for Employees, Officers and Directors is available at the Corporate Governance link of the Investor Relations section of our website. Basis of Presentation The unaudited consolidated condensed financial statements presented herein are presented on the same basis as the Company's 2010 Annual Report on Form 10-K. We have made the disclosures in accordance with accounting principles generally accepted in the United States of America as they apply to interim reporting, but condensed or omitted certain information and disclosures normally included in notes to consolidated financial statements in accordance with the SEC's rules and regulations. The unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2010. On the Acquisition Date, the Company acquired substantially all of the assets of Auto/Cyber. The results of Auto/Cyber's operations have been included in the consolidated financial statements since that date. The acquired businesses, through proprietary content, generate and sell in-market consumer automotive Purchase Requests and, through the Autotropolis.com website, provides new car Purchase Requests and related digital products directly to automotive dealers. 16-------------------------------------------------------------------------------- Table of contents Overview We are an automotive marketing services company that assists automotive retail dealers ("Dealers") and automotive manufacturers ("Manufacturers") market and sell new and used vehicles through our internet purchase request referral programs, together with related Dealer marketing products and services, online advertising programs and data products. Internet purchase request referrals ("Purchase Requests") are internet requests from consumers seeking information or quotes regarding pricing and availability of new or used vehicles or for vehicle financing. Our network of owned, consumer-facing automotive websites ("Owned Websites"), which include our flagship website, Autobytel.com®, Autotropolis.com®, Autoweb.com®, AutoSite.com®, Car.comsm, CarSmart.com®, CarTV.com®, MyGarage.com® and MyRide.com®, provide consumers with information and tools to aid them with their automotive purchase decisions and the opportunity to submit Purchase Requests. Purchase Requests are internally generated from the Company's Owned Websites ("Internally-Generated Purchase Requests") or purchased from third parties ("Other Purchase Requests") that generate Purchase Requests from their websites ("Third Party Websites"). We sell Internally-Generated Purchase Requests and Other Purchase Requests directly to Dealers and indirectly to Dealers through a wholesale market consisting of Manufacturers and other third parties in the automotive Purchase Request distribution industry. In conjunction with our Purchase Request programs, we also offer Dealers and Manufacturers other products and services to assist them in capturing online, in-market customers and selling more vehicles, including our iControl by Autobyteltm, WebLeads+, Email Marketing Manager, and Lead Call products and services. Our Owned Websites offer Manufacturers the opportunity to feature their makes and models within highly contextual content. Through their advertising placements on the Company's Owned Websites, Manufacturers can direct consumers to their respective websites for further information. We believe this transfer of consumers from our Owned Websites to Manufacturer sites is the most significant action measured by Manufacturers in evaluating our performance and value as a marketing partner. Most of the Manufacturers advertising on our Owned Websites have benefitted from all-time highs at times during 2010 with regard to our performance metrics such as click-through rates and actions taken once consumers reach the Manufacturer's site. One hundred percent of the consumer page views generated from Manufacturer advertising on our Owned Websites are transferred to Manufacturer sites. We have also developed, internally or in partnership with others, data and market analytics products utilizing information from users of our Owned Websites. These products provide marketing insights to advertisers and agencies demanding better performance from their advertising dollars across online and offline sources. In June 2011, we launched the first phase of a multi-phase redesign of its flagship website, Autobytel.com. The new website delivers a comprehensive consumer proposition of Your Lifetime Automotive Advisor® by assisting consumers as they navigate all stages of the automotive shopping, buying and ownership experiences. By engaging consumers throughout the entire lifecycle of their automotive lives, Autobytel enhances its opportunity to further scale its brand and market penetration. For the three and six months ended June 30, 2011, our results of operations were affected and may continue to be affected in the future, by market and economic factors, including, but not limited to, the following: · General economic and automotive industry conditions, including: · The adverse effect of high unemployment on the number of vehicle purchasers, · Availability of, and interest rates for, financing for vehicle purchases, · Pricing and purchase incentives for vehicles, · Rising gasoline prices, and · The pace of recovery in vehicle production by Japanese Manufacturers post the March 2011 earthquake and tsunami in Japan. · The market for Purchase Requests, including: · The effects of competition and Purchase Request sourcing (i.e., Purchase Requests from our Owned Websites versus Other Purchase Requests acquired from third parties) on our supply and acquisition costs of quality Purchase Requests and the resulting effects on sales, pricing and margins for our services and products, and · Increases or decreases in the number of Dealers in our Dealer base. · The market for advertising services, including: · Continued volatility in spending by Manufacturers and others in marketing allocations, · The amount of visits (traffic) to our Owned Websites, 17-------------------------------------------------------------------------------- Table of contents · The cost of acquiring traffic to our Owned Websites, and · The rates attainable from our advertisers. Results of Operations Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010 % of total net % of total net 2011 revenues 2010 revenues $ Change % Change (Dollar amounts in thousands) Revenues: Purchase requests $ 14,189 93 % $ 11,245 93 % $ 2,944 26 % Advertising 988 7 869 7 119 14 Other revenues 70 - 17 - 53 312 Total net revenues 15,247 100 12,131 100 3,116 26 Cost of revenues (excludes depreciation of $87 and $40 for the three months ended June 30, 2011 and 2010, respectively) 8,885 58 7,889 65 996 13 Gross profit 6,362 42 4,242 35 2,120 50 Operating expenses: Sales and marketing 2,211 15 2,886 24 (675 ) (23 ) Technology support 1,662 11 1,430 12 232 16 General and administrative 1,943 13 3,060 25 (1,117 ) (37 ) Depreciation and amortization 504 3 188 1 316 168 Litigation settlements (261 ) (2 ) (43 ) - (218 ) 507 Total operating expenses 6,059 40 7,521 62 (1,462 ) (19 ) Operating income (loss) 303 2 (3,279 ) (27 ) 3,582 (109 ) Interest and other income 13 - 313 3 (300 ) (96 ) Income (loss) before income tax expense 316 2 (2,966 ) (24 ) 3,282 (111 ) Income tax expense 117 1 35 - 82 234 Net income (loss) $ 199 1 % $ (3,001 ) (24 )% $ 3,200 (107 %) Purchase Requests. Purchase Requests revenue increased $2.9 million or 26% in the second quarter of 2011 compared to the second quarter of 2010 primarily due to the acquisition of Auto/Cyber. The volume of new and used retail automotive Purchase Requests delivered decreased 11%, but was offset by an increase of 75% in the volume of automotive Purchase Requests delivered to Manufacturers and other wholesale purchasers. Advertising. Advertising revenues increased $0.1 million or 14% in the second quarter of 2011 compared to the second quarter of 2010 due primarily to an increase in direct email marketing revenue. Cost of Revenues. Cost of revenues consists of Purchase Request and traffic acquisition costs, and other cost of revenues. Purchase Request and traffic acquisition costs consist of payments made to our Purchase Request providers, including internet portals and on-line automotive information providers. Other cost of revenues consists of search engine marketing ("SEM") and fees paid to third parties for data and content, including search engine optimization ("SEO") activity, included on our properties, connectivity costs, development costs related to our websites, compensation related expense and technology license fees, server equipment depreciation and technology amortization directly related to the Company's websites. SEM, sometimes referred to as paid search marketing, is the practice of bidding on keywords on search engines to drive traffic to a website. The $1.0 million or 13% increase in the cost of revenues in the second quarter of 2011 compared to the second quarter of 2010 was due primarily to an increase in SEM costs associated with the acquisition of Auto/Cyber. 18-------------------------------------------------------------------------------- Table of contents Sales and Marketing. Sales and marketing expense includes costs for developing our brand equity, personnel costs, and other costs associated with Dealer sales, website advertising, Dealer support, and bad debt expense. Sales and marketing expense in the second quarter of 2011 decreased by $0.7 million or 23% compared to the second quarter of 2010 due principally to lower headcount-related compensation costs. Technology Support. Technology support expense includes compensation, benefits, software licenses and other direct costs incurred by the Company to enhance, manage, maintain, support, monitor and operate the Company's websites and related technologies, and to operate the Company's internal technology infrastructure. Technology support expenses in the second quarter of 2011 increased by $0.2 million or 16% compared to the second quarter of 2010 due to increased personnel costs associated with the Auto/Cyber acquisition and increased website hosting fees. General and Administrative. General and administrative expense consists of executive, financial and legal personnel expenses and costs related to being a public company. General and administrative expense in the second quarter of 2011 decreased by $1.1 million or 37% compared to the second quarter of 2010 due to decreased headcount-related compensation costs and a decrease in other controllable costs. Depreciation and amortization. Depreciation and amortization expense for the second quarter of 2011 increased by $0.3 million primarily due to the addition of intangible assets related to the Auto/Cyber acquisition in the third quarter of 2010. Litigation settlements. Patent and other litigation settlements for the second quarter of 2011 was $0.3 million, primarily from the settlement of an arbitration claim seeking indemnification from a third party supplier relating to the third party's method of soliciting Purchase Requests. The arbitration settlement represented the recovery of legal fees and other related expenses previously expensed under General and Administrative operating expenses. Interest and other income. Interest and other income was $13,000 in the second quarter of 2011 compared to $0.3 million in the second quarter of 2010. Interest and other income consisted primarily of patent licensing fees received. Income taxes. Income tax expense was $0.1 million in the second quarter of 2011compared to $35,000 in the second quarter of 2010. The current quarter tax expense was primarily related to state taxes in Texas, Michigan and Florida and the increase in the deferred tax liability related to tax deductible goodwill amortization. Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010 % of total net % of total net 2011 revenues 2010 revenues $ Change % Change (Dollar amounts in thousands) Revenues: Purchase requests $ 29,153 93 % $ 21,979 92 % $ 7,174 33 % Advertising 1,989 7 1,922 8 67 3 Other revenues 138 - 42 - 96 229 Total net revenues 31,280 100 23,943 100 7,337 31 Cost of revenues (excludes depreciation of $142 and $76 for the six months ended June 30, 2011 and 2010, respectively) 18,758 60 14,953 62 3,805 25 Gross profit 12,522 40 8,990 38 3,532 39 Operating expenses: Sales and marketing 4,630 15 5,639 24 (1,009 ) (18 ) Technology support 3,386 11 2,677 11 709 26 General and administrative 4,028 12 5,749 24 (1,721 ) (30 ) Depreciation and amortization 950 3 377 2 573 152 Litigation settlements (328 ) (1 ) (2,806 ) (12 ) 2,478 (88 ) Total operating expenses 12,666 40 11,636 49 1,030 9 Operating loss (144 ) - (2,646 ) (11 ) 2,502 (95 ) Interest and other income 23 - 490 2 (467 ) (95 ) Loss before income tax expense (121 ) - (2,156 ) (9 ) 2,035 (94 ) Income tax expense 250 1 48 - 202 421 Net loss $ (371 ) (1 )% $ (2,204 ) (9 )% $ 1,833 (83 %) 19-------------------------------------------------------------------------------- Table of contents Purchase Requests. Purchase Requests increased $7.2 million or 33% in the first six months of 2011 compared to the first six months of 2010 primarily due to the acquisition of Auto/Cyber. The volume of new and used retail automotive Purchase Requests delivered decreased 7%, but was offset by an increase of 96% in the volume of automotive Purchase Requests delivered to Manufacturers and other wholesale purchasers. Advertising. Advertising revenues increased $67,000 or 3% in the first six months of 2011 compared to the first six months of 2010 due primarily to an increase in direct email marketing revenue. Cost of Revenues. Cost of revenues consists of Purchase Request and traffic acquisition costs, and other cost of revenues. Purchase Request and traffic acquisition costs consist of payments made to our Purchase Request providers, including internet portals and on-line automotive information providers. Other cost of revenues consists of SEM and fees paid to third parties for data and content, including SEO activity, included on our properties, connectivity costs, development costs related to our websites, compensation related expense and technology license fees, server equipment depreciation and technology amortization directly related to the Company's websites. The $3.8 million or 25% increase in the cost of revenues in the first six months of 2011 compared to the first six months of 2010 was due primarily to an increase in SEM costs associated with the acquisition of Auto/Cyber. Sales and Marketing. Sales and marketing expense includes costs for developing our brand equity, personnel costs, and other costs associated with Dealer sales, website advertising, Dealer support, and bad debt expense. Sales and marketing expense in the first six months of 2011 decreased by $1.0 million or 18% compared to the first six months of 2010 due principally to lower headcount-related compensation costs. Technology Support. Technology support expense includes compensation, benefits, software licenses and other direct costs incurred by the Company to enhance, manage, maintain, support, monitor and operate the Company's websites and related technologies, and to operate the Company's internal technology infrastructure. Technology support expenses in the first six months of 2011 increased by $0.7 million or 26% compared to the first six months of 2010 due to increased personnel costs associated with the Auto/Cyber acquisition and increased website hosting fees. General and Administrative. General and administrative expense consists of executive, financial and legal personnel expenses and costs related to being a public company. General and administrative expense in the first six months of 2011 decreased by $1.7 million or 30% compared to the first six months of 2010 due to decreased headcount-related compensation costs and a decrease in other controllable costs. Depreciation and amortization. Depreciation and amortization expense for the first six months of 2011 increased by $0.6 million primarily due to the addition of intangible assets related to the Auto/Cyber acquisition after the first six months of 2010. Litigation settlements. Patent and other litigation settlements for the first six months of 2011 were $0.3 million compared to $2.8 million in the first six months of 2010. The $0.3 million in the first six months of 2011 was primarily from the settlement of an arbitration claim seeking indemnification from a third party supplier relating to the third party's method of soliciting Purchase Requests. The arbitration settlement represented the recovery of legal fees and other related expenses previously expensed under General and Administrative operating expenses. The Company received $2.7 million in the first six months of 2010, which represented the final installment of the settlement of the Company's patent infringement against Dealix Corporation. Interest and other income. Interest and other income was $23,000 in the first six months of 2011 compared to $0.5 million in the first six months of 2010. Interest and other income consisted primarily of patent licensing fees received. Income taxes. Income tax expense was $0.3 million in the first six months of 2011compared to $48,000 in the first six months of 2010. The current quarter tax expense was primarily related to state taxes in Texas, Michigan and Florida and the increase in the deferred tax liability related to tax deductible goodwill amortization. Employees As of August 1, 2011 we had 120 employees. We also use independent contractors as required. None of our employees are represented by labor unions. We have not experienced any work stoppages and consider our employee relations to be generally good. 20-------------------------------------------------------------------------------- Table of contents Liquidity and Capital Resources The table below sets forth a summary of our cash flows for the six months ended June 30, 2011 and 2010: Six Months Ended June 30, 2011 2010 (in thousands)Net cash provided by (used in) operating activities $ 213 $ (833 ) Net cash used in investing activities (619 ) (489 ) Net cash provided by financing activities 154 102 Our principal sources of liquidity are our cash and cash equivalents balances. Our cash and cash equivalents totaled $8.6 million as of June 30, 2011 compared to cash and cash equivalents of $8.8 million as of December 31, 2010. Net Cash Provided by (Used in) Operating Activities. Net cash provided by operating activities in the six months ended June 30, 2011 of $0.2 million resulted primarily from net losses of $0.4 million, as adjusted for non-cash charges to earnings, in addition to cash used to reduce accrued liabilities of $1.3 million primarily related to the payment of annual incentive compensation amounts and severance accrued in 2010 and paid in the first six months of 2011 and a $1.4 million decrease in our accounts receivable balance. Net cash used in operating activities in the six months ended June 30, 2010 of $0.8 million resulted primarily from net losses, as adjusted for non-cash charges to earnings, $0.8 million of cash received related to our accounts receivable, partially offset by cash used to reduce accrued liabilities of $0.8 million primarily related to the payment of annual incentive compensation amounts accrued in 2009 and paid in the first six months of 2010. Net Cash Used in Investing Activities. Net cash used in investing activities was $0.6 million and $0.5 million in the six months ended June 30, 2011 and 2010, respectively, and is related primarily to the investment in upgrading our internal information technology infrastructure. Net Cash Provided by Financing Activities. Our primary source of cash from financing activities is from the exercise of stock options. 387,000 stock options were exercised in the six months ended June 30, 2011 resulting in $0.3 million of cash inflow. In addition, contingent payments of $167,000 were made related to the Auto/Cyber acquisition. 226,108 stock options were exercised in the six months ended June 30, 2010, resulting in $0.1 million of cash inflow. Our future cash flows from employee stock options, if any, will depend on the future timing, exercise price, and amount of stock option exercises. Off-Balance Sheet Arrangements At June 30, 2011, we had no off-balance sheet arrangements as defined in Item 303(a)(4)(D)(ii) of Regulation S-K. |