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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," "will" 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 our Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2013 ("2013 Form 10-K"). 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 the 2013 Form 10-K. 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 the reports are electronically filed with or furnished to the SEC. Unless the context otherwise requires, the terms "we", "us", "our", "Autobytel", and "Company" refer to Autobytel Inc. and its consolidated subsidiaries. Basis of Presentation The accompanying unaudited consolidated condensed financial statements presented herein are presented on the same basis as the 2013 Form 10-K. We have made disclosures in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation with respect to interim financial statements, have been included. The statements of income and comprehensive income and cash flows for the periods ended September 30, 2014 and 2013 are not necessarily indicative of the results of operations or cash flows expected for the year or any other period. The unaudited consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the 2013 Form 10-K. On January 13, 2014 ("AutoUSA Acquisition Date"), Autobytel and AutoNation, Inc., a Delaware corporation ("Seller Parent"), and AutoNationDirect.com, Inc., a Delaware corporation and subsidiary of Seller Parent ("Seller"), entered into and consummated a Membership Interest Purchase Agreement in which Autobytel acquired all of the issued and outstanding membership interests in AutoUSA, LLC, a Delaware limited liability company and a subsidiary of Seller ("AutoUSA"). AutoUSA was a (i) lead aggregator purchasing internet-generated automotive consumer leads from third parties and reselling those consumer leads to automotive vehicle dealers; and (ii) reseller of third party products and services to automotive Dealers. The integration of AutoUSA was completed during the three months ended June 30, 2014, and we believe we will see benefits from the synergies associated with the AutoUSA acquisition throughout the remainder of 2014. -15--------------------------------------------------------------------------------- Table of Contents Effective October 1, 2013, the Company acquired substantially all of the assets of privately-held Advanced Mobile, LLC, a Delaware limited liability company, and Advanced Mobile Solutions Worldwide, Inc., a Delaware corporation (collectively referred to in this Quarterly Report on Form 10-Q as "Advanced Mobile"). Advanced Mobile provides mobile marketing solutions (e.g., mobile applications, mobile portals, mobile websites, TextShield®, mobile text marketing, quick response codes, text messaging, short message service and multimedia service) for the automotive industry. TextShield® provides a web-based portal that allows Dealers to centrally manage text communications. This web-based tool includes role-based permissions, a global opt out feature and the ability to monitor all text communications between dealership employees and consumers. By assisting a dealership with compliance issues surrounding text, this tool opens up a wide array of text-based marketing for dealers and allows consumers to interact with dealers using one of the most preferred methods of mobile communications. The acquired assets consisted primarily of customer contracts, technology license rights and rights in domain names and short codes used for SMS texting. 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 to consumers through our programs for online purchase request referrals ("Leads"), Dealer marketing products and services, online advertising programs and mobile products. Our consumer-facing automotive websites ("Company Websites"), including our flagship website Autobytel.com®, provide consumers with information and tools to aid them with their automotive purchase decisions and the ability to submit inquiries requesting Dealers to contact the consumers regarding purchasing or leasing vehicles ("Vehicle Leads"). For consumers who may not be able to secure loans through conventional lending sources, our Company Websites provide these consumers the ability to submit inquiries requesting Dealers or other lenders that may offer vehicle financing to these consumers to contact the consumers regarding vehicle financing ("Finance Leads"). The Company's mission for consumers is to be "Your Lifetime Automotive Advisor"® by engaging consumers throughout the entire lifecycle of their automotive needs. Lead quality is measured by the conversion of Leads to actual vehicle sales. Leads are internally-generated from our Company Websites ("Internally-Generated Leads") or acquired from third parties ("Non-Internally-Generated Leads") that generate Leads from their websites ("Non-Company Websites"). We rely on detailed feedback from Manufacturer and wholesale customers to confirm the performance of our Leads. Since 2011 we have been using IHS Automotive (which acquired R.L. Polk & Co. in 2013) to evaluate the performance quality of both our Internally-Generated Leads as well as Non-Internally-Generated Leads. Our Manufacturers and wholesale customers and IHS Automotive match the Leads we deliver to our customers against vehicle sales data to provide us with buy rates (rate at which consumers who submit a new vehicle lead purchase a new vehicle within 90 days) for the Leads we deliver to our customers and information that allows us to compare these buy rates to the buy rates of the Leads we acquire from third party suppliers. Based on the most current IHS Automotive data, automotive Leads from consumers shopping on Autobytel.com have a buy rate of approximately 21% within 90 days of Lead submission. In addition, we report a number of key metrics to our customers, allowing them to gain a better understanding of the revenue opportunities that they may realize from acquiring Leads from us. We can now optimize the mix of Leads we deliver to our Dealers based on multiple sources of quality measurements. Also, by reporting the buying behavior of potential customers, the findings also can help shape improvements to online Lead management; online advertising and dealership sales process training. By providing actionable data, we place considerable intelligence in the hands of our customers. -16--------------------------------------------------------------------------------- Table of Contents For the three and nine months ended September 30, 2014, our business, results of operations and financial condition were affected, and may continue to be affected in the future, by general economic and market factors, conditions in the automotive industry, the market for Leads and the market for advertising services, including, but not limited to, the following: ? The effect of unemployment on the number of vehicle purchasers; ? Pricing and purchase incentives for vehicles; ? The expectation that consumers will be purchasing fewer vehicles overall during their lifetime as a result of better quality vehicles and longer warranties; ? The impact of gasoline prices on demand for vehicles; ? Increases or decreases in the number of retail Dealers or in the number of Manufacturers and other wholesale customers in our customer base; ? Volatility in spending by Manufacturers, Dealers and others in their marketing budgets and allocations; ? The effect of changes in search engine algorithms and methodologies on our Lead generation and website advertising activities and margins; and ? The competitive impact of consolidation in the online automotive referral industry. Results of Operations Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013 The following table sets forth certain income statement data for the three-month periods ended September 30, 2014 and 2013 (certain amounts may not calculate due to rounding): % of total % of total 2014 revenues 2013 revenues $ Change % Change (Dollar amounts in thousands) Revenues: Lead fees $ 25,880 95 % $ 20,653 96 % $ 5,227 25 % Advertising 1,093 4 956 4 137 14 Other revenues 391 1 26 - 365 1,404 Total revenues 27,364 100 21,635 100 5,729 26 Cost of revenues (excludes depreciation of $7 and $18 for the three months ended September 30, 2014 and 2013, respectively) 16,356 60 12,826 59 3,530 28 Gross profit 11,008 40 8,809 41 2,199 25 Operating expenses: Sales and marketing 3,336 12 2,745 13 591 22 Technology support 2,055 7 1,855 8 200 11 General and administrative 3,161 12 2,526 12 635 25 Depreciation and amortization 483 2 362 2 121 33 Litigation settlements (25 ) - (66 ) - 41 (62 ) Total operating expenses 9,010 33 7,422 35 1,588 21 Operating income 1,998 7 1,387 6 611 44 Interest and other income (expense), net (177 ) - 24 - (201 ) (838 ) Income before income tax provision 1,821 7 1,411 6 410 29 Income tax provision 697 3 138 - 559 405 Net income $ 1,124 4 % $ 1,273 6 % $ (149 ) (12 %) -17--------------------------------------------------------------------------------- Table of Contents Leads. Purchase request revenues increased $5.2 million, or 25%, in the third quarter of 2014 compared to the third quarter of 2013 primarily due to a 20% increase in Lead volume as a result of strong demand across nearly all programs, with a major Manufacturer starting a Lead program with Autobytel as a primary supplier, as well as additional revenues from the acquisition of AutoUSA. Advertising. Advertising revenues increased $0.1 million, or 14%, in the third quarter of 2014 compared to the third quarter of 2013 as a result of increased page views and click revenue. Other Revenues. Other revenues increased $0.4 million in the third quarter of 2014 compared to the third quarter of 2013 due to increased sales of the Company's mobile products as a result of the Advanced Mobile acquisition in the fourth quarter of 2013. 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 websites, 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. Cost of revenues increased $3.5 million, or 28%, in the third quarter of 2014 compared to the third quarter of 2013 primarily due to a corresponding increase in lead volume. 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 third quarter of 2014 increased by $0.6 million, or 22%, compared to the third quarter of 2013 due principally to an increase in headcount-related expenses associated with the acquisitions of AutoUSA and Advanced Mobile. 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 expense in the third quarter of 2014 increased by $0.2 million, or 11%, compared to the third quarter of 2013 due to increased headcount-related expense associated with the acquisitions of AutoUSA and Advanced Mobile. 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 third quarter of 2014 increased by $0.6 million, or 25%, compared to the third quarter of 2013 due to an increase in headcount-related compensation costs and professional fees associated with increased merger and acquisition activity. Depreciation and amortization. Depreciation and amortization expense in the third quarter of 2014 increased $0.1 million to $0.5 million compared to the third quarter of 2013 primarily due to the addition of intangible assets related to the acquisitions of Advanced Mobile and AutoUSA offset by a portion of the intangible assets related to the acquisition of Autotropolis, Inc. and Cyber Ventures, Inc. (collectively, "Cyber") being fully amortized in 2013. Litigation settlements. Payments primarily from 2010 settlements of patent infringement claims against third parties relating to the third parties' methods of Lead delivery for the third quarter of 2014 were $25,000. Interest and other income (expense), net. Interest and other expense was $0.2 million for the third quarter of 2014 compared to interest and other income of $24,000 for the third quarter of 2013. The third quarter of 2014 included interest expense of $0.2 million compared to $81,000 in the third quarter of 2013. Income taxes. Income tax expense was $0.7 million in the third quarter of 2014 compared to income tax expense of $0.1 million in the third quarter of 2013. Income tax expense for the third quarter of 2014 differed from the federal statutory rate primarily due to state income taxes and permanent non-deductible tax items, while income tax for the third quarter of 2013 differed from the federal statutory rate primarily due to various state minimum taxes and the deferred tax liability related to tax deductible goodwill amortization. -18--------------------------------------------------------------------------------- Table of Contents Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013 The following table sets forth certain income statement data for the nine-month periods ended September 30, 2014 and 2013 (certain amounts may not calculate due to rounding): % of total % of total 2014 revenues 2013 revenues $ Change % Change (Dollar amounts in thousands) Revenues: Lead fees $ 76,727 96 % $ 55,013 95 % $ 21,714 39 % Advertising 2,531 3 2,567 5 (36 ) (1 ) Other revenues 979 1 88 - 891 1,013 Total revenues 80,237 100 57,668 100 22,569 39 Cost of revenues (excludes depreciation of $21 and $70 for the nine months ended September 30, 2014 and 2013, respectively) 48,828 61 35,311 61 13,517 38 Gross profit 31,409 39 22,357 39 9,052 40 Operating expenses: Sales and marketing 11,078 14 7,122 12 3,956 56 Technology support 5,971 7 5,328 9 643 12 General and administrative 8,899 11 6,961 12 1,938 28 Depreciation and amortization 1,373 2 1,196 2 177 15 Litigation settlements (118 ) - (205 ) - 87 (42 ) Total operating expenses 27,203 34 20,402 35 6,801 33 Operating income 4,206 5 1,955 4 2,251 115 Interest and other income (expense), net (518 ) - 331 - (849 ) (256 ) Income before income tax provision 3,688 5 2,286 4 1,402 61 Income tax provision 1,394 2 292 1 1,102 377 Net income $ 2,294 3 % $ 1,994 3 % $ 300 15 % Leads. Purchase request revenues increased $21.7 million, or 39%, in the first nine months of 2014 compared to the first nine months of 2013 primarily due to a 34% increase in Lead volume as a result of strong demand across nearly all programs, with a major Manufacturer starting a Lead program with Autobytel as a primary supplier, as well as additional revenues from the acquisition of AutoUSA. Advertising. Advertising revenues decreased $36,000, or 1%, in the first nine months of 2014 compared to the first nine months of 2013 as a result of fewer direct email campaigns coupled with the timing of website advertising display revenue. Other Revenues. Other revenues increased $0.9 million in the first nine months of 2014 compared to the first nine months of 2013 due to increased sales of the Company's mobile products as a result of the Advanced Mobile acquisition in the fourth quarter of 2013. Cost of Revenues. Cost of revenues increased $13.5 million, or 38%, in the first nine months of 2014 compared to the first nine months of 2013 primarily due to a corresponding increase in lead volume. Sales and Marketing. Sales and marketing expense in the first nine months of 2014 increased by $4.0 million, or 56%, compared to the first nine months of 2013 due principally to an increase in headcount-related expenses associated with the acquisitions of AutoUSA and Advanced Mobile. Technology Support. Technology support expense in the first nine months of 2014 increased by $0.6 million, or 12%, compared to the first nine months of 2013 due to increased headcount-related expense associated with the acquisitions of AutoUSA and Advanced Mobile. -19--------------------------------------------------------------------------------- Table of Contents General and Administrative. General and administrative expense in the first nine months of 2014 increased by $1.9 million, or 28%, compared to the first nine months of 2013 due to an increase in headcount-related compensation costs and professional fees associated with increased merger and acquisition activity. Depreciation and amortization. Depreciation and amortization expense in the first nine months of 2014 increased to $1.4 million compared to $1.2 million for the first nine months of 2013 primarily due to the addition of intangible assets related to the acquisitions of Advanced Mobile and AutoUSA offset by a portion of the intangible assets related to the Cyber acquisition being fully amortized in 2013. Litigation settlements. Payments primarily from 2010 settlements of patent infringement claims against third parties relating to the third parties' methods of Lead delivery for the first nine months of 2014 were $118,000. Interest and other income (expense), net. Interest and other expense was $0.5 million for the first nine months of 2014 compared to interest and other income of $0.3 million for the first nine months of 2013. The first nine months of 2014 included interest expense of $0.5 million compared to $0.2 million in the first nine months of 2013. The first nine months of 2013 also included receipt of $0.5 million related to early termination of a license agreement pursuant to which the Company, as licensor, had licensed certain rights in the Company's proprietary software, business procedures, and brand. Income taxes. Income tax expense was $1.4 million in the first nine months of 2014 compared to income tax expense of $0.3 million in the first nine months of 2013. Income tax expense for the first nine months of 2014 differed from the federal statutory rate primarily due to state income taxes and permanent non-deductible tax items, while income tax for the first nine months of 2013 differed from the federal statutory rate primarily due to various state minimum taxes and the deferred tax liability related to tax deductible goodwill amortization. Liquidity and Capital Resources The table below sets forth a summary of our cash flows for the nine months ended September 30, 2014 and 2013: Nine Months Ended September 30, 2014 2013 (in thousands)Net cash provided by operating activities $ 5,590 $ 2,719 Net cash used in investing activities (10,969 ) (5,014 ) Net cash provided by financing activities 8,765 4,372 Our principal sources of liquidity are our cash and cash equivalents balances and positive operating cash flow. Our cash and cash equivalents totaled $22.3 million as of September 30, 2014 compared to cash and cash equivalents of $18.9 million as of December 31, 2013. On February 13, 2012, we announced that the Board of Directors had approved a stock repurchase program that authorized the repurchase of up to $1.5 million of Company common stock. The Board of Directors authorized us to repurchase an additional $2.0 million of Company common stock on June 7, 2012. The Board of Directors approved an additional $1.0 million stock repurchase program on September 16, 2014. As of September 30, 2014, we are authorized to repurchase up to $3.0 million in Company common stock. Under these repurchase programs, we may repurchase common stock from time to time on the open market or in private transactions. This authorization does not require us to purchase a specific number of shares, and the Board of Directors may suspend, modify or terminate the programs at any time. We would fund repurchases through the use of available cash. We began repurchasing Company common stock on March 7, 2012. No shares have been repurchased since 2012. The shares repurchased in 2012 were cancelled by the Company and returned to authorized and unissued shares. Credit Facility and Term Loan. On January 13, 2014, the Company entered into a Credit Facility Amendment with Union Bank, amending the Company's existing Loan Agreement with Union Bank initially entered into on February 26, 2013, and amended on September 10, 2013 (the existing Loan Agreement, as amended to date, is referred to herein collectively as the "Credit Facility Agreement"). The Credit Facility Amendment provides for (i) a new $9.0 million term loan ("Term Loan"); and (ii) amendments to the Company's existing $8.0 million revolving line of credit ("Revolving Loan"). -20--------------------------------------------------------------------------------- Table of Contents The Term Loan is amortized over a period of four years, with fixed quarterly principal payments of $562,500. Borrowings under the Term Loan or under the Revolving Loan bear interest at either (i) the bank's Reference Rate (prime rate) minus 0.50% or (ii) the LIBOR plus 2.50% (an increase under the existing Revolving Loan from 1.50%), at the option of the Company. Interest under both the Term Loan and the Revolving Loan adjust (i) at the end of each LIBOR rate period (1, 2, 3, 6 or 12 months terms) selected by the Company, if the LIBOR rate is selected; or (ii) with changes in Union Bank's Reference Rate, if the Reference Rate is selected. The Company also pays a commitment fee of 0.10% per year on the unused portion of the Revolving Loan payable quarterly in arrears. Borrowings under the Term Loan and the Revolving Loan are secured by a first priority security interest on all of the Company's personal property (including, but not limited to, accounts receivable) and proceeds thereof. The Term Loan matures December 31, 2017, and the maturity date of the Revolving Loan is March 31, 2017. Borrowings under the Revolving Loan may be used as a source to finance capital expenditures, acquisitions and stock buybacks and for other general corporate purposes. Borrowing under the Term Loan was limited to use for the acquisition of AutoUSA, and the Company drew down the entire $9.0 million of the Term Loan, together with $1.0 million under the Revolving Loan, in financing this acquisition. The outstanding balances of the Term Loan and Revolving Loan as of September 30, 2014 were $7.3 million and $5.25 million, respectively. Net Cash Provided by Operating Activities. Net cash provided by operating activities in the nine months ended September 30, 2014 of $5.6 million resulted primarily from net income of $2.3 million, as adjusted for non-cash charges to earnings, in addition to cash used to reduce accrued liabilities of $0.3 million primarily related to the payment of annual incentive compensation amounts and severance accrued in 2013 and paid in the first three months of 2014 and a $0.2 million increase in our accounts payable balance related to the timing of payments made. This was offset by a $0.7 million increase in our accounts receivable balance related to the timing of payments received from our customers as well as a $0.8 million change in other assets. Net cash provided by operating activities in the nine months ended September 30, 2013 of $2.7 million resulted primarily from net income of $2.0 million, as adjusted for non-cash charges to earnings. In addition accounts payable increased $2.3 million offset by a $4.7 million increase in our accounts receivable balance related to the timing of payments received from our customers. Net Cash Used in Investing Activities. Net cash used in investing activities was $11.0 million in the nine months ended September 30, 2014 primarily related to the acquisition of AutoUSA. Net cash used in investing activities was $5.0 million in the nine months ended September 30, 2013 and was primarily related to $1.8 million in advances on the purchase of Advanced Mobile, a $2.5 million investment in AutoWeb and a $0.2 million investment in SaleMove in the form of a note receivable. We also purchased $0.6 million of property and equipment and received $0.1 million related to a final escrow payment related to our investment in Driverside. Net Cash Provided by Financing Activities. Stock options for 118,996 shares of the Company's common stock were exercised in the nine months ended September 30, 2014 resulting in $0.5 million cash inflow. We also borrowed $9.0 million and $1.0 million against the Term Loan and Revolving Loan, respectively, to fund the purchase of AutoUSA in the nine months ended September 30, 2014. Payments of $1.7 million were made against the Term Loan borrowings in the nine months ended September 30, 2014. Stock options for 51,931 shares of stock were exercised in the nine months ended September 30, 2013, which resulted in $0.2 million cash inflow for the nine months ended September 30, 2013. Net cash provided by financing activities in the nine months ended September 30, 2013 also included $4.25 million in borrowings under the credit facility and was offset by contingent payments of $83,000 related to the Cyber acquisition. Our future cash flows from employee stock options, if any, will depend on the future timing, exercise price and amount of stock options exercised. Off-Balance Sheet Arrangements At September 30, 2014, we had no off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(D)(ii). -21--------------------------------------------------------------------------------- Table of Contents |