Description

Overview

Autobytel is an attractive small cap, generating a 40% return on tangible capital and trading at 9x unadjusted free cash flow. Autobytel is asset light online U.S. auto marketing company, which has experienced high rates of revenue growth while producing large amounts of FCF.

Autobytel (ABTL) is an automotive marketing services company that assists automotive retail dealers and OEMs market and sell new and used vehicles through the company’s programs for online lead referrals, dealer marketing products and services, online advertising and consumer traffic referral programs and mobile products.

ABTL has a market cap of $144m with $19m of net cash for an enterprise value of $144m. The company should be able to produce $16m of FCF (cash flow from operations less capex) for a multiple of only 9x EV. Subtracting out non-cash stock based compensation leads to adjusted FCF of $12m (12x EV). The company is asset light, generating the $12m of adjusted FCF on only $28m of working capital and PPE, generating a return on tangible capital of over 40%.

The company’s high historic revenue growth rates (22% 3 year CAGR) has coincided with rising U.S. auto sales (3% 3 year CAGR). ABTL’s stock price went from trading at $18/share in October 2016 to $11/share after the company’s 3Q 2016 earnings release as revenue growth declined to 9% (with negative growth in the company’s main lead business), and a 2.8% decrease in gross margin. The declining revenue was explained by a company decision to reduce lower-quality lead supply to increase the overall quality of its leads, which will help with customer retention and pricing power. The revenue growth decline also coincided with a decline in total U.S. auto sales (18m unit SAAR declining to 17m SAAR).  

With flat to moderately declining SAAR, the company should be able to achieve positive revenue growth going forward as lead quality is stabilized and the company continues to take market share of online lead generation sales and a higher % of OEM marketing is devoted to online advertising. I think despite an outlook of only ~5% revenue growth, the company should trade at a higher multiple due to its high free cash flow generation and return on tangible capital.

ABTL was previously written up by andreas947 in 2013, which was a terrific and very well-timed analysis. That write up and lengthy comment thread provide a lot of good background on the company.

Business Description

Lead Generation - 78% of revenue

Autobytel is an automotive marketing services company. It operates several consumer facing websites (car.com, autoweb.com, Autobytel.com and usedcars.com) that provide consumers with information and tools to aid them with their automotive purchase decisions and the ability to submit inquiries (leads) requesting dealerships to contact the consumers regarding purchasing or leasing vehicles. Autobytel then sells these leads to auto OEMs and dealerships. These internally generated leads represent 80% of all leads sold. The other 20% of leads are bought from third-party providers from non Autobytel websites that are resold. The company continually strives to increase the proporation of higher quality internally generated leads, which it has increased to 80% in 2016 from 70% in 2012.  Selling leads account for 78% of company revenue.

The leads will include information on what  specific vehicle the customer is interested in as well as the  consumer’s name, phone number, email, and postal address. The leads go through qualify verification checks to verify contact information before they are sold. Quality control helps maintain higher “buy rates” (% of leads converting to a sale within 90 days), which is a key advantage/selling point over its competitors. The company’s recent  buy rate was 17%, roughly 2x higher than the industry average at ~8%.

The company typically generates revenue on a per-lead basis. Leads and lead revenue have increased at a 22% CAGR from 2013 to 2016. Pricing has remained flat at an average $13.50/lead. The higher quality Autobytel website leads sell for around $22/lead. At a 17% buy rate, this results in a per car sold cost of around $129 to dealers. This is a much better ROI than competitors who charge ~$300 on a per car sold basis (like TrueCar), or who charge a similar amount per lead but have lower buy rates. ABTL leads also represent a compelling value compared to offline marketing dollars that are a less targeted and effective form of advertising spend. As a result, I expect ABTL revenue to grow faster than overall OEM ad spend and SAAR car sales

ABTL sold 9.3m leads in 2016, resulting in an estimated 1.6m car sales (estimated at 5% of U.S. new car sales and 2% of U.S. used car sales). .

The majority of leads (~60%) are sold to OEMs, rather than individual dealerships. This trend has been accelerating as for example in Q216 190 regional retail dealers were transitioned into a comprehensive OEM program . This should be a net positive for gross margin dollars as OEMs are more sophisticated, requiring less customer service and purchasing additional data products.

90% of lead sale revenue is for new cars, with 10% of revenue from used sales. With the volume for used cars at 2-3x new cars, the company is seeking to increase the amount of used car leads. After reducing a large amount of lower quality used-car leads and revamping the usedcars.com website (obtained in $25m cash Dealix acquisition in 2015), management expects increased used car lead growth going forward.

In Q1 2016, lead revenue declined 9% yoy. As the lower quality lead reduction initiative is lapped, lead revenue should start stabilizing in the next couple of quarters.

Click Advertising - 22% of revenue

The company’s AutoWeb program accounts for the vast majority of the other 22% of revenue. The AutoWeb program sells pay-for-click advertising revenue from OEM and dealer advertisements primarily from the company-operated websites, but also from third party websites that have contracted with AutoWeb. Clicks under this program are from high intent auto shoppers using the company’s website to research car purchases. The AutoWeb business was bought in 2014 for $28m in stock and has accelerated the advertising business from $1m in revenue per quarter to $8m in Q1 2017 (up 112% yoy). This business should continue to quickly grow as ABTL expands this new product and signs up new customers.

Management, Financial,  and Valuation

The current CEO, Jeff Coats, has been with the company since 2008 and has done a great job of profitably growing the company since the last recession. The biggest downside of management is how much they are paid, which is way too much for a company this size. Total compensation for the top 5 executives have averaged $5.2m over the last 3 years, with the majority of compensation in the form of stock & options. This results in very stock based compensation ($2.8m average for last 3 years)  which increases cash flow and management's non-gaap earnings.

The company has guided to  $156-$160m in revenue in 2017, up from $157m in 2016 ($150m on a like for like basis after adjusting for the sale of the finance leads business in Q4 2016). After msd declines in lead revenue and strong dd increases in click advertising revenue for 2017; I expect leads revenue to be flat in 2018 with ~20% growth in click advertising revenue, leading to ~5% overall revenue growth.

FCF is much higher than earnings for ABTL due to 3 primary reasons.

1. The company accrues taxes at around a 42% but has $75m in federal NOLs and $30m in state NOLs so ABTL will pay little cash tax (~8-10% of pre-tax income) for the next 10 years

2. The acquisitions of Dealix $25m cash in 2015,AutoWeb $28m stock in 2014, and AutoUSA $10m cash in 2014 lead to large balances of intangible assets that are being amortized against earnings. I am adding this intangible amortization back when calculating adjusted FCF.

3. The company has a lot of stock based comp which is included in EBITDA/earnings but is added back for cash flow. As I view this as a real expense, I take this back out for calculating adjusted FCF.

The company has gross margins of around 35% with opex of around 30%, leading to 5% operating margins. If you add back intangible amortization of $5.7m, operating margins would be around 8.5%. Gross margins have declined from 39% in Q2 2016 to 34.6% in Q1 2017 as the company has increased expenses in acquiring new customers with the growth/startup of its click advertising business and increased non-cash amortization of intangible assets. Gross margins should be able to recover to the back to the high 30s over time as click advertising is growing to a larger share of total revenue and carries a higher gross margin (~50%). Intagible amortization will decline from 2019-2022 as the intangible assets are written off. This will cause gross margins and earnings to increase (with earnings becoming closer to the higher cash flow figures).

Run Rate Earnings:

Run Rate FCF

I think the stock has 1 year upside of 40% based on a multiple of 16.5x adjusted FCF

Cyclicality

Autobytel revenue is cyclical as sales are tied to OEM/dealership advertising budgets and U.S. car sales. From the 2007 peak to 2009 trough, auto sales declined 29% while ABTL revenue declined 38%. Since coming out of the recession, auto sales are up 53% while ABTL revenue is up 202%. While a major recession will cause auto sales and ABTL revenue to decline, I would expect ABTL revenue to decline less than auto sales due to the increasing spend to online sales for OEM and dealerships. In addition the business is now better managed and customers have a better understanding of the economic value proposition than they did ten years ago.

While the cycle timing is far from ideal with the U.S. economy likely at the tail end of its expansion from the last recession and U.S. auto sales already peaking, I think ABTL still offers a better value proposition than the general market and its competitors.  ABTL currently has $160m of revenue with a ~5% growth rate trading at 0.9x sales and 12x adjusted FCF, with a positive 8.5% adjusted operating margin. Competitor TrueCar is is larger and is growing faster (~20%) at $290m of revenue but is trading at over 6x sales, with negative operating margins. Other cyclical industrial stocks with higher capex requirements (and thus lower FCF conversion) are trading at 24x P/E ratio.

Conclusions

ABTL has strong returns on tangible capital and free cash flow conversion. I think ABTL is an interesting value stock that should realize price appreciation once stronger growth returns.

Catalyst

FCF build

Growth in click advertising revenue causing gross margins to revert back to high 30s 

Eventual return to higher revenue growth leading to revalution of stock