Attached files
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| EX-99.1 - PRESS RELEASE - AutoWeb, Inc. | ex99-1.htm |
| 8-K - CURRENT REPORT - AutoWeb, Inc. | auto8k_nov52020.htm |
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
Eric
Martinuzzi
Lake Street Capital Markets,
LLC,
Research
Division
Gary Frank
Prestopino
Barrington Research
Associates, Inc.,
Research
Division
Lee T.
Krowl
B. Riley Securities,
Inc.,
Research
Division
ATTENDEES
Sean
Mansouri
Gateway Group,
Inc.
|
|
Presentation
Operator
Good afternoon, everyone, and thank you for participating in
today's conference call to discuss AutoWeb's financial results for
the third quarter ended September 30, 2020.
Joining us today are AutoWeb's President and CEO, Jared Rowe; and
the company's CFO, J.P. Hannan; and the company's outside Investor
Relations Adviser, Sean Mansouri with Gateway Investor
Relations.
[Operator Instructions]
I would now like to turn the call over to Mr. Mansouri for some
introductory comments.
Sean Mansouri
Gateway Group, Inc.
Thank you. 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
September 30, 2020, which was filed prior to this call 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
the 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 that 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. Good afternoon, everybody. During the third quarter,
we continued to execute on our plan with key operational
improvements throughout the entirety of the business, which led to
our highest levels of quarterly gross profit and margins since
2017. Despite continued COVID-19-related challenges throughout the
automotive market, our progress across key financial metrics
reflects the success of our overall operational discipline and also
flexibility.
Although trends in our industry have improved since the lows of the
pandemic in Q2, dealers and consumers alike are still contending
with broader macroeconomic uncertainty. North American auto
production began to pick back up at the end of last quarter, but
the effects of the industry-wide new vehicle production reductions
in Q2 as well as historically high used-car wholesale pricing
throughout much of the quarter continued to challenge retail
dealers' inventory levels.
Meanwhile, the delayed passage of a new stimulus bill has strained
consumer confidence and project books, and particularly across
Middle America, which is really our core consumer demographic. So,
all in all, these factors really have deeply altered vehicle
purchasing dynamics.
In this environment, we focused on staying efficient with our
resources to drive profitable growth, particularly at the gross
profit and adjusted EBITDA level. Well, overall, online shopping
metrics have increased across the industry. This doesn't always
translate into a higher number of car buyers. As such, we continue
to intensely operate at lower levels of media spend, a
mass-projected industry selling rates, which provides a more
accurate reflection of a true consumer demand. Similar to last
quarter, we could have driven far greater numbers of leads than we
did in Q3. However, much of this traffic would have been difficult
for our customers to monetize for the reasons that I mentioned
earlier.
Instead, by strategically taking volume out of our business, we are
preserving value for our customers by providing them with
high-quality, higher-margin leads. Instead of delivering a larger
discounted set of leads that may not result in near-term vehicle
sales, we believe we're providing a premium concentrated amount of
targeted leads submitted by action-minded car buyers who are more
likely to purchase a vehicle. We expect to gradually start driving
more volume as selling rates improve. However, we'll do so with a
diligent focus on margin, quality and efficiency.
I'd like to remind everybody that when we talk about efficiency,
we're not talking about improving the efficiency of the actual
vehicle transactions or the software that facilitates them. Rather,
we're working to create a more efficient process for how active car
shoppers, with a vehicle in mind, can be matched with the sellers
who can meet their needs. Where most automotive digital media
properties monetize impression-based approaches, we're really
focused on creating an integrated marketing platform that's focused
on transactional matchmaking at scale. The strategic initiatives
we're implementing are really helping us stay well positioned for
where automotive digital marketing is headed.
Now that said, we already have made some key enhancements to our
product and service offerings to improve the quality of our
matching process between buyers and sellers. One of the
capabilities that we've focused on during our turnaround is being
more efficient with our marketing spend by improving consumer
conversion in our lead funnels.
As I mentioned last quarter, we began to roll out a new, more
contemporary lead funnel experience for some of our mobile audience
campaigns, and those resulted in gains of over 50% lead conversion
during the second quarter. So, I mean, in essence, AutoWeb was 50%
more efficient, converting mobile consumers into revenue-generating
leads in Q2 for these specific campaigns.
I'm pleased to report that in Q3, we were able to maintain those
gains while deploying an even larger number of mobile audiences
against these new experiences. We now have the majority of our
mobile audience engaging with experiences that contain these
conversion optimizations. And we're continuing our efforts to
expand this to our remaining mobile audience segment.
It is worth noting that our audiences vary across our portfolio and
that the organization -- I'm sorry, the optimizations for one
audience don't always translate to optimizations for another
audience. But that said, I want to underscore the competency that
we have in driving meaningful conversion rate optimization and just
how durable these gains are, at least thus far in 2020, we expect
well beyond. We're extremely pleased with the performance of this
new conversion model, and we're going to continue to implement
further improvements of the process by which users engage with our
media.
Across our organization, we have worked diligently over the past 2
years to execute on our turnaround and establish AutoWeb as a lean,
efficient organization. We think our results demonstrate that this
foundation is soundly in place. The improvements we're making to
what we offer and how we operate allow us to really deepen our
understanding of how to best support the engagements between our
dealer customers and their consumers.
I'll have a bit more to discuss about our operational performance
and some of the strategic initiatives that we're going to be
focused on in the future. But before commenting further, I'd like
to turn it over to J.P. to walk through our Q3 financial results.
J.P.?
Joseph Patrick Hannan
Executive VP & CFO
Well, thanks, Jared, and good afternoon, everyone. Total revenue
for the third quarter increased 5% sequentially to $17.8 million.
This was down from $28.6 million in the year ago quarter. Our
digital advertising revenues increased 11% sequentially to $3.1
million, and that was down to $6 million when compared to the year
ago quarter. The expected year-over-year declines are in line with
the COVID-19-related challenges throughout our industry. However,
as Jared mentioned, we've continued to proactively reduce our
marketing spend to keep our click and lead volumes aligned with
true market demand in this environment.
Now the success of this strategy is reflected in the gross profit
line, which increased 6% sequentially and 9% year-over-year to $6.5
million. Our third quarter gross margin improved to 36.1%, and
that's an increase of approximately 90 basis points sequentially
and a significant increase year-over-year from 20.7%. This increase
was driven by our improved revenue mix in our leads business as
well as a modest recovery in our clicks business.
We also significantly reduced operating expenses during the
quarter, which were down 8% sequentially and 14% year-over-year to
$6.7 million, and that's due to our continued disciplined approach
to cost management.
The net loss in the third quarter of 2020 improved to $400,000 or a
loss of $0.03 per share, and that compared to a net loss of $1.4
million or $0.10 per share in the second quarter of 2020 and
compared to a net loss of $1.7 million or $0.13 per share in the
year ago quarter.
Adjusted EBITDA in Q3 improved to $1 million, which more than
doubled from Q2 and was up 21% from last year. We are very
encouraged by this growth as it continues to validate the
resilience of our turnaround. Now looking ahead, we don't
anticipate a straight line of growth from here. Given there is
seasonality in our business, Q4 and Q1 are typically the slowest
quarters in our business due to the holidays and the model year-end
sell-down dynamics. And as such, our goal is to operate near break
-- to breakeven levels from an adjusted EBITDA perspective before
then ramping back up to our stronger portion of 2021.
At September 30, 2020, cash equivalents and restricted cash stood
at $14.6 million, and that compared to $8.5 million at June 30. And
as of September 30, we had an outstanding balance of $10 million on
our $20 million revolving credit facility with CIT Northbridge
Credit. Our commitment to improving our liquidity and prudently
managing our costs continues to pay off. And if present trends
hold, we're very comfortable with our balance sheet and liquidity
going forward.
Now as you may have seen today, we also filed a $30 million shelf
registration statement with the SEC. This registration statement is
not yet effective and does not constitute an offering of any
securities by the company. Although we do not have any immediate
plans for any offering of securities, having a registration
statement in place provide us with flexibility should we desire to
opportunistically access the capital markets to invest in our
business. Jared is going to come back momentarily to provide more
color on our strategic outlook and road map.
Now looking ahead to Q4 and 2021. We plan to continue delivering on
our commitment to run an efficient and effective organization. And
as we've been doing all year, we'll closely monitor industry
conditions as they evolve over the months ahead. But we believe
that we remain financially well positioned to navigate this market
environment and prepare for the next phases of our long-term
growth.
And so with that, that will conclude my prepared remarks, and I'm
going to turn it back over to Jared.
Jared R. Rowe
CEO, President & Director
Thanks, J.P. So, as I mentioned earlier, our traffic and volumes
overall have continued to be impacted by COVID-19-related
disruption to both consumer demand and automotive advertising
budgets. This pattern is consistent with overall automotive media
search spend. Nevertheless, we're still working to optimize our
revenue mix by remaining efficient with the tools we have and
leveraging new initiatives to modernize our products. We see plenty
of opportunity ahead for our lead and click products as the
automotive market recovers.
So, in our leads business, we have sustained our operational
momentum by prioritizing value and really improving efficiency by
adapting to current demand dynamics and driving continued
improvements in our cost of acquisition. We've been able to
maintain lead pricing while offering customers high-quality leads
from lower funnel action might in car buyers. Leads will continue
to serve as a source of stability for dealers and OEMs during this
period of uncertainty, and they can more effectively attribute the
value to a lead purchase than they can to other forms of media. We
intend to continue leveraging this advantage to support our clients
and provide them with these high-quality actionable leads that
ultimately drive real vehicle sales.
Now with a strong operational foundation in place, we're now
preparing for the next stage of our business transformation through
strategic product innovations, which we expect to accomplish
organically and through some inorganic opportunities where
appropriate. As I mentioned earlier, we believe
transaction-oriented matchmaking represents the future of
automotive digital marketing. Other internet verticals, such as
insurance, employment sites, real estate, home improvement sites,
they've already evolved their services from relying on filter-based
searching to using highly specialized algorithmic matching to
optimize a certain desired outcome for all users on both sides of
the marketplace.
We see the same shift occurring within digital automotive. We know
that each car shopper has a very unique set of needs and
preferences, and that each dealer and OEM has a specific value
proposition and end-market consumer in mind. The better we can
understand which sales funnel to pair with each consumer, the
better marketing efficiency we can drive for our dealer and our OEM
customers alike.
We're now at the point in our business transformation that you'll
see us focus more intently on product evolution as opposed to just
product optimization. This product evolution will be
delivered iteratively over
time, and we'll focus on improving how we can match buyers and
sellers. We do plan to evolve our consumer and retailer
interactions to be far more profile based. But better understanding
how consumers prefer to buy and ultimately how retailers prefer to
sell, we can more intelligently match buyers with
sellers.
Today, most automotive media companies simply match buyers and
sellers based on product price and geography. However, this
approach does not properly factor into the matching process that
car buying is the highly nuanced and preference-driven process.
With that in mind, we want our data to be able to capture as much
of these nuances as possible so that we can facilitate highly
tailored matches. We believe that this will, in turn, increase the
likelihood of a transaction occurring, while helping to optimize
client margin.
As I mentioned earlier, other vertical categories have made similar
transformation. So, we're really confident in our assessment of
what the market needs.
Now implicit in this matchmaking approach is the intention of
embedding more retail-ready components in our conversion funnel,
such as trade-in and finance enablement. Think of this as marrying
our best-in-class customer -- consumer acquisition costs with
dealer-enabled digital retailing components at scale. Our approach
to building this functionality out will really follow our current
pragmatic approach to resetting AutoWeb. So being able to acquire
or integrate with existing retail-ready components that are already
built out would be a much more efficient use of time and capital
than trying to build out all of these types of features from
scratch by ourselves.
As we continue establishing ourselves as an integrated marketing
platform that supports what we consider to be the most critical
matchmaking elements of a vehicle transaction, we want to have the
ability to support the industry shift towards digital retail in a
unique and powerful way. Some work in this area has already begun.
However, we do have a long road ahead.
This product evolution provides us with a really exciting
trajectory for our business. Our strategy has proved to be
extremely resilient through industry-wide headwinds this year and
has laid strong groundwork for us to continue transforming our
operations to keep pace with the broader transitions in automotive
digital marketing. As we look ahead at the end of 2020 and into
early 2021, which are traditionally the slowest periods of our
business, as J.P. outlined earlier, our goal is to operate near
breakeven levels in adjusted EBITDA, even while investing for the
future in our business.
We're very, very proud of the progress that we've made thus far.
But quite frankly, we believe we're just getting started here. Our
entire team is excited and as committed as ever to continuing our
transformation as we move forward to the next phase of growth here
at AutoWeb.
So, with that, we're going to open it up for
questions.
Question and Answer
Operator
[Operator Instructions]
And sir, your first question comes from the line of Gary Prestopino
of Barrington Research.
Gary Frank Prestopino
Barrington Research Associates, Inc., Research
Division
A couple of things. The first thing is just trying to write down as
you were going through your narrative and all that. One of you guys
mentioned something about the goal is to operate at breakeven
levels of EBITDA. And I mean you've started to really come into the
black here. And is that because, as we go forward, there's going to
be more uplift on the investment and what you're doing to kind of
transform the company?
Jared R. Rowe
CEO, President & Director
Yes. Gary, I think there's 2 things going on here. One is we do
plan to invest a little bit more aggressively in the product side
of the business to really transform it because we've stabilized the
financial. And so from a financial turnaround perspective, we feel
really good there. The other thing is it's wise. Q4 and Q1
historically are not great selling seasons for automotive, and we
do follow that seasonality.
On top of that, all the macroeconomic uncertainty that's out there
right now, we think it's best to be a little conservative in our
approach right now. And -- but again, we do intend to continue to
drive this business ahead and make the investments we need to make
because we do see better days ahead for us.
Gary Frank Prestopino
Barrington Research Associates, Inc., Research
Division
Okay. So that would just be for Q4 and Q1 that you're talking
about, this kind of issue hitting the P&L?
Jared R. Rowe
CEO, President & Director
Yes. Q2 and Q3, generally speaking, are better performance-wise for
us financially because those are the big selling seasons. And so as
the market recovers, we'll get the benefit of that. But again, the
middle of the year is really where a business like ours tends to
[indiscernible].
Gary Frank Prestopino
Barrington Research Associates, Inc., Research
Division
And then, I mean, how badly do you think your client base has been
hit here by the fact that there is no new stimulus? And it looks
like the economy is growing, but I mean it just seems like your
clientele does get hit more when these -- when you don't have these
government transfer payments out in the market?
Jared R. Rowe
CEO, President & Director
Yes, it does. Our consumer base is really Middle America. When you
look at the education level, when you look at the earnings levels
of the folks who use our services, these are folks who, $10, $15,
$20 a month really matters to them from a payment perspective. And
these are the folks who have been hit hardest by what's going on
with COVID and the unemployment and just some of the general
economic downturn. So yes, that is a fair statement, Gary, is that
our users aren't as affluent as maybe you see some of the other
sites out there. But again, we like our user base because we do
believe very strongly that when you're talking about Middle
American car buyers, there's a lot of those folks out there. And so
we deliver real value to a very large segment of the buying
population.
Gary Frank Prestopino
Barrington Research Associates, Inc., Research
Division
Okay. And then can we just talk about this new contemporary lead
funnel experience that you rolled out? Could we just go into that a
little bit more and just kind of simplify that for me?
Jared R. Rowe
CEO, President & Director
Yes. Sure, absolutely. So, we talked on a couple of the calls about
kind of the progress that we're making here from a mobile
perspective. And I think you'll probably recall that when we --
when this management team first showed up a couple of years ago, we
didn't actually have mobile experiences. So, the first year, year
and a half, was really focused on just mobile enablement, right?
Stop sending mobile traffic to desktop experiences because we know
that, that's a grade conversion. And we did that in the first year,
year and a half.
Then we spent a bunch of time really optimizing those experiences
is one thing just to have a mobile experience. It's another thing
to actually make the mobile experience convert as well as the
desktop experience. And I guess the best way for me to say it is,
these mobile experiences that we created, just to enable mobile
experiences, they were kind of basic experiences, but they didn't
have the benefit of multiple iteration cycles of trying to tweak
them and make them work better. And our business is all about
conversion rate. Our business is all about the small tweaks, right,
the small improvements that add up over time. And so it took us a
bit of time to take those mobile experiences that we've built and
then start to optimize them and really understand how consumers
interact with them so that we can get as many through the process
as possible. But at the same time, we don't necessarily erode the
quality, right? It's always this little virtuous triangle for us,
which is the cost of media, the conversion rate and then,
ultimately, the close rate on the leads that you send
through.
So, it just took us a bit of time and a lot of cycles. And again,
the benefit of it started showing up in Q2. But Gary, I will tell
you there's probably hundreds of optimization cycles and small
tweaks that we've made over an extended period of time that got us
to the point where you could start to see the benefit in Q2 and
then it's carried through in Q3. And again, we're just getting
started on this optimization process. So that's the best way to
describe it. Hopefully, that was helpful.
Gary Frank Prestopino
Barrington Research Associates, Inc., Research
Division
How much of your traffic right now is mobile versus
desktop?
Jared R. Rowe
CEO, President & Director
Less than 60%.
Operator
And sir, your next question from Eric Martinuzzi of Lake
Street.
Eric Martinuzzi
Lake Street Capital Markets, LLC, Research Division
Yes. You talked a little bit about investing in the business.
Typically, there's people, that topic. I just wanted to know, as we
look at Q3, the operating expense of $6.7 million. Where does that
go next quarter?
Joseph Patrick Hannan
Executive VP & CFO
I think that goes up -- flat to up slightly. And I think what Jared
is talking more about as we go into next year and some of the
software development, things that we do, that's where there'll be
some additional costs. Most of that will be capitalized on the new
products. It's really that what we're facing most immediate is, as
Jared mentioned, the sort of the seasonal downturn for Q4 and
Q1.
Jared R. Rowe
CEO, President & Director
Yes, Eric. And if I could just expand upon that a little bit. And
where you'll see some of the -- one of the reasons we talked about
it and the way we do in terms of the investment is any time we
build a new experience or new approach, we tend to lose efficiency,
right, on click-through rate efficiency, conversion rate efficiency
and monetization efficiency. And so as we make some of these new
investments too, kind of like on the mobile side, we've got to go
backwards before we go forward with some of these new experiences.
And so to J.P.'s point, it's -- we are going to get hit with the
seasonality of the business just in general. And then on top of
that, we are going to take some focus from some of our teams and
allocate it differently. Instead of just trying to grind away and
just continue to optimize the existing products, which we'll do
that, too, but it won't be 100% of our focus, we're going to carve
some of the resources away and focus on some of this product
innovation, which ultimately will mean because we only have so many
cycles in a day, it will ultimately mean that we may lose some
efficiency as we build towards the future. But again, this
trade-off is something we're very aware of. We've done before, and
so we expect to be able to manage our way through it fairly
effectively.
Eric Martinuzzi
Lake Street Capital Markets, LLC, Research Division
Okay. I want to ask a couple of questions on the quarterly
operating metrics. What's behind the decline in the retail dealer
count? I would have thought that Q3 would be your seasonally
stronger, your first quarter exiting kind of the COVID lockdown Q2
quarter. Why that retail dealer count decline?
Jared R. Rowe
CEO, President & Director
We ran into some headwinds around inventory levels. Also, dealers
were exceptionally profitable in Q3, and you could see that with
some of the publics and how they've announced. And so what we saw
was we saw dealers who didn't have the high levels of inventory on
the new car side and even on the used car side. And so they pulled
back and what they did was they harvested that profitability. And
so we did see a little bit of a pullback. The nice thing is, and
the good thing is the capacity went up, which means the dealers who
stayed on took more, but we did lose some dealers.
And like we've been talking about, Eric, the dealer side of it and
the retail side of it, we're confident in our ability to rebuild it
over time. We've got some work to do in the selling motion. We --
it's really choppy, the results are. And we continue to have these
choppy results where one quarter, we'll have a good quarter. Next
quarter, we'll go backwards. But I am confident that we're doing
the right things, and we're heading in the right direction. But
that would be my response to around what we saw with the dealers.
We just saw a lot of dealers pulling back so that they could
harvest profitability in Q3. Don't blame them, quite
frankly.
Eric Martinuzzi
Lake Street Capital Markets, LLC, Research Division
Yes. And then on the -- historically, there's been a correlation
between your lead traffic and your click traffic. We saw those
metrics -- again, I'm talking sequentially here, but we saw those
going in different directions, lead traffic up, click traffic down.
What's behind that?
Jared R. Rowe
CEO, President & Director
Yes. So, the click traffic is interesting because the click traffic
and the click product, as you've seen in Q2 and Q3, got hit harder
than the lead side of the business. And it's come back a little
slower. And so from a traffic perspective, we generate traffic off
of our -- for the leads or the clicks product, not just off of our
SEM traffic, but we also have some publishers in the network,
automotive sites, high-quality traffic, but we essentially have
deployed our technology on their sites. And so we've always got
this interesting dynamic of when our SEM spend goes up, our click
traffic goes up. When our SEM spend goes down, the click traffic
goes down. And then you've also got these other dynamics where
sometimes if one of our publisher sites pushes traffic or pulls
back on traffic, it could have an impact on us as
well.
The real interesting thing around Q3, I think, Q2 and Q3, is the
traffic story is important, but also the revenue per query or the
revenue per click. And I look at it both ways. So, I apologize. I
put back and forth between my internal metrics and my external
metrics. But that revenue per click and revenue per query number
has gone down, and it's starting to recover. And so that's a good
sign in my mind because, again, this got hit harder than the lead
side because this is a search-like product. So, when you see people
pulling back on search spend like we saw in Q2, Q3 and it projected
for a period of time out, it has more of a direct impact on the
click product at the revenue per click or revenue per query line
than it does on the lead side. So, those are the dynamics that play
inside the click business. We did get a little bit more efficient
on our conversion. We feel good about it. It's starting to recover.
Some of the strengthening that you've seen is carrying through. But
we've got a long way to go on that click product because it's the
lowest. That click product in Q2, I want to say, on a monthly
basis, was nearly about half of what it was pre-COVID levels, but
we're digging our way out of it.
Eric Martinuzzi
Lake Street Capital Markets, LLC, Research Division
Okay. The -- I don't want to take it for granted, but obviously,
you guys have done good work on the gross profit and the gross
margins here, especially that 36.1% for Q3, up sequentially from
Q2. I realize we're facing seasonal pressures here in Q4 and Q1,
but what's a good assumption to use for gross margin? What are you
targeting?
Joseph Patrick Hannan
Executive VP & CFO
Well, I think in this mid-30% range, I mean, is what we're
targeting. I think what's interesting this quarter as you saw,
revenue went up, and we still were able to expand on the margin.
And so I think we can hold a good part of that even with a little
revenue decline.
Jared R. Rowe
CEO, President & Director
Yes. And then the important part there, Eric, is some of the
efficiency we're driving like, and that's one of the reasons why we
talk about the mobile stuff. Those sorts of durable process
improvements will give us some confidence in holding these gross
margin levels. And again, we've said this before, we expected to
get to these gross margin levels. We just got there a little
quicker, quite frankly, than we initially anticipated. And so we
feel pretty good about the tools we have available to us to
continue to hold those numbers. We're going to be very focused on
those lines. We know we need to make some investments. We know we
need to transform the product set. We're going to do that, too. But
listen, this management team isn't going to lose track of the gross
profit line.
Operator
Our next question, sir, from Lee Krowl of B. Riley
Securities.
Lee T. Krowl
B. Riley Securities, Inc., Research Division
Just a follow-up on the last commentary around gross margin
trajectory. I guess, just to kind of clarify, is 30 -- mid-30s kind
of the sustainable level go forward? Or are there other elements to
the product improvements and efficiencies that you can drive that
there is future expansion?
Jared R. Rowe
CEO, President & Director
Yes. So, I would -- let me -- go ahead, J.P. You go
ahead.
Joseph Patrick Hannan
Executive VP & CFO
I was going, yes, I do think there is opportunity for expansion,
but you take it from there, Jared.
Jared R. Rowe
CEO, President & Director
No, no, I agree. I was going to say the same thing we had, probably
as we're talking over each other. It's going to require product
transformation. Now listen, we're going to keep grinding on the
business we have, right? And we're going to keep extracting maximum
value out of it. And there is some improvement that could be had
with -- and we've talked about this in the past, right, mix, right?
In retail versus wholesale, clicks as a percent of total revenue,
these are all things that can drive that gross margin line. So,
there's still opportunity there. But where we think the real
opportunity for this business is, is in the transformation of the
product set. The products that we have is good. The products that
we have is intensely useful. The product set that we have is really
just bread and butter, right? It's good stuff.
Where we want to go with this matchmaker approach, and we think our
take on the matchmaker approach, we think will alter the trajectory
of the business longer term. But over the short term, there are
some things we can do to continue to optimize the core business. We
just don't want to get out ahead of ourselves here. And so mid- to
low 30s is kind of where we think we can live from a gross margin
perspective right now while we invest in the business and really
try and turn the screw to where that next phase of the work we're
doing here, which again, we think is exciting.
Lee T. Krowl
B. Riley Securities, Inc., Research Division
Got it. That makes sense. You guys kind of have talked about the
seasonal component to your outlook. Fully respecting that the
industry is definitely seasonal and we have that pullback, I kind
of wanted to just kind of dissect the impact of used inventory --
or excuse me, new inventory, obviously, kind of in a headwind since
we've seen a recovery across the industry up until just recently.
So, do you expect an improvement in new inventory to help partially
offset the typical seasonality or we work through the seasonality
and that new inventory headwind that we've seen kind of just washes
out in the seasonality components of Q1 -- or excuse me, Q4 and
Q1?
Jared R. Rowe
CEO, President & Director
I'll give you my wish list here, Lee. My wish list is that we
finally get those cars that they've been building since May and
June through the systems and into the dealership showrooms. At the
same time, we see a continued softening on the wholesale side in
terms of pricing. We then see a reaction by the OEMs of
incentivizing those new vehicles and then hopefully, some
government stimulus. If my wish list gets met, all right, I think
we could see some interesting dynamics that don't necessarily look
like the normal seasonality of the business. But that's an awful
lot to ask for. And in the current environment, I'm just not so
certain. So, I'm hopeful that inventories do start to build. I'm
hopeful that sell down is something that the OEMs have to really
attack in Q4. I'm hopeful that used car pricing continues to
soften, which means that they're going to have to really attack the
new car side with incentives. And I'm hopeful that somehow, we can
put some money in some folks' pockets so that they've got a little
bit more disposable income and a little bit more confidence in
their financial outlook, and they want to use some of that money on
buying cars.
I don't know if that answered your question directly or not, Lee,
but that is -- that's our hope. And if all that hits, then, yes,
right? You listen, Q4, Q1 could be better than expected. I just
can't bank on that as we sit right now.
Lee T. Krowl
B. Riley Securities, Inc., Research Division
Got it. That makes sense and definitely helpful to kind of frame
the outlook. Last question, you guys kind of put out a press
release about a QuinStreet relationship. Maybe just talk about the
opportunity and evolution of that relationship kind of near term
and long term?
Jared R. Rowe
CEO, President & Director
Yes. Well, I think those -- so a couple of things. One is we talk
about, in particular, our traffic product, rather our click
product. We talk about selling those clicks to endemic, near
endemic and then non-endemic buyers. I think QuinStreet is a great
example of a near-endemic buyer who sees real value in our
audience. We know there's more of those out there. It is a business
development opportunity. And it's one that when we find someone
like a QuinStreet who has scale distribution in automotive finance,
it's a really interesting strategic partnership that allow us to
optimize over time. So, we think there's more of those
opportunities, both in the endemic and near-endemic side. I've been
very open about the fact that we sell more of our clicks to
non-endemic buyers than I would like. So, this is just a really
nice example of us finding someone who values our traffic, who
delivers real value also into our consumer base.
Most consumers don't think about transitioning their auto insurance
until they're thinking about buying a car. So, it's just a nice
strategic fit. I think there's more opportunities out there like
that, and you're going to see us continue to try and take advantage
of our traffic to the benefit of our consumers and then also the
benefit of some of these near-endemic partners who, again, getting
access to a very targeted lower funnel audience like ours. It's
uniquely valuable to them as well.
One thing I would say, Lee, too, is, listen, F&I, right,
finance and insurance, right, big part of dealers back in gross
profit. What I would say, though, is most dealers don't sell car
insurance. And so as we think about these things, too, we're not in
the business of competing with our clients. We're in the business
of helping our clients. And so as we think about these things, just
to understand, we're going to focus on them in a very
client-friendly way. And so that's where this made all the sense in
the world. And again, we think it's a nice relationship that we can
optimize and grow over time.
Operator
And sir, our next question is from Ed Woo of Ascendiant
Capital.
Edward Moon Woo
Ascendiant Capital Markets LLC, Research Division
I know it might be a little early to look into 2021, but what do
you think the car industry sales will look like? And how do you
think the used car business will, I guess, change over the next 6
months?
Jared R. Rowe
CEO, President & Director
Yes, Ed, I wish I had a better answer for you. I'm a little nervous
about what's going on right now just from a macroeconomic
perspective. And so I mean we're tracking at, what, $15 million to
$16 million SAR as we sit right now. $15.5 million, I guess, the
number was less when we saw. It will be interesting to see if we
can carry that momentum through 2021. I'm not so certain that we
can, but I'd like us to.
And on the used car side, we continue to see strength there. I
think some of that's going to have to do with how the OEMs react
from an incentive perspective. Listen, the affordability of new
vehicles is something that's been creeping up for a couple of years
now, several years now. And in an environment where maybe the
economy isn't quite as strong as it once was and consumers aren't
quite as confident in their financial outlook as they once were,
it's going to put pressure on that trade-off decision around do I
buy a new car or do I buy a used car because of the pricing
differential.
So, I wish I had a better answer for you, Ed. I do think you're
going to continue to see just more innovation around digitally
enabling the transaction, which is going to allow consumers to have
access to this trade-off between new and used in an even more fluid
way than they can today. But I wish I could be a little bit more
bullish or optimistic about 2021 as we sit here today. I just --
there's too many unknowns for me and too many variables, which is
why you're seeing us kind of be a bit conservative in our approach
right now just because we want to see how this plays out over the
next couple of quarters because we think we'll know a lot more come
the end of Q1 next year.
Operator
And sir, we do have a follow-up question from Gary Prestopino of
Barrington Research.
Gary Frank Prestopino
Barrington Research Associates, Inc., Research
Division
Just a quick question here. Do you have what the click revenue was
and I guess, display revenue was, how that breaks out among the
advertising revenue?
Joseph Patrick Hannan
Executive VP & CFO
We -- yes, it's in the 10-Q. I have to -- I don't know the exactly.
The number is broken out there.
Jared R. Rowe
CEO, President & Director
And Gary, what I'll tell you is the vast majority is click
revenue.
Gary Frank Prestopino
Barrington Research Associates, Inc., Research
Division
Okay. I'll find it in the Q. I just thought you might have it
handy.
Jared R. Rowe
CEO, President & Director
And Gary, just to add on to that. So, the display ad revenue, like
we've talked about in past periods, has been a bit in decline
because of all the kind of the trends in display, and it's not a
core area of focus for us. So, the bulk of it is the click
side.
Operator
And sir, at this time, this concludes our question-and-answer
session. I would now like to turn the call over to Mr. Rowe for
closing remarks.
Jared R. Rowe
CEO, President & Director
Okay. Well, I just want to say thank you. I appreciate everybody
joining the call. We appreciate your continued interest in the
business. We continue to appreciate your support of the business. I
also just want to thank the team. This is -- the last couple of
quarters have been pretty rough on the team just overall because of
all the uncertainty out there, whether it be market uncertainty,
what's going on at home, what's going on just in the economy
overall. And I couldn't be more proud of the work that the AutoWeb
team has done in a very challenging environment. So, I just want to
make certain I say thank you to all of them for all your great work
because this is your work. So, thank you.
Other than that, we just look forward to speaking again on the next
earnings call, and we're looking forward to talking about Q4 and
full year 2020 results. So, thank you for your time, and we'll talk
again soon.
Operator
Ladies and gentlemen, this does conclude today's conference call.
You may now disconnect your lines at this time. Thank you for your
participation.