Autobytel Misleading Investors On Purchase Requests? (ABTL)

The management of Autobytel (ABTL) has been misleading investors into believing that all or most of the purchase requests that Autobytel sells to dealers originate from Autobytel websites. This is evidenced in their Form 10-Q for the 1st quarter of 2006. On page 19, there is an in-depth discussion of the sale of purchase requests by Autobytel to dealers, but no discussion of the buying of purchase requests by Autobytel from third party companies.

This language misleads investors into believing that Autobytel has a lot of web traffic through its websites and generates the purchase requests from Autobytel.com, Autoweb.com, Car.com, CarSmart.com, AutoSite.com, AICAutoSite.com, Autoahorros.com and CarTV.com.

The costs for buying the purchase requests are hidden in traffic acquisition costs ('TAC') on page 22. The term 'traffic acquisition cost' is usually used to describe advertising or affiliate costs for driving web traffic to a website. This is not the case at Autobytel. Websites such as Yahoo and KBB collect the consumer's information on their website. The consumer's information is then offered for sale to Autobytel and Dealix. The consumer is not connected to the Autobytel website via a click-through and therefore there is no brand recognition of Autobytel by the consumer.

The truth: 80% of purchase requests sold by Autobytel to dealers are bought by Autobytel from third party companies.

This has been taking place for over five years as the company continually loses money.

Management is failing to remedy this misperception in an effort to collect high salaries and bonuses until the company is put to bed quietly. (The bonus schedule has been accelerated to every six months instead of yearly.)

The Sarbanes-Oxley Act has provisions for misstatements in the financial reports. Officers who 'willfully' sign off on faulty financial reports knowing they are incorrect could be sentenced to 20 years in prison and fined $5 million. Another provision of the law allows corporate boards of directors to seize the bonuses and stock profits of chief executives and finance chiefs whose companies restate financial results because of 'misconduct.'

It will be interesting to see what happens at Autobytel.

Autobytel is simply an intermediary in the automotive leads business. They buy consumer information from websites and sell it to dealers. It is just a matter of time until they become disintermediated by a more competitive company with less overhead in management.

Questions to ask at the next earnings announcement conference call:

• What percentage of leads sold by Autobytel are purchased from other websites?
• What is this trend over the last five years?
• What is the trend for the average cost per lead purchased over the last five years?

[Editor's note: These are strong allegations. Readers should check the facts carefully themselves.]

Full disclosure: the author has no position in ABTL.

Comments

[Michael Benavides]

Copied from my reply to the other related post from Mr Goodwin:

The practice of arbitraging purchase requests ("leads") in the industry is commonplace and is actually used by some providers as a competitive advantage (when the leads come from reputable third party automotive research sites).

In fact, of the four major networks (AutoNation/AutoUSA, The Cobalt Group/Dealix, Internet Brands/CarsDirect.com and Autobytel.com), all of them source the majority of their leads from third parties.

The differentiating factor is who those third parties are. The major auto portals provide a good quality set of leads, but open affiliate networks (programs which pay third parties for traffic and/or leads) allow some junk through the door. Spammers have been virtually eliminated from the top networks' product mix and no longer materially impact overall quality.

The questions to ask are what percentage of the leads come from native traffic, from websites with at least 1MM uniques/mo, from sites with 200k-1MM u/mo and what percentage come from sites with under 200k u/mo.