Over the years, Autobytel (NASDAQ:ABTL) has been beset with problems like slowing growth and several financial restatements. To turn things around, the company hired a new CEO, James Riesenbach, who is a veteran of the dot-com world, having served as senior vice president of AOL's Search and Directional Media Group. But don't expect a quick return to success -- or that it can even be achieved at all. In fact, on the company's most recent conference call, even Riesenbach downplayed expectations.

Ultimately, Autobytel's recent third quarter was a disappointment. Revenues fell 8% to $28.1 million, and the company posted a net loss of $7.9 million, or $0.19 per share. This compares to a net loss of $287,000 or $0.01 per share in the same period a year ago.

The biggest part of Autobytel's business is selling qualified leads to auto dealers (in the third quarter, fees from these leads were about $16.5 million). However, this can be a tough business, as has been the case with other players like InsWeb (NASDAQ:INSW) and HouseValues (NASDAQ:SOLD).

Basically, the costs of buying online traffic is increasing -- putting pressure on margins. These costs are termed "traffic acquisition costs" or TAC, which is included in the cost of revenues. Unfortunately for Autobytel, the cost of revenues increased 8% during the third quarter to $13.8 million, increasing from 42% to 49% of overall revenues.

Autobytel's problems are fundamental in nature -- for the typical consumer, the decision to purchase a car is infrequent (perhaps every three to four years). As a result, it is expensive and difficult to build a lasting consumer brand.

But Autobytel is getting aggressive in terms of extending its brand. For example, the company announced an exclusive deal with AOL to manage its Autos site. Moreover, on the conference call, Riesenbach indicated there may be more portal deals. After all, while he was at AOL, he worked on partnerships with companies like Google (NASDAQ:GOOG), Infospace (NASDAQ:INSP), and Shopzilla.

But these portals realize the value of their traffic and are likely to strike deals that are in their favor. In other words, such revenues may be low-margin for Autobytel.

Interestingly enough, perhaps the best thing Autobytel can do is significantly reduce its cost structure. For example, the company has over 400 employees. True, Autobytel announced a 10% reduction in its workforce. But compared to other online companies -- such as Bankrate (NASDAQ:RATE), which has only 159 employees -- Autobytel looks bloated.

Autobytel's announcement to possibly divest two divisions may help to further decrease the headcount. The divisions include: AIC (Automotive Information Center), which provides marketing data, and RPM (Retention Performance Marketing), which helps auto dealers build customer loyalty.

Another mitigating point for Autobytel is that advertising dollars continue to move into the online auto sector. According to a study from eMarketer, this segment is expected to grow 27% in 2007 to $2.7 billion.

Of course, despite all this, Autobytel has nonetheless languished over the years. In other words, the company definitely needs to rethink its approach. Given the challenges, it's going to take some time to turn things around.


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Fool contributor Tom Taulli does not own shares of any company mentioned in this article. He is currently ranked 41 out of 13,230 in CAPS.