Marchex, Inc. (MCHX) Q4 2011 Earnings Report, Transcript and Summary

Good afternoon. My name is Christian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Marchex Fourth Quarter Earnings Conference Call. [Operator Instructions] I will now turn the call over to our host, Mr. Ethan Caldwell, General Counselor and Chief Administrative Officer.

Thank you. Good afternoon, everyone, and welcome to Marchex's Business Update and Fourth Quarter 2011 Conference Call. Joining us today are Russell Horowitz, Chairman and Chief Executive Officer; John Keister, Executive Vice Chairman; Peter Christothoulou, President; Brent Turner, Executive Vice President; and Michael Arends, Chief Financial Officer. During the course of this conference call, we will make forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical fact included on this call regarding our strategy, future operations, future financial position, future revenues and other financial guidance, acquisitions, projected costs, prospects, plans and objectives of management are forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. The actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. There are a number of important factors that could cause Marchex's actual results to differ materially from those indicated by such forward-looking statements as are described in the Risk Factors section of our most recent periodic report and registration statement filed with the Securities and Exchange Commission. All of the information provided on this conference call is as of today's date, and we undertake no duty to update the information provided herein. During the course of this conference call, we will also reference certain non-GAAP measures of financial performance and liquidity, including OIBA, adjusted OIBA, adjusted EBITDA and adjusted non-GAAP EPS. A reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is contained in today's earnings press release, which is available on the Investor Relations section of our website, and the definitions of these measures, as used by us, and the reasons why we believe these measures provide useful information are also contained in today's earnings press release. At this time, I would like to turn the call over to Russell Horowitz.

Thank you, Ethan, and welcome, everyone. On today's call, I'll briefly discuss our business and operations. Mike will review our financial results, and then we'll open it up for Q&A. As you all know, we believe the rapid growth of the mobile marketplace combined with Call Analytics and technology will transform how advertisers buy and measure phone calls as a lead source. As we look at our progress over the last several years and think about what's next, we continue to believe that first, strong advertiser demand exists for connecting with new customers through the phone. Today, we're working with hundreds of thousands of local and national advertisers, many of whom are buying pay-per-call for the first time. Second, the Call Advertising opportunity is large. Third-party industry sources predict billions of dollars will fall [ph] into Digital Call Advertising over the next several years. Importantly, there appear to be very few companies in this market that currently have the necessary technologies and relationships with both advertisers and call media sources, including leading mobile carriers, to achieve a leadership position. While it's still very early, in this regard, we feel that Marchex is in a unique position to be one of the leaders in Call Advertising. Third, mobile and emerging media are drivers. Growth in the use of mobile devices and other call media sources that drive personal connections through the phone are changing how consumers search for information and how advertisers interact with those consumers. Today, mobile sources make up the majority of calls that flow through the Marchex platform and Marchex's voice search products delivered to consumers through our mobile carrier partnerships are very well-positioned to benefit from this trend. And fourth, education and technology are the current obstacles to growth and adoption. In the Forrester Research Report issued in September of 2011, 40% of marketers who aren't using performance-based Call Advertising simply weren't aware of the opportunity. Over the last few years, Marchex has successfully transitioned our business to one driven by the growth of Digital Call Advertising and leveraged against the growth of mobile. In this timeframe, our Call Advertising products have grown significantly and in 2011, represented the vast majority of our business, contributing more than $100 million in revenue. While we have successfully transitioned our business from one previously focused on click advertising to one that is now highly focused on Call Advertising, there's still much for us to do with this market evolves, both as it relates to our products and our customer relationships. That said, everything we're doing is squarely focused on positioning Marchex as a leader in what we believe will be a transformative market. Looking at the fourth quarter, our business continued to experience meaningful year-over-year growth driven by our Digital Call Advertising products. However, the fourth quarter didn't meet our overall expectations as our non-call-driven products have budget volatility. Something we previously communicated may occur, given our investment focus on the Digital Call Advertising opportunity. In addition, we do have exposure to period-to-period variability with committed advertising budgets, which can translate to variability in our financial performance. That being said, we are maintaining our focus on the initiatives that are driving our growth, which are centered on Digital Call Advertising, adding more advertisers of all sizes, growing existing advertisers, adding and growing unique sources of call media and continuing to innovate with our Call Analytics platform. With that, I'll hand the call over to Mike.

Thanks, Russ. During the fourth quarter, continued focus on our call-driven products helped drive meaningful year-over-year revenue and cash flow growth. Total revenue for the fourth quarter was $39 million, with call-driven revenues representing $28.2 million. During the quarter, we continued to add new advertisers of all types as well as new partners to the Digital Call Marketplace. As a result, our call-driven revenues grew more than 38% on a year-over-year basis pro forma for the Jingle acquisition. Our non-call-driven revenues experienced a decline of nearly $1 million sequentially as we saw weakness from advertiser spending given market factors and our decision to concentrate our investment in product development and support for our higher growth Call Advertising products. We had previously communicated that we believe our non-call-driven revenue will decline over time as a result. Excluding stock-based compensation, acquisition costs and amortization of intangible assets, total operating costs were $33.5 million for the fourth quarter of 2011. Sales and marketing costs, excluding stock-based compensation, were $3.9 million. During the quarter, sales and marketing expense levels were in line with our expectations. In the near term, we expect our marketing expense to be relatively stable to modestly down from current levels. Longer-term, consistent with what we've messaged in prior quarters, we expect to increase sales and marketing expense in support of the continued growth of our sales and customer support teams and the evolution of our products. Adjusted operating income before amortization for the fourth quarter was $5.5 million. Adjusted EBITDA was $6.5 million. GAAP net income applicable to common stockholders was $920,000 for the fourth quarter of 2011 or $0.03 per diluted share. This compares to GAAP net income applicable to common stockholders of $593,000 for the same period of 2010 or $0.02 per diluted share. Adjusted non-GAAP income per share, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.08 per share. During the fourth quarter, we generated $3.7 million in operating cash flow and had $37 million cash-on-hand as of December 31, 2011. Additionally, we sold a small number of non-strategic domains that yielded $2.3 million in incremental cash flow. As highlighted previously, we expect non-strategic domain sales to be uneven quarter-to-quarter, but we do continue to see strong demand. During the quarter, we acquired 460,000 of our common shares for a total price of $2.9 million, bringing our total shares acquired under our repurchase program to 10.9 million or 29% of our common shares outstanding. We will continue to be opportunistic with respect to share repurchases while also maintaining a meaningful cash position for financial flexibility. As we have communicated previously, we are evaluating potential strategic alternatives for our non-call-driven products and assets, including our domain name assets, in order to further focus on products and opportunities that can drive business growth. We believe our rich asset base is not being properly valued and whether through select development of these assets, sales or a combination of both, we are going to more aggressively pursue how best to get this value realized. We expect this process to take some time, but we are focused on it today and hope to have more information to share with you in the coming periods. Now turning to our outlook for 2012 and the first quarter. First, looking at our initial revenue guidance for 2012. As previously communicated, for the year, we anticipate revenue of between $150 million and $160 million. In addition, we expect call-driven revenues to grow more than 20% over the course of 2012. We also expect lower revenue in the first quarter versus the fourth quarter, primarily due to lower budget spends from advertisers for our non-call-driven sources and some period-to-period variability with committed advertising budgets. After the first quarter, we anticipate sequential revenue growth resuming for each of the remaining quarters in 2012. We continue to believe our investment and focus on product development and support, for our higher growth call-driven products will pay off as the Digital Call Advertising market continues to evolve and that these products will remain the core driver of our growth. Next, looking at adjusted OIBA and EBITDA margins for the year. For 2012, we expect more than $15 million in adjusted operating income before amortization and more than $19.5 million in adjusted EBITDA. As we discussed previously, we saw a significant growth in demand for our call-driven products over the last 2 years, driven by strong advertiser adoption. Our sales strategy to direct national call advertisers and resellers, however, is still evolving and we have exposure to period-to-period variability with committed budgets. This can translate to variability in our financial performance. As we move forward, we are carefully managing our investment levels such that as we grow, a portion of the incremental contribution will be allocated to support our growth initiatives, including investments in our products, our people and our customers. The rest will flow through to contribute to expanding profit margins over the course of the year. As previously communicated, we believe Marchex can deliver strong annual growth rates in revenue and EBITDA margins scaling beyond 20% over the long term. And with that, I will hand the call back to Russ.

Thanks, Mike. In a relatively short time, we have successfully transitioned our business to Digital Call Advertising, which is closely aligned with the rapid adoption of mobile. We believe mobile will be one of the most important digital advertising trends in history. While these markets are still early, we are now past the point of initial validation and believe we will see significant adoption of performance-based Call Advertising over the next several years. We continue to invest to reinforce our leadership position in Digital Call Advertising while working to educate the market and steepen the adoption curve, which continues to be amongst our most important initiatives. I want to thank our employees for the continued hard work and dedication, and we look forward to updating you on our progress throughout the year. With that, I'll hand the call back to the operator for Q&A.

[Operator Instructions] Our first question comes from the line of Eric Martinuzzi with Craig-Hallum.

You were impacted, negatively impacted, by a large customer taking their digital advertising spend elsewhere and at least at the time of the announcement of the news, it sounded like there could be the potential for some relief there given they were being incented to take that demand elsewhere. Do you have any additional color on the large customer's intentions?

Thanks for the question. This is Mike. We actually don't have any updated information that's consistent with where we were before. There could be some good things that come in the latter part of the year if some of that spend comes back. But right now, we've put out the guidance as we set it forth just a few weeks ago as well, and we don't have any more information to update at this time.

Okay, and then you have a couple of payoffs coming up on your Jingle acquisition. You do have a decent cash balance, your -- I've got you at $37 million on the cash balance and it looks like you owe $19 million in April of this year and another $19 million in October, but you do have the option to use cash or equity. Could you comment there, please?

This is Mike again. So it's actually a little bit less than that. It's a little closer to $35.5 million over those periods of time, and as you know, we do have $37 million in cash at the end of the year, and we are generating a significant amount, tens of millions of dollars of operating cash flow as we forecast this year, as well as here in the recent periods of time. If you take our free cash flow and you add to that some of the potential cash that we may generate from the sale of some of the non-strategic assets, I think we're in a fairly flexible position with being able to accommodate cash payments if we so choose on those dates. In addition, we have the flexibility to consider other things as well, including how that may deal with repurchases of our own stock recently. And a couple of months ago, we actually increased the amount of shares, the number of shares that we have in our stock repurchase plan, and that may be, again, a choice that we go into the market and selectively make repurchase moves.

So the intent is to pay the obligation with cash, is that correct?

I think it will all depend, and we've been consistent with this. We have the flexibility in our hands on both of those dates, April and October, to pay in either cash or stock. And so I think it behooves us to actually see what the market bears on those dates from a stock perspective before we make that decision, and that will be the appropriate time to make that decision.

Okay, and then the non-call parts of the business, do you have -- just backward-looking for Q4, I don't know, did we get those numbers? Is that something you can comment on?

The non-call-driven revenues for the fourth quarter were about $10.8 million, and the call-driven revenues were $28.2 million.

[Operator Instructions] Our next question comes from Robert Coolbrith with ThinkEquity.

I'm just wondering if you could talk a little bit, first off, about your strategy to diversify your revenue streams further, decrease revenue concentration. Yes, anything you can do to accelerate that, are you considering some new channel partnerships or you got anything in the pipeline that might be able to decrease revenue concentration from your perspective? And I have a follow-up also on the potential of strategic alternatives.

Sure. Thanks for the question. A very good one. Look, Digital Call Advertising is a young business. We feel very good about the fact that a couple of years ago, this was a space that really wasn't on anyone's radar and it wasn't a big variable in our business and in a short time, we've taken it from nothing to a $100 million business. We think the investment we've made in people and product platforms to get it to this point don't stop here. And there's a lot more folks on the advertiser side and also in the media -- call media source side, particularly with mobile, that it's relevant to. And so one of the big themes in 2011 you heard us talk about was investment in the products, the platforms and the people to support growing the business. So we've articulated some of the short-term variables around financial performance, but we're big believers in the Digital Call Advertising opportunity and how that translates to delivering significant growth for Marchex. At this stage, in terms of scale, call it approximately $150 million business and a $100 million-plus Call Advertising business, it's natural that there's going to be some customers who are bigger adopters in the early phases. And so we think this is just part of what any company going through this kind of an emerging market faces, and we do think that a lot of the investment we've made over the last 9 to 12 months around sales and account management will pay off with diversification. So we think it's focus and time are what deliver us to diversification across a broader base of customers and greater scale.

Great, thank you. And also, I realized that Michael said you'll provide some additional color on potential strategic alternatives over time, but wondering if you could maybe talk a little bit more about which options may or may not be on the table. With respect to the domains, do you consider any of them at this point to be strategic to the call-driven business? Or are they also just strategic to the Publishing business, obviously? And then in terms of selective domain development, could you maybe tell us a little bit of more what you might mean by that? Could we see a significant investments or would it be something that would be done in more sort of a scalable way? As potentially sort of in line with what you had been working on with the Open List integration a number of years back?

Good. Look, again, good questions. Yes, the theme that we're applying to this process is focus, clarity and unlocking unrealized or unrecognized value. So there are domains and website assets that are very relevant to our value proposition with Call Advertising that we have invested in and will continue to invest in. As we go through this process, there may be some assets that we have not developed yet that we view as contributing within this kind of greater clarity and focus on Call Advertising. As it relates to the balance of those assets, it is a diverse set of assets with a diverse set of potential partners or interested parties. Some may be more holistic. Some, it may be beneficial for us to kind of segment out that process. It's early in the process at this point. We feel good about some of the conversations that have been started. But it's premature to report back in terms of where we are. The pieces around our investment in selective assets will be consistent with our focus and clarity around our growth opportunities.

[Operator Instructions] There seem to be no further questions. Please proceed with any closing remarks.

Look, we appreciate everyone's participation and the questions you've asked up here. Obviously, it's very early in the year, but we feel very good about what's going on at Marchex and our ability to have a successful 2012 and make meaningful progress as a company and for our investors. Thank you.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.