Marchex, Inc. (MCHX) Q1 2013 Earnings Report, Transcript and Summary

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

Thank you. Good afternoon, everyone, and welcome to Marchex's Business Update and First Quarter 2013 Conference Call. Joining us today are Russell Horowitz, Chairman and Chief Executive Officer; Peter Christothoulou, President; John Keister, Executive Vice Chairman; 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. In addition, there are certain risks and uncertainties relating to our previously announced proposed spinoff transaction which contemplates a separation of our mobile and call advertising business and our domain and advertising marketplace business including, but not limited to, the impact and possible disruption to our operations, the timing and certainty of completing the transaction, the high cost in connection with the spinoff, which we will not be able to recoup if the spinoff is not consummated, the expectation that the spinoff will be tax-free, revenue and growth expectations for the 2 independent companies following the spinoff, unanticipated developments that may delay or negatively impact the spinoff and the ability of each business to operate as an independent entity upon completion of the spinoff. 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. 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, revenue with domain sales, adjusted OIBA and EBITDA with domain sales 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 release, which is available on the Investor Relations section of our website. And definitions of these measures as used by us and the reasons why believe these measures provide useful information are also contained in today's earnings release. At this time, I'd like to turn the call over to Russell Horowitz.

Thank you, Ethan. Thank you, everyone, for joining us for today's call. We started off the year with good momentum, and there's several trends driving growth in Marchex, some of which helped us in the first quarter. The first trend is higher mobile adoption, resulting in rising national and local advertising budgets dedicated to mobile channels. Several points here. First, more large national and small local businesses are embracing mobile and call advertising for the first time. In the first quarter, we added more than 40 national and reseller customers across our call products, including brands such as Pella, an energy-efficient window and door manufacturer; Charter Communications; TBC Corp., one of the nation's leading automotive services companies; and Ziplocal. Separately, we meaningfully grew existing relationships, including adding thousands of local businesses into our call marketplace to resellers. Next, the local advertising market is increasingly -- increasing in importance in mobile performance advertising, as many smaller or regional local businesses are interested in generating leads for mobile consumers. We see this in our expanding resource channel, where our partners are looking to offer call-based leads that deliver new customers to their local businesses. Additionally, a new opportunity is quickly emerging. Many national businesses with a local presence, such as auto manufacturers with regional dealerships or insurance companies with local agents, are coming to these in the digital marketing landscape. Historically, these brands have run under national and local marketing campaigns through separate initiatives, and that's created widespread inefficiencies. Given the fragmentation in mobile, one of the biggest problems we're seeing is competition at the local level among those who work for the same brand. National businesses are now intent on changing this. Ad spend is growing rapidly, and there's greater demand for higher return on investment. National brands spent more than…

Thanks, Russ. Total revenue for the first quarter was $36.2 million, with call-driven and other related revenues representing $31.1 million. Call-driven revenue growth accelerated to 17% year-over-year and 9% sequentially. We continue to make progress growing budgets from existing advertisers as well as adding new advertisers. Our investments in products, technology and people were the principal drivers in the first quarter. And in the near term, we expect to continue investing in our products and technology. Over time, we believe we can capture additional efficiencies and increased margins in these products, as we gain additional scale. For the first quarter, including domain sales, Archeo revenue was $6.5 million. Excluding domain sales, revenue from Archeo was $5.1 million. Overall, we saw some decreases in advertising spending in these products due to our historical decisions to concentrate our investments in our higher-growth mobile and call advertising products. Excluding stock-based compensation, separation costs and amortization of intangible assets, total operating costs were $34 million for the first quarter of 2013. Sales and marketing costs, excluding stock-based compensation, were $2.8 million. During the quarter, we hired additional sales and marketing employees, as we invested in the opportunities we see to unlock performance-based call advertising and to support Archeo. In the near term, we expect our marketing expense may modestly increase from current levels in support of continued growth of our sales and customer support teams and the evolution of our products. Product development costs were $6.5 million, as we were able to hire some additional product and engineering talent during the quarter to continue to build out our market-leading Call Analytics platform and our call marketplace. Adjusted operating income before amortization for the first quarter was $2.2 million. Adjusted EBITDA was $3.1 million. GAAP net income applicable to common stockholders was $85,000 for the…

Thanks, Mike. From our technology to our products to our people, Marchex is focused on delivering on the opportunity in mobile performance and call advertising. We believe in tangible, data-driven results that generate new customers for our advertisers and higher yield for publishers. As more advertisers continue to adopt our products, it's great to see validation that supports our early commitment to mobile performance and call advertising and also to see our progress translating into higher growth. I want to thank our employees for their hard work and dedication, and we look forward to updating you again soon. So with that, I'll hand the call back to the operator for Q&A.

[Operator Instructions] Your first question is from Andre Sequin with RBC Capital Markets.

When you take a look at the near-term growth catalysts in your call business, what are you looking towards there? Is it more existing clients or winning new clients? And then, I guess, in connection with that, the announcement around Ziplocal, do you see that as more of a near-term driver or intermediate? And then separately, we talked last quarter about pricing trends in different verticals in the call business. Are there any particular trends you're seeing there in the course of this quarter?

Sure. Thanks for the questions, Andre. As it relates to growth catalysts going forward, when we look at existing relationships and new ones, we do see a real balance. One of the things you heard us talk about in this call so far as those advertisers that have come into the mobile channels and kind of worked their way up the learning curve are understanding performance more. And as they do, we see dollars shifting into mobile and -- specifically focused on performance. And so we see catalyst to grow existing relationships based on that trend. In parallel with that, those folks who are now, call it, second-wave adopters, who are initially coming into mobile, seem to have pretty tighter cycles in those learnings. And we're able to get them to appreciate performance, I'd say, at a faster rate than perhaps even some of our early adopters. So I think it's balanced. But I do think we have plenty of opportunity to grow existing relationships as well as continue to bring in more customers and kind of broaden those folks for whom we're a good fit. The other thing that we -- when we started to talk about last quarter and we're bringing more emphasis to now is the opportunity with this kind of national-local problem. When we look at these national companies that have local agent or dealer networks and kind of the problems that exist is, mobile continues to grow and the increased fragmentation that comes with it translates to the national brand and local agents or dealers competing for placements on a very small screen. And it leads to brand confusion and economic inefficiencies. And so kind of almost in real time, we've seen this massive market become a place where brand confusion and economic inefficiency has created a big problem that's only getting bigger. And so somewhat serendipitously, we've historically supported these national customers and these local customers, but there's this very organic convergence of needs here that we've seen particularly well suited to solve. And so we think that's -- one of the key catalysts for us going forward as well is growth of our national ad relationships, driving into being part of their local solution and that being a catalyst for new relationships as well. In terms of pricing trends, consistent with last quarter, there are certain categories that, as we see adoption, we do see some pricing pressure move, move prices up. But nothing new per se versus the trends we saw last quarter. And we think that will continue going forward.

Your next question is from Dan Salmon with BMO Capital Markets.

2 questions. First, yesterday, you had a quick update in a press release of new product solution. One of the things you mentioned was a pay-for-performance model, and I know that's been part of the platform. But I was just wondering if there were some new options for pricing for clients that we can maybe flesh out a little. And then second, just maybe an update on the supply side of the call marketplace and anything that's been positive, negative or otherwise there lately.

Good questions, and thanks, Dan. As it relates to kind of our pricing model, one of the things that we've recognized over the last year or more is that the growth of mobile has translated to a lot of confusion for folks. And so we've been very focused on communicating what we think is a very comprehensive value proposition in terms of what Marchex can deliver and trying to make the model through which they buy it as simple as possible in terms of pay-for-performance and Pay For Call. And so that's the model that we're using, where we deliver a lot of value, solving a lot of problems under a performance-based model with Pay For Call. And right now, we think the conversion rates in driving the 29% for national guys and validating, that about 2/3 of the calls we drive to local businesses are generating product and service conversations is a real validation. Our goal is to continue to try and take the friction out of the process and make it easy for folks to adopt this. And so we're going to maintain that model of really emphasizing pay-for-performance with Pay For Call. And so that's where we are and how we envision things moving forward from here. On the supply side, we have grown -- I don't think we've come out with anything specific from an announcement perspective. But we have grown our supply-side relationships. We have more than 100 sources we're working with actively. We've integrated with more than 300 to figure out which hundred both -- drive both quality and quantity. And we're growing existing supply-side relationships, and we're also adding new ones. And I would look at this as a place that you'll see some disclosable activity as we move forward in the next period.

Your next question is from Carter Malloy with Stephens and Company.

So one's on the Local Leads platforms improvement for national advertisers, can you just explain a little more on the potential of that product? And is that factoring your guidance and contributing to this year's guidance at all?

Sure. When you look at this national-local opportunity, we don't want to get ahead of ourselves. But at the market level, you've got $40-plus billion that national companies spend each year, targeting local customers. And as I noted, the problem is big and getting bigger based on the complexities of mobile. And it's kind of happening very dynamically. And a lot of these brands are realizing kind of the rate at which economic inefficiency is getting worse. And the importance of having a cohesive approach to managing their brand, both at the national level and understanding really what kind of logical rules to drive when a call ought to be driven to the national call center versus to a local agent or dealer based on who it -- kind of consumer intent and which of those entities is best suited to close that transaction. And so for us, we do see this as one of the real catalysts in our business over the next couple of years. We do see it as a real-time one. It has been a source of investment, and we've been messaging that investment as part of our kind of directional guidance as well as financial guidance. But I would say that we're not trying to be over -- we're not trying to overthink ourselves in timing it, and we do think that there's a catalyst there that may not be fully reflected. And when we get more visibility on its impact is when I think we'd kind of factor that more meaningfully into our guidance and how we set expectations.

Okay. And then also, given at your reports lately showing some comparable domain sales in the thousands on average, and I think you guys had some at a much higher average of $27 or something like that. Can you help us understand just the standalone value of Archeo? I know it's a difficult topic to navigate from a disclosure standpoint. So maybe even just a minimum, if someone came along and said "Hey, I'll pay you $50 million or $75 million for that," would that be worth a consideration? Or is it, in your mind, worth much more than that?

Very good questions. I'll do the best I can to be as transparent as I can, given our process. Historically, we've said we believe that there's 9 figures of asset value there. And the obstacle to getting that realized was focus on investment. And so this process has been about getting the folks in place who have the expertise and can bring the focus and, in turn, to make the investment on unlocking and demonstrably showing what these asset values are. So that we can unlock those asset values and, in turn, create a growth opportunity with Archeo. The data that we shared in our release this week, I think, is very affirmational. We talked about the fact that we think we've got some of the most valuable premium digital real estate in the world, and we have world-class people who, we are very thankful, who've committed to Archeo and have helped us build a process in an organization and create the intellectual property to really start to institutionalize what it means to validate our beliefs and, hopefully, translate that into a kind of broader appreciation for what we've got. In the context of what would it take for us to part with those, I'm going to leave that one alone but reiterate that the data we shared this week were metrics we felt were very meaningful in establishing who Archeo is, our premium position in the market and the opportunity we've got forward to both unlock liquidity and create a recurring premium business in this industry. And so we think we're just getting started. A lot of the people we've hired, literally, have started within the last weeks and months, and a lot of the tools that we've been building are just coming into their hands and use. So we think it only gets better from here and will only be easier for people to appreciate the value that we've come to know and love.

[Operator Instructions] We have no further questions at this time. Do you have any closing comments?

Appreciate everybody's participation in our call today. And we'll look forward to updating you on our business progress very soon. Thank you.

Thank you, everyone, for joining today's conference call. You may now disconnect.