Marchex, Inc. (MCHX) Q1 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Marchex First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Ethan Caldwell, General Counsel. You may begin your conference.

Thank you. Good afternoon, everyone. And welcome to Marchex’s business update and first quarter 2015 conference call. Joining us today are Peter Christothoulou; and Michael Arends. Before we get started, I’d like to take this opportunity to remind you that our remarks today will include forward-looking statements, including with respect to our financial and operational performance, and actual results may differ materially from those contemplated by those forward-looking statement. Risks and uncertainties that could cause these results to differ materially are set forth in today's earnings press release and in our most recent annual report on Form 10-K filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today we will undertake no obligation to update these statements for subsequent events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The earnings press release is available on Investor Relations section of our website at marchex.com. At this time, I would like to turn the call over to Pete Christothoulou.

Thanks, Ethan. And thank you all for joining us on our first quarter conference call. As I mentioned on our prior call in late February, my attention is focused on the two pillars that will drive our success and our growth, our clients and our people. Since then there have been several developments. Our company’s focus and strategy to lead in mobile advertising analytics has crystallized, leading to heightened emphasis on enterprise clients and accelerated product development. We have added more than 20 new enterprise clients to Call Analytics platform, namely due to our recent product launch of Call Analytics Research. We have hired approximately 30 new team members, in areas critical to the long-term success, such as in product and engineering, marketing and client engagement. And we have divested the Archeo domain assets, allowing it to devote more time and energy to execute our analytics strategy and supporting our clients and people. Philosophically, we believe that providing our clients a consistently superior experience must be the undercurrent of everything we do, from technology development to product innovation to client engagement. Protecting the customer experience is what builds trust, which is what forms the backbones of great companies and we are here to build something great. After meeting many of our clients, partners and prospects, to better understand their pain points over the last several weeks, I feel even more confident about establishing Marchex as the world’s leading mobile advertising analytics company. The common theme I am hearing from marketing and agency executives is that understanding mobile advertising outcomes and through return on investment is without a doubt their biggest challenge. This problem developed out of shift and consumer behavior that you saw coming. The digital online platform in everyone pocket is ironically driving offline actions. As consumers, we are increasingly engaging with mobile brands on our mobile phones and those interactions are driving offline sales, whether that’s cooking to call business or walking into a store and it’s a trend that will continue to increase. This dynamic forms a gigantic market gap for enterprise marketers. Mobile is fragmented without cookies to rely on, we have no crumbs to follow the customer journey. In fact, today's entire marketing analytic ecosystem is capable of measuring value offering outcomes, much less tying them back to specific ad campaigns and tactics. With rising mobile usage and expanding budgets, the need for marketers to tie ad spent actual results in real time has never been greater. Once enterprise marketers have real actionable insights into mobile, we believe the budgets will expand at even more aggressive rates. This is a problem everyone is up against and exactly the problem Marchex is solving. Connecting online behaviors to real world, offline transactions in real-time. So far more than 1 billion phone calls have run through our analytics platform, which has given Marchex the intelligence to understand each and every touch point in the customer journey. From the moment, the consumer hits a click-to-call button to the duration of conversation to when that call ends. Opportunity has never been clear. We have become a company that can help provide 360 degree view of mobile marketing efficiency. We are already well down that path and now launching channel specific applications that integrate into existing market or dashboards. And we’re going to launch more to accelerate our capabilities. Conix Research was the first channel specific application we launched, allowing search marketers to see all calls from mobile search campaigns at the key word level and understand which calls converted into sale in real-time. This is the first time marketers have had access to these kinds of insights. Furthermore, we removed the pain from marketers face as they embrace a new product by proactively integrating their data and insights into the existing dashboards. This does create an easy adoption path by allowing clients to take action immediately, which has made Conix Research, one of our most successful product launches. This year our clients will see continued product progress and additional channel specific applications brought to market. Now I want to talk about our people. We’re both empowering the channel we have and investing in hiring new, experienced people to accelerate our opportunity. We will take a measured approach before going hard here because it's necessary. Read book, build and recruit, the best channel in order to position ourselves to capture this market and serve our enterprise clients at the highest level. At this moment, marketers are focused on exactly the problem we solve. And we’ll continue to focus Marchex and prioritize only the opportunities that are core to our mission. Our sale, the Archeo assets, is an example of this prioritization. Clarity not only helps our people operate at a higher level but allows us as a company to attract the best talent to create pioneering innovative technology and build the best place to work. Everything we do from the people we hire, the products we develop, the clients we focus on serving to the capital decisions we make is focused on establishing Marchex as the world’s leading mobile advertising analytics company. I’m very excited with the direction Marchex is headed. And with that, I'll hand the call to Mike.

Thanks Pete. For the first quarter, Call-Driven and other related revenues were $35 million while total revenue was $42.6 million. The first quarter was characterized by continued progress in building a healthy sales pipeline to support future growth. In addition during the quarter, approximately $450,000 was recognized in revenues related to a final performance clause under our prior Allstate contract. For the first quarter including domain sales, Archeo revenue was $7.5 million. Domain sales were $6.4 million during the quarter. In addition, in April, we sold more than 200,000 domains for $28.1 million, as part of our efforts to focus our business on a core mobile advertising analytics opportunity. We are keeping a small number of sites and certain operating assets of Archeo going forward. We will update our financial information related to the discontinued domain name operations in the second quarter. Excluding stock-based compensation, total operating costs were $35 million for the first quarter of 2015. Sales and marketing costs, excluding stock based compensations were $3.4 million. Over the coming periods, we expect our marketing expense may modestly increase from current levels in support of continued growth of our sales and customer support teams and additional marketing initiatives. Moving to adjusted operating income before amortization and EBITDA, Call-Driven adjusted OIBA and EBITDA were $2.6 million and $3.5 million respectively. Including domain name sales, total adjusted OIBA for the first quarter was $7.6 million and adjusted EBITDA was $8.5 million. GAAP net income was $4.6 million for the first quarter of 2015, or $0.11 per diluted share. This compares to a GAAP net income from continuing operations of $846,000 for the same period of 2014, or $0.02 per diluted share. Including domain name sales, adjusted non-GAAP income per share, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.12 per share and $0.08 per share for the same period in 2014. During the first quarter, we generated $6.2 million in operating cash flow and had more than $83 million in cash on hand as of March 31, 2015. Including the $34.8 million in gross proceeds from the recent domain portfolio transactions, pro forma cash on hand is approximately $108 million. In addition during the quarter, Marchex purchased 225,000 of its outstanding Class B common stock for a total price of $930,000 under our new share repurchase program established in November 2014. Now turning to our initial outlook for the second quarter of 2015. I’d like to first start out by mentioning we are making solid progress in our business across a number of fronts, including adding new customer relationships, expanding existing ones and developing new products and partnerships. Looking first at our Call-Driven revenue guidance for the second quarter. For the second quarter, we are forecasting $34 million or more for Call-Driven revenue. While advertiser budgets can change and we can experience period-to-period variability based on a variety of factors, we continued to make progress in our business. As Pete mentioned, we are excited by the number of new advertiser conversations we are having around our call analytics research product. We are highly focused on growing our advertiser base and our product footprint, as we broaden the footprint of advertisers we work with and increasingly penetrate our customer relationships with products that bring transparency to their mobile advertising spend. We are building a pipeline for future growth. Next, looking at Call-Driven adjusted OIBA and EBITDA margins. For the second quarter, we are projecting $1 million or more in Call-Driven adjusted OIBA and $2 million or more in Call-Driven adjusted EBITDA. Our guidance takes into consideration additional hiring to support our growth initiatives, such as in sales and marketing and in product and engineering, as well as adjustments, including compensation, personnel related items and certain professional fees that flow through disproportionately in the first half of the year versus the second half. We believe, we have an early mover advantage in mobile advertising analytics and we're continuing to invest to support our growth opportunity. We’re excited by the progress we're making with our customers and our products and look forward to updating you throughout the year. I’d like to thank you for joining us today and we look forward to reporting on our progress as we move ahead. I will hand the call back to the operator to take questions.

[Operator Instructions] Your first question comes from the line of John Campbell with Stephens Incorporated. John, your line is open.

Just on the Allstate business. If we look at the 1Q results and just basically turn out the Allstate business, did you guys -- I mean, was that about 21% or so year-over-year growth in just Call-Driven rev?

Yes.

So yeah. Good growth there expat. And then if I think about next quarter, I think you guys got it to $35 million -- $34 million or so, so looking at that that’s another pretty decent, I think that implies about 14% or so year-over-year growth. I know you guys didn’t do the full year guide just go around but assuming kind of all that’s equal and you guys are obviously going through contract negotiations everyday. But if things remain roughly the same, is there any reason why we shouldn’t see that similar type of growth path?

John, this is Mike. Thanks for the question. I think, we're in a position right now where we’re making some very good progress, especially with the Marchex Call Analytics research product. And we definitely think that there is more and more new customers that are interested in mobile advertising and the analytics that are helping remove some of those blind spots that they have within mobile advertising. And we’re seeing it with the conversations we’re having. We’re seeing it in the trials that we’re working on right now with some of these new customers in the Marchex Call Analytics research product. And I think there's more of that to come. We've given the guidance for the time being with where we’re at and we certainly look forward to and believe that the investments we're making are going to payoff and translate into more opportunity, more new customers and more expansion of those customers. And hopefully, that will play out in the form of growth as we look ahead.

Got it. Okay. I think that’s helpful. And then as you guys think about entering this new budget season in this past quarter, without naming any names, I wouldn’t expect you guys to do that. But were there any particular clients that of the larger variety that move budgets higher this year?

Hey, John. This is Pete. I’ll just echo what Mike said, I think, without any clients we continuously get traction in the categories that we’ve been focused on building leadership in between auto, financial services, both banks and the insurance category, cable and satellite and telecom. More importantly, I think we are very excited about what our recent product launches have driven in terms of Call Analytics Research, not just the adoption but more importantly the performance that we are driving for clients and the mobile visibility we are bringing and we think that's good -- that’ll be play out that way for the rest of the year.

Got it. And then I don’t know if you guys can provide this now or if we can just wait on the quarterly filing. But what was the percent of route for the top five?

I don't think we have it directly in front of us. But it's not inconsistent with how it’s been in the last periods.

Okay. Great. That's helpful. Thanks guys.

Gentlemen your next question comes from the line of Darren Aftahi from Northland Securities. Darren, your line is open.

Hey, guys. Thanks for taking my questions. Just three, first, any update on YP contract negotiations? Two, it sounds like your sort of dispositions is very positive on the new Call Analytics Research launch? Do you contextually have any paying customers and if you can get a little bit more granular in terms of why customers are so excited about this and kind of resonating in your optimism? And then, third, your cash balance as a percentage of your mark cap is pretty robust. It looks like you are buying some stock back. But can you maybe give us a better idea of what is a reasonable amount of cash you need to have on the balance sheet to run the business and then where there maybe some areas where you get that -- deploy that strategically? Thanks.

Sure. Thanks, Darren. This is Pete. I’ll take the first two, and Mike, will take the third. Regarding YP, as you know, they have been -- we have been a partner with them for 10 years and a good partner. We are in active dialogue with them now and making good progress. And I expect that we’ll finalize our agreement with them by end of the quarter if not sooner. As a relates to Call Analytics Research and the launch, our clients paying right now the answer is, yes, they are paying and we are seeing traction there. And really the reason why clients -- existing clients and prospective clients are excited about this is because without this product they are blind to one of the biggest media categories in mobile and that's mobile search. This product brings 100% attribution to every keyword that results in a phone call and not only what the result is, but does a sale occur or not in real time. And the ability for us to provide -- bring that visibility to marketers ultimately make mobile accountable is translating to a lot of very interesting conversations, good adoption and importantly, the results that we are driving, I think the case study that we recent released highlight brand seeing 30% or 40% increases to their ROI or 30% cost decreases in other way to think about that. So mobile visibility coupled with high ROI is what’s driving the adoption of this product. And as we said earlier, we’ll have more channel specific applications that apply to other media types not just search during the year.

And the follow-up on your question about the cash, yes, we have a very healthy flush cash position right now and that provides a number of good things from the perspective of flexibility. I think that's the biggest part of the equation that we look ahead with. We have relatively limited needs for working capital, as we look ahead and as the company scales and grows. The working capital need isn’t that robust. So we don't need a lot of cash for those types of things, which leaves a lot of it available for additional capital to invest forward in the product and the technology. As well as just any initiatives that would drive growth further and one of the things that we’re continuing to look at it is the opportunity is global, it is ubiquitous. There are interested parties and customer bases that are not just national, but international and global customers that are interested in using the analytics and the technologies on a global basis. So we do think there are probably some things in store ahead where we will look to expand and look for that global growth.

Your next question comes from the line of Rohit Kulkarni from RBC Capital Markets. Rohit, your line is open.

Sorry -- hello -- can you hear me?

Yes.

Sorry I was on mute. I guess a couple questions. And again sorry if this was already asked. But can you provide any color on which verticals are doing better in terms of client ads, any new clients that you would want to highlight in case they are becoming material portion of the net new revenue that you’re adding? And secondly, kind of a modeling question. How should we think about kind of the ex Archeo revenue and EBITDA contribution? As well as you broken out the dominant sales separately, so how should we think about that? And lastly, on kind of the capital allocation side of things, maybe this was asked already. But of repurchased 900,000 shares, you’re kind of discontinuing the dividend. So how many shares do you have outstanding in any -- in the authorization and anything we should read into why you’re discontinuing the dividend?

Rohit, thanks. I’ll take the first part of that. To answer your question, we have more than 20 large enterprise brands that we have added most recently, again in the vertical that we consistently been strong and growing our share and including auto, financial services, cable, and telecom. And we continue to see a robust pipeline in those verticals and others.

Rohit, this is Mike. So if you go back to the model, if you think about Archeo, and some of the tables we put out today, we showed some illustrative figures for the breakout of the revenues from the domain sales over the trailing five quarter basis. I would point you there as a good place to take a look at just to see the profile of the business with and without some of the domain sales that we transacted here in the last few weeks. We have about 41.3 million shares in the diluted share count for the first quarter. In terms of the dividend, historically that dividend has been tied to some of the cash flow attributable directly to the Archeo operations. So that’s a key part of the equation, but also in giving context to just where opportunity is and where the focus of the company is, it is the mobile analytics advertising opportunity that is before us. We think there is significant opportunity from a customer perspective, from a consumer adoption perspective, things are moving along that direction. And so from that perspective, it gives us a lot of flexibility to take advantage of the things that are ahead of us out there.

Okay. Great. Thank you.

[Operator Instructions] Your next question comes from the line of Gene Munster from Piper Jaffray. Gene, your line is open.

Hey, guys. I know we talked a lot about cash here, but just one final question. When you think about sort of global opportunity, is that something that you plan to invest your cash in and organically grow, or could there be some kind of strategic acquisitions that might make sense to kind of accelerate some of that business? Thanks.

Thanks for the question. Many of our brands that we work with today are global. Today, we work with some of the largest global brands in the planet. And our approach internationally is really to support them as we talked about before and use the go-to markets with our existing clients to form [B-chat] [ph] internationally and expand from within. So I would close by saying we think we have many global clients that were already embedded with two assets to move with them into various international markets and now will be our primary move. Beyond that to the extent options open up for us that further accelerate opportunity, we will take advantage of that.

This concludes today’s question-and-answer period. I would now like to turn the call back over to the presenters for closing remarks.

Thank you everyone for joining the first quarter call. We appreciate your support and look forward to updating you soon.