Marchex, Inc. (MCHX) Q2 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Patti and I will be your conference operator today. At this time, I would like to welcome everyone to the Marchex second 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. And I would now like to turn the cal over to Mr. Ethan Caldwell, General Counsel. Sir, you may begin your conference.

Thank you. Good afternoon, everyone. And welcome to Marchex's business update and second quarter 2015 conference call. Joining us today are Peter Christothoulou and Michael Arends. Before we get started, I would 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 statements. 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 and we 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 the 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 everyone for joining us for our second quarter conference call. Let me begin by reiterating two important trends that I believe will define Marchex's future. First, mobile performance advertising is the next big market. Large enterprises and their agencies are increasingly looking to move spending from desktop to mobile, but in order to do so they need to understand the consumer's path to purchase the same way they do in the online e-commerce world. Second, as a result of our focus and investments in analytics, Marchex provides unparalleled real-time insights into the mobile customer journey. As a result, global leaders are choosing Marchex for their mobile performance solutions, which is accelerating our opportunity. Now turning to the market. We are seeing the largest global advertisers and their agencies increasingly embrace mobile and seize on the opportunity to measure their ad dollars against the real customer outcomes. Enterprise marketers are making decisions today that will shape the future of mobile advertising. And right now these marketers acutely understand they need real performance in order to survive and thrive in mobile. Wanting to understand the mobile customer journey is a large-scale ship that will critical mass over several years, but it's fueling a growing demand for mobile advertising analytics today. For years, agencies that control billions in global media spend have largely sat on the sidelines, unsure of the performance of their mobile ad campaigns. The mobile landscape was simply too new, but that is changing a big way. Now CMO's have the urgency to make mobile accountable. They want to improve the consumer experience, harness as much data as possible to inform their marketing strategies and drive meaningful business growth through this medium. We saw the cycle play out more than a decade ago. As ad dollars moved from traditional media to the desktop, enterprise marketers needed greater transparency around consumer actions. So they integrated analytics products that optimize e-commerce transactions, which became the engine of the online economy. As the analytics improved, marketers gain valuable insight to the customer journey, which allowed them to optimize their tactics and improve the customer experience. Ultimately these analytics products drove significant online e-commerce growth. With mobile ad spending expected to more than double by 2019 in the U.S. alone, the need for mobile analytics products that measure mobile customer outcomes is greater than ever. We believe analytics will drive and accelerate click-to-call commerce, which will be the engine of the mobile economy. But there is a real challenge to marketers' face. In mobile, the majority of consumer purchases occur offline, through either a phone call or a store visit. What makes this even more frustrating for marketers is that today's marketing analytics infrastructure is not built to capture data for consumer calls or track other offline outcomes. Because the flow of data stops as soon as the call transfers to the call center or connects directly to a business. Marketers are left in the dark and have no way of knowing what transpired. This is a crippling disadvantage for those want to expand their mobile customer acquisition initiatives and it's a problem that will only increase over time with the growth of mobile driven calls to businesses. 70% of consumers now click-to-call for mobile search. Click-to-call is also embedding further into social media, mapping, apps and other mobile publisher end points. The trend toward mobile driven calls is real and pervasive. The advisory firm BIA/Kelsey estimates that Americans alone will make 162 billion consumer-to-business phone calls from smartphones by 2019, up from 93 billion this year. This is where Marchex has a distinct advantage. We believe that click-to-call would be a dominant mobile performance ad model and in the last two years we have been able to build one of the world's leading mobile analytics platforms for enterprise marketers. Bringing a real visibility to the mobile customer journey is the centerpiece of our mission and our opportunity. Our dedicated focus allowed us to make significant progress over the last few months against the initiatives that will support our long-term growth. For example, in June we announced our expansion into Europe, Canada, Australia and New Zealand to support enterprise marketers that need to tie mobile advertising spend to sales at scale and globally. We now have clients utilizing our products across multiple geographies, including CDK Global, Hearst, Intuit and Yell. We anticipate our international growth to continue as we expand our geographic coverage over the coming quarters. We also continue to innovate and develop products that help bring visibility to the mobile customer journey. Marchex currently has more than 30 patents in mobile analytics, click-to-call, advertising attribution, audio signal processing and consumer privacy developed by our 180-person product and engineering team. We continue to onboard new customers for call analytics for research product, which is the first enterprise-level solution to bring 100% keyword attribution to mobile search and we plan on expanding our platform further with product launches and enhancements this year. Finally, our strategic integrations and deep client relationships highlight the market need and reinforce our enterprise growth opportunity. We are excited about our new and exclusive partnership with Light Reaction and Xaxis, the mobile performance business of the world's largest advertising agency group, GroupM. GroupM is the parent company to WPP's media agencies, MediaCom, Mindshare, MEC and Maxx which buy more than $104 billion in media worldwide. Light Reaction and Xaxis will now sell two of Marchex's mobile performance products through the GroupM agencies. The first is M-Call, a new click-to-call mobile performance product, powered by Marchex that enables advertisers to generate high-quality phone leads directly from mobile websites and in-app ads across hundreds of top publishers and apps. The second product is Marchex Call Analytics, a real-time mobile advertising analytics platform that measures sales and consumer intent from mobile, click-to-call campaigns. This is an important announcement for Marchex and the first time that click-to-call mobile performance and analytics products have been launched by a major global agency holding company. We can deliver exactly what enterprise marketers need to go to mobile advertising budgets at the moment mobile is becoming an indispensable part of their overall budgets. 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 and accelerating our enterprise growth opportunity. We are excited about momentum about we are creating and look forward to updating you in the coming periods. With that, I will hand the call to Mike.

Thanks Pete. For the second quarter, call-driven and other related revenues were $34.5 million, while total revenue from continuing operations was $35.3 million. Today's commentary will largely focus on financial results from continuing operations unless otherwise noted due to our sale of the bulk of our domain portfolio, which included a sale to GoDaddy for $28.1 million and domain sales of approximately $400,000 during the second quarter. These sales were part of our efforts to focus our business on our core enterprise mobile advertising analytics opportunity. For call driven and related revenue, the second quarter was characterized by continued progress in building a healthy sales and client expansion pipeline to support future growth. From signing new customers and new channel partners to continuing to build our pipeline of customers trialing, our call analytics for search product, we feel good about the progress we are making in our business. In addition, during the quarter we got the benefit of added visibility by extending our relationship with YP through the end of 2016. We know some investors track our growth without YP and Allstate, so to help their models with this framework in mind, call-driven and related revenue in the second quarter grew 24% compared to the same period in 2014 with sequentially up in comparison to the first quarter of 2015 and we expect that growth to continue. Regarding our recently signed exclusive global partnership with Light Reaction, we believe our agency channel will be an increasing contributor to growth going forward, particularly as the relationship gets fully launched globally over future quarters. For the second quarter, Archeo revenue from continuing operations was $888,000. Excluding stock-based compensation, total operating costs were $34 million for the second quarter of 2015. Moving to adjusted operating income before amortization and EBITDA, call-driven adjusted OIBA and EBITDA were $1.4 million and $2.4 million respectively. Excluding domain sales and discontinued operations, total adjusted OIBA for the second quarter of 2015 was $1.3 million and adjusted EBITDA was $2.3 million. GAAP net income, including discontinued operations was $20.9 million for the second quarter of 2015, or $0.50 per diluted share. This compares to a GAAP net income of $1 million for the same period of 2014 or $0.02 per diluted share. GAAP net loss from continuing operations was $1.3 million for the second quarter of 2015 or $0.03 per diluted share. This compares to a GAAP net loss from continuing operations of $102,000 for the same period of 2014 or $0.0 per diluted share. Adjusted non-GAAP income per share, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, including discontinued operations, was $0.37 per share and $0.07 per share for the same period in 2014. Excluding discontinued operations, adjusted non-GAAP income per share was $0.02 per share and $0.05 per share for the same period in 2014. We ended the second quarter with more than $104 million in cash on hand as of June 30, 2015. In addition, during the quarter, Marchex purchased approximately 79,000 of its outstanding Class B common stock for a total price of $353,000 under our share repurchase program established in November 2014. Now turning to our initial outlook for the third quarter of 2015. I would like to start out by mentioning, we are making solid progress in our business across a number of fronts, including adding new enterprise customer relationships, expanding existing customers, adding new partnerships and developing new products, all of which will continue to support our long-term growth profile and continuing momentum in the enterprise channel. For the third quarter, we are forecasting $34.5 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 continue 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 for search product as well as the early customer conversations we were having through our new channel partners. 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 and performance to their mobile advertising spend, we are building a pipeline for future long-term growth. Next, looking at call-driven adjusted OIBA and EBITDA margins. For the third 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 product and engineering and in international markets to support growth of our customers, channel partners and product initiatives. We are seeking to capitalize on our early mover advantage in mobile advertising analytics for the enterprise and we are continuing to invest to support our growth opportunity. We believe the market is significant and continue to believe Marchex is uniquely positioned as the market accelerates. We are excited by the progress we are making with our customers, our channel partners and our products and look forward to updating you throughout the rest of the year. I would like to thank you for joining us today and we look forward to reporting on our progress as we move forward. I will hand the call back to the operator to take questions.

[Operator Instructions]. Our first question comes from Darren Aftahi with Northland Securities. Darren?

Hi guys. Thanks for taking my questions. Just two, if I may. First on the Light Reaction deal, can you talk about time to market and when do you expect that the start impacting your P&L? And then second one, on your call-driven business just core ex-YP, where are you guys seeing sort of abnormal strength and what particular verticals you call out? And then in terms of any existing domestic opportunities, are there are opportunities to cross pollinate that internationally? Thanks.

Sure. Thanks, Darren. This is Pete. On the first thing with Light Reaction and WPP and GroupM, we are really excited about the partnership. It highlights that enterprise marketers and agencies have a real need to drive mobile performance and we are very excited to partner with them and go-to-market domestically and internationally. Right now, we are in training and integration mode and we expect that to be the case for the remainder of the year. We are excited about what our opportunity is with them, particularly as we look into next year. Regarding abnormal strength in verticals. We are seeing very strong traction in financial services. We continue to see strong traction there. We highlighted a customer addition this quarter was Intuit. We are also seeing strong traction in the travel category. We added Carnival and other clients. And so those are two categories we are seeing good growth. And the third is telecom. Regarding cross-pollination, I think the question is really, are clients that are utilizing our products domestically able to extend with us internationally? The answer is yes. And that's been core to our international strategy, which is invest with our partners and make sure that we can provide them global solutions seamlessly. We have done that CDK who started with us in the U.S., who now we have extended to Canada,, Australia and New Zealand and others as well. So that's definitely a part of what we are doing.

Thanks.

Our next question will be from Rohit Kulkarni with RBC. Rohit?

Great. Thank you. I guess on this global scale, can you just draw that out a little bit more as to what is the level of investment that you are doing? It seems like a mouthful in terms of the geographies that you are expanding into, but does that imply feet on the street? Or is that sales people calling on local businesses? Or are you leveraging any partnerships in there? And then I have a couple of follow-ups.

Sure, Rohit. Thank you. You are going back to the prior answer. As we look to expand internationally, the first wave of that is really expanding with our clients, existing clients, which we have many that operate internationally. We are able to support those clients with many of the resources that we have today as we have existing integrations. As we start to expand into new international territories with them, of course, we will selectively look to support those clients' international territories directly. But even if you look back to our agency agreement with GroupM and WPP, we are really selling our products into their agencies, entering their teams to sell or promote our products to their clients. And so by virtue of that, we end up with a distributed sales force globally. Mike, did you want to add to that?

One thing I would add, Rohit, is when we think about the investment, if you look at our current forecast and guidance, that include some of the investments related to rolling out in select countries today. There is going to be more activity on a go-forward basis. And I think it will incrementally create the opportunity and grow as we move forward, in particular with the agency channel relationships. This is a big opportunity. It is a global integration. It is something that will unfold over time and in the coming periods. And we think there is can be much more than just the domestic market that we are rolling out to in 2016. And we will be going on a country-by-country basis as it make sense with them. With feet on the street through, as Pete talked about those relationships, the investment is relatively built-in already with some of the revenue forecast that can come to bear. There will potentially be some infrastructure, but if you look at our total capital expenditures for the business, they aren't inordinate and to be able to set up shops on the European continent or in the Asian continent, it's something that we feel we can do relatively cost-effectively. So we will see how that rolls out. But we see it very much as a positive opportunity.

Okay. And then a quick follow-up on YP revenue. It does seem like sequentially it's ticking down couple hundred thousand dollars over the last four quarters or so. And that's a nice disclosure, at least gives us better color as to how the core business is growing. In terms of how you want us to think about this? I know some people model it separately or together. It that the run rate agreement that you have signed around couple hundred thousand dollars sequential decline over the next few quarters? And then I will have one more follow-up actually.

So, Rohit, when we think about the YP relationship, one of the things that we have had is almost 10 years now of a very healthy partnership and they are committed to good relationships and good partnering with us and just recently just a few weeks ago we were able to extend the partnership through the end of 2016,which I think helps give a lot more visibility for us. And we look forward to partnering and supporting them in all the needs that they bring to bear. In terms of how we think about our opportunity though and this is one thing that we have focused on over the course of the last two years, the products suite and the advancements of the products that we are bringing to market are more focused and bringing to market more for the enterprise, the large-scale national type of a customer. And that is one of the reasons why some of the folks have asked us to think about that more and why we have shared the growth factor rate of the 24%, which we do think has the opportunity to continue to grow. And that is where more of the resources and allocation as well as the product movement over the coming periods is going to be focused on.

Okay. And then, do you have the comparable number for prior one or two quarters, the 24% year-on-year for the core, core ex-YP and ex-Allstate?

If you look at the first quarter, it was also approximately 24% on a year-over-year basis.

Okay. Great. And last question, I think. Pete, in the past you have talked about strategically how you think about the business, I guess more rather than creating one-size-fits-all solutions, you had a greater bias towards more channel specific custom solutions. Do you have any updated thoughts around those as to how that fits into your next 12 to 18 month product roadmap?

Yes. I thin our thoughts are largely consistent with what we have said, our goal to drive the highest client performance we can in mobile. And to do that, specialization is required in the distinct media channels, search, display, social and others. And our job here is to make sure that we are developing products that bring visibility into all those channels to allow our clients to make decisions in real-time and that's consistent with what we said and you will see more developments from us here in the coming quarters.

Okay. Thanks, Pete. Thanks, Mike.

Thank you.

Our next question will be from Gene Munster with Piper Jaffray. Gene?

Hi guys. I think a few of my questions may have been asked here, but maybe just one bigger picture question. Longer-term, how are you thinking about and how should we think about the size of the enterprise opportunity and maybe the growth of that opportunity going forward? And then second and a follow-up to that is, any particular customers that you think might be interesting to maybe highlight or call out on the enterprise side that maybe in the pipeline or you think are good opportunities? Thanks.

Sure. I think the first thing is, each and everyone is working very hard here and we are making a lot of progress in a very short amount of time to ramp our enterprise efforts. As we think about what the opportunity looks like, we think about really dissect the opportunity into distinct verticals, meaning categories. So which categories are appropriate for our products, which clients have within those categories need real-time visibility and more marketing efforts to drive highest performance. And as we talked about before, there are like 15 core categories that we think about, all of which are nine figure opportunities in our mind. And from a growth perspective, as Mike highlighted earlier, we believe that this last quarter in our enterprise focus highlighted growth. We believe that growth can maintain and accelerate and that's our focus.

Maybe one quick follow-up on that. Pete, you mentioned the potential for acceleration of growth. Any thoughts on what it might take, from a business standpoint to get to that point of acceleration? Thanks.

It's not going to take anything different than what we are doing today. I think the example of relationship that we announced with GroupM and Light Reaction, highlights our execution on taking our products to market with leading enterprise marketers. And that opportunity alone and the execution of that opportunity, we think can be a catalyst and there are others similar to that.

Perfect. Thank you.

[Operator Instructions].There are no further questions I would now like to turn the call back over to Ethan Caldwell for closing remarks.

Thank you, everybody. We appreciate your support and look forward to updating you on the next quarter conference call.