Marchex, Inc. (MCHX) Q3 2015 Earnings Report, Transcript and Summary

Good day. My name is Victoria and I will be your conference operator today. At this time I would like to welcome everyone to the Marchex third quarter conference call. [Operator Instructions]. Thank you. I would now like to turn the call over to Ethan Caldwell, General Counsel. Sir, you may begin.

Thank you. Good afternoon, everyone and welcome to Marchex's Business Update and Third 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 these 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 Securities and Exchange Commission. 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 third quarter conference call. As I've highlighted on our calls throughout the year, everything we do is focused on establishing Marchex as the world's leading mobile advertising analytics company. Providing marketers with 360 degree view of what happens after consumers click on mobile ads is a very large opportunity. Given the vast adoption of mobile and the fact that mobile devices now exceed desktop computers, we believe this opportunity is more significant than traditional web analytics. Right now, marketers are hungry for visibility into the mobile consumer journey. They want to measure the online to offline purchase path including the ability to understand what happens when consumers click to call and go offline into a call center or directly interact with their retail store front. With mobile calls to businesses expected to nearly double to over 160 billion by 2019, the need to understand what happens in a live dialogue has never been greater. And so we're moving quickly against our goal to lead mobile advertising analytics and we expect our momentum to continue into 2016. Global enterprise customers are looking for solutions to help them solve their measurement and attribution needs. In the past few months our pace of innovation has accelerated to meet that need and we have delivered new solutions to solve client pain points. We've also expanded our international footprint to support new and existing clients and we have recruited industry experts to join our executive team. This has helped us attract the largest and most sophisticated marketers to a growing base of enterprise clients such as Windham Hotels and Resorts and Verizon Wireless. In my conversations with clients and prospects I hear a consistent theme. Mobile measurement and attribution is critical to expanding mobile advertising budgets. This is especially true among global brands which are increasingly demanding analytics that give insights into the mobile consumer journey. There is no question that mobile has transformed our lives. We consume information insatiably through multiple devices and often toggle between these devices at the same time. Mobile has empowered consumers in new and exciting ways, yet for marketers, mobile is fragmented and notoriously complicated. Marketers find themselves up against a huge struggle, understanding the performance of mobile ads across apps, native placements and websites in this ever-changing ecosystem. To add to the complexity, mobile is driving offline actions at an accelerating rate. Consumers see an ad and increasingly they chose to call businesses. Because these offline actions can't be captured with traditional technologies, this creates a massive blind spot for marketers who want to measure the performance of their mobile ads. We recently teamed up with Digiday to survey more than 275 enterprise brands, agencies and publishers about this problem. The findings show that more than 70% of marketers who now spend less than 30% of their budget on mobile would significantly invest more if they could solve the measurement and attribution gap. Measuring mobile performance is no longer a want to have. It's a must have. Marketers want the ability to measure the effectiveness of their advertising in mobile the same way they do in desktop advertising. I hear global CMOs talk about this all the time. Most acknowledge they are still meaningfully underinvested in mobile and that's because they are at a crossroads. They need to engage with their consumers in the way consumers want to engage with their brands. But marketers don't want to contract with multiple vendors and integrate multiple solutions in order to bridge the measurement and attribution gap. What they want is the right partner, one who can tend to all their analytics needs, all under one roof. We believe this will be a major 2016 theme for advertisers that will play out over the next several years. As a result, Marchex is moving fast and our product pipeline is quickly expanding to meet these needs and we expect our pace of innovation to further accelerate next year. I'm excited to talk about two recent developments. An update to our search analytics product and the coming release of our next channel specific application display analytics. The updated release of search analytics is reflective of our approach to quickly iterate and improve our products. This latest release further enables brands and agencies to measure their conversions from offline actions through their search campaigns. New features include updates like call only campaign support which was a feature introduced by Google this year for marketers who only want to target mobile devices and call intelligence enhancements including real-time call DNA which automatically provides consumer data for enterprises that chose to not record phone calls, an industry first for clients in industries such as financial services. We continue to add new clients to this product like Safelight, NetZero and others. I'm also thrilled about the coming release of a beta product that for the first time ever enables enterprise marketers to measure any inbound phone call to a call center or retail store front as influenced by exposure to display advertisement on a desktop or mobile device. This is a breakthrough mobile analytics product for the $28 billion display advertising industry. We can now empower digital marketers to measure the ROI of programmatic campaigns by connecting offline phone calls with display impression data even when a phone call occurs weeks or months after exposure to an ad. The reports are delivered in real-time and track cross device conversions, providing marketers with actual intelligence to shift towards display tactics that produce positive returns. With consumers expected to make hundreds of millions of phone calls to businesses from smart phones over the next several years, the ability to understand display's role in driving this outcome is a critical component in completing a 360 degree view of mobile measurement. Our momentum is helping us build a world-class team of industry experts that will fuel our growth in 2016 and beyond. In September, Gary Nafus joined us as Chief Revenue Officer. Gary is an industry veteran that brings more than 15 years' experience in enterprise software and advertising technology sales. He last led Kenshoo's Americas team and prior to that he was Vice President of sales at Oracle for several years. We also added Matt Muilenberg as Client Evangelist who comes to Marchex from CDK Global, the largest global provider of integrated information technology and digital marketing solutions to the automotive retail industry. We're excited to have Gary and Matt onboard and we will continue to add talent selectively. We believe it can help us accelerate enterprise client adoption and satisfaction. Our vision goes beyond the U.S.. We know that in order for us to lead we must be global. This is why we expanded our international presence earlier this year and expect to continue entering additional markets in 2016. We extended our coverage to include Europe, Canada, Australia and New Zealand because we know that the largest global marketers want to operate seamlessly across geographies, yet centrally maintain a 360 degree view of their performance. This was validated as we won clients across multiple geographies, including CDK Global, Intuit and Yell. Over the coming months we will continue to move into markets where we see the greatest returns and opportunities to support our customers, agency holding companies and technology channel partners. These initiatives are all translating into winning new clients and partners and we expect the trend to continue in 2016. We had an active quarter as we released new products, expanded internationally, launched a new agency holding company relationship and augmented our sales and client engagement teams. This let to new client progress of global brands and existing relationship growth, primarily across the auto, financial services, telecom and travel categories. Last quarter we announced our partners with GroupM through Light Reaction and Xaxis. We're in the early stages of this rollout and enthusiastic about the future of the relationship. Agencies control hundreds of billions of dollars in global media spend and we're very focused on extending our technology into these organizations to fuel their mobile performance initiatives. We're actively adding the relationships needed to broaden Marchex's reach and competitive advantage. We expect our progress with clients and technology partners to continue as we look into next year. In the coming years we believe mobile advertising growth will be driven by enterprise marketers who increasingly embrace mobile advertising analytics. We'll continue to build our team and accelerate the pace of innovation as we expand our global opportunity. While I'm pleased with our third quarter results, I'm much more excited about the initiatives and developments taking place that will shape the success of our clients, our people and the company over the next several years. We look forward to updating you in the coming periods. With that, I'll hand the call to Mike.

Thanks, Pete. For the third quarter, call-driven and other related revenues were $36.1 million while total revenue from continuing operations was $36.9 million. I'd like to start out by mentioning we're making progress in our business across a number of fronts, including adding new enterprise customer relationships, expanding existing customers, adding new strategic partnerships and developing new products like display analytics. All of these initiatives will continue to support our long-term growth profile and our building momentum in the enterprise channel. As we mentioned last quarter, 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 third quarter grew 31% compared to the same period in 2014. We're in the midst of the budgeting process for our customers for next year and we feel good about our customer and product pipeline as we build towards the future. For the third quarter, Archeo revenue from continuing operations was approximately $700,000. Excluding stock-based compensation, total operating costs were $34.4 million. Looking at additional details on the P&L service costs as a percentage of call-driven revenue were largely consistent quarter over quarter. Sales and marketing was $3.9 million which was also largely consistent quarter over quarter though this is an area where we expect to increase investment over time as we expand our sales footprint and marketing initiatives. Product development was $7.1 million, down modestly quarter over quarter, mostly due to the timing of our product pushes and other initiatives. Longer-term this will continue to be an area of focus for Marchex as we invest to support our market leadership position in mobile advertising analytics. Moving to adjusted operating income before amortization and EBITDA, call drive adjusted OIBA and EBITDA were $2.2 million and $3.1 million respectively. From continuing operations, total adjusted OIBA for the third quarter of 2015 was $2.4 million and adjusted EBITDA was $3.3 million. GAAP net loss from continuing operations was $191,000 for the third quarter of 2015. This compares to a GAAP net loss of $22.5 million for the same period of 2014. Adjusted non-GAAP income per share, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress was $0.04 per share compared to $0.05 per share for the same period of 2014. Operating cash flow was $7.6 million for the quarter and we ended the third quarter with more than $108 million in cash on hand. In addition, during the quarter Marchex purchased approximately 476,000 of its outstanding class B common stock for a total price of $1.9 million under our share repurchase program established in November 2014. Now turning to our initial outlook for the fourth quarter of 2015, for the fourth quarter we're forecasting $33 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, including a seasonal drop off in call volumes and lower overall advertising budgets from service-based businesses in the fourth quarter, we continue to make progress in our business. From continuing to add new enterprise customer relationships to signing new channel partners and launching new products, we're building a foundation for long-term growth. 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 feel good about the growing pipeline. Next, looking at call-driven adjusted OIBA and EBITDA, for the fourth quarter we're projecting $1.5 million or more in call-driven adjusted OIBA and $2.5 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 engineering and in international markets to support growth of our customers, channel partners and product initiatives. Over the coming years we believe mobile advertising growth will increasingly be driven by enterprise customers embracing mobile performance advertising through the utilization of mobile advertising analytics. Given our early mover advantage, we believe we're in a unique position to capitalize as this market accelerates. As a result we're continuing to invest to support our growth opportunity and we're excited about the progress we're making in our business and we want to thank all of our employees for their hard work. I'd like to thank you for joining us today and we look forward to reporting on our progress as we move forward. With that I will hand the call back to the operator to take questions.

[Operator Instructions]. And we have a question from Rohit Kulkarni.

This Dillon on behalf of Rohit. Can you comment some more on how the partnership with Light Reaction has gone so far and how agency relations are trending overall? And then can you just comment on how we should expect seasonality in the business to trend going forward in 2016? Thank you.

With regards to the agency relationships, particularly with the GroupM companies, it's going very well. We're well into our training stages and client education stages. I think the main thing for you and others to understand is your clients are facing a real problem in mobile. They have a massive blind spot in mobile measurement attribution. And GroupM and Xaxis and Light Reaction are utilizing Marchex as the mobile performance product regarding our analytics and our call marketplace and bringing us into several customer conversations. Our pipeline is very robust right now and growing quickly, including internationally. So, we feel very good about where we're in the context of that relationship. Importantly we're focused on extending obviously that relationship as well as working with other agencies in the coming periods.

To address your seasonality question, think about the call volume dropping substantially in the latter part of December and also for service-based businesses, generally in the fourth quarter there is some drop-off in terms of their advertising or their budget spend. But if you look at the first quarter of this year, if you look at the metric that some folks have asked us about previously without the YP level and you look on a year over year basis and the first quarter year over year we grew 24%, similarly 24% year over year growth in the second quarter and in the third quarter it accelerated to 31%. But if you think about those ranges on a year over year comparative basis, the forecast and the guidance that we put out there puts us in that general 20% to 30% range for the fourth quarter and hopefully with some of the progress that we're seeing, one with the products, with the call analytics for search and the releases that we've had there as well as just this recent introduction of the beta version that's coming to market of the display analytics and some of the customer progress that we're seeing as well as the channel partnership relationships that are in incubation stage but hopefully are going to be rolled out more in 2016. I think we can see progress ahead of us as some of things that we're feeling.

[Operator Instructions]. And there are currently no questions.

Great, everybody. Thank you for joining us for our third quarter call. We look forward to updating you on our next Q4 call in the coming year. Thank you.