Marchex, Inc. (MCHX) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is Angel and I will be your conference operator today. At this time, I would like to welcome everyone to the Marchex Third 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. Ethan Caldwell, Chief Administrative Officer, you may begin your conference.

Thank you. Good afternoon everyone and welcome to Marchex's business update and third quarter 2016 conference call. Joining us today are Michael Arends and Gary Nafus. 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 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 or Quarterly Report 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 our Chief Financial Officer, Michael Arends.

Thank you, Ethan. Good afternoon and thank you everyone for joining us today. I'd like to start by giving you a quick overview of the areas our executive team is focused on. After that, our Revenue Officer, Gary Nafus, will discuss our customers and some of the trends we are currently seeing. Then, I'll provide an update on our financial results. First, I want to highlight Marchex's unique position in the mobile advertising analytics market. Today, Marchex works for some of the largest brands in the world. Our relationships with these companies have taken years to develop. Often beginning with products trials, we've been able to expand the relationships with leading global brands through the differentiated value we provide to our customers. We've invested over a $100 million into our products, infrastructure and the ability to deliver outstanding customer service. Through our investments, we have built a reliable platform that provides unique understandings of mobile and offline convergence for mobile marketers. It's enabled us to build the base of customer relationships that is unique in our industry. With that said, let us acknowledge that Marchex has fallen short of expectations for growth this year. There are various reasons for this including investing in products with long potential payout windows that have not met the early returns threshold we anticipated and also significantly revamping our sales and marketing organizations. We're now working quickly to identify our most important strategic investments in order to return the Company to profitability and long-term growth. We've created an Office of the CEO which is comprised of myself, Gary Nafus, Ethan Caldwell and our Former CEO and Founder Russell Horowitz. Our Chairman of the Board and Deborah Mills is also working with us in providing oversight. And has more than 25 executive leadership experience in global advertising and marketing and has held the roles of President, CEO and Chairman for companies within the Omnicom Group. Together, we are assessing Merchex strength and weakness as well as the opportunities that will bring Merchex back to profitability and growth. Creating an Office of the CEO was for us the best interim solution. Between the Office of the CEO and our senior leadership team, we have a very experienced group with deep subject matter expertise. Additionally, this team has made up of those of us who are closest to the business and deeply understand Merchex's customers their need and our position in the market place. This framework is also helping us move forward and make progress while we search for a new CEO. Right now, we are evaluating the key profit areas within Merchex to uncover our best opportunities to grow existing customer and win new ones. Equally is important we are scrutinizing which offerings are not meeting out internal expectations. This work has already begun with leaders from the products and the business organizations. They spent the last 30 days discussing product visions with clients and prospects. Our evaluation is being driven by this feedback and a careful understanding of our existing customer needs. This means, we'll be working to expand some of our most strategic customer relationships. We have opportunities to embed deeper with existing customers and win new ones through our growing product portfolio and our continued commitment to outstanding service. While we will continue to accelerate key areas of innovation, we'll also look to scale back investments that are critical to serving our existing customers or prospects especially areas that aren't addressing immediate strategic needs. We've made significant product investment in the past year focused on innovative initiatives to help marketers' measures -- measuring mobile and offline conversions. Most of those products are nearing completion and we expect to have more information to share with you on that soon. We built a valuable business although it's not being reflected in our current financial performance. Merchex has a solid foundation of customers, technology and people to build upon and our focus now is on refining our early market opportunity to ensure we make financial progress and are in a position to capture additional market share. With that, I'd like to hand the call over to Gary to cover some insides on our customers.

Thanks Mike. One of the foundations of Merchex is its strong customer base which includes 17 of the largest global brands in the Fortune 500. We have focused our energy on five core verticals travel, automotive, financial services, home services and communications. We work with category leaders in each of these segments such as State Farm, Bridgestone, T-Mobile, and DirectTV. Each one of these verticals represents a significant opportunity and we work with blue-chip clients in each. For example, in the travel vertical, we work with four of the largest hotel brands as well as four of the largest cruise lines in the world. There is still much more to be done. We remain focused on ramping our sales force, adding new customers and diversifying our overall customer base. This is a challenge we are taking head on and we'll take some time. As part of this process, we have added 25 new customers year-to-date. We've added relationships with brands like Wyndham, Meineke, AccorHotels, Vonage, Princess Cruise Lines and many others. Our client relationships typically start with a single product line or media channel which we grow overtime. We scale this plans by proving value and trials and then exposing them to additional value we can drive with other products. We believe our drilling product portfolio will also open up additional opportunity for cross-sell into these clients. Leading brands continue to work with Marchex because we provide them with products, technology and insights that they cannot find anywhere else. One example I'd like to point out is in the cable and satellite vertical, an industry that has significant opportunity and is forecast to spend more than $5 billion in digital marketing this year, in turn driving millions of inbound sales calls. In a recent study, Marchex Call DNA technology analyze data from more than 1 million inbound phone calls placed by consumers to cable and satellite companies. Marketers in this vertical have assumed that customers are shifting to internet-only services; however, our insights reveal that 57% of new cable orders include traditional TV server. There is also a perception that millennial are leading the pack of cord cutters. While this may be true our data shows 40% of callers to cable companies are millennial households representing a golden opportunity to develop new products or bundles that appeal to this audience. Because cable subscriptions remain a high consideration purchase with the wide range of options and multiyear contracts, our research proves that phone calls are still the primary sales channel for cable and satellite operator. Our insights directly position Marchex to help these clients drive customer acquisition through efficient media strategies, and it's a key reason why we work with 5 of the top 10 largest cable and satellite companies in the U.S., another exciting opportunity and capability for our customers as the ability to holistically measure the online to offline mobile consumer journey from lead generation through to converging. Display analytics which we expect to launch to general availability in the fourth quarter allows clients to measure how effective display media is enjoying call conversions. By entering to display market with an analytics product, we are adding another important offline data measurement capability for our customers. To compliment this progress, Marchex is integrating with various marketing leaders to open up potential customer channel opportunities. In October, we announced the new integration with Google's DoubleClick Campaign Manager. DoubleClick is the largest display network in the world and marketers can now securely upload Marchex display analytics data to DoubleClick and attribute inbound phone calls to digital and mobile advertising campaigns. DoubleClick customers can now better understand their consumers, thanks to the rich phone call data that Marchex provides. Through this partnership and others, we believe Marchex has built a platform with unique capabilities to provide valuable performance measurement and insight for our customers. Those insights and the growing importance of measuring offline signals is a key reason why global brand are working with Marchex. With that, let me hand it back to Mike to cover the financials.

Thank you, Gary. For the third quarter, call driven revenues were $30.7 million. We know some of you track our growth without YP, so to help their models with this framework in mind. Call driven revenues in the third quarter excluding YP were $24 million compared to $26 million in the year-ago period. The third quarter was primarily influenced by two factors we mentioned in our second quarter call, a decrease in budgets from certain recently acquired customers as well as seasonally slower spending from key categories like insurance which are particularly waited to the front half of the year. Additionally, while we believe that new customer relationships on an expanded sales pipeline can have a meaningful impact on our long term growth. They are not yet at a scale that is impacting our financial profile in the near term. Now looking further down to the P&L for the third quarter, excluding stock based compensation and acquisition and disposition related cost, total operating costs for the third quarter were $34.4 million. Service costs were $18.3 million and were down from $19.7 million in the third quarter of 2015. However, they were up as a percentage of revenue largely due to a mixed shift in lower margin product revenues year-over-year. Sales and marketing was $5.2 million which was up year-over-year as we continue to invest in our sales organization. Product developments were $6.6 million, down modestly year-over-year. Moving to adjusted operating income before amortization and EBITDA for the third quarter, call driven adjusted OIBA and EBITDA were a loss of $3.7 million and $2.9 million respectively. GAAP net loss from continuing operations was $5.9 million for the third quarter of 2016 or $0.14 per diluted share. These compares to GAAP net loss from continuing operations of $191,000 or $0.00 per diluted share for the same period of 2015. Adjusted non-GAAP loss per share was $0.06 per share compared to income of $0.04 per share for the same period in 2015. We ended the third quarter with more than $105 million in cash on hand. Now, turning to our outlook for the fourth quarter; first, let's discuss revenue. For the fourth quarter, we expect call driven revenue of $26 million or more. Our guidance takes no account that advertiser budget can change and we can experience period-to-period variability based on a variety of factors including at seasonal drop off in call volumes and lower overall advertising budgets from service based businesses in the fourth quarter. Overtime, as we broaden the footprint of advertisers we work with and increasingly penetrate our customer relationships, we can create a past to long-term growth. Next, looking at call driven adjusted OIBA and EBITDA; for the fourth quarter, we are forecasting call driven adjusted OIBA at a range of a loss of $3 million to a loss of $4 million. For call driven adjusted EBITDA, we are forecasting a range of loss of $2 million to a loss of $3 million for the fourth quarter. Our guidance takes into the consideration our updated revenue outlook. It's important we align our investments and cost structure with our current revenue levels to ensure that we are addressing positive cash generation and so that our future growth drives greater efficiency and offering leverage. Customer attraction from sales and marketing initiatives, and growth of our enterprise customer base will also open up opportunity to see flow through to cash contribution and meaningful financial operating leverage. We believe in our value and as one of the early movers in the mobile advertising analytics markets, Merchex has build a robust and reliable platform that delivers unique and critical insights for enterprise marketers who depend on us to grow their business. Both myself and the team believe there is much we can do to optimize for success. I'd like to thank all of our employees for their hard work. We continue to be very focused on delivering on our customer needs and continuing to provide the products and service that drives their success. And with that, I'd like to hand the call back to the operator to take questions.

[Operator Instructions] Your first question comes from the line of Gene Munster. Your line is open.

Few questions here. First, in terms of the CEO search now you talked about, the Office of the CEO and that's the best for the near term, is there any expectations about when that could be announced? And my second question just is in terms of cash. First, use of cash, potential use of cash and second terms of cash burn, is there any expectations, I know you're not giving 2017 guidance, but any expectations about if there will be cash burn into 2017? And sorry for the laundry list here, but my final question is just, you mentioned sales force transition, how long do you think that that will last? Is that a two quarter or is that a fourth quarter type of transition? Thanks.

Thanks, Gene. This is Mike. I'll take the first couple of parts of the questions, and now on the sales force and some of the customer facing team items will pass that off to Gary. In terms of the CEO search, we've initiated the search. The Board has started the process, it is early. We do expect that it may take some time and we do plan on giving updates as we progress with that. The current management team and our focus today, the current management team has a good base, a deep understanding of our existing team's capabilities, the customer profiles and market opportunity. And we continue to focus on progressing in the interim period where we are searching for the CEO on that opportunity. In terms of the user of cash, we are in a good position that we've got over $105 million and that provides some very good financial flexibility as part of that. And the team today is very much looking at our strategic initiatives, our priorities. What are the things that matter most for our customers today and for the pipeline of customers that we've gone on the table to be able to source and solve for; and so with those prioritizations in mind, we are working in the next 30 to 60 days very actively on making sure that we keep those in a good order and focus less on the things that would take so much longer term paths to obtain. And so from a use of cash perspective in the very near-term and immediate-term, the next few months, there is no immediate use of cash planned. In terms of our goals, those strategic initiatives in the prioritizations are very much focused at a return to profitability, there is an urgency on our part to be able to look to that, we want to do that as soon as possible, we don’t have an exact timeframe. But also those prioritizations are focused on bringing about a return to growth and the long-term growth focus.

Hi gene. This is Gary. Regarding the sales force, yes, good progress on the sales force, 2016 has been a year of investments into the sales force where we've been focused on upgrading our sales forces to more senior talent, and we continue to work through the ramp process there. We have them focused on diversifying our client base. And as we look forward, we are thinking about us having a lot of the ingredients that will need for a long-term success with more ramped reps, all focused on finding new clients as well as up-selling our existing clients.

[Operator Instructions] There are no further questions at this time. I turn the call back to the presenters.

Thank you very much everyone for taking the time today. We look forward to providing further updates as we have them in the coming periods.

This concludes today's conference call. You may now disconnect.