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Marchex, Inc. (MCHX)

Q4 2016 Earnings Call· Thu, Feb 16, 2017

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Transcript

Operator

Operator

Good afternoon. My name is Kandy and I will be your conference operator today. At this time, I would like to welcome everyone to the Marchex Fourth Quarter Conference Call. I now turn the call over to Ethan Caldwell, General Counsel.

Ethan Caldwell

Management

Thank you. Good afternoon everyone and welcome to Marchex's business update and fourth 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.

Michael Arends

Chief Financial Officer

Thank you, Ethan. Good afternoon and thank you everyone for joining us today. I'd like to start by updating you on what the office of the CEO has been focused on. Over the last few months we have been listening to our customers and evaluating key product areas to uncover where we can best grow existing relationships and win new ones. We successfully extended our relationship with YP through 2018. In addition, we continue to win new relationships with Fortune 1000 companies largely based on the unique measurement capabilities and insights our analytics platform can provide. Equally is important, as part of our strategic review, we have been scrutinizing which of our offerings are not meeting out internal expectations. As we work to scale our new analytics customer relationships and their financial contribution, we still remain subject to budget fluctuations from some of our largest Call Marketplace customers. The marketplace is a media product where we have historically been vulnerable to changing media tactics given the nature of the product and this is carried over into our initial outlook for the first quarter of 2017. The Call Marketplace has also been impacted by the decline in the financial contribution from our YP relationship over the last year. In addition, the revised economic terms in the expansion of the YP relationship, the extension of the YP relationship, along with its related impact on the Call Marketplace are factored into our initial guidance. Despite these short-term Call Marketplace impacts, we remain highly focused on returning Marchex to being cash flow positive and delivering long-term profitability. We are going through a strategic business review with each of our product areas to determine which areas have the best opportunities for growth and value creation in order to optimize for financial progress. Going forward, one…

Gary Nafus

Management

Thanks Mike. Despite a challenging 2016 that included ramping our sales force, we made progress building Marchex's footprint of new customers and strategic product areas. In 2016, we added 30 new enterprise clients. In addition, we extended our relationships with certain strategic clients like YP, where we now have a deal through 2018. With the ramp sales force, we expect to add new analytics customer relationships and new revenue. One of our most exciting developments has been our recent integration with Facebook. Facebook partnered with Marchex for two reasons. First, because it recognizes that marketing measurement on social media has to evolve; and second Facebook wanted to offer the most reliable and advanced Call Analytics intelligence to enterprise brand that spend billions of dollars marketing on its global platform. While the Facebook influence is immense, ad exposure on social media can be difficult to tie back to phone calls made to businesses. Our partnership eliminates that blind spot. By giving marketers a deeper understanding of what happens on a phone call that stems from a Facebook ad. Instantly measuring cross channel impact is what today's marketer's need to convert prospects into customers. Evolving our product platform differentiates Marchex in the marketplace and opens up opportunities to cross sell to clients. In December, we launched display and video analytics to tap into the more than $11 billion that brands are expected to spend on video advertising in the US this year alone. With our product, enterprise marketers can now measure the impact of display and video advertising campaigns on inbound phone calls to a call center or a store. Marchex display and video analytics also allows marketers to measure video advertising units in both premium and programmatic video publishers. Marketers can understand the impact of mobile display in app, and video…

Michael Arends

Chief Financial Officer

Thanks Gary. For the fourth quarter, call-driven revenues were $28.4 million. We know some of the track growth without what YP, so to help models with this framework in mind call-driven revenues in the fourth quarter, excluding YP were $22.4 million, compared to $25.3 million in the year ago period. On a year-over-year basis, the fourth quarter call-driven revenues without YP were primarily influenced by a decrease in budgets from certain customers who were the subject of acquisitions and from the previously mentioned trends with a limited number of Call Marketplace customers. Additionally, while we believe that new customer relationships and 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. Looking further down the P&L for the fourth quarter, excluding stock-based compensation, total operating cost for the fourth quarter were $31.2 million. Service costs were $15.9 million, down from $19.5 million in the fourth quarter of 2015. Sales and marketing was $5.2 million, which was up year-over-year, as we continue to invest in our sales and marketing organization. Product development was $6.4 million, down modestly year-over-year. Moving to adjusted operating income before amortization and EBITDA for the fourth quarter, call-driven adjusted OIBA and EBITDA were losses of $2.9 million and $2.1 million respectively. GAAP net loss from continuing operations was $5.7 million for the fourth quarter of 2016 or $0.14 per diluted share. This compares to GAAP net income from continuing operations of $1.2 million or $0.03 per diluted share for the same period of 2015. Adjusted non-GAAP loss per share was $0.04 per share, compared to income of $0.03 per share for the same period in 2015. We ended the fourth quarter with more than $103 million in…

Operator

Operator

[Operator Instructions] Your first Brett Huff from Stephens. Your line is open.

Brett Huff

Analyst

Good afternoon guys and thanks for taking our questions. Couple of them, number one, in terms of the 10 million annualized savings that’s really helpful, I just want to see if the method we’re roughly thinking about makes sense to you, if you take your sort of negative 7 million or so of EBITDA in 2016, and assume you’d get something like half of the 10 million, you kind of alluded to a ramp that would get you probably minus 2 million depending on how quickly that happens for 2017 for EBITDA, is that the right sort of magnitude to think about how quickly you can get that traction from those savings?

Michael Arends

Chief Financial Officer

So, Brett this is Mike. Thanks for the question. I think the context of the $10 million in the annualized savings is more directed at a comparison to the actual costs in 2016 versus the profitability measure, which obviously includes the full outlook of the revenue streams as well. What we do think is that we can relatively quickly see meaningful impact of those annualized savings and we see the majority of that benefiting us already beginning in the second quarter.

Brett Huff

Analyst

Okay, that's helpful. And then in terms of the Facebook deal, thanks for putting up the detail you did a couple of days ago, it was really helpful obviously, if you are excited about that, can you give us a sense of qualitatively where are we in the process of figuring out how to turn that into revenue, I think it’s kind of a referral relationship, but has a backend integration, can you just flush that out a little bit for us so we understand what exactly the technical relationship is and kind of how going forward the referrals and things like that might work?

Gary Nafus

Management

Yes, thanks for the question Brett, this is Gary. So, we are super excited about the Facebook relationship. The partnership is a very critical element for us to have an omnichannel capability relative to the specifics of about how the relationship works. Marchex will be the selling engine for that offering. Facebook, we do have a good partnership with Facebook and we are hopeful for referrals, but it’s certainly not a situation where they are reselling our capabilities, but we are relative to how it will contribute to the revenue line, probably a good example is to start look at our search capability that we brought out and within about 12 months we saw good revenue contribution for that product line.

Brett Huff

Analyst

So, it is kind of 12 months in past similar things, so maybe we can think at least on that level of time magnitude. Okay that helps. And then any change in - or in the discussions you are having with your customers and sort of the shifting budget priorities on media spend, can you give us any update on the tender of those discussions, I mean, is there any new rationale or different rationale for maybe spending less on call-driven ad stuff versus other particular channels on media, any update on why this shift, if it might come back, when it might come back etcetera?

Gary Nafus

Management

Sure. With regards to the large financial institution that we do business within one is one of our largest customers, that shift was very predicated on them investing in one of their product lines versus another, and so in 2016, we were very involved in a product line of ours and driving phone leads to them. They have de-emphasized that as part of their 2017 plan, and so that is the biggest impact. We don't have any other indications around areas where it’s going to have further impact.

Brett Huff

Analyst

So, it’s kind of a - it was a tactical decision on their part that just happen to flow-through to you all?

Gary Nafus

Management

Yes.

Brett Huff

Analyst

Okay. And then in terms of some of the new products that might be coming out, still you had to come, and you know the omnichannel is a big one, I know you also focus on trying to get to revenue faster the one that you think are going to be bigger hits, any update or sort of previews on the tender of some of those releases or can you give us an update on any of that you have articulated already or things that you can tell us a little bit more about as we look through the rest of this year?

Gary Nafus

Management

Yes, you bet. We do have a great product pipeline right now and we're really excited. We released in December the display and video analytics capability and then very recently added on the Facebook. We do expect more releases coming throughout this year and so we're really excited about the product pipeline that is coming down the pipe and we believe that we are able to see that flow through to new customers and new revenue just as soon as humanly possible.

Brett Huff

Analyst

Okay. That's all needed. If I have more, I will jump back in the queue. Thanks for your time.

Gary Nafus

Management

Thank you.

Operator

Operator

Your next question comes from the line of Darren Aftahi from Roth. Your line is open.

Darren Aftahi

Analyst · Darren Aftahi from Roth. Your line is open

Hey guys thanks for taking my questions. Just a few if I may, first on your guidance commentary about breakeven, potential positive EBITDA on the second half of the year, does that comment, I know you're not giving fiscal 2017 sales guidance, but does that contemplate growth sequentially as the year progresses and then I have a got a couple of follow-ups.

Michael Arends

Chief Financial Officer

Hi Darren this is Mike. So, we have given the view on today for the first quarter is the revenue, as well as the profitability side of the picture. We’ve also given some of the leading indicators of where we think the profitability will move or migrate towards over the course of the coming quarters for 2017. There is a variety of outcomes on the revenue side of the equation. We’re focused very much on the strategic business review of all the different products, as well as business areas and aligning our investments in those areas for things that we think will definitely provide a return on investment and bring us back to return to the long-term growth, as well as profitability that we desire. Analytics are a key component as part of that, we see that with our investments with some of the things that the customers are giving us feedback for as well as how we’re winning new customers and adding to our pipeline in that area, relative to some of the other areas. So, we hope to be able to give more progress updates as we go through the course of the year there.

Darren Aftahi

Analyst · Darren Aftahi from Roth. Your line is open

And then following up on Facebook, what do you need to prove to move from Marchex's selling initiative to more of a Facebook referral model from Facebook?

Gary Nafus

Management

Well Facebook has been shifting to an agnostic view and allowed measurement tools to come in and measure their ads. And so that’s the biggest shift that’s going on. I would say, it will probably likely remain a Marchex sold product for the life of the product as they haven't gotten into reselling of attribution solutions thus far.

Darren Aftahi

Analyst · Darren Aftahi from Roth. Your line is open

Got it. And then third, can you give us any update on the WPP relationship you guys announced last year? And then lastly, I know there is some commentary either in the call or in the release about CEO search, what sort of variables have to be in place that I think you guys are going to move forward, is it to get the business in mind and kind of look the CEO or the kind of mutually exclusive tracking in terms of how you are thinking about that? Thank you.

Gary Nafus

Management

Darren , I will take - this is Gary, I will take the WPP. So, we still have a great partnership with WPP and we do go to market together and when they have clients that are in call based industries where they do acquisition over the phone we work with them heavily and so it is still a great partnership and we work very closely together.

Michael Arends

Chief Financial Officer

And Darren this is Mike, I will take the second part of the question about the CEO search and I think part of it comes and dovetails from the strategic review that we’re doing with the different products in the business areas. Out of that comes alignment of investment to be able to meet some of our objectives about returning to long-term growth and profitability. In the meantime as we are working towards those initiatives and refining exactly what the best path is for that search for the CEO, we have a team that’s operating today that has a lot of history with our customers, our technology our products and our people, and we feel are capable of driving the business forward in the meantime.

Darren Aftahi

Analyst · Darren Aftahi from Roth. Your line is open

Great, thank you.

Gary Nafus

Management

Thanks Darren.

Operator

Operator

There are no further questions at this time. I turn the call back over to the management team.

Michael Arends

Chief Financial Officer

Thank you everyone for the time and joining us today and we look forward to giving you an update as we progress through the year.