Marchex, Inc. (MCHX) Q1 2017 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. My name is Shannon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Marchex First Quarter Conference Call. [Operator Instructions] Thank you. It is now my pleasure to turn today's conference over to General Counsel, Ethan Caldwell. Mr. Caldwell, you may begin your conference.

Good afternoon, everyone, and welcome to Marchex's Business Update and First Quarter 2017 Conference Call. Joining us today are Michael Arends and Russell Horowitz. 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'd like to turn the call over to our Chief Financial Officer, Mike Arends.

Thank you, Ethan. Good afternoon, and thank you, everyone, for joining us today. Over the last few months, the Office of the CEO has been focused on accelerating Marchex's product progress, growing the insights we can deliver for our customers, and expanding key partnerships to open doors into new markets and opportunities. As we drive our business forward, we are continually measuring our results and adjusting our investment decisions. This ensures we remain on course with our financial and strategic priorities. Since last fall, the Office of the CEO has focused on stabilizing the business and accelerating the development of our product platform from the investment phase into the execution phase. I am glad to report that since December, we've been releasing the suite of products that provide enterprise customers' insights into their marketing spend across all media channels, and surface important insights into their sales operations at a level of detail they haven't had before. The rollout of our new products started with the launch of display and video analytics. We can now measure the impact of display and video advertising campaigns on inbound phone calls to call centers and stores, and we can measure video advertising units in both premium and programmatic video publishers. This product is invaluable to marketers because it measures the connections between impression data with concrete customer purchases over the phone, which importantly closes the purchase loop for them. This year, we also launched our social analytics product, rounding out Marchex's robust Omnichannel Analytics Cloud. Now Marchex can measure consumer engagement in some of the world's largest social media channels by deciphering which campaigns are most effective at driving phone calls to businesses. These actionable insights, into which advertising channel drives specific offline interactions, allow marketers to adjust tactics and strategies across the major media channels used for brand recognition and customer acquisition. And we're not done. Most recently, we launched Speech Analytics. This is a new technology that gives Marchex a unique advantage in the industry. By transforming the raw abstract data of customer conversations into real time actionable intelligence, Marchex Speech Analytics empowers marketers to quickly identify opportunities to retarget ads and adjust their marketing spend. Now marketers and sales operations managers can go deep into customer conversations and uncover a host of operational insights about their business and sales teams as well. No longer do the tools to evaluate sales optimization, call center and agent efficiencies and the quality of the customer caller experience sits solely in the fragmented call center environment. Now, through Marchex Speech Analytics, those tools are readily available to marketers. Historically, Call Analytics solutions have relied on raw data and log files that marketers must manually categorize and interpret, a time-consuming process with a high margin for error. Marchex Speech Analytics can instantly quantify lost opportunities for sales, identify potential new customer or sale calls and track agent effectiveness. It also provides searchable call transcripts. We believe Marchex Speech Analytics has the capability to save millions of dollars for enterprise customers, while also brining about meaningful operational efficiencies. Our new product releases new partnerships with global companies, such as Facebook, show the strides we are making in providing enterprise brands both the insights and the reach they need to connect with their customers in today's multidevice, multichannel world. We feel very good about the unique intellectual property we are developing and our pace of innovation. Although flow-through into the financial results will take time to play out, we believe we've taken crucial steps to ensure Marchex is uniquely positioned in our industry with leading products and partnerships, and that these can be key factors in helping us get back on the path to growth and profitability. With that, I'd like to hand the call to Russ.

Thanks, Mike. As a founder of Marchex and a member of the Office of the CEO, I am glad to be with you here today. Over the past few months, we've been accelerating the pace of innovation around our product platform and deepening key relationships and partnerships. We have a new lens on the business, which is crucial to the financial and strategic success of Marchex, both for now and in the future. Starting last October, we began an extensive review into the state of our business and took active steps to realign our team for success. Since then, we have executed on a series of initiatives to put Marchex back on the path to generating positive cash and to aligning the company's investments for more tangible and timely returns. First, we decided to pull back on investments that weren't aligned with our near-term financial and strategic goals. As part of that process, we have taken, and are taking, more than $10 million in annualized costs out of our business and realigning our cost structure with our current revenue outlook. I am glad to be able to share that we currently anticipate Marchex to be at or near breakeven for adjusted EBITDA as early as the current quarter. Next, we've accelerated the launch of several of our products that each have characteristically high-margin profiles, and we have cultivated new partnerships with industry leaders. Both our key to reframing our overall opportunity and our future growth story lies with this progress. In addition, we've reorganized and restructured the company in ways that leverage our individual and collective strengths and we have made other key changes where needed. We are also continuing to evaluate our leadership structure as we evolve our organization. In the coming months, we'll share further updates as we examine how best to augment our leadership. While many challenges remain, we are making progress toward achieving a financial profile that returns Marchex to generating positive cash. We continue to explore ways to unlock value in our business as part of our ongoing strategic review. We also continue to focus on selling our new products to broaden our base of customers. Today, we are on-boarding many of the relationships that we have formalized over the last year. As we work through an aggressive product launch queue, we expect to have opportunities to ramp these relationships over time and expand our customer base. We're committed to seeing our customers succeed as their success will fuel ours. It's been a busy few months, and we look forward to sharing our progress as we go forward. And with that, I'll hand the call back to Mike.

Thanks, Russ. When looking at our financial results, for the first quarter, revenues were $24.4 million. We know some of you track our growth without YP, so to help models with this framework in mind, enterprise revenues in the first quarter, excluding YP, were $19 million compared to $27.4 million in the year-ago period. On a year-over-year basis, the first quarter revenues without YP were primarily influenced by a decrease in budgets from customers, who were the subject of acquisitions and from the previously mentioned trends with a limited number of Call Marketplace customers. While we believe that new customer relationships we signed over the last year, along with 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 immediate term. Looking further down the P&L for the first quarter. Excluding stock-based compensation, total operating costs for the first quarter were $26.5 million. Service costs were $13.5 million, down from $21.8 million in the first quarter of 2016. Sales and marketing and product development costs were $4.6 million and $5.2 million, respectively, which were down year-over-year. Now moving to adjusted operating income before amortization and EBITDA for the first quarter. Adjusted OIBA and EBITDA were losses of $2.2 million and $1.4 million, respectively. During the quarter, we recognized approximately $700,000 from restructuring costs associated with our cost-saving initiatives. GAAP net loss was $3.5 million for the first quarter of 2017 or $0.08 per diluted share, compared to GAAP net loss of $3.7 million or $0.09 per diluted share for the same period of 2016. Adjusted non-GAAP loss per share was $0.03 per share, which was similar to the first quarter in 2016. We ended the first quarter with more than $103 million in cash on hand. Now turning to our outlook for the second quarter. First, let's discuss revenue. For the second quarter, we expect revenue of $22 million or more. Our guidance takes into account a few of, a variety of factors, and the first of which is the first quarter tends to be the high watermark during the year for our financial services customers. Secondly, we are seeing the flow-through impact from the new economics of the long-term extension of the YP relationship and from the customers we had that were acquired last year, which we discussed in the fourth quarter conference call, and we expect will flow throughout the year. Our guidance also takes into account the many of the new relationships we entered into over the last year are very early in the ramp phases and are not yet meaningfully contributing to the overall financial progress of the business at this point. Over time, as we win more new customers and increasingly penetrate our existing customer relationships with our expanding product pipeline, we believe we can create a path to long-term growth. Next, looking at adjusted OIBA and EBITDA. For the second quarter, we are forecasting adjusted OIBA at a range of a loss of $1 million to a loss of $2 million. For adjusted EBITDA, we are forecasting a range of breakeven to a loss of $1 million for the second quarter. Over the last few months, we've taken steps to align our investments and cost structure with our current revenue levels to ensure that we can make progress toward our goal of positive cash generation, and so that our future growth drives greater efficiency and operating leverage. As we see traction from sales and marketing initiatives and grow our enterprise customer base, we are putting the business in a position to realize these goals. We believe we're on the right track to returning Marchex to profitability and working toward reopening the door to long-term growth. I'm confident that by aligning our investments, accelerating the pace of innovation, expanding our product portfolio, refining our cost structure, we are putting the company back on the path towards success. Thank you to all our employees for their hard work and for continuing to focus on our customers' needs. And with that, I'll hand the call back to the operator to take questions.

[Operator Instructions] Your first question comes from the line of Brett Huff. Your line is open. Please go ahead.

First question is, how are the conversations going with those handful of clients that have caused some of the revenue volatility. I know you said there’s a few of them that started getting a little wobbly in terms of revenue last year. How are those conversations progressing and kind of where do you see those going based on those conversations?

Thanks, Brett. This is Mike. I think the majority of those that are -- have the volatility impact to them are those that were acquired as part of fairly large mergers or purchase -- acquisition scenarios in the past year. And a lot of that is -- there is either an incumbent that has a different profile, a different marketing engagement program that they're operating under and they're going to market in a different way. They have brand tactics that are different than some of the source and use of the primary value proposition that we have around the phone Call Analytics. And I think that's a key driver of some of the items that are affecting us right now with those specific customers.

That's helpful. And then in terms of sort of the Facebook update, I think you mentioned that you're still making good progress in the social channel. That was, I think, an important announcement that a lot of our investors are paying attention to. Can you give us an update on that in terms of where we are? And hooking up the back end, any initial reads on positive success together?

Yes, Brett, this is Mike, again. And thanks for the question. This is -- Facebook for us is an important and exciting partnership, one that we hope we can grow over time. We have been very focused in the course of the last 6-plus months on accelerating the innovation and the ability to get to execution phase of releasing products. And to that end, we released display and video analytics in December of this past year and just a few weeks ago, we did announce and release our Omni-channel Cloud platform, which includes our social analytics and Facebook in the partnership and integration we have with them is a key part of that. And then most recently, we also, just a few days ago, released our Speech Analytics platform, which helps on a macro basis, thousands of phone calls can come in on a given day and then on a real-time basis, we can give a marketer insights around what's happening with those calls and create opportunities for cross-sells, up sells, lost opportunity reports as well sales representative efficiency and improvement ideas. And allow the marketer to take actions is one of the key things from all of these product initiatives, including with the Facebook relationship. It's very early. We've had, with that Facebook relationship, a number of customers already initiate trials and pilots with us. And we're looking forward to providing updates as we move forward through the course of the year. We don't have a perspective of the magnitude of the financial contribution it can reveal to us at this point in time.

Okay, that's helpful. And then last one for me. It sounds like you've gotten, fairly successfully got some of the products that were in the pipeline out and you mentioned a couple of them. Can you tell us a little bit about how you see those growing, when you think that they might move the needle so that we see them in the revenue? And then also any update on near medium-term things also still in the pipeline in product development that we might see this year or early next?

I appreciate the question, Brett, as well. So when we think about some of the investments that we've focused on over the course of the last 6-plus months, we believe a lot of the work we are trying to do is realign the investments for things that the customers are not only valuing in the near and intermediate term, but also interested in paying for meaningfully to provide financial contribution. And a lot of the product releases are things we think, from the customer standpoint, will provide value. So to that end, we've released a lot. We've got a number of trials that are ongoing right now. If you look at our Marchex Call Analytics for search that we released a little over 18 months ago, we saw something that we hope will play out here with these products as well, which was there’s a lot of trials, pilots, they take 3, 6, 9 months. We get into a facet where we get learning's back from the customer, we tweak, we update. And those learning's enable our sales team to go into the budget cycle season that the customer has, and ultimately get some financial contribution back to us, some revenue generating events back to us. It does take time, but we're hopeful that some of these recent product releases will play out in the same way. And again, the Call Analytics for search, which was released in the last 24 months, is now a million, a multimillion dollar-plus product with a high contribution margin.

Your next question comes from the line of Darren Aftahi. Please go ahead.

This is Dylan on for Darren. On related to analytics, where do you see the long-term mix for that business? And how does it impact the profits?

Thanks, Dylan. This is Mike, again. With respect to just the mix of our profile, again, on the marketplace, which is more our pay-for-call product that generates new customer leads via the phone for our customer base, that product profile is about $0.20 to $0.30 contribution margin for each dollar that comes in. And on the analytics when we embed that with our customers, we generally make more than $0.50 on the dollar of contribution. And with some of the most recent product feature add-ons, we think we can actually get higher and potentially even significantly higher product contribution margins for that. So if you look at how the mix plays out over the course of the future, a lot of our efforts are focused around generating incremental penetration with the analytics products. If those are the products that were to grow at a more rapid rate, then clearly our overall margin profile would improve and increase even from the levels that's at today.

And one more, and I am sorry if I missed this earlier. But with Facebook and some of the pages that they have related to small businesses, and the same thing with Instagram, could you explain a little bit how that might impact inbound calls?

I think a lot of the social media engagement and call media analytics branded messaging from a brand marketer, brand advertiser, they're getting in front of consumers and those consumers are engaged with Instagram, with Facebook in a variety of different ways. Those display engagements of getting a creative out in front of the consumer influences their actions, and whether it influences them immediately or they would potentially click and call, or whether it influences them from a branding perspective when they see it even more than once, they see it multiple times to effectively make a phone call or take some other action at a later date, that's part of what we're trying to help the marketer to understand. It's been a key blind spot in their equation for some time now, and we're coming in and actually helping them solve for that, and giving them information which ratifies some of the value proposition of what the consumers are seeing and doing within that social media application, and Facebook and Instagram in this particular case.

There are no further questions on the phone lines at this time.

We want to thank everyone for their time today, and we look forward to providing a further update on the next call.

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