Marchex, Inc. (MCHX) Q2 2017 Earnings Report, Transcript and Summary

Welcome to the Marchex Second Quarter Conference Call. My name is Ronnie and I will be your conference operator today. [Operator Instructions]. I would now like to turn the conference over to Mr. Ethan Caldwell. Sir, the floor is yours.

Good afternoon, everyone and welcome to Marchex' Business Update and Second Quarter 2017 Conference Call. Joining us today are Michael Arends and Russell Horowitz. 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 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. During the second quarter, we continued to build on a series of initiatives to stabilize Marchex while taking steps towards profitability. We're pleased to report that early results show we're moving in the right direction. This year, we've moved aggressively to identify key opportunities in sales, marketing and product innovation and to align our investments to support these initiatives. We've also pulled back in areas that are not core to supporting these key opportunities in the near term. We've made changes to our business, in some cases significant changes and as a result, we returned to positive operating cash generation in the second quarter, our first time doing so in the past 6 quarters. At the same time, we've continued to expand Marchex' opportunity in the key markets where we have customer momentum. These initiatives, we believe, are putting us back on a path to growth and we're now seeing early indicators from this rigorous focus and execution. Over the last several months, we've aligned our cost structure and continued to invest in the areas where we can strategically win new business. We have also accelerated our product progress by launching various new products. By adding new capabilities and insights that advertisers can only access through Marchex' product platform, we're putting ourselves in a position to expand existing customer relationships, attract new customers and deepen integrations with leading technology players throughout the landscape. One of our most exciting technology breakthroughs has been the launch of our Speech Analytics platform. We already see signs that Speech Analytics is expanding our sales opportunities with both existing and new customers. This unique, innovative product solves a critical pain point for our customers, who need a solution to help them understand the raw data across millions of customer conversations that take place every month. Our customers now have a real time, actionable intelligence that they can use to increase sales, improve call center operations and optimize the customer experience which can lead to measurable growth in their business. Early feedback from customers has been encouraging. In fact, we're using their experiences to train our sales force and shape our product evolution to entrench us with some of the largest brand in the U.S. In addition, to Speech Analytics, we've recently launched audience targeting. This is a new solution that leverages real customer interactions to automatically build high-value audience segments for display and social media platforms. We believe Marchex is uniquely positioned to deliver high-value audiences to marketers by virtue of the sheer amount of data we can analyze. More than 300 million calls cross our platform each year and this vast call stream gives us a unique ability to understand how to reach mobile users on the go. We're now taking those insights and bringing them into some of the world's largest display channels, such as Facebook. And that's not all. In June, we expanded the capabilities of our Search Analytics product to enable companies of all sizes to maximize their spend and increase ROI on paid-search campaigns. While previously targeted for enterprise-level companies with large budgets, these same capabilities are now available for small and medium-sized companies as well. Marchex search essentials helps eliminate a blind spot for marketers by attributing every inbound phone call to a paid search keyword. As a result, marketers have the insights they need to make real time adjustments to drive more efficient performance for their paid-search campaigns. We're constantly improving and expanding the capabilities of our products. This is an example of our ability to take a product tailored for large enterprise customers and open it up to a broader audience and opportunity. We've launched pilots with new customer using several of these recently introduced products and we expect our early learnings to help us sharpen our go-to-market strategies while continuing to evolve these products ahead of next year's budget cycle. As part of our expanding product pipeline, we've added and in some cases deepened, our strategic partnerships with leading media and technology companies. Just last month, we announced new integrations with Adobe Analytics Cloud to enable marketers to both increase sales and retain customers by better understanding how customers and prospects interact with their bands. We also announced our promotion to business partner in the Adobe Exchange partner program for Adobe Experience Cloud. Through the combination of Adobe and Marchex, brands can now connect digital behaviors with off-line transactions from calls and stores in order to produce highly personalized and impactful campaigns. We look forward to continue to develop our relationship with Adobe. And with that, I'd like to turn the call over to Russ.

Thanks, Mike. This year, we've accelerated the pace of our product innovation and deepened key relationships to fulfil on our mission of focusing on our customers and their success. We're capitalizing on areas where we believe Marchex has a lead and are focusing our investments in these areas. This is a new lens we've put on our business as we move to stabilize Marchex, evolve our strategy and ultimately position the company for growth. We believe the markets we're operating in have meaningful opportunity. In fact, a study released last week from Forrester found that customers who call the business are the most valuable prospects for a business. According to the study, phone customers convert faster, spend more and have a higher retention rate than customers who contact brands via other channels such as in-store or online. Our progress this year will help Marchex emerge as the leader in helping businesses drive more calls, understand what happened on those calls and convert callers into customers. We're highly focused on selling our products to a broader base of customers and we're encouraged by the initial success in our sales efforts to add new trials with new large brands this year which is a prerequisite to delivering growth. We expect to have opportunities to ramp these new relationships and expand relationships with our existing base of customers too. While there is more to do, Marchex is well positioned to solve these critical needs for businesses. It's been a busy year so far and aside from stabilizing our business and returning it to positive operating cash generation, we've also ways to see for growth and evolution. We look forward to updating you more in the coming months. And with, I'll hand the call back to Mike.

Thanks Russ. For the second quarter, revenues were $22 million. We know some of you track our growth without YP, so to help models with this framework in mind, Enterprise Revenue in the second quarter excluding YP was $17.2 million compared to $26.3 million in the year-ago period. YP was recently acquired by Dex, as we work through this transition, we will provide further updates. On a year-over-year basis, the second quarter revenues without YP were primarily influenced by a decrease in budgets from customers who were the subject of acquisitions and from the trends with a limited number of Call Marketplace customers mentioned on prior calls. Each of these factors, we expect to flow through the balance of the year. While we believe the new customer relationships we signed over the last year along with an expanding sales pipeline and expanding product queue 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 second quarter, excluding stock-based compensation, total operating cost for the second quarter were $22.3 million. Service costs were $12 million, down from $20.3 million in the second quarter of 2016. Sales and marketing and product development costs were $3.4 million and $4.1 million respectively which were down year-over-year. Moving to profitability measures. Adjusted operating and income before amortization for the second quarter was a loss of $326,000. Adjusted EBITDA was a positive $400,000. GAAP net loss was $1.3 million for the second quarter of 2017 or $0.03 per diluted share compared to GAAP net loss of $68.8 million or $1.65 per diluted share for the same period of 2016. Adjusted non-GAAP loss per share was $0.01 per share which compared to a loss of $0.02 for the second quarter in 2016. We ended the second quarter with more than $102 million in cash on hand. Now turning to our outlook for the third quarter. First, let's discuss revenue. For the third quarter, we expect revenue of $21 million or more. Our guidance takes into account that many of the new products we launched this year are in the early adoption phases and are not yet meaningfully contributing to our financial results. We're encouraged by our pipeline of pilots and with some of the large customers that are engaging with us to help them meet their needs. Over time, as we win more new customers and increasingly penetrate our existing customer relationships with newly launched products and our expanding product pipeline, we believe we can create a path to long term growth. Next, looking at adjusted OIBA and EBITDA. For the third quarter, we're forecasting adjusted OIBA to be a loss of $1 million or better. For adjusted EBITDA, we're forecasting breakeven or better and another quarter of positive operating cash generation. Our initiatives to align investments and cost structure with our current revenue levels paid off in the second quarter. Our belief is that these initiatives also put us into a position so that our future growth drives greater efficiency and operating leverage. As we see traction from sales and marketing initiatives, grow our enterprise customer base and scale some of the customers we're currently piloting with, we believe we're putting the pieces together to lay a strong foundation for Marchex and reopening the door to long term growth. Thank you to all of our employees for your hard work and for continuing to focus on our customers' needs. I will hand the call back to the operator now to take questions.

[Operator Instructions]. And your first question comes from the line of Brett Huff with Stephens.

This is Blake on for Brett. First of all, you noted positive operating cash generation for the quarter. Congrats on that, for the first time in, I think, 6 quarters and guided EBITDA and operating cash generation to be breakeven or positive for next quarter. Should we expect this breakeven amount for EBITDA or free cash flow to be sustainable from here, from the next quarter, as kind of a run rate heading into next year?

Blake, this is Mike and I'll address that one. So we've given the update and the forecast for what we're seeing with our current expectations for the third quarter. We haven't gone beyond that, but there is a number of things that are happening with our business today. We spent a lot of time and effort in the last 9 months, working on aligning the costs with the related revenue stream, also working on aligning some of the introduction and the innovations from the product perspective to get that out into the market so that we get feedback and learning from customers. And we've been in a fortunate position where some of these innovations are being valued from our customer standpoint to bring on a bunch of new pilots. And we're hopeful that especially on the analytic side of the equation that can give us an opportunity for the future to bring back some of the long term growth that we've been working towards. In terms of the operating cash profile position, I think we're in a much better position today, especially for the third quarter. But with those other thoughts in the background, I think that will serve us well as we move into not only the fourth quarter but into 2018.

Great. And just wondering if we could get an update on the search for the new CEO progression. Do you have a strategy internally on maybe the potential timing of when that should happen by?

Yes, sure. Thanks for the question, this is Russ. In terms of where we're today, we're continuing to operate with the office of the CEO framework and we think it's working very effectively. When you look at the goals we laid out late in the fall when we took on the structure and how those would be sequenced, we're making progress and removing obstacles to making further progress. And so we've been looking to augment leadership in a number of areas and we talked about the CEO position and we made progress on bringing on some new leadership which is having a positive impact. For now, the office of the CEO framework is one we'll continue with. Recently, I committed to coming back on the Board of Director and committing myself as an executive as well and more available as part of my set of responsibilities. And we feel the combination of this framework and the team is being effective. And that's the way we're going to operate for now, that may evolve based on needs and based on progress and the visibility it gives us into our leadership team and what we need to augment it with.

Okay. And it looks like you're continuing to leverage the Facebook partnership with the launch of audience targeting. How would you describe, overall, that integration with Facebook? How is that going? And then any more color you could share with us on maybe some early positive data points or findings then apply when we could expect revenue from that to start. And just generally, you mentioned deepening integrations with other tech players, any more color on what some of these partnership might look like would be helpful.

Sure, this is Russ. I'll hit the first part. When you look at the Facebook product launch and some of the customers that we've been integrating as part of that product offering, we continue to make progress. I don't have any specific data to share with you today. The way I'd look at it is, we've gone through a pretty virtuous cycle in terms of product innovation and product release and Facebook is definitely one of those, when you look at the social and Facebook integration. When we think about these building blocks that set the stage for reinvigorating growth, it's one of them. We're not really breaking it out right now, but along with the other recent product launches with Speech Analytics and audience, these are kind of 3 catalysts for us when you look at the sales pipeline, both to win new customers and more deeply penetrate existing relationships. As it relates to the second part, not sure what - if you got any color you can add when you look at other potential tech integrations or partners, Mike?

So this is Mike. I'll just refer to semantically. We don't have anything to announce specifically today. But getting integrated into digital marketing ecosystems, dashboards, user interface where we can supplement, those are some of the partnerships that we're engaged with. Another example is, for many of the marketers that we work with, the high consumer intent, the value of the phone call is - it's some of their best customers that are coming on board. To be able to market to those kinds of customers or remarket to those customers, there is a variety of places that there's integration points in the digital ecosystem. We're working on integrations to help facilitate getting these high-intent consumer audiences that are making phone calls, being able to be integrated into a variety of places so that our marketers, who are our customers, can get access to them more easily through remarketing programs.

Okay. And then just lastly, any commentary you can give on variability and revenue from your large clients? How is that being trending? Any trends you can call out there? And are there any new products that are maybe getting better traction that you think could be bigger near term revenue drivers?

So on the first question, I'll address, there is a couple of things. One we have the relationship with YP that has had consistency in terms of the trajectory and the financial profile over the last number of periods and we continue to work with them on that basis in the business-as-usual aspect. So obviously, that is an impacting for us. In addition, we have some of the impact, especially in the financial services category, where more of the budgets are weighted towards the front part of the year, so from a seasonal perspective, there's generally declines as you look quarter-over quarter and then that resets again as you get into the beginning part of the year. So some of those things are trending. In addition to that, we've released a series of new product innovations over the course of last 6, 7 months. There is a variety of pilots for those new products releases that we've actually started in many cases. And we expect that in those analytics areas where we've released those new products, we do think there is some meaningful traction that can happen. And if you look back 18 months ago, we released a new product which was Call Analytics for search, that today has got a run rate in the multimillion-dollar framework. We think that some of these features sets, as well as the new products on the analytics side, have the possibilities to be able to generate those kind of revenue streams which on the analytic side also has high-contribution margin.

Your next question comes from the line of Darren Aftahi.

This is Dylan [ph] on for Dan. I was wondering - you talked about some of your new products and the new customers and everything that's in the sales pipeline but it's not yet up to scale, I was wondering if you could maybe talk to what sort of integration levels those need to come to before they start to contribute? And sort of the traction that you are seeing. I know you've kind of talked about it a little bit already, but do clients prefer certain products based on what's their media and Internet company? And then I have a few follow-ups.

Dylan, this is Mike. I think just [indiscernible] we've introduced something that operationally is valuable to some of our marketing customers on the Speech Analytics side of the equations. At the same time, it's really valuable for those kind of marketers who are trying to pinpoint and hone in on a consumer base that they want to retarget or remarket to, that's a subset of all the phone calls that are coming in from their organic user base. There is all sorts of different applications across a variety of industries, including financial services, including telecommunications, home services, automotive, hospitality, that have applications within those Speech Analytics components. We've also released significant relevant products to some of these customers that are piloting with us in the Omnichannel arena. And what I mean by that is, being able to get insights around display marketing as it relates to the phone calls or the off-line transactions and engagement that consumers are taking with those marketers and that specifically is one of the facets with it - with the social marketing and social media with our Facebook relationship as well as some of the display networks. And helping to create audiences from that data and information sets is really relevant to all sorts of different marketers today. Again, the same kind of types of marketers that - the vertical categories that I mentioned beforehand, but there's probably some others as well.

And then on the product development side, you've seen a lot of - you've launched a lot of those new products in last 18 months and you've talked about continuing to invest. Could you talk about a little bit of the pipeline you see developing down the road?

So when we talk about pilots, most of those are very nominal financial arrangements. And as we mentioned before, the Call Analytics for search product was introduced less than 2 years ago and today has a run rate that is in the several million-dollar range. We believe that not just the add-on Speech Analytics capabilities, we think that some of the Omnichannel products which includes audience targeting as a subset of that, also have those kind of profiles. And we think that the customers that are interested in those kind of things are very much along the themes of the vertical areas that we talked about before. In terms of remarketing and retargeting, there is all sort of other verticals that we could open up in time which includes real estate as a vertical, it includes other types of travel, it includes - when you think about home services, even opening it up to places that are small and medium-size business like contractors for that matter or in the health industry, where they're going out and remarketing in the dental, in the medical areas and trying to learn more about how their customers engage and communicate with them in terms of customer acquisition through the phone.

There are no more questions at this time.

We want to thank everyone for taking the time today and we look forward to providing more updates at our next earnings call.

Thank you for participating in today's conference call. You may now disconnect.