Marchex, Inc. (MCHX) Q4 2017 Earnings Report, Transcript and Summary

Good afternoon. My name is Doris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Marchex Fourth Quarter Conference Call. [Operator Instructions].I will now turn the call over to our host, Mr. Ethan Caldwell, General Counsel. Sir, please go ahead.

Good afternoon, everyone, and welcome to Marchex' Business Update and Fourth Quarter 2017 Conference Call. Joining us today are Mike 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 references 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. The fourth quarter represented another step forward. We're solidifying the foundation of our business, making progress with our products and establishing meaningful customer opportunities for 2018. Before we turn to the specifics of the quarter, I'd like to thank our employees who have worked diligently to help Marchex advance our long-term strategic goals to stabilize the business and create new opportunities that can drive long-term growth. Our consistent focus on delivering on our customers' most critical problems is at the center of everything we do and is the key driver of our progress. Some of our achievements in the fourth quarter and in 2017 include, first, Marchex launched 5 new products over the course of the last year. This has been the most robust launch cycle in our history and has given us a unique position in our markets in terms of the breadth and depth of insights we can deliver to our large enterprise marketers. Second, we added more than 40 new customers in 2017. In addition, we're building a broad pipeline of opportunity across multiple industries. Third, we returned the company to positive operating cash generation through a company-wide effort to concentrate our business in strategic product and sales areas. We've created a more focused and entrepreneurial Marchex, and we're beginning to see the benefit of these efforts. Over the course of the last year, we've continued to build and deploy what we believe is the most comprehensive and accurate conversion analytics platform in our industry. Our platform leverages proprietary machine learning and artificial intelligence to drive unique and growing business insights. Businesses have a growing need to understand what is happening across all customer channels, as mobile technology plays an ever larger role in how people interact with each other and with brands. Research has shown that people who pick up the phone and call businesses are typically the most valuable and engaged customers for brands, and often, are in the final stages of a purchasing decision. Businesses today need comprehensive insights into every conversation, and especially those with their most valuable prospective customers. Understanding how to best manage those conversations, which can include millions of calls each month is a tremendous challenge for marketing organizations. Some of the largest brands in the U.S. have struggled to solve this problem, and as a result of our product and customer focus, Marchex is well situated to help them. In 2017, Marchex went broader and deeper in terms of the insights and actionable intelligence we can surface across millions of calls each month. To highlight a few of our product launches, through the launch of Marchex Omnichannel Analytics Cloud, we can now surface unique insights on all digital media channels, including search, display and video, social and websites. Through these products, enterprise marketers can now get more efficient media spend and lower their customer acquisition costs with the 360-degree view of their spend across online and offline connections. Having developed a broad platform for conversational insights, we can now extend our products and value proposition to new markets and more customer segments. Last year, we extended our platform to companies of all sizes through the launch of Marchex Search Essentials, which is a new version of our leading search analytics. And this is an initiative that's just beginning. Furthermore, we can now go deeper into analyzing customer conversations than ever before through our recently launched Marchex Speech Analytics. In addition to helping business understand what's happening on inbound phone calls from consumers, brands can use those insights to convert more of those callers into customers. This proprietary and patent-pending technology delivers the highest levels of accuracy and results for our customers across tens of millions of inbound calls, using machine learning and artificial intelligence functionality to continually refine and improve the results. With speech-enabled call volumes growing across our platform, the data and insights we can deliver is also growing, which continually makes our speech product even better. We were also leveraging our scale to innovate with new products. In July, we launched Marchex Audience Targeting, which uses call data to automatically assemble high-value customer segments for display and social media platforms, such as Facebook. Our call data repository, which captures valuable audience characteristics from the more than 300 million calls we process each year is a growing asset that is building unique audience capabilities. In the future, we anticipate being able to leverage this product on behalf of large customers to expand their targeted customer acquisition efforts across a wide range of media. Together, our Speech and Call Analytics technology are giving Marchex one of the most comprehensive conversation analytics insight platforms in the market. Maintaining our focus on advertiser's needs has allowed us to successfully add relationships with dozens of new brands and build a pipeline of new trial customers. By building relationships with companies such as Midas and GM, Marchex has taken the lead with the large brands that need conversational insights and actionable intelligence. Our products have also opened unique partner opportunities, such as the launch of Marchex Social Analytics, built on a partnership with Facebook, to provide advertisers increased visibility into which social campaigns are driving conversions. Additionally, through our integration into Adobe, brands can now connect digital behaviors with offline transactions from calls to stores in order to produce highly personalized and impactful campaigns. And we look forward to continuing to develop our relationship with Facebook, Adobe and others. With the revamped sales focus across these product areas and a stable of new customers, Marchex now has many of the key ingredients needed to help make continued progress in 2018. Through our relentless focus on customers and our prioritization of investments and products where we have momentum and a competitive advantage, we met our goal of returning Marchex to positive operating cash generation in 2017. Thanks to the hard work of our employees, we have achieved this goal without compromising our strategic opportunities. And as a result, our company is stronger, and we have first-mover advantages with large brands in areas like speech, call and omnichannel analytics. And with that, I'd like to hand the call over to Russ.

Thanks, Mike. 2017 was a foundational year in which we refocused the company and reopened the door to meaningful opportunity. Today, we've realigned our business to better support our customers and are able to measure the results in a more timely manner. Marchex is a more disciplined company, with a growing base of customers and the capability to keep investing in their success. I want to briefly provide an update on our strategic review. As we've indicated previously, we continue to evaluate a variety of initiatives, which could include acquisitions. We took the first step in December when we announced the special dividend payable in the first quarter. Our growing confidence and our longer-term outlook gives us greater flexibility to execute on our strategic review process. As we move forward this year, we'll continue to assess business progress and evaluate a variety of options. We remain highly focused on improving our financials and further refining our long-term strategic goals. If 2017 is a measure of the type of progress we can make in 1 year, I look forward optimistically to what we can accomplish in 2018. And with that, I'll turn the call back to Mike.

Thanks, Russ. For the fourth quarter, revenues were $21.8 million. I mean, we know some of you had previously tracked our revenue without YP, so to help models with this framework in mind, revenue in the fourth quarter excluding YP was $17.7 million, and this compares to $22.4 million for the fourth quarter of 2016. And as a reminder, YP was acquired by Dex in 2017. Also of note, in the fourth quarter, we recognized over $500,000 of revenue related to an analytics customer we piloted in prior periods. And at this stage, we are moving to a full contractual relationship, and believe this can be a meaningful long-term customer for Marchex. On a year-over-year basis, as discussed on prior calls, the fourth quarter revenues without YP were primarily influenced by a decrease in budgets from customers who were the subject of acquisitions and from trends with the limited number of Call Marketplace customers. We're starting to see some favorable impact from our building customer trial pipeline, particularly in several of our analytics products launched last year. Many of these trials are initially small, and it will take time to determine the scope of the fully ramped relationships. We expect this expanding sales pipeline may have a meaningful impact for our long-term growth, particularly for our analytics products, though 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 fourth quarter, excluding stock-based compensation, total operating cost for the fourth quarter were $21.4 million. Service costs were $11.5 million, down from $15.9 million in the fourth quarter of 2016. Sales and marketing and product development costs were $3.3 million and $4.1 million, respectively, which were down year-over-year. Moving to profitability measures. Adjusted operating income before amortization for the fourth quarter was $434,000. Adjusted EBITDA was approximately $1 million. Net loss applicable to common stockholders was $841,000 for the fourth quarter of 2017 or $0.02 per diluted share, compared to a net loss of $5.7 million or $0.14 per diluted share for the same period of 2016. Adjusted non-GAAP income per share was $0.01 per share, which is compared to a loss of $0.04 for the fourth quarter in 2016. We ended the fourth quarter with more than $104 million in cash on hand. Now turning to our outlook for the first quarter. First, let's discuss revenue. For the first quarter, we expect revenue of $21 million or more. Regarding our business progress, we are encouraged by the pipeline we are building, particularly with our analytics products. And as discussed earlier in the call, our efforts to launch new products like Speech Analytics in 2017, along with the concentrated sales effort, has built a pipeline of trials, along with some recently signed deals with large Fortune 5000 brands. While it is too early to comment on the scope of potentially fully ramped relationships from many of the new brands we're engaging, we continue to make progress on our goals. Next, looking at adjusted OIBA and EBITDA. For the first quarter, we are forecasting adjusted OIBA to be a range of a loss of $1 million or better. For adjusted EBITDA, we're forecasting breakeven or better for the first quarter. Regarding our guidance for profitability measures, consistent with prior years, it is worth noting that there are adjustments, including compensation, personnel-related items and certain professional fees that flow through disproportionally in the first quarter and half of the year compared to the second half. Our initiatives in 2017 to align our investments and cost structure with our current revenue levels enabled us to return the business to positive operating cash flow, including in the fourth quarter. These initiatives can also put us in a position so that our future growth can drive greater operating leverage and profitability. In addition, as 2018 progresses, we anticipate it getting increased visibility regarding our multifaceted relationship with DexYP. Furthermore, we continue to make investments in key product areas like speech technology, that's help win new customers, build a robust new customer pipeline and build a road map for future product development that is unique in our industry. That may require some continued investments, but we plan on maintaining our overall goal of financial discipline and matching our investments toward revenue levels and business progress. We are highly focused on returning Marchex to growth over time. As we see traction from sales and marketing initiatives, grow our customer base and scale some of the customers we are currently piloting with, we believe we are putting the pieces together to reopen 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. And with that, I will hand the call back to the operator to take questions.

[Operator Instructions]. We do have a question from the line of Darren Aftahi with Roth Capital Partners.

Just to see, if I may, first, can you just kind of give us a sense for the advertising landscape for some of your customers in 2018 for kind of your product portfolio kind of relative to 2017? And then on your Q1 sales guidance, I'm curious what your sort of embedded assumptions about YP is relative to the enterprise business. And then I got a couple of follow-ups.

Sure. This is Russell. On the first part of the question relative to the advertising landscape, mobile continues to be highly relevant and a big driver overall, and specifically, with the opportunity around conversational analytics. And so if you contrast that with 2017, clearly, that was a trend in 2017 as well. But we do see that catalyst as being accentuated. And we feel like the product launch, as we went through in 2017, have set us up increasingly better when you think about our opportunities to win new customers, grow existing customers and hope we see the combination of those things, be good catalyst to resume growth.

On the second part of your question, Darren, maybe -- this is Mike, maybe it's easiest if you could reiterate just to make sure we were clear on the question.

Yes. I'm just kind of curious within the Q1 sales guidance assumption, like what's implicitly assumed in terms of YP is that sort of a relative to the Enterprise business. Said it another way, are you still expecting YP to be a declining piece of revenue, vis-a-vis rest of your business?

So as we mentioned in the call, I think there's a number of different interesting facets of our relationship with DexYP. And as part of some of the historical relationships that we've had, those aspects of it, we think that recent historical trends are going to continue at least in the near term as part of the course of the relationship. There are many other facets that are in discussion or in progress, and we think, today and the early part 2018, we have many more opportunities for our company than we did at the beginning of 2017, or even for that matter, if you look back in the 2016 time period. And part of that comes from the new product introductions. Some of those new product introductions, we think, may be of interest with DexYP, and there are some discussions that are being pursued. And we look forward to providing more updates on that as we progress through the year. But I think it's a little bit too early at this stage of the year.

Fair enough. And just two more if I may. Just an update on the Facebook relationship kind of what you're seeing in terms of traction there? And then lastly, just as to cash dividend, like any updated plans in terms of the balance sheet?

Sure. This is Russell. I'll take the first part and Mike can take the second part. Yes, on the Facebook front, that's a relationship that we continue to value and appreciate. We've got various customers that we've launched with that product. That product has been an important element of our omnichannel offering. And as we think about it in 2018 and talk about increased opportunities and catalysts for us, it's part of the reason why we feel that way.

And on the second part, even without - ex the dividend, we still think we've got a very healthy balance sheet. We're debt-free. We're going to have a significant [indiscernible] of cash, which for us, given some of the stabilization that we've seen over the course of the last year in the business, we think it provides that strategic flexibility. It's still possible that we'll be able to take that remaining cash balance and build on it over the course of 2018. Time will tell. But again, we want to reiterate that we see with some of the new product introductions, with some of the trials going on with customers, more opportunity today for possible return to growth than we have in the recent past.

And I'd like to go ahead and hand it back to management for any closing remarks.

Thank you, everyone, for joining us on the conference call today, and we look forward to providing further updates as we progress throughout the course of the year.

And ladies and gentlemen, this does conclude today's conference call. You may now disconnect.