Marchex, Inc. (MCHX) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Marchex First 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. I would now like to turn the call over to Mr. Ethan Caldwell, General Counsel. Sir, you may begin.

Thank you. Good afternoon, everyone, and welcome to Marchex’ Business Update and first quarter 2018 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 on our website, 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. In the first quarter, we saw the investments we’ve made over the past year on our technology and products create meaningful customer opportunities for 2018. Since January, we’ve added more than seven new customers across multiple verticals, including enterprise customers in both real estate and health. Our focus on our customers critical needs is at the center of everything we do, with more than $237 million smartphone users in the U.S. alone and more than $169 billion calls to businesses each year in the U.S., handling conversations over the phone with best practices has never been more important. Consumers who call businesses are serious buyers. Time and again, the data proves that people who take the deliberate action of making a phone call are much more likely to make a purchase. Yet businesses still face meaningful challenges when it comes to understanding how to convert these callers into satisfied and loyal customers. This applies to businesses across the spectrum from national brands that source calls through a call center to those who drive calls to small businesses serving local customers. Let me take a moment to share thoughts regarding one of our more recent products, Speech Analytics. Since it was launched last year, this technology and our ongoing investment has been a key driver for winning new customers. It has also meaningfully expanded our pipeline of opportunities. That’s, because with our Speech Analytics technology, our customers are seeing a wealth of actionable insights in real-time, customer insights that only several months ago they couldn’t imagine having at their fingertips. Our Speech and Call Analytics technology includes artificial intelligence that uses machine learning to extract actionable insights from huge volumes of call data and is solving complex problems to help businesses grow. Businesses that use the phone to connect with customers now have an ability to use our technology to measurably improve their sales and customer service performance. In the first quarter, we also launched a new interface for our Speech technology for enterprise customers, giving them innovative, first-time capabilities to surface insights on thousands of calls on-demand in seconds. Businesses can now respond to customer inbound inquiries over the phone in real-time and adjust sales and/or customer service tactics using insights from our platform. Our insights also help businesses discover more effective ways to deliver more high-intent consumers to their cost centers, franchise locations, dealerships, or individual business locations. These unique capabilities are helping Marchex gain traction with some of the largest brands in the United States and we’ve seen substantial interest by new customers, including market-leading Fortune 500 companies. We’ve also undergone new trials and launched integrations with customers and valuable verticals, such as auto services, home services, and financial services. The exciting part is that, it feels like we are at the front-end of what may be a very big market opportunity. Our Speech and Call Analytics technology through the use of AI and machine learning is extracting insights that provide the gateway for businesses to improve the customer experience and ultimately convert more customers. Take, for instance, the residential real estate market. A recent study by the Marchex Institute found that when an agent discusses specific features of a rental, the appointment rates can double from 15% to 31%. Other significant insights or analytics have been able to surface in this vertical included pinpointing how many rings potential prospects or tenants are willing to wait through before hanging up, and which incentives can help real estate managers close more deals. These are critical insights that can significantly boost desired outcomes and we’re excited by the measurable ways our technology can help businesses be smarter and more strategic on how to grow and operate. Furthermore, through this year, we will also be expanding our AI-driven Call and Speech Analytics capabilities and anticipate winning more new trials, growing our strategic partner footprint and on-boarding more new enterprise brands. With that said, I’d like to hand the call to Russ.

Thanks, Mike. I’d like to provide a brief update on our ongoing strategic review. As we continue to make progress with the business, we’re also carefully considering external opportunities that will help us accelerate Marchex’s overall opportunity and growth. The strength of our balance sheet affords us the flexibility to examine a variety of options to achieve our goals, including potential acquisitions. We took one step towards creating a balanced approach for our stakeholders with our special dividend in late March. As we move forward, we’re highly focused on capitalizing on a range of opportunities before us, although moving decisively in areas where we have momentum and product leadership. We remain committed to taking a disciplined overall approach in conjunction with our efforts to strengthen and enhance our operating profile, all while continuing to focus on returning Marchex to grow. And with that. I’ll hand the call back to Mike.

Thanks, Russ. For the first quarter, revenues were $21.9 million. We know some of you have previously tracked the revenue without YP. So to help models with this framework in mind, revenue in the first quarter, excluding YP was $18 million. As a reminder, YP was acquired by Dex in 2017. On a year-over-year basis, as discussed on prior calls, the first quarter revenues without YP were primarily influenced from trends with a limited number of Call Marketplace customers. On a sequential basis, the business, excluding trends related to our largely – to our legacy YP business increased over $400,000. With our analytics products and several of the new products launched last year, we continue to see building interest from large brands. In addition to an increase in overall interest, we’ve made progress with our existing pipeline, launching early integrations with several new and existing large enterprise customers. Many of these trials and integrations 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 on our long-term growth, particularly with our analytics products, though they are not yet at a scale that is meaningfully impacting our financial profile. Looking further down the P&L for the first quarter, excluding stock-based compensation, total operating costs for the first quarter were $22.1 million, compared to $26.5 million in the first quarter of 2017. Service costs were $12.7 million, down from $13.5 million in the first quarter of 2017. Service costs were up as a percentage of revenue, largely due to a shift in revenue mix. Sales and marketing and product development costs were $3.4 million and $3.6 million, respectively, which were down year-over-year. Moving to profitability measures, adjusted operating income before amortization for the first quarter was a loss of $204,000. Adjusted EBITDA was $321,000. Net loss applicable to common stockholders was $926,000 for the first quarter of 2018, or $0.02 per diluted share, compared to a net loss of $3.5 million, or $0.08 per diluted share for the same period of 2017. Adjusted non-GAAP income per share was $0.00 per share, which compared to a loss of $0.03 for the first quarter in 2017. We ended the first quarter with more than $84 million in cash on hand. As a reminder, the company paid a $0.50 per share special dividend in late March. Now turning to our outlook for the second quarter. First, let’s discuss revenue. For the second 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. While it is too early to comment on the scope of potentially fully ramped relationships from many of the new brands we are engaging, we continue to make progress on our goals. As discussed earlier in the call, we’re encouraged by the early interest in new products like Speech Analytics and we expect we will continue to win new trials and integrations this year. Next looking at adjusted OIBA and EBITDA. For the second quarter, we are forecasting adjusted OIBA to be a range of a loss of $1 million or better. For adjusted EBITDA, we are forecasting break-even or better for the second 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 disproportionately in the second quarter and first-half of the year compared to the second half. In the first quarter, we continue to see the benefit of business progress and our cost initiatives supporting our ability to continue our positive EBITDA contribution. Additionally, as the year progresses, we expect to get increased visibility regarding our multifaceted relationship with DexYP. The combination of these factors over time can put us in a position, so that our future growth can drive greater operating leverage and profitability upon a return to overall growth. Even considering our progress on profitability over the last year, we are continuing to invest in key product areas. Our Call Analytics and Speech technology capabilities are helping win new customers and build a robust pipeline and roadmap for future product development that is unique in our industry. To maintain our technology and product leadership, it may require some continued investment, but we plan on maintaining our overall goal of financial discipline and matching our investments toward revenue levels as business progresses. As we grow our customer base and scale some of the customers we’re in early integration phases with, we believe we’re 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.

At this time, we would like to open the lines to questions. [Operator Instructions] Our first question is from the line of Darren Aftahi from ROTH Capital Partners.

Hi, guys, this Dillon on for Darren, thanks for taking my call. A couple for me. First, on what you mentioned about gaining more Dex visibility down the line. I wonder if you could sort of provide us with some more color as to what you might start seeing there to give you that confidence in the visibility? And then as it relates to the analytics, if you could talk a little bit about maybe some of the progress with your OEM partners and those trials with the automotive sectors, and what other verticals you could potentially expand into? And then lastly, sort of with the excess – with the cash, you have any plans for it, whether it be excess dividends, or sort of what’s your – what the plan is with that? Thank you.

Thanks, Dillon. This is Mike, and why don’t I start with the first part of your question regarding gaining more visibility with DexYP. I think, we’ve had, as we’ve talked about in the past, a longstanding relationship with YP and now DexYP with some of their platforms and how we work with enabling some of the things for their small business customers, we don’t see any change in that in the near-term as part of the program. We do think that some of our new products and in particular our analytics and potentially also our Speech Analytics capabilities maybe of interest with DexYP, we continue to have ongoing dialogue and engagement with them. And those would be the primary areas we think there may be some change and we could get more visibility into over the course of this year and make a different kind of a progress with DexYP. With regards to some of the verticals in the OEM partners that you mentioned, we have been in the course of 2017 on-boarded some of the large OEM customers in the automotive vertical. We do also believe that in the automotive vertical, there’s a healthy pipeline building for us. It’s probably the pipeline area of the greatest strength in terms of what we see in the near and the intermediate term. We think there continues to be interest again in some of the new product areas that we’ve released here in the course of the last year. And we were fortunate this past quarter actually to go into a couple of other areas that we think are possibilities although they’re fairly light at this stage, which includes some wins from pilots and moving them from pilot to actually on-boarded relationship with the real estate category, as well as the health category. And hopefully, there is an opportunity for more traction there as the pipeline continues to build.

Yes, Dillon, on the question in terms of potential uses of the cash. As we mentioned in the course of the script, we’ve made progress in aligning our cost structure with revenue levels, but we’re also optimizing investments in the areas where we’re seeing existing customer product momentum. There’s more work to do on that front. But we have a long history of partial returns of capital to shareholders in various forms and we’re continuing to evaluate the next steps and possibilities as business circumstances dictate. And one of the continue themes you hear is that, we’re committed to taking a disciplined overall approach in conjunction with our effort to strengthen and enhance the operating and growth profile when we think about various uses of cash and potential strategic activity. Appreciate the question.

Great. Thank you, guys.

And at this time, I’m showing that there are no further questions over the phone. Presenters, I turn it back to you.

We thank, everyone, for joining us today, and we look forward to updating you on our next quarterly conference call to share further updates.