Marchex, Inc. (MCHX) Q3 2018 Earnings Report, Transcript and Summary

Good day. My name is Ian and I will your conference operator today. At this time, I'd like to welcome everyone to the Marchex Third 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 it turn over to Ethan Caldwell, Chief Administrative Officer. Sir, you may begin.

Thank you. Good afternoon, everyone, and welcome to Marchex's Business Update and third quarter 2018 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 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. We are pleased today to be discussing the developments advancing our business and we have some important updates to share as part of this. We are seeing our conversational analytics solutions resonate in the marketplace. We experienced another record of monthly call volume with more than 23 million calls in a single month, which exceeded our prior record of more than 20 million calls in a single month that had occurred in the second quarter. We also signed more than five new enterprise customers while continuing to grow our sales pipeline. We expect to see continued growth in call volumes across the platform as our new speech and call analytics customers ramp from early stage adoption into long-term deeply integrated relationships. Our increasing momentum is a direct result of our commitment to understanding our customers' needs and investing in the technologies and products that help to solve complex problems associated with customer engagement. The AI and machine learning driven solutions we are developing today were only points of imagination years ago. Today's media landscape is complex and confusing for large and small businesses. Consumer behavior across digital channels is shifting and evolving and businesses need new ways to engage customers in their preferred communication channels, which include both voice and text. What's interesting and revealing about consumer behavior is that calls remain one of the most lucrative paths to customer conversion. People want to connect directly with other people and that's not changing. For years, our data has shown that customers who call businesses spend more converted at a higher percentage and churn less. We see these data trends playing out across verticals as we have a growing base of hundreds of millions of consumer to business phone calls. Through these calls Marchex has unique and unmatched scale of conversational data. This valuable data is giving us unparalleled insights in the consumer to business conversations. It is the portal through which we deploy AI and machine learning to drive solutions that help our customers measurably accelerate sales. For many of our new customers, some of whom are sitting on top of significant unstructured and poorly understood customer conversation data, this is their first time in understanding where we believe they are missing out on millions of dollars in new sales opportunities. Our analytics solutions can identify surface and target customers who represent the highest intent to purchase, such as those who book an appointment or ask for a price quote. Our platform can also pinpoint moments in conversations when businesses have the highest opportunities to convert. Whether through understanding when to simply pick up the phone or through more sophisticated conversational data analysis that probes into customer sentiment and extracts indicators of a potential sale, we empower businesses to take action on conversational data to create better customer experiences, make better decisions and most importantly measurably increase sales. We're transforming the way businesses engage with their customers through data trained sales techniques, smarter processes and personalized solutions in ways they never thought were possible. As we productize new capabilities, we bring greater insights across all of the conversations businesses are having with their customers. And this in turn powers a virtuous cycle where we get more calls across our platform from new and existing customers, which feeds a growing conversational dataset and drives our ability to innovate with new personalized solutions, text conversation analytics and predictive responses. These new solutions are opening up significant growth opportunities for Marchex. And this leads me to my next important update because we believe so deeply in the power of data and we understand the tremendous value that data driven solutions bring to our customers. We recently launched the Marchex Innovation Development Lab, a new research and development group to help lead product innovation in our industry. As part of this strategic initiative, so far this year, we have more than doubled our data science team. And we expect these investments to increase the pace at which businesses can identify customer engagement opportunities and address them with predictive AI driven solutions. Furthermore, I'm excited to share that today we announced the acquisition of Telemetrics, a leading call and text tracking and analytics company. Telemetrics has a long history of engaging and supporting enterprise brands across complementary verticals such as auto and local resellers. In addition, Telemetrics’ strong customer relationship management team shares a passion for their customers that aligns with our customer centric approach. So far this year, Telemetrics has had more than 100 million minutes of business and customer conversations across their platform. This is highly complementary to Marchex’s existing market leading conversational data set and as our scale grows and as we also reap the benefits of our investments in AI and speech technology, we expect that combined company will continue to increase our leadership position in the conversation analytics market. In addition, Telemetrics’ smart number product enables enterprise businesses to capture and analyze SMS text interactions. Texting and messaging is one of the fastest growing areas in the conversation analytics space. Marchex has been testing a variety of SMS text communications solutions and we believe the addition of Telemetrics will accelerate our expansion into this important communication channel. We feel very excited about this strategic transaction and that bringing in a team that understands the value of conversational analytics and knows how to win and support major brands, will help advance both our future products and customer initiatives. And with that, I'd like to hand the call to Russ.

Thank you, Mike. In 2017, we began moving aggressively to reopen the door of opportunity at Marchex. Leveraging unique assets to develop solutions that match closely with our customers’ priorities has been one of the central pillars of our culture and product investments. We believe AI powered conversation analytic solutions and our proprietary speech technology can dramatically improve customer conversion rates, help businesses grow sales and accelerate the development of personalized solutions. As adoption of many of our most recent products grows, we are expanding the scale of our conversational data and the roadmap of solutions we can build for our customers across their most important conversation channels. The share volume of inbound business and consumer conversations we handle every day is giving us a strong foundation to build a leading conversation in analytics platform. With the addition of Telemetrics, we believe our opportunity is further enhanced both in terms of product capabilities and customer opportunities. Furthermore, today's announcement shows that we will continue to explore the various ways we can announce our operating profile and capitalize on areas where we have increasing momentum. Telemetrics represents an example of one such opportunity. While we do this, we will continue to take a balanced and disciplined approach to our business and capital deployment. And with that I'll hand the call back to Mike.

Thanks, Russ. For the third quarter, total revenues were $20 million relatively consistent with the second quarter. Analytics revenue increased sequentially in the third quarter while marketplace revenue continued to see impact from budget shifts from a small number of media clients, which was consistent with expectations. Despite these trends in the second and third quarter, we believe we may see that trend stabilized somewhat in the fourth quarter. Offsetting the third quarter of marketplace trend was continued growth in core analytics revenues, which was up 8% on a sequential basis. Today's new disclosure on core call analytics revenue included in our earnings press release highlights some of the favorable trends we're seeing from the early adoption by large brands of our conversation analytics solutions. During the quarter, we continued to ramp early relationships and so additional contribution from components of the new decks analytics relationships that included revenue from early integrations. We're seeing favorable results from customers utilizing solutions built off of our proprietary speech technology. Given the growth and margin profile as well as the stickiness of these products, we plan to increasingly optimize resources to support our areas of greatest growth potential. Looking further down the P&L for the third quarter, excluding stock-based compensation, total operating costs for the third quarter were $20 million compared to $21.8 million in the third quarter in 2017. Service costs were $10.8 million down from $11.8 million in the third quarter 2017. Sales and marketing and product development costs were $3.2 million and $3.8 million respectively, which were both down year-over-year. Moving to profitability measures. Adjusted operating income before amortization for the third quarter was $70,000. Adjusted EBITDA was $495,000. Net loss applicable to common stockholders was $457,000 for the third quarter of 2018, or $0.01 per diluted share compared to a net loss of $811,000 or $0.02 per diluted share for the same period of 2017. Adjusted non-GAAP loss per share was $0.00 per share compared to non-GAAP income of $0.00 per share for the third quarter in 2017. We ended the third quarter with approximately $79 million in cash on hand. Now turning to our outlook for the fourth quarter. For the fourth quarter, we are forecasting revenue of more than $22 million. And for the partial fourth quarter, Telmetrics is anticipated to contribute $1.25 million in core analytics revenue. The fourth quarter guidance takes into account anticipated lower call volume across both analytics and marketplace due to the seasonal impact of lower general inbound call volume later in the year. That said, we continue to expect Marchex's core analytics revenue to be up meaningfully year-over-year with double-digit growth and expect this growth trend to continue into 2019. As discussed earlier on the call, we're encouraged by the interest in new products integrated with our speech technology and we expect we will continue to win new trials and integrations going forward. Next, looking at adjusted OIBA and EBITDA. For the fourth quarter, we are forecasting adjusted OIBA of $200,000 or more, which includes Telemetrics partial quarter contribution. 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 first half of the year compared to the second half and particularly in the fourth quarter. For adjusted EBITDA in the fourth quarter, we are forecasting $800,000 or more. We continue to invest in our speech technology, artificial intelligence, machine learning and data science initiatives as well as in expanding our analytic solutions into new communication channels. These areas are important drivers of the new solutions we introduced last year as well as the additional solutions we expect to introduce next year. We're seeing very good interest by many new large enterprises and seen momentum builds in the early adoption of our products. These are also catalysts to introduce additional products with vertical specific applications into many of our new large enterprise relationships. We believe our vertical traction in areas like auto are just getting started and are replicable in other verticals. We're taking advantage of our early traction in these important verticals to inform our roadmap and investment priorities. And we believe doing so will put us in a good position for future growth and to drive greater operating leverage and increase profitability. Thank you to all of our employees for your hard work and for continuing to focus on our customers' needs. And with that, I would like to hand the call back to the operator to take questions.

[Operator Instructions] Our first question is from line of Darren Aftahi from Roth Capital.

Hi, this is Dillon on for Darren. Thanks for taking my questions. I first wanted to touch on sort of what you see as some of the main drivers per call volume going forward and helping you reach some of that scale and then how Telemetrics plays into that?

Sure, thanks for the question. As we see greater adoption by a larger number of customers, better consuming multiple products particularly – you get a natural increase in call volumes and that's what is a piece of creating that virtuous cycle. So those are really the dynamics that are driving it. With Telemetrics, we add – we increased our footprint of opportunity bringing in new customers. We do believe there's opportunity across all products, gain product momentum and kind of emerging into new channels such as text. And we think the combination of that puts their existing conversational volumes, give us even greater scale and just kind of feed the system in a very positive way.

Got it. And then with the announcement of your new sort of AI technology lab, do you have any plans for sort of expanding that further whether there be hiring more data scientists like you've already mentioned you doubled. I'm just sort of curious what’s your plans are there? And are the idea that you're coming up within that lab, are they organic as in like your data scientists sort of developing the products and the ideas? Or is it sort of based on collaboration with some of the needs of your clients and what they kind of want to see?

Well, it's a combination of both. If you look at our whole product and engineering organization, we've got an ambitious product roadmap and we’re growing The MIND Lab. Yes, we are continuing to look to scale that group and add more data scientists. What we're seeing is that as we learn more from our customers and take those learnings into our product and engineering team and mine our data and apply AI and machine learning. It just – again, it creates a virtuous cycle around our ability to solve these very forward-looking problems on behalf of our customers. And so, we think what we're seeing makes us feel like this is a very strategic investment that we should continue to make.

Thank you. And then last one from me, given the cash balance, you still have – are there still any plans for maybe additional acquisitions or other ways to return value to shareholders like you've done in the past?

Well, as I mentioned in the script, we will continue to look at ways to enhance our operating profile. That said we'll continue to maintain a very disciplined approach on how we're thinking about capital deployment. So consistent with our prior message, we feel really good about Telemetrics and advancing the strategic cause that a point that we have increasing clarity around our opportunity and how that translates into customer and product momentum and we’ll continue to look at all the different ways we can enhance our operating profile but be disciplined in our approach in doing so.

Understood, thank you.

Thank you.

And our next question is from the line of Mike Latimore from Northland Capital.

Great, thanks a lot, yeah. Thanks. It looks excellent. I guess just on the call analytics business, which you're now breaking out, which is great. It was kind of moving along, it sort of 7.3 million to 7.5 million for awhile there and then it's really accelerated last couple quarters. Can you just elaborate a little bit on kind of what's causing that sequential acceleration in the last two quarters?

Thanks Mike. This is Mike. So if you look at a lot of the work that we did in 2017 and it was platform related. And it enabled some of the opportunities to bring out the speech technology deployment and then applications that were customer value oriented of how we use the speech technology. And we had a number of pilots’ tests that were going on in the analytics arena during that timeframe. We've been successful with some of those pilots and it's simply a transition of moving them to onboarded status and recognizing some of that value in the form of the revenues that are coming along with it. And hopefully some of these trends are there to stay with our existing customer base, but also with some of the new pipeline customers that we have in the channel.

Got it. And then the gross margin effectively for the companies improved sequentially in the last two quarters pretty nicely. I guess is that related to this call analytics growth?

There is a piece of that. If you look historically at where our marketplace revenue streams and the margins related to that, generally the contribution would be in the $0.20 to $0.30 on an incremental dollar of revenue. The contribution with the analytics is higher, north of $0.60 on the dollar and potentially greater than that depending on the type of product or the data product that we would add into it. And so, yeah, there has been a mix shift as you can see from some of the breakout that we provided and that that's complementary to the overall margin profile.

Got it. And then on Telemetrics, you talked about 100 million minutes of, I guess, phone calls, but then you also highlight the SMS opportunity here. I guess how much SMS volume are you seeing?

It’s still in the early stages. It’s a relatively recent product introduction here in the last while. But, yeah, we think there's a lot of complementary nature to it, not just how they can expand and grow with the existing customer set, but also with our customers and we're looking forward to bringing that to bear jointly for our joint customers.

Got it. And then just lastly, I know it’s on the Telemetrics site, they talk about having an API. Is that generally how they go to market as API to developers? Or is that sort of a secondary emphasis of theirs?

I think in terms of existing integrations, it would be a secondary emphasis. However, it may become more of an opportunity in the future as they go to market on a prospective basis.

Okay, great. Thank you.

Thank you.

And at this time, I'm showing that we have no further questions. I'll turn it back to the presenters.

We appreciate everybody's participation today and we look forward to sharing more progress with you soon. Thank you.

Ladies and gentlemen, this does conclude today's conference call. We thank you greatly for your participation. You may now disconnect.