Marchex, Inc. (MCHX) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thanks for standing by and welcome to the Marchex Third Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Mr. Trevor Caldwell. Please go ahead.

Thank you. Good afternoon, everyone and welcome to Marchex’ business update and third quarter 2019 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 references to our financial and operating 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 and quarterly report filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we take 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 this time, I would like to turn the call to Mike Arends.

Thank you, Trevor. Good afternoon and thank you, everyone for joining us today. Today we will update you on our progress in the third queerer and how Marchex has rapidly evolving to meet the growing needs of our customers who are just beginning to understand the power of unlocking consumer intent with AI-driven technologies. Our innovations, some of which we just recently launched, are key to accelerating our customer’s sales process and driving more revenue. They’re also driving the evolution of Marchex from a leading call analytics company to a leading conversational analytics and solutions company. The insights we’ve delivered for years through our call analytics and speech technology platforms have us uniquely positioned to attach a wider array of critical problems for our customers through AI and automated solutions. These problems go well beyond measuring media performance. We are seeing our customers implement our sweetest solutions across the broadening scope of their customer conversations and interactions from inbound calls to outbound calls to text messaging and beyond. This year we achieved a series of important milestones. We launched a new AI-based platform that was the focus of significant investment over the last 18 months. It reflects our growing scale and gives us the ability to provide real-time insights that are using to develop new AI-driven signals which are fuel for our future product roadmap. In August, we announced a new suite of predictive AI models featuring 230 initial signals that bring powerful conversational insights for businesses then engaged with customers over the phone and via text. This is a significant step toward unlocking the power of more than 1 billion minutes of conversational data and cracking the code of consumer intent. We recently announced advancements with our Clean Call technology to bring the power of AI and adaptive learning to stay in front of the ever-changing tactics of robocallers. Our technology empowers our customers to beat robocallers at their own game and save millions of dollars in lost productivity from having to feel these disruptive and useless calls. We expect our ability to innovate we’ll accelerate as we increasingly utilize Marchex Stream, our new core infrastructure platform as a foundational piece of our new products, and there’s more. This summer, we also launched our new Sales Edge product suite, an AI-based product family that provides mission critical sales insights and automation tools across national and regional businesses and enables businesses to rescue lost sales. This has the potential to be transformative. In the past, these opportunities were considered lost and, in many cases, franchise owners and corporate brands were not aware of the lost opportunities happening every day across their businesses. In some verticals, this problem is particularly pervasive and we believe represents a nine figure opportunity for our customers to capture through utilizing our products. Sales Rescue for example, which is part of the Sales Edge suite helps brands recapture lost opportunities even after a prospect has moved on despite having a clear intent to make a purchase or an appointment. Because of our emerging products and capabilities, our customers are growing sales and creating measurably better customer experiences. Sales Rescue launched in August, the first of our Sales Edge product suite. We are pleased with the initial favorable feedback and interests, and already we’ve entered into eight pilots and we expect that number to grow as we see a strong need for Sales Rescue at the individual franchise and store level. In fact, given the impact in the early trials, we are already receiving corporate level interest in sponsoring additional pilots and programs. Over the coming months, we intend to expand the product capabilities to match the growing asks of our early customers for this product, and we expect to land additional opportunities as well. In parallel, we intend to continue to launch the rest of the Sales Edge family over the coming quarters. Our goal with investing in AI-driven solutions is to arm businesses with data-driven intelligence and a deep knowledge of consumer intent and also to provide the tools and automation needed to act on their highest value opportunities. These emerging capabilities are the fuel that supports our product roadmap, and in the future, we will be further enhancing our deep intent signals and surfacing predictive signals into the selling process to enable brands to use augmented AI-driven sales solutions to close more business, create better customer experiences and lasting relationships. We recently released the study on the aftermarket automotive industry showing that auto service stores failed to capture millions in sales over the phone. Among the findings, we discovered that customer representatives fail to book appointments or sell products nearly a third of the time, when there is clear intent expressed by the caller. It’s a big miss and it’s a gap that we believe can be closed with new Marchex solutions like Sales Rescue. And with that, I’ll hand the call to Russ.

Thank you, Mike. Marchex is becoming more mission critical to our customers than ever before. In many ways, our customers are just beginning to understand how AI-driven capabilities and solutions can help them improve their sales process, sales outcomes and customer experiences. At the same time, our clients are asking us to solve increasingly complex problems to help them capitalize on the high impact opportunities in their business. We done a lot over the last couple of years, but in many respects, we’re also just getting started. The problems we can help our customers address is growing meaningfully, along with the market opportunities that Marchex is addressing. We will continue to look for ways to focus our product pipeline to meet this growing demand, while opportunistically creating ways to accelerate our emergence as a leader in conversational analytics and solutions. And with that, I’ll hand the call back to Mike.

Thank you, Russ. For the third quarter, revenues were $24.8 million. During the quarter, we continued to see growth year-over-year growth from both our analytics and marketplace products. Looking at the product areas, core analytics revenue was $13.5 million representing meaningful year-over-year growth. Revenues from our core analytics products comprised more than 50% of our total revenue. Similar to last quarter, this had an aggregate benefit on service costs as a percentage of revenue given the higher gross margin characteristics from this revenue stream. On an annual basis, we continue to see progress, particularly in verticals like auto, where we have benefited from the rollout with customers we’ve had in trials and early integrations. In addition, the e recently launch of our Sales Rescue product is meeting with favorable early interest and represents an opportunity to further build our pipeline as we cross-sell existing customers and continue to expand our product suite into new dynamic markets. Given the initial interests, we are continuing to invest in our growing conversational analytics and solution suite, and as mentioned, Sales Rescue represents the first of our Sales Edge products and we are seeing favorable feedback from the trials. We expect to launch additional products within the suite of sales acceleration solutions we can offer our clients in the coming quarters. Looking at the marketplace, third quarter revenue grew on a year-over-year basis largely from budget increases from certain large customers as well as some contribution from new customers as compared to the year ago period. During the quarter, we also saw a progress in our Thrive relationship on a year-over-year basis, with growth driven by increases in marketplace initiatives, offsetting the decline in the legacy Local Leads product. We continue to anticipate local leads consistent with past commentary, will transition towards the end of the year. Overall, we continue to look forward to close long-term relationship with Thrive. And looking at the P&L for the third quarter, excluding stock-based compensation, amortization of intangible assets and acquisition-related costs, total operating costs for the third quarter were $24.2 million compared to $19.9 million in the third quarter in 2018. Service costs were $12.7 million, up from $10.8 million in the third quarter of 2018. As noted, service costs as a percentage of revenue decreased on a year-over-year basis due to a slightly higher mix coming from our analytics products. As our new products launch and they contribute to growth over time, we believe growth in our analytics stream can continue to positively impact service costs as a percentage of revenue. Sales and marketing costs were $3.8 million. This amount was down modestly compared to the third quarter of 2018 on a percentage basis. Product development costs were $5.1 million, and were large flat with the second quarter. We continue to invest in new products and are expanding AI and data science capabilities. We have made significant progress this year launching new product and new infrastructure, which is helping us position ourselves for long-term growth and strategic expansion. These are just some of the examples of the investments we are making to meet the increasing opportunities presented by our customers. Now moving to profitability measures. Adjusted operating income before amortization for the third quarter was $611,000. Adjusted EBITDA was $1.1 million. Net loss applicable to common stockholders was $1.2 million for the third quarter of 2019 or $0.03 per diluted share compared to a net loss of $457,000 or $0.01 per diluted share for the same period of 2018. Adjusted non-GAAP income per share was $0.01 per share compared to adjusted non-GAAP loss of $0.00 per share for the third quarter of 2018. Additionally, we ended the third quarter with approximately $52 million in cash on hand. Now turning to our outlook for the fourth quarter. We are forecasting revenue of $26 million or more for the fourth quarter. The fourth quarter is typically a seasonally lower quarter due to a significant downturn in call volumes to our customers across all product areas around the holiday periods. However, this year for analytics, we expect to see continued growth on a year-over-year basis, partially offsetting the seasonal call volume decline and as a result, anticipated range of modestly down to potentially in line with the third quarter core analytics revenue of $13.5 million on the sequential basis. The rollouts of some existing customers from trial phases continues to contribute, and this may also offset some of the normal seasonal decline. In addition, we are pleased to see some initial interest in our Sales Rescue product launch. Well that may take time to contribute meaningfully, we expect our Sales Rescue and other related new products will be key drivers of potential growth in the future based on early feedback. We look forward to launching further new products supported by our expanding AI innovations over the coming quarters. Similarly for our marketplace product, we are forecasting year-over-year growth for the fourth consecutive quarter, and potentially a modest increase in sequential quarterly revenue, largely due to the increased budget allocation from some of our largest customers into the end of the year, along with some additional incremental contribution from new relationships offsetting a normally seasonally decline in call volumes. And next looking at adjusted OIBA and EBITDA. For the fourth quarter, we are forecasting adjusted OIBA to be breakeven or better and for adjusted EBITDA to be in the range of $1 million. We’ve made significant progress this year across our organization. A few months ago, we launched a new foundation of technical infrastructure that will support increased scale and future product innovation. This new platform will enable Marchex to innovate faster and to capitalize on the ongoing investments we’re making in AI, data science and new solutions. We are in the earliest phases of expanding our product suite to address an expanding array of mission critical problems our customers are asking us to help solve. In many ways, our current customers are designing our future roadmap. Keeping the customers high impact needs is our focus is transforming Marchex and tangibly expanding our addressable market as we look to the future. As we launch new products, we’re becoming stickier with our customers and see an opportunity for meaningful long-term growth both with existing customers and then taking these solutions into new markets where similar problems are pervasive. There is still much to do, but I want to thank the Marchex team for all their hard work and we look forward to updating you on our plans for 2020 on our next call. And with that, operator, we will hand the call back to you.

[Operator Instructions] We have a question from the line of Mike Latimore.

Yeah, hi this is [Vijay Devar] [ph] for Mike Latimore. First on the industry verticals. Could you generally comment on the auto vertical, how has the growth from autos especially on sequential basis? And any other vertical which you think is growing faster than expected?

So Vijay, this is Mike. Thank you for the question. The auto vertical again we saw sequential growth, we also saw some year-over-year growth in the automotive vertical, particularly on the analytics side of the equation. I think it’s also an area we believe there some fairly fruitful opportunities on a go-forward basis and also some opportunities for the product and the Sales Rescue opportunities as they lie and not just for the manufacturer level, for the OEM level, but also at the dealer side solution. Some of the other areas that we saw some progress then include home services, and we also saw uptick in our pipeline with the hospitality vertical this past quarter.

Great and have their acquisitions perform as expected?

Vijay, I think as I understood the question, you were asking about the acquisitions?

Yes, of course.

So if you go back to the end of 2018, we did couple of acquisitions and as part of the acquisitions, some of the customer revenue was in line with what we have been communicating over the past number of quarters. There are some differences there, they do have some differences in the vertical focus, but in terms of what we were expecting, one of them there has been some decline in the revenue stream and the other one has had some modest uptick in the revenue stream. It is very challenging to break out the different customer revenues precisely given some of the work that we’ve done with the different customer arrangements, but if we were to break out anything that would be the level of compartmentalization that we could do.

Okay. And lastly, I think if you can comment on your Clean Call solution and how much revenue it could contribute for this fiscal year?

Sure. In terms of Clean Call, it’s been a core part of our overall analytics offering for a period of time. And so when we think about kind of the enhancements to it, it’s a catalyst for our analytics relationships generally and also as a foundational piece of our perspective products. So we don’t specifically break it out on the basis of its own kind of revenue contributions, but it is a core part of our differential value proposition with analytics customers and it ends up being a key ingredient in helping to drive how we’re innovating and differentiating performance on a perspective basis.

Okay. If I can ask one more. You have any – how’s the product pipeline for the rest of the year – for the next year and how many products you have plan to come out with and what are the areas where that such products could be impact?

The primary focus right now is this continued growing launch of our Sales Edge suite, with Sales Rescue being the first of those products and so for us, it really highlights where we think we are at an inflection point in terms of our opportunity, and meaningfully expanding our addressable market. Historically our analytics products have been geared towards insights, making sure that we’re delivering strategic insights to our customers, but what the Sales Edge suite is doing now, is taking those insights and moving I think much more deeply into not just servicing where their highest impact opportunities are by providing the tools and automation to act on those opportunities and harvest them. And so for us, that’s really what’s driving an increase and what we think as a strategic opportunity and our addressable market. So that Sales Edge suite is going to be a key driver and a key focus. And as we mentioned, Sales Rescue is a catalyst right now, and we think the subsequent releases will build on that over the next few quarters.

Okay and finally on what’s your current headcount and the hiring plan for the next six months?

So we’ve got a number of FTEs it’s still close to around 300 total FTE equivalents as we said here today and we think particularly in sales and the account management there maybe some opportunity to continue to grow the team in those areas as we progress with the revenue streams over the course of 2020.

Okay, thank you.

Thank you.

[Operator Instructions] And with no audio questions pending, I’ll hand it back for closing remarks.

Thank you, everyone for joining us today and we look forward to updating you on our next quarterly conference call. Thank you.

Thank you. Thanks again.

This does conclude today’s conference call. We thank you for your participation and ask that you please disconnect your line.