Ladies and gentlemen, thank you for standing by, and welcome to Marchex Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to Mr. Trevor Caldwell. Thank you. Please go ahead, sir.

Good afternoon, everyone, and welcome to Marchex's Business Update and Fourth 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 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 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. The reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release is available on the Investor Relations sections of our website. At this time, I'd like to turn the call over to our Chief Financial Officer, Mike Arends.

Thank you, Trevor. Good afternoon, and thank you, everyone, for joining us today. 2019 was an important year for Marchex. We made significant strides in our evolution from an insights and analytics provider to an insights, analytics and sales acceleration company. Our foundation as the industry-leading call analytics solutions provider has been critical in opening the door to this bigger opportunity with cross-channel consumer insights centered on sales acceleration opportunities. As we focused on measuring the effectiveness of inbound marketing-driven phone calls to businesses, we amassed a wealth of conversational data. We felt that if we could leverage this data in strategic ways, there would be a multibillion-dollar opportunity based on moving beyond insights and into sales enablement and acceleration. Today, our product solutions and ongoing investments in artificial intelligence are helping our customers use this data not only to understand their marketing return on investment, but most importantly, to close the loop with this data to improve their sales processes and achieve better sales outcomes. Our future is in helping businesses enhance the efficacy of their sales initiatives and create measurably better customer experiences that help them grow faster. In the fourth quarter, we acquired Sonar Technologies, which is an enterprise text and messaging sales engagement platform. This extends our analytics and engagement solutions beyond calls into text and messaging. Sonar's technology enables enterprises to deliver timely and highly personalized experiences via text messaging, which is one of the most heavily used mobile consumer communication channels. Sonar brings us a strong team with deep subject matter expertise. Sonar processes millions of messages for leading organizations in real estate, consumer lending, travel, automotive and other industries. We are working towards giving our enterprise customers a view of their customer conversations across calls and texts, which are 2 most common business…

Thanks, Mike. We're heavily focused on the impact our newest products can have with existing and new customers and are, therefore, investing in the talent and next-generation infrastructure needed to make meaningful progress. This is the context for our recent additions of new executive and senior leadership positions, which is a key part of our commitment to accelerate the customer adoption of our products. We're very pleased to bring on John Roswec as our Chief Revenue Officer. John is a seasoned sales leader with a long track record of success, scaling sales teams at innovative technology organizations with the world's largest brands. He's been in the technology and media industry for more than 20 years and deeply understand this space. As we continue to execute on our opportunities, we will look for places where we can augment our team with world-class talent, look at potential acquisitions that's financially sensible or at partnerships that can accelerate our efforts. Our new expanding capabilities are enabling Marchex to solve large-scale problems that have plagued businesses for years. By empowering businesses with our unique end-to-end sales enablement solutions, we're positioning ourselves as the partner of choice in the conversational analytics and sales acceleration landscape. We've made meaningful progress over the last 2 years in everything we're doing today, from our investments in products and infrastructure, to our leadership additions and strategic initiatives, is designed to help us take advantage of the new and significant opportunities emerging in our business. There's much still to do, but we are committed to helping our customers solve mission-critical problems and translating that into meaningful growth for Marchex. And I'll hand the call back to Mike.

Thank you, Russ. Looking at our financial results, for the fourth quarter, revenues were $28.6 million. During the quarter, we saw year-over-year growth for both our Analytics and Marketplace products for the fourth consecutive quarter. Looking more closely at the product areas, core analytics and solutions revenue was $12.7 million. We continue to see progress on a year-over-year basis, particularly based on the rollouts we've had with customers and trials and early integrations. Verticals like auto continue to be drivers. And just as importantly, we believe there is considerable opportunity to expand our footprint of adoption in the auto vertical and others in 2020 and beyond. Also, we recently successfully converted some of our earliest pilots for Sales Edge Rescue into annual commitments. While the revenue from the pilot showed up in our noncore revenue line in the fourth quarter, we expect at some point later in 2020, that these will start to contribute to core analytics as these customers roll to full programs. Looking at the marketplace. Fourth 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 incremental progress in our Thryv 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 will transition in the near future, consistent with prior commentary. However, we expect some modest contribution may extend through the first part of the year. And looking at the P&L for the fourth quarter, excluding stock-based compensation, amortization of intangible assets and acquisition-related costs, total operating costs for the fourth quarter were $28.1 million, compared to $22.4 million in the fourth quarter in…

[Operator Instructions]. And your first question comes from Darren Aftahi with Roth Capital Partners.

Just a couple, if I may. Just some clarity on a few of these things. So on the four new Sales Edge Rescue customers, how many of those were pilots and then, if you can indulge us, what verticals those were in?

So three of them were pilots that were converted. One of them was a direct new lead. The verticals, the primary ones, are health care and auto services.

Great. On your guidance and then kind of annual commentary. So I'm just kind of curious, trying to understand the -- so it looks like your analytics guidance kind of year-over-year is flattish. But then you made some commentary about auto OEMs potentially accelerating growth later in the year. I'm just kind of curious what kind of gives you the confidence to say that kind of right now in February. Is there any kind of data point with auto OEM that you feel like gives you strong ambition that growth can accelerate? And by that kind of commentary, how material of acceleration could we see?

So, Darren, this is Mike. There are several parts to the question in terms of how I think best to address. One is we've done a lot of work on the product to be able to set the stage for new product introductions. Sales Edge Rescue is one of those areas that we've introduced to the market, but there's still various features and facets that will be added over the course of 2020. And the feedback has already resonated with the customers coming back to us, and it's positive. There are new products that are coming. I think that's part of the equation of why we feel some optimism looking ahead. There are new features. And there's that feedback on those initiatives that are specifically Sales Edge Rescue. In terms of the auto vertical, there's a couple of things that are happening. One is the large OEM relationship that we have. They have put forth initiatives to invigorate an opportunity to go after some of their dealer network in a much more robust way, and they're planning on rolling that out here in the coming periods. So we see that potentially moving things forward. In addition, there's a variety of other relationships that we've deepened and also one that are new. And they've stretched not just in the auto OEM area, but some of the auto services vertical. And to that end, I think one of the things that we've then done is, seeing some of this feedback and knowing that the new products are coming on board, we've made the conscious decision to invest further in some of the sales and marketing initiatives, and why we brought on some of the new team members. And we feel good about what some of those things can garner for us as well.

Yes, Darren, this is Russ. Just to add. We've kind of -- we're at or just past this inflection point as our opportunities evolved from analytics to include sales acceleration and enablement. And getting through these initial pilots with Sales Rescue allowed us to work through how to sell it, on board it more quickly. And so between kind of our product evolution and the customer opportunities and visibility, it kind of increased visibility, we feel like as the year unfolds, it's about execution and timing. Obviously, it's early in the year, but that's what gives us, I'd say, the confidence in thinking about 2020 is a good year to execute and make progress with adoption and expansion.

Great. That's helpful. Just last one for me on the auto services investment. I'm just curious in terms of capital deployment, one, why you think this is such a good use of capital as maybe not benefiting your core business and perhaps it does. And then just strategically, maybe you could expand a little bit more on why you think this is such a great use of capital?

I'll jump in and hit on a couple of themes. Automotive is a vertical where we feel we've got some unique strengths, both with our technology and our relationships. And we feel we're executing well and see opportunities for acceleration based on our core continued execution of expansion of capabilities and more and deeper relationships. We saw an opportunity here to leverage the technology and relationships in combination with a defined amount of capital and extend what we think could be meaningful opportunities for value creation. And so that was the impetus for this and why we feel good about it.

And our next question is from Mike Latimore with Northland Capital.

Great. On the 4, I guess, larger customers, 3 of which came out of pilot, I mean, what kind of annual recurring revenue might we think about for these? Is it 5-figure, 6-figure, 7-figure? Just trying to get a sense of the potential sizes here.

Thanks, Mike. This is Mike responding here. So in terms of the 4 that we have so far, there's a few of them that I think are probably tens of thousands in terms of opportunity, but could become hundreds of thousands of full rollout onboarded revenue streams on an annual basis. And there's a couple of them that we think are already $100,000-plus in terms of the range. I don't think any of them at this stage would be $1 million-plus opportunities, but there are others that we're talking to where there could be some meaningful amounts in that range at some point in the future.

Okay. Got it. And then the large auto OEM, you've been working with these guys for a while. I guess what gives you more confidence they might accelerate this year versus kind of last year?

I think, more specifically, some of the plans that they've put down on paper and that they have scheduled out in terms of time frames, investment profiles, reinvigoration of just some of the initiatives that they want to put forth, and they're making more tangible and concrete moves in that regard, and that's been relayed to us very succinctly and clearly.

The addressable market you're in. I mean, what's your general view of the growth rate of that market in call analytics?

Yes, this is Russ. Call analytics, we've looked at is -- it's a meaningful growth opportunity. Obviously, our enthusiasm for Marchex has increased significantly as we've been able to kind of take that analytics opportunity and extend it much more broadly into sales enablement and acceleration. I've historically kind of described that analytics applied to inbound marketing-driven phone calls is a very valuable mission-critical solution. But its limitations of that, you get a percentage of those media dollars effectively for providing your product or service. As we extend that into kind of this broader sales enablement and acceleration market, you're tapping beyond the limited kind of application of a small percentage of marketing dollars based on your value impact to the enterprise, given how you can recognize kind of through these insights what these missed opportunities may be, quantify the impact of what it would mean to harvest those and then provide the solutions that allow them to take action on those and then measure the actual impact and benefit. By doing that, we think our addressable market has been expanded from a very interesting one to a transformational one. And we think the steps we're taking now are clearly catalysts for us to grow and accelerate and validate that and share that progress as well. And so while we're not giving specific percentages, we think it's very meaningful. When you look at the expanded footprint and kind of our access to the dollars associated with the problems we're solving.

Okay. Got it. Got it. And then in the press release, you talked about maintaining your profitability profile in fiscal '20. I guess, when you say profitability, do you mean EBITDA, first? And second, do you mean that you would just be positive EBITDA? Or that you'd have the same level of EBITDA as fiscal '19?

At this stage, I think, excluding the auto services investment, what we've talked about is making progress over the course of the year from the first quarter. And I think that, in aggregate, with that progress, you should get to a point in aggregate for the year where you're above or a positive number. And clearly, when you're looking at the fourth quarter, because of the leverage in the business and the business model, with some of those investments complete by the end of the fourth quarter, you're going to be in a place where you could potentially be at those levels of what the run rates were in 2019 are up.

And just to add, look, what we're looking is we've made the decision to accelerate investment last year in our products and innovation so that we'd have the solutions, like Sales Rescue, we do today. Obviously, more recently, we felt we've seen what was needed to make additional incremental investment on sales leadership and organizational expansion based on where our products and opportunity were. And the nice part about these is that the contribution margins associated with these products is very high. So as we move forward, we'll need to make judgment calls around how much of that contribution we potentially look to reinvest if we're getting validation on growth opportunity and extension as well as letting it flow through.

Great. And then just last one on the investment in the private auto services company. I mean what are you getting out of that? Is it access to a new service? Is that a equity investment? Just, really, what's your benefit?

Exactly. It is a majority stake equity investment. A lot of the development activities will flow through on our results of operations. And hopefully, we get an opportunity to expand and create an additional revenue stream as well as additional opportunity with some of the relationships in the auto services area.

And there are no further questions at this time.

We want to thank everyone for taking the time today, and we will look forward to continuing to update you as we go and progress throughout the course of the year. Thank you.

And, ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.