Marchex, Inc. (MCHX) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Marchex Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Mr. Trevor Caldwell, Senior Vice President of Investor Relations and Strategic Initiatives. Thank you. Please go ahead, sir.

Thank you very much. Good afternoon, everyone, and welcome to Marchex's business update and third quarter 2020 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. 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 sections of our website. At this time, I'd like to turn the call over to our Mike Arends, our Co-CEO and Chief Financial Officer.

Thank you, Trevor. Good afternoon and thank you everyone for joining us today. Just a few weeks ago, we finalized our strategic evolution where we separated our media assets and now have clarity and more singular focus on our conversational intelligence and sales engagement opportunity. We also completed our joint tender offer with one of our largest shareholders in which we purchased approximately 25% of our outstanding stock. With these important and strategic events successfully closed, we believe we are well-positioned to move forward and make meaningful progress. Marchex Technology Solutions address unique high-impact problems for our customers. We harness our rich conversational data to expand our AI capabilities to solve an increasing array of mission-critical problems for our customers and as a part of this, we provide customizable, visual analytics to make it easier for marketers, salespeople and call-center teams to realize actionable insights across a growing amount of conversational data. According to recent market reports, the speech analytics market is expected to grow to more than $2 billion in the next two years. Further, the use of texting between consumers and businesses is exploding. Businesses need our help more than ever to understand and capture each and every new customer engagement. They're under increasing pressure to deliver compelling, personalized experiences at each turn of our marketing and sales engagement process across communication channels. Every step on that path to purchase from the customer's first interaction with an advertisement through the sales conversation over text or phone, has the ability to be a customized experience that delivers on customer need. By delivering conversational intelligence into highly impactful, sales engagement solutions that allow businesses to harvest the value of these customer interactions, we have the potential to capitalize on this emerging, multibillion-dollar market. Although COVID-impacted economic conditions remain fluid, in the third quarter we saw signs of recovery in our business and in certain verticals such as with our auto, home services and dental customers. Furthermore, what many of our customers and prospects remain cautious about where and how they are spending their dollars, we are seeing increasing signs that they are more willing to start planning go-forward opportunities. Despite the current macro uncertainties, we've continued to execute on positioning Marchex as a leader in conversational intelligence and sales engagement. Our recent interactions with customers and prospects, reinforce our belief that we can come out of this current cycle and accelerate as the business environment normalizes. With that, I'd like to hand the call to Russ.

Thanks Mike. We are in an inflection point in our industry. According to e-market research, we're now spending more time on our mobile devices and in front of our TVs. We increasingly just need to push buttons on our mobile phones to engage with the business and initiate some type of potential purchase. Marchex is a technological leader in our space and we believe our expanding AI capabilities, give us the unique opportunity to deliver for customers that need immediate insights from sales conversations combined with the ability to act on those insights to close more sales. We deliver a full picture of customer engagement, starting with a marketing campaign that drove the customer conversation through the performance of the individual sales representative as well. The set of problems we can now solve for is larger than anything Martech has ever tackled. It represents a significant expansion of our market opportunity. To capitalize on this opportunity, we've created a more focused organization with rapidly expanding capabilities and a robust future product pipeline. We believe the COVID slowdown does not distract from our long-term opportunity and as Mike noted, we are now completing our transition to being a business uniquely focused on the conversational analytics and sales engagement opportunity and we are increasingly being recognized in impactful ways. For example, in its April 2020 Industry Report, Opus Research evaluated 11 solution providers for defining the emerging conversational intelligence market. Eleven companies included were analyzed on four factors breadth of conversational intelligence services, multichannel such as voice and text messaging, engagement model and speeds to deploy as well as size customer base and longevity. Marchex was the highest rated company in the report and we were judged to have the widest breath of conversational analytics capabilities. The Opus Research Report describes a number of our key differentiating attributes, which I will quickly run through. Advanced AI models and signals built on a large-scale conversational dataset of more than 1 billion minutes of consumer to business conversations processed annually, proprietary voice transcription with no human accuracy, more accurate even then IBM Watson, Marchex stream real time conversational data streaming and business intelligence platform, patented [ph] clean call technology, which has been enhanced with new, patent pending adaptive robocall blocking technology that uses AI and voice biometrics, multichannel analytics expansion into text messaging and Opus noted that the Sonar acquisition has expanded the footprint of Marchex's robot conversational dataset extending our ability to use artificial intelligence to service deep consumer intent signals across text, messaging and voice communication channels. More than $100 million in research and development investment and more than 40 patents, products used by more than 1,000 companies including many of the world's largest brands, mission-critical reliability with 100% call infrastructure availability for five years and running. Security and privacy; Marchex has maintained the highest security framework in our industry to uniquely meet the security requirements of many ports in 500 companies and Opus recognized our distinction here as a key differentiator. Beyond the Opus Report, a subsequent report in September by Forrester Research found that Marchex was one of only eight companies of significance when it comes to innovative sales engagement solutions. This is new recognition for Marchex's emerging capabilities in this extensive market. This recognition in combination with the Opus Research Report showcases our emerging leadership and momentum across this space and it's worth noting that Marchex was the only company that was recognized in both of these reports spanning the conversational intelligence and sales engagement markets. We have a leading conversational analytics technology and sales engagement solutions platform, more than 1,000 customer relationships including world-class brands. We have a diversified business without any significant customer concentrations and we are strategically well-positioned in a highly dynamic and potentially transformative market that is forecast to grow meaningfully. We think it's pretty straightforward and simple. It may have taken us a while to get to this point, but this is where we want to be. And with that, I'll hand the call back to Mike.

Thank you, Russ. For the third quarter, revenues were $26.5 million. The third quarter continued to be characterized by the events of the COVID-19 pandemic. We saw our call volumes for some customers partially recover in the summer, which is typical of the seasonally higher summer period for verticals like home services. Within our business, volumes near the end of this past quarter typically slow into the fall and we've seen that trend continue in October. New business remained largely delayed in the quarter as many prospects and customers continue to wait on deployments of new sales technology while interest remains active looking forward into next year. For the third quarter, cost containment remained a priority and a core topic of conversation about both existing and new customers. However, there were pockets of renewed interest in technology applications and our services from a variety of vertical categories that give us a clearer view into several new opportunities that we believe will play out in our favor as businesses adjust to the new normal to reach customers and prospects in their selling processes. Looking on a vertical basis, we saw increases in appointment trends from the lows in April in categories like home services, dental and auto, which historically peaked in the summer months. In the summer, verticals like travel recovered somewhat off of April volume levels, but remained down significantly on a year-over-year basis. Also as I mentioned on the last earnings call, during the third quarter, we provided a series of options to support our customers including discounts, payment timing and other relief and in certain cases, waive minimum package commitments. We also had some customers close their doors or radically curtail their operations due to the pandemic. Many of these latter items will have some level of permanent impact, although as Russ noted, we do not currently believe that the magnitude of these customer initiatives or shutdowns related to the pandemic, detracts materially from our long-term opportunity. Now let's look at the product areas more closely. Core analytics and solutions revenue was $13.6 million for the quarter. Excluding the contribution of the disrupted auto customer, which was previously referenced on the second quarter call, core analytics and solutions revenue would be approximately $12.9 million. While we're all continued to adjust ongoing COVID-19 uncertainties, we continue to see progress with our analytics products and solutions and believe this will benefit Marchex in the long-term. Our 2020 customer pipeline for our sales engagement products has remained impacted and certain pilots continue to be deferred or extended. However, various customers took steps to bring back furloughed staff and we're continuing to see engagement with prospective deployments, though timing is still uncertain given the broader climate, but it is worth noting that we expect that the sales rescue product opportunities could be robust as we see an unwinding of the business impact from the pandemic. Our conversations with prospects have been encouraging in this regard. Now looking at the marketplace and local leads platform revenues, third quarter revenue was down slightly on a sequential and year-over-year basis driven largely by the expected decline from the legacy local leads platform. These will be reflected as discontinued operations for the yearend period in light of the recent completion of the divestiture transaction. And looking at the P&L for the third quarter, excluding stock-based compensation, amortization of intangible assets and acquisition disposition-related costs, total operating costs for the third quarter were $28.1 million compared to $24.1 million in the third quarter in 2019. Service costs were $15.3 million up from $12.9 million in the third quarter of 2019. Service costs as a percentage of revenue increased on a year-over-year basis largely due to the mix shift in revenues. We continue to anticipate and believe that as we launch our new analytics products and sales engagement solutions and they begin to contribute, we can see a positive impact on service costs as a percentage of revenue over time. During the quarter, we also continue to make progress on our infrastructure initiatives and believe these investments will provide long term service cost margin benefits in 2021 and beyond. Sales and marketing costs were $4 million. This amount was largely similar to the third quarter of 2019 and the sequential decrease was consistent with several recent initiatives to streamline our sales and marketing expenses. Product development costs were $5.7 million and were up as a percentage of revenue compared to the third quarter in 2019 reflective of our increased investment in our infrastructure initiatives as well as the Sonar acquisition. Moving to profitability measures; adjusted operating loss before amortization for the third quarter was $1.7 million. Adjusted EBITDA was a loss of $1.3 million. Net loss applicable to common stockholders was $3.7 million for the third quarter of 2020 or $0.08 per diluted share. This compares to a net loss of $1.2 million or $0.03 per diluted share for the third quarter of 2019. Adjusted non-GAAP loss per share was $0.03 per share for the quarter compared to an adjusted non-GAAP income of $0.01 per share for the third quarter of 2019. Additionally, we ended the third quarter with approximately $39 million in cash on hand net of current debt obligations. The tender offer closing in October further reduced our cash by nearly $11 million bringing the pro forma balance to approximately $28 million. Now turning to our outlook; the current environment remains highly fluid and as noted, there is uncertainty in the near-term. However, we are seeing good engagement from a planning perspective that we believe could positively impact the intermediate term and beyond. Now let's first discuss the fourth quarter. While the third quarter saw levels of recovery in certain verticals, for many of our customers, sales conversation volumes are still down on a year-over-year basis, which is continuing to impact their planning process. Additionally, for many of our customers, the fourth quarter is the seasonally lowest as call volumes decline during the holiday period and as a result, we do expect core analytics and solutions revenue will be sequentially lower in the fourth quarter, reflecting this normal seasonal impact and also because we do not expect any further contribution from the disruptive auto customer consistent with our remarks last quarter. While we're starting to see initial signs of thawing in our sales pipeline and we do believe several of these may restart in the near-term, it is still a challenge to forecast when these growth opportunities will meaningfully impact our business. As we look at the intermediate term and beyond, we're encouraged by many of the conversations we're having with existing and potential new customers about next year. These conversations combined with a robust plan to introduce new products and capabilities over the course of next year, lead us to believe we will see progress towards our growth goals. Assuming the current trajectory of conversations continue and there is an unwinding of the business impact from the pandemic in 2021, we believe there is a path to achieving organic double-digit annual revenue growth on a run rate basis for core analytics and solutions as we move through next year. We will also continue to act prudently to preserve our balance sheet and financial liquidity. Over the intermediate term, as some of our new product sellthrough favorably impact the P&L, we believe we can see a path in 2021 to breakeven or better on an adjusted EBITDA basis before the end of the year. We continue to believe in our opportunity and are actively developing new conversational intelligence and sales engagement solutions, some of which we have already begun to test in the channel and in addition, we're continuing our infrastructure initiatives including our investments in Marchex stream, which is our platform that analyzes consumer to business conversational data, gains insights in real time, extract signals of consumer intent and supports predictive analytics and the development of artificial intelligence driven use case specific applications. We believe the investment in our infrastructure initiatives will provide a solid foundation to support our future product innovation and expanding AI capabilities. While the environment this year has led to unprecedented challenges for many of our customers, we believe we made significant progress in building the foundation for future growth. We have a liquid balance sheet. We've been large purchases of our own shares. We believe we're well positioned with cutting-edge technology and despite the setback created by the Coronavirus' impact, we believe that the conversational analytics and sales engagement markets could be transformational over time. Additionally, while risks always must be acknowledged and the impacts and uncertainties of COVID continue, we think our upside is potentially meaningful. As the key executives and shareholders of Marchex, Russ and I are committed to advancing the opportunities with all of our key constituents, including our employees and our customers and doing so in a manner that can recognize and maximize value for our shareholders as well. Over the coming months, we expect to have more news to share regarding new products and progress with customers and to all of our employees, Russ and I are very appreciative of your hard work and dedication, your ability to keep our focus on solving critical customer problems is a driver of our emerging opportunities and our long-term success and we look forward to our future. With that operator, we'll hand the call back to you.

[Operator instructions] Your first question will come from Darren Aftahi with ROTH Capital Partners. Please proceed with your question.

I hope you're well. Two if I may. I know you acquired Sonar roughly 10 months ago. I am just kind of curious I know there is some talk with their text analytics capability and your call analytics just kind of to create this closed-loop multitouch platform. I am just curious any sort of timeframe for maybe when that might be rolled out or if it's being piloted beta with customers, just any kind of insight there? And then your commentary about how the intermediate outlook, I am just kind of curious to get back to kind of that double digit organic growth on a run rate basis, what sort of needs to happen from a business environment I mean are you assuming COVID is complete in the rearview mirror, are we kind of as hybrid scenario where and I quite know what that looks like, but I'm just kind of curious any context around it would be helpful?

Darren, thanks for the good words and you're healthy and well too. Let me address your first question and my maybe you can jump in on the second. On the product front, the acquisition of Sonar accelerated a lot of what we were working on and that was part of the key strategic pieces involved with it because our belief was given the acceleration of adoption of texting by consumers with businesses, this would become a must have component of an integrated solution and the good news and one of the reasons why we feel pretty positive and encouraged about we're going directly, is our conversations with customers have really validated their need for an integrated voice and texting solution and we've gone through a fairly accelerated product development cycle where that's something that we're going to be expecting to be able to deliver into market very shortly. So we do have products that we are testing with, with integrated voice and text and we believe that's a catalyst for us in 2021 as well as a strategic differentiator and that's the texting capabilities of one of the accelerants for us in leveraging our analytic insights platform into the sales engagement applications, which we think expands our addressable market. So the texting aspects are current events and we think the catalyst in 2021.

And Darren, this is Mike. Why don’t I address the second part of the question about some of the intermediate thoughts about our growth rate and I think part of your question revolves around what's the impact from COVID. We don't know the exact impact of COVID and what the unwinding will come to bear. How that will exactly will play out. We do think in 2021 it is more likely that there is going to be some unwinding. We hope its substantial and we hope it becomes completely in rearview mirror, but we don't think it has to be completely in the rearview mirror for us to make progress. In specific terms, we have been making a lot of progress on our products in the last six to nine months, while we've been in this environment. Russ just talked about some the integration that's going on with our texting solution capabilities and how that's resonating with some of our existing customers. There are a variety of products that we have slated for the table over the course of the next six to nine months as well as beyond that number of months. The conversations that are happening with our existing customers as well as some of our prospects are suggesting there's some strength in our ability to get momentum and we had some momentum going prior to the entry into the COVID world. We do think it won't take that much to be able to get that momentum back and that's what we're looking forward to and we're trying to do as much as we can right now to set the stage for exactly that in 2021.

Just on the margin, any outside of the your customer base in auto and home services and that all the like in HVAC, are there any other verticals you would call out that maybe text might be the turnkey to unlock more quickly in terms of penetration?

Sure, there is a variety of them, a couple I'd hit on are I think you mentioned dental. There's other applications in the health category where it could be complementary. Financial services has been a big category and we see application and insurance and financial services and then senior living is when we talked about and there is a vertical where we think we can make headway as well.

Your next question will come from Mike Latimore with Northland Securities. Please proceed with your question.

Hi, this is [indiscernible] on for Mike Latimore. Could you tell me how have call volumes stranded by month June to October?

Sure, this is Mike. So thank you for the question. The call volumes in April and parts of April were lowest that we've seen in some time and had the really radical impact from the COVID activity. We saw some uptick starting again into May and June. July and August showed continued strengths, so increases there. September, we definitely had some of the impact of the seasonal volume start to ebb and show some impact during that month and we saw some of those continuations as expected in the normal seasonal course as we move through October. We've had a number of customers that unfortunately have been significantly impacted by the pandemic and some of them have been more permanently impacted by the pandemic, but Russ has mentioned some comments already during the course of the call, where we do believe that those permanent impacts and calls going away are not going to detract especially in the intermediately long-term term from our opportunity. We still think we can get some of the momentum what we've talked about on this call.

Okay. And you effectively giving customers modified terms or break of best to normal pricing?

So in the course of March, April and some the subsequent months, we have provided and we had comments previously where we had referenced we have provided adjustments for some of customers in some cases that included pricing breaks or some modified packages or timing delays for them to be able to deal with their set of circumstances. For the most parts that has all been resurrected and returned back to normal conditions at this point in time and knock on wood, if things do continue to unwind, we'll be looking forward to that momentum building in a healthy way as opposed to a compromised way.

[Operator instructions] At this time, there are no further questions in queue. Do we have any closing remarks at this time?

We wanted to thank everyone for joining us today and we look forward to continuing to share our progress over the coming months and quarters. Thank you.

Thank you, everyone.

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