Marchex, Inc. (MCHX) Q1 2021 Earnings Report, Transcript and Summary

Good afternoon. My name is Celine. And I will be your conference operator today. At this time, I would like to welcome everyone to the Marchex First Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] Thank you. I would now like to hand the conference over to your speaker today Mr. Trevor Caldwell, Senior Vice President of Investor Relations. You may begin your conference.

Thank you, Good afternoon, everyone. Welcome to Marchex's business update first quarter 2021 conference call. Joining us today are Michael Arends and Russell Horowitz Co-CEOs; Leila Kirske our CFO. 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. 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'd like to turn the call over to Michael Arends.

Thank you, Trevor. Good afternoon and thank you everyone for joining us today. In the first quarter, we saw the early benefits of greater organizational clarity and singular focus on the conversational analytics and sales engagement opportunity. We began to see initial signs of a pandemic recovery in our sales pipeline and conversation volumes, all while innovating on our future product roadmap. Let me first address total conversation volumes which increased noticeably near the end of the first quarter. Although January was largely consistent with December, volumes started to pick up in February, and in March, we saw increased volumes that approached 2019 levels. This corresponded with several of our customers experiencing increased consumer activity, while also gradually reopening locations in multiple regions. For instance, we noted measurable improvements in conversation volumes at the end of the quarter in verticals such as auto services, dental, home services, and auto manufacturing in geographic regions that were reopening. As an example, in-home services and healthcare conversion volumes increased nearly 20% in March over the prior year. Again, those numbers are almost in line with 2019 levels. And importantly, we see that some of these trends have continued into the current quarter. Meanwhile, verticals such as travel have remained significantly disrupted in the first quarter relative to historical patterns. However, we hope to see a favorable shift in the coming month as the outlook for the pandemic improves. We also saw new sales and existing customer interest accelerate in the first quarter. In fact, we signed more new customers and upsells than at any point in the last 12 months. These new customers spent multiple product lines across a variety of sectors, including auto, home services, and advertising agencies, among others. Right now, businesses increasingly want to understand how to engage customers over text. Brands, especially those that have suffered temporary store closures are more open and eager to communicating with their customers through text channels in light of the pandemic, given it is a consumer-friendly way to establish a connection and start the relationship building process. Given this renewed and increased interest, we've moved aggressively to accelerate our product and sales efforts in the first quarter. We expanded teams in key areas such as texting, and we launched new AI-driven products that solve an expanding set of industry specific use cases in verticals such as auto. In addition, the company continued to focus on our integration efforts in order to accelerate our timeline to deliver additional advanced analytics and sales engagement solutions in 2021. Each of these initiatives sets the stage for expanding our opportunity footprint this year and beyond. From the millions of conversational data points we aggregated and then analyzed, it is clear that call and text-based customer conversations through mobile channels have taken on heightened importance in the purchasing process. The pandemic has created significant consumer behavioral changes. Today, consumers perform research online before they initially call or text the business. And by the time they take this step, they're typically armed with robust information and closer to a purchasing decision. As a result, that initial call or text has emerged as a critical interaction for brands to handle successfully. A recent study we conducted on the new pandemic shaped habits of auto shoppers illustrates this. Trust and transparency are paramount. 91% of the shoppers we surveyed, said establishing trust through transparency includes disclosing prices beforehand. The old method of enticing a customer to come down to a showroom test drive a car and negotiate in person does not work for today's highly informed and educated shoppers. This is mostly been replaced by online research and call and text-based interactions with the dealer. Through our current product innovation cycle, we are enabling our customers to take advantage of these trends and consumer engagement. Our products give customers the power to gather the critical actionable insights across voice and text communication channels, and the ability to deliver the right customer experience at each point of the selling process. The combination of these value-added applications drives greater measurable impact to increase sales through improved conversations. We know what consumers want today, a seamless end-to-end sales experience. Multi-channel cohesion across voice and text is imperative. Many brands struggle with this, given the disparate technology stacks where data lives. Early on, we saw the power of artificial intelligence and invested in centering our technology platform around it. AI can help organize and examine data at a rapid fire rate to help businesses understand in real time, which sales and marketing campaigns are working and which are not. And also empower them to take the appropriate action to enrich customer engagement and increase sales productivity. In fact, our return to revenue growth is being driven by our AI-powered product initiatives. That brings together multi-channel solutions in voice and text with vertical specific applications that drive increased sales. Our recent law launch of Marchex Engage for Automotive is an example of using an AI-powered solution to solve unique sales challenges directly at the dealership level. In the initial trial of this product, we saw significant and demonstrable impact on car sales for the dealerships, and are eager to bring the solution more broadly to the entire industry throughout this year and going forward. We are moving aggressively to complete the work to integrate our technology platforms which we should complete this year. Our new integrated product platform will serve as the foundation for future innovation, and will enable the company to simplify product integrations and upsell opportunities. And in addition, we continue to anticipate achieving more than $2 million in annualized cost savings on a run-rate basis by the end of 2021 through these technology infrastructure initiatives. We're moving to expand our product and sales effort in key areas like texting, and launching new products that solve complex problem problems in multi-billion dollar markets like auto. And we're excited by the developments in the first quarter. And we look forward to updating you more in the coming months. And with that I'll hand the call to Russ.

Thanks, Mike. We're really encouraged to see the initial signs of momentum building in our business since the start of the year. Over the last 12 months, we've made the decision to more deeply concentrate on the transformational opportunity in conversational analytics and sales engagement solutions. We're now seeing early evidence of traction in our vision and strategy. We're creating a unified suite of sales engagement solutions across voice and text channels, which will empower our customers to capitalize on those actionable insights in real time. We're opening new markets and expanding our addressable market. With our auto dealer product, we will have the opportunity to sell into thousands of franchise dealers over the next several years. Through our investments in unifying our infrastructure, we can now take advantage of Marchex as a leading conversational data to innovate into the future, and create new opportunities to cross sell and upsell with easier integrations for our customers and new channel partnership possibilities. Our plans for 2021 are appropriately ambitious, and we intend to execute on all of them. In the first quarter, we saw the first signs of acceleration in our business, which demonstrates the strategy while in its early stages is starting to pay-off. As a result of this progress, we anticipate growth can sequentially accelerate and be on track to achieve our targets for this year, as well as set the stage for a strong long-term operating profile. As we look at our strategic priorities for 2021, we are focused on making substantial progress in introducing new AI-fueled products in driving increased momentum and auto tech and other core verticals. Furthermore, and importantly, we have simplified our business and created organizational clarity. This sets us up to execute well while establishing a leadership role in a very important transformative market. And with that, I will handle the call - I hand the call off to Leila.

Thank you, Russ. I'm excited to be here today and share my thoughts on our business and our progress so far this year. At high level, while the overall environment continues to be characterized by the impact that COVID-19 has had on our lives and those of our customers, we've seen some encouraging signs during the first quarter. Most notably, as Mike mentioned, we saw conversation volumes increase over the course of the quarter and positive developments in our sales pipeline. And while we cannot predict when the economy will return to normal. We believe our customers and our prospects, businesses will benefit from gradual reopening. That, combined with our ongoing product initiatives, she provided tailwind from our checks this year and going forward. For today's commentary, I will focus on financial results from continuing operations. On that basis, but only for the first quarter was $13 million. Conversation volumes remain somewhat depressed during January but started to recover in February, while March saw healthy volumes as we approach 2019 levels. Notably, we saw some key customer categories like home services and healthcare experience a healthy growth in March that continued into April. While the COVID environment continues to impact categories like hospitality and dental versus a normalized environment, we did see some positive progression in March in those areas. In addition, the gradual reopening of the economy has led to a rise in new customer wins and upsells. In fact, as Mike mentioned in the first quarter, new enterprise customer sales represented a high relative to the last 12 months. As we introduce new products over the course of 2021, we expect that these products will contribute to further build our sales pipeline. Now let's get to the P&L for the first quarter. Excluding stock-based compensation, amortization of intangible assets an acquisition or disposition of related costs. Total operating costs will continue operations for the first quarter were $16.3 million, compared to $16.8 million in the first quarter of 2020. Service costs were $5.4 million, up from $4.8 million in the first quarter 2020. Service costs increased as a percentage of revenue on a year-over-year basis, largely due to our infrastructure initiatives, which includes cloud migration initiatives, certain platform integrations and other technology projects. We anticipate as we complete these infrastructure projects and derive revenues from the launch of our new analytics products and sales engagement solutions, we will see a positive impact on service costs as a percentage of revenue over time. Sales and marketing costs of $3.4 million, and that was down to from the first quarter of 2020. Product development costs of $5.2 million and were down as a percentage of revenue compared with the first quarter of 2020, reflective of an increased revenue scale is compared to the year ago period. Moving to profitability measures adjusted operating loss before amortization and continuing operations in the first quarter was $3.4 million. Corresponding adjusted EBITDA was a loss of $3 million improving in the fourth quarter of 2020's adjusted EBITDA loss of 3.2 million. GAAP net loss from continuing operations of $5.3 million for the first quarter of 2021, or $0.12 per diluted share. This compares to a net loss of $25.5 million or $0.54 per diluted share for the first quarter of 2020. Adjusted non-GAAP loss from continuing operations was $0.08 per share for the quarter compared to an adjusted non-GAAP loss from continuing operations of $0.07 per share for the first quarter of 2020. Additionally, we ended the first quarter with approximately $23 million in cash on hand net of current debt obligations. Now turning to our outlook. We are generally optimistic about the year and the ultimate recovery of the economy. However, the current environment remains highly fluid in the near term. For example, here in Washington State, we still have several counties stuck in Phase 2 due to rising COVID cases, which implies lowering purchase capacity in many businesses. We know that in certain regions, we are not out of the woods, and accordingly, some of our customer pilots and trials remain on hold. That being said, we continue to have solid engagement with those prospects and our existing customers. And the trend looks favorable relative to the year ago period. In the second quarter of 2021, we believe we will make further financial progress on both revenue and profitability metrics relative to the first quarter. We also believe that our growing sales pipeline and product initiatives should enable us to make progressive sequential financial progress throughout this year. And we continue to believe with an unwinding of the business impact from the pandemic, we can be in a position to reach double digit growth on a run-rate basis at some point this year. Now turning to our profitability metrics and our balance sheet. Over the course of this year, we continue to believe we will advance towards our goal of reaching breakeven or better for adjusted EBITDA on a monthly run-rate basis by the end of the year. Also similar to the revenue commentary, we believe that we will make sequential progress on our profitability measures throughout this year. We believe our opportunity in the conversational analytics and sales engagement market is significant. This year, we will take significant steps to position Marchex to emerge as a leader in this market. We will launch new AI-driven conversational intelligence and sales engagement solutions, and convert some prospects which are already in trials into full customers. In the meantime, we're moving aggressively to accelerate our infrastructure initiatives, which will open new markets, new partnerships and support our future product innovation in rapidly expanding AI capabilities. Taking together, we believe that these initiatives can drive a strong growth profile this year, and can drive significant intermediate and long-term operating leverage. Over the coming months, we expect to have more news to share regarding new products, new partnerships, and are expanding AI capabilities. To all of our employees, we thank you. The executive leadership is very appreciative of your hard work and dedication. With that operator will hand the call back to you.

Thank you. [Operator Instructions] We have our first question coming from the line of Mike Lattimore with Marchex [ph]. Your line is open.

Hi, guys, this is [Indiscernible] on for Mike. People go back to work and talk, [indiscernible] your volume generally. Like a key Marchex value is monitoring sales effectiveness from a remote location?

In terms of the volumes and whether we're helping measure sales effectiveness from remote locations, I think the primary focal point is how a consumer engages with the business. And as long as the consumer is engaging with the business through a channel that's dedicated primarily to a mobile device, whether it's voice or text. We absolutely see those trends benefiting our volume. And we think over the course of 2021 with some of the greater engagement activity between consumers and businesses that we expect will come with an unwinding of a pandemic. There should be momentum there and volume increases.

And I'll take that. This is Russ. One of the elements for us when we look at the last year is a lot of our customers are service-based businesses, or national companies that had a distributed national footprint in terms of locations. And they were the first to really face the brunt of shutdowns. What's happening now, when you look at reopenings in combination with renewed sales initiatives? Because once you set your locations, trying to drive more customers to those locations obviously doesn't make sense. And so that was the disruption we all face. But we're, - we believe we're on the other side of it now. And as those reopenings continue to happen, that those initiatives to drive more customer leads and conversions continue to happen. And the volume of move in parallel, that becomes a tailwind. That helps us in addition to our product progress, and our sales momentum.

All right. How are the call volumes tracking in April and May? Is it improving from first quarter?

Yes, this is Leila. Our car volumes have been pretty steady quarter-over-quarter. Pretty much any higher than the prior and tracking consistently this current year.

Right. And how's your traction with messaging services?

This is Russ. Texting is one of the catalysts for us. We see that on the customer front. Consumers are driving a real - steepening of the adoption curve. Because consumers want the ability not just to call, but to text, it ends up being just a much more efficient way to connect either on the consumer inbound basis on the business outreach back to the consumer. And so as businesses see that consumer traction, and as we kind of touched on in the course of our formal presentation. There's an increasing urgency, just given some of the complexity of the existing business infrastructure to find integrated solutions that support both voice and text. And that lines up. It's right in line with what we believed would be a significant opportunity for Marchex. And so when we talk about our catalyst, we hit on the auto vertical as an example. And we hit on our text products in our text and these products specifically, because of the increased recognition and urgency around adoption and integration.

All right. Thank you.

Thank you.

[Operator Instructions] There are no further questions at this time. I will now turn the call over back to the speakers for additional comments.

Hi, this is Russ. Appreciate everyone's participation today. Just a few closing thoughts, that last question on text. Text was really the first product that started to take off this year. And we touched on some of the other catalysts that we're seeing unfold. But when we think about some of the key themes that we see, it's really kind of our current view and seeing this convergence of our three key positive elements with new product releases, or increased sales momentum. And again, these macro trends that are leading to overall volume growth. And we think the combination of these three and other elements are leading to this increasingly positive outlook of increased acceleration in our quarter-to-quarter growth, as well as a bigger opportunity footprint. So again, as things down now we feel really good with the way 2021 is shaping up for us. And we appreciate all your ongoing interest and involvement with Marchex. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.