Marchex, Inc. (MCHX) Q2 2021 Earnings Report, Transcript and Summary

Good afternoon. Thank you for attending the Marchex’s Second Quarter 2021 Earnings Call. [Operator Instructions] I would now like to pass the conference over to your host, Trevor Caldwell, Senior Vice President of Investor Relations and Strategic Initiatives with Marchex. Thank you. You may proceed Mr. Caldwell.

Thank you, Amy. Good afternoon, everyone. And welcome to Marchex's Business Update and Second Quarter 2021 Conference Call. Joining us today are Michael Arends and Russell Horowitz, our Co-CEO; and 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 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 this time, I'd like to turn the call over to Michael Arends, our Co-CEO and Chief Financial Officer.

Thank you, Trevor. And thanks everyone for joining the call. In the second quarter, we saw the benefits of focusing our company on the conversational intelligence and sales engagement markets. We are making progress across each of our strategic initiatives, including market expansion, product momentum, increasing our sales pipeline and innovating in ways to solve a growing number of mission-critical problems for businesses. As consumer behavior and customer engagement evolve, we are focused on staying in the forefront to help businesses deliver personalized selling experiences and an increasingly multi-channel operation. Today, consumers utilize multiple communication channels during the buying process. As a consumer, it is common for each of us to move from voice, to text, to email. This is simply the new reality of how we interact in the digital environment. This channel shift becomes a challenge for many businesses who often lose track of the customers as they transition from a text to a phone call and back. To the customer, the experience can become a garbled and disjointed path from beginning to end on the path to purchase, because today businesses have different systems to engage them depending on which communication channel the customer first engages with. For Marchex, this presents a major opportunity. By aggregating multiple touch points in the consumer buying journey, Marchex captures more data, which enhances our ability to build and improve our world-class AI-driven products. We put powerful, conversational intelligence in the hands of businesses and help them close the loop between marketing and sales in order to help them deliver better and more cohesive buying experiences to their customers. We enable our customers to sell more and achieve positive value impacts. We've concentrated our resources on the conversational intelligence and sales engagement markets. These are bigger, more transformative markets than the ones Marchex has traditionally focused on. We saw what we felt could be a transformative opportunity and accelerated our efforts to capitalize on our unique position. The favorable effects of that strategic decision are starting to materialize in our growth. Coming out of the pandemic, more new customers are adopting our new products and existing customers are continuing to renew and extend their relationship with us. Conversation volumes are up from a year ago with several key categories approaching 2019 levels. The reopening of the economy is of course a factor in our growth as well. People are increasingly contacting businesses again, to spend on everything from cars to dental work, to address the needs they had to put off during shutdowns. And we're encouraged by what we have seen so far this year and are optimistic about the future. Our most recently launched solutions use machine learning and AI to boost insights for businesses at a granular level and are a factor in our increased overall momentum. This has reinforced our position as an end-to-end conversational intelligence solutions provider that integrates the most critical, conversational data and sales and marketing processes to convert customer leads. That means marketing-driven leads are being connected with sales conversations, over voice and text to close the loop. We allow disparate processes to be streamlined for our customers and give them the capabilities to shape the sales process, to close more business, which can be transformational in terms of value impact. We see confirmation of that in our sales pipeline expansion in our new products, including our tech solutions and our recently released auto product, Marchex Engage for Auto, which is the first vertical specific adaptation of our broader conversational intelligence and sales engagement solution suite. We will launch additional solutions and expanded product capabilities throughout 2021 and 2022. We're also accelerating our cloud-based infrastructure initiatives to continue moving faster as an organization to innovate and solve mission critical problems for businesses. For example, Marchex recently announced its integration into VinSolutions’ Connect CRM, the largest dealership customer relationship management system. This integration enables automotive dealers to deliver a better customer experience and automatically keep their CRM up to date with conversation events and outcomes. Dealers now have a streamlined view of the omni-channel path to purchase that expands their ability to respond to inbound inquiries, while delivering a better buying experience. Marchex helps auto dealers gain unique insights into the consumer path to purchase and the tools to better engage the customer in their preferred communication channel. We're already seeing the results and impacts. When dealers better understand the customer experience, they in turn improve sales team performance, one invariably affects the other. The VinSolutions integration is the first of many integrations that our new technology platform will leverage as we develop new capabilities through the advancement of our channel partner strategy. Our new platform will help us not only build our integration partnerships, but also improve our onboarding and sales process and innovate faster as we move forward. Our advancements and innovations are getting industry-wide acknowledgements. In June, Marchex won fifth product awards so far in 2021 when AI breakthrough awards recognized us as the winner of the Best AI Solution for Sales based on the Marchex sales engagement product suite. This award follows others, including the recent Artificial Intelligence Excellence Award for the sales engagement product suite and the 2021 2021 Gold Stevie Award for Marchex's Marketing Edge solution. And just today, we were named and highlighted as the “Market Leader” in Conversational Intelligence by Opus Research, an independent research firm, which focuses on the customer engagement market in its Conversational Intelligence Intelliview report. We will continue to expand our offerings with AI-driven products and features that build on our core value proposition, strengthening our position as a leader in helping businesses leverage conversational intelligence, delivering the selling experience that today's consumers demand and in turn drive more sales and growth. And with that, I will hand the call to Russ.

Thanks, Mike. As we've discussed, consumers engage with businesses across multiple communication channels. With a powerful and expanding platform of value-added applications across voice and text, Marchex can now unify and provide a 360-degree view of customer and process interactions across the primary mobile communications channel. This is the first time that holistic view has been available to many of our customers' sales and marketing teams. Through our conversational intelligence platform, businesses can turn the strategic insights we provide into more of their most valued sales outcomes. Industry-leading companies are turning to Marchex to solve mission-critical problems in their sales process, and we are increasingly being recognized by industry-leading research firms for our unique and emerging position in these markets. The recognition is helping us build increased momentum as we continue focusing on accelerating innovation and delivering measurable progress on what we believe is a transformational path. And with that, I will hand the call to Leila.

Thank you, Russ. At a high level, the second quarter is a reflection that we are taking steps to recover and move past the COVID-19 crisis. Many of our customers continue to reopen for business and are prioritizing the development – deployment of sales software again. As Mike mentioned, we saw conversation volumes increase over the year ago period with several categories approaching 2019 levels. We also saw positive developments in our sales pipeline, enhanced by our new product advances. While there continues to be a regional element to the reopening in the U.S. in terms of relative strength from a conversational volume perspective, we believe overall trends are heading in the right direction. That said, we are watching recent trends closely to see if any resurgent factors impact future planning initiatives. Combined with our ongoing initiatives to launch new products, economic recovery should provide a favorable tailwind from Marchex going forward. For today's commentary, I will focus on our financial results from continuing operations. On that basis, revenue for the second quarter was $14 million versus $12.7 million for the same quarter last year. Conversational volumes maintain some of the momentum from March with many categories seeing double-digit increases on a year-over-year basis. The COVID environment continues to impact categories such as hospitality and dental compared to a normalized environment, but other categories such as auto services saw a meaningful increase relative to the year ago period. In addition, improved economic environment, combined with the launch of new products and continued feature enhancements, is leading to an increase in new customer wins and upsells compared to the year ago period. Now let's shift to the P&L for the second quarter. Excluding stock-based compensation, amortization of intangibles and acquisition or disposition-related costs, total operating costs from continuing operations for the second quarter were $14.8 million compared to $17.1 million in the second quarter of 2020. Service costs were $5.5 million for the second quarter. Service costs decreased as a percentage of revenue compared to the first quarter of 2021, largely due to a higher revenue level as well as realizing benefits from some of our infrastructure initiatives, which includes cloud migration initiatives, certain platform integrations and other technology initiatives. We anticipate as we complete these infrastructure projects and derive revenue from the launch of our new conversational intelligence products and sales engagement solutions, we will continue to see a positive impact on service costs as a percentage of revenue over time. Sales and marketing costs were $2.5 million. This amount was down from the second quarter of 2020, due in part to continued optimization of our selling and marketing efforts. Product development costs were $4.7 million and were down as a percentage of revenue compared with the second quarter of 2020, reflective of the efficiencies gained from technology platform progress as compared to a year ago. Moving to profitability measures. Adjusted operating loss before amortization for the quarter was $900,000. Corresponding adjusted EBITDA was a loss of $500,000, improving from the first quarter 2021 adjusted EBITDA loss of $3 million. GAAP net loss from continuing operations was $300,000 for the second quarter of 2021 or $0.01 per diluted share. This compares to a net loss of $5.7 million or $0.09 per diluted share for the second quarter of 2020. Adjusted non-GAAP loss from continuing operations was $0.02 per share for the quarter compared to an adjusted non-GAAP loss from continuing operations was $0.07 per share for the second quarter of 2020. Additionally, as we ended the second quarter – we ended the second quarter with approximately $27.8 million in cash on hand. Now turning to our outlook. We continue to be optimistic about the year and the ultimate recovery of the economy. Furthermore, we believe our internal momentum will add to our future growth prospects. For the third quarter of 2021, we believe we will make continued financial progress on both revenue and profitability metrics relative to the second quarter. We also believe that our sales pipeline and product initiatives should enable us to grow on both a year-over-year and sequential basis in the third quarter. This progress should manifest in growth on a year-over-year basis throughout the remainder of 2021, which can help us achieve our goal of reaching breakeven or better for adjusted EBITDA on a monthly run rate basis during the course in 2021. This progress will be driven by continued execution with increased sales, along with our cloud-based infrastructure and other technology initiatives, which we expect to lead to some additional ongoing savings before the end of 2021. We believe the opportunity in conversational intelligence and sales engagement markets are significant. We are committed to investing appropriately to ensure our existing sales and product momentum will continue into the next year. We believe Marchex is uniquely positioned as a trusted partner for market-leading companies that need AI-driven conversational intelligence and sales engagement solutions. We solve an increasing array of mission-critical problems to help businesses deliver a great selling experience in an increasingly complex ecosystem of customer communications. Marchex's award-winning voice and tech solutions are a testament to our employees and their dedication to our customers' needs. As we continue to focus on accelerating our technology and product initiatives, we believe we can create and deliver long-term growth profile and drive significant intermediate and long-term operating leverage. Over the coming months, we expect to have more news to share regarding new products, new relationships and our expanding AI capabilities. To all of our employees, we thank you. The executive leadership team is very appreciative of your hard work and dedication. With that, operator, we'll hand the call back to you.

Certainly. [Operator Instructions] The first question is from Austin Vetterick with ROTH Capital Partners. You may proceed.

Thanks. Good afternoon. Thanks for taking my questions. I'm on the line for Darren today. My first question, if you could speak more towards some of the key growth drivers that you think will be prominent moving into the second half of the year and more specifically more on the CRM integrations.

This is Mike here. So in terms of some of the growth drivers, we've clearly got a little bit of impact from a volume perspective from consumer activity, just regaining some of the pre-COVID activities. At the same time, I think a lot of the work that we've done over the course of the last year from a product perspective and bringing along a couple of the new solutions that we mentioned today, including the auto dealer solution as well as some of our products within the texting arena have allowed us to sign up more new customers. And this last quarter was representative of signing and onboarding several new customers and a significant difference, obviously, than what it was a year ago period, but getting back to those levels that existed in the pre- COVID era. And we think with some of the product progress, there's some momentum from a new product perspective as well as extending the relationships with some of our existing customers and potentially having some of these existing customers onboard and sign on with some of these new feature sets. Those, I think, are the keys to some of the progress that we see prospectively for the rest of 2021. At the same time, not just for the rest of 2021, but 2022, there are several new product and feature sets including some engagement outside of just the auto area that we expect to bring to the table and bring to bear for customers as well as new potential customers. And we think that's an important driver as we look ahead, not just for 2021, but beyond.

Yes. And this is Russell. I'll just add on. The – when you take what Mike hit on and synthesize it into a few key themes, one, we feel we have a lot of headroom with our existing customer base. That new product progress that we're making is also really illuminating the opportunity to add new customers, so we have room to grow products are catalysts to win new customers. And then importantly, to hit specifically on your question around the VinSolutions integration, one of the things we've been focused on is we feel we have strong validation of the value impact of our product. And so one of the things we've been mindful to is what are the ways we can make it easier to adopt and operationalize those into existing operational workflow. CRMs are a core part of that and an integration strategy is what allows us to do so on a kind of more frictionless basis. And so by virtue of integrating with VinSolutions and auto, that's a catalyst for us to be able to sell more, increase the velocity of adoption, increase the velocity of use as well as value impact, which we think becomes a catalyst for growth. So those themes apply more broadly. So auto is a catalyst. Texting is a catalyst, which run across the horizontal spectrum of all of our verticals. We see catalysts in select other verticals that we look at for product expansion going forward as well. And as Mike mentioned, obviously, with COVID, there's always questions on what might happen. But directionally, we think that we've got a net tailwind in terms of volume impact overtime. Thank you.

Got it. And kind of the follow along on that with the CRM systems. Generally, certain industries, certain verticals will share similar CRM systems. I'm curious if you're kind of targeting – focusing on one vertical at a time as opposed to casting a wide net and targeting multiple verticals at the same time. Just pragmatically, if that makes more sense to kind of focus on one at a time.

Yes. So our approach to this has been to create capabilities in our product sets that are applicable to multiple verticals. And then what we wanted to do is take those and apply it to a specific vertical, one where we felt we had a really strong strategic position and so some unique strategic advantages and validate that, which is what we've been doing in the auto space with VinSolutions. And there's more integrations to come that we think are accelerant. As we do that and see the success, it's to start to extend our efforts in parallel into other core verticals where we can have vertical-specific applications and vertical-specific integrations as well. So prove it out with auto and then in parallel, start to build out vertical-specific applications and our other core verticals, given the kind of learnings and acceleration we did by virtue of our success in auto. Does that address your question?

It does. Yes. I appreciate that. And just a last quick one for me. With the economy reopening, which certainly seems like a tailwind for many of the verticals that you participate in. How much risk do you see with the business given the proliferation of the new delta variant?

So this Mike. I think if you look at what's happened with any consumer activity any resurgence can create consumer impact where there's lessening of just the consumer activity. Whatever we may be seeing here in the very recent period of time, what we do believe is that the opportunity is there regardless, it's a question of, are we going to have blips in the equation? Consumer activity continues to focus on voice, it continues to focus on texting, that continues to be engagement from businesses, needing some of the insights and information flow and sales engagement, technologies that we have. Those things are going to exist and permeate, regardless of some of the COVID impacts. Even if we see some lessening of consumer activity in the very short term, because of any kind of resurgence, we think it's just a question of the intermediate and long-term playing out to the advantage of us with some of the new product introductions and adoptions by businesses of these technologies.

Got it. Well, thanks. I appreciate your time.

Thank you. The next question is from Mike Latimore with Northland Capital Markets. You may proceed.

Hi guys, This is [indiscernible] on behalf of Mike Latimore. Thanks for taking my question. Could you give me an update on what percentage of your revenue is user based versus annual subscription?

Yes, I would say the majority of our revenue is usage-based at this point, but it's being driven more and more by subscription.

During the quarter with double digit year-over-year growth this year, do you expect that growth today to be sustainable thereafter?

It's a very good question. I think clearly we've seen some of the impact not just from a volume perspective of consumer activity returning, but also from some of the new product introductions. As we've mentioned before, we have a slate of features, new products Russ talked extensively about some of the vertical applications and CRM integrations that we think we're going to be bringing to the table in addition to the VinSolutions CRM program that we've recently put out to market. As those things come to bear we see opportunity and we're looking for a revenue not only to grow, we think there's the possibility, especially in the intermediate term, as we get back to normalized levels of consumer activity for potential acceleration.

Right. And what percent of your customers are now at or above pre-COVID level?

This is Mike. I think when you look at the different categories, we certainly have a significant amount of resurgence back to volume levels, similar to 2019 in a category like Auto Services, even car sales, and some of the work that we do in the auto sector is a return to significant levels that were pre-COVID as [ph]. And there's a few other areas that have similarly move forward. Home Services is a key example. But there's other categories that we mentioned are simply not at the level that they were and hospitality, travel, it would be one of them. I think if you look at some of the health care networks, even in the dental category, it's progressed and it's significantly improved from what it was a year ago, but it's not at the levels that it was back in 2019. But many of the areas have come back with strength, certainly as we've seen here in the recent periods of time.

All right. Thank you.

Thank you. [Operator Instructions] There are no additional questions waiting at this time, I will now pass the call back over to the management team for additional remarks.

Thank you everyone for joining us today. We appreciate your time and we will look forward to providing further updates this upcoming quarter with initiatives and progress for the third quarter. Thank you.

That concludes the Marchex second quarter 2021 earnings call. Thank you for your participation and enjoy the rest of you.