Marchex, Inc. (MCHX) Q3 2021 Earnings Report, Transcript and Summary

Hello and welcome to the Marchex’s Third Quarter Earnings Conference Call. My name is Charlie and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Trevor Caldwell, Senior Vice President, Strategic Initiatives and Investor Relations to begin. Trevor, please go ahead.

Thank you, Charlie. Good afternoon, everyone and welcome to Marchex's business update and third 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 Mike.

Thank you Trevor and thanks everyone for joining the call. During the third quarter, the resurgence of the pandemic from the Delta variant impacted customers in some of our key verticals. And as we navigated through those challenges, we remained focused on key initiatives to drive our customer and go-forward growth opportunities. And I'm pleased to report that we saw significant progress from those efforts. Let's first discuss conversation volumes. Primarily during the latter half of the third quarter, we saw a decrease in conversation volumes in certain verticals, such as home services and auto, which may also have been impacted to some degree by supply chain disruptions. These categories are typically strong in the third quarter, and we are attributing these lowered volumes to the resurgence of the pandemic. That being said, we continue to see a return to a more normal purchasing cycle for most enterprise customers. We also see building interest in our sales engagement suite of products and tech solution, which is reflected in our growing pipeline and continued confidence in our larger opportunity for 2022 and beyond. Against that backdrop, we made significant progress in our core strategic initiatives for the year, particularly over these last few months. First, we finalized a long-term renewal of one of our largest OEM customers with a framework that enables us to extend through 2025 based on our continued execution. We also expanded relationships with two additional OEM partners, each with significant room for growth in 2022 and beyond, based on traction with some of our newest products. Trends like e-retailing are driving OEMs to accelerate the adoption of new sales practices and solutions. The data that we provide through our products is critical in shaping their strategies to tackle this shift. In fact, many of our OEM opportunities are based on Marchex's expanding role in helping the auto industry take on this challenge. And second, we made significant advancements in our technology infrastructure and cloud initiatives. In 2021, as a strategically more focused company, we've been able to move rapidly in building out our platform, which has helped contribute to the company achieving profitability ahead of schedule. While there is more work to be done, moving our technology infrastructure to the cloud is enabling Marchex to innovate faster. It means we can scale, innovate within a common architecture and expand the breadth of capabilities we can provide to our customers. We can develop new AI signals more quickly and deliver them in easily consumable ways via integrations with new channel partners. Furthermore, we can onboard new customers faster than ever on our new platform. And this is having a positive impact on our prospect and upsell conversations. Third, our product launches are also accelerating. Just yesterday we announced Marchex Anywhere, a new hub that expands access for our conversational intelligence products to CPaaS, UCaas and CCaaS platforms. Marchex Anywhere opens up a channel strategy for Marchex to deliver our entire suite of current and future products into platforms that have access to tens of thousands of businesses. This innovation brings our market-leading conversational intelligence services to an expanding universe of businesses looking to enhance their existing sales, customer engagement, marketing and communication platforms with the power of actionable insights from customer conversations. Marchex Anywhere also offers two types of integrations; communication platform integrations, and zero code integrations. This significantly expands the number of companies that can employ Marchex's conversational intelligence to enhance their sales, customer engagement and marketing efforts. And our solutions continue to receive industry validation. We were recently named the overall SaaS winner in the analytics and business intelligence category of the 2021 APPEALIE SaaS Awards based on our leading conversation intelligence platform and sales engagement product suite. And this underscores Marchex with momentum in achieving leadership recognition. And it's the eighth award we've received this year, which is a record for our company. As new products are introduced and begin to sell-through, we expect to see additional operating profile as a direct result of [Technical Difficulty]. There's no doubt there's still more work to be done this year and next, but we are confident in our long-term strategy and we look forward to sharing more on our operations and outlook. And with that, I'll hand it over to Russ.

Thanks Mike. In the third quarter, we continue to make substantial business progress in positioning Marchex to capitalize on the long-term opportunity in conversational intelligence and sales engagement solutions. We are creating a market-leading suite of products that can deliver end-to-end solutions from the first media dollar to individual store or location performance. It is a bold vision and one that is transformative to our customers and ourselves. During the last several months, we've taken important steps in the form of new solutions and capabilities we have brought to market, and there is much more to come. Securing new long-term commitments with several of our leaders -- several of the leaders in our large core verticals gives Marchex significant headroom to grow simply based on the relationships we have in place today. This, combined with our product momentum and growing base of new customers, will serve as the foundation for our long-term increasing growth. While continuing to invest in our cloud-based technology initiatives, we are ensuring that we are moving toward a financial profile that can include significant growth and operating leverage as we execute. I'm energized by our future. And I look forward to updating you in the coming months. And with that, I'll hand the call over to Leila.

Thank you, Russ. At a high level, our third quarter 2021 results were mix as recent pandemic headwinds impacted conversational volumes. However, this is offset by significant traction with new customers in vertical, such as home services and automotive, which will benefit our long-term revenue profile. During August and September, we saw a softening of conversational volumes in key categories on a month-over-month basis. On the other hand, we continue to see consistent sell-through our new products on a year-over-year basis when excluding certain revenue, timing and pricing adjustments that were made during 2020 related to the pandemic in order to support customers who in many cases were severely impacted. Even though last year had its challenges and the full impact of these adjustments carry forward into this year, we are still making significant progress. From a new sales perspective, the third quarter, which is typically a slower quarter for enterprise sales due to similar business slowdown, was consistent with the second quarter. This suggests that our new products are resonating and that our target customers are returning to a new -- normalized purchasing behavior. Further, our long-term sales pipeline continues to develop favorably. On the operating cost side, we continue to see progress related to our technology infrastructure initiatives, enabling us to achieve our profitability goals much more quickly than anticipated. For today's commentary, I will focus on our financial results and continue operations. On that basis, revenue for the third quarter was $13.7 million versus $13.8 million for the same quarter last year. As Mike discussed, we extended our relationship with one of our largest OEM customers through a multi-year framework that has provisions that could extend the term of this partnership into 2025. We also recently expanded two additional OEM relationship and see significant opportunity for growth in the auto and other core verticals. Furthermore, we believe that the continued growth and breadth of our product pipeline will favorably impact our opportunities with current customers, as well as open new channel opportunities. Now let's shift to the P&L for the third quarter. Excluding stock-based compensation, amortization of intangible assets and acquisition disposition related costs, total operating costs from continuing operations for the third quarter was $13.9 million compared to $17.4 million in the third quarter of 2020. Service costs were $5.7 million for the third quarter. Service costs were largely flat on a year-over-year basis. We experienced a slight increase in the second quarter of 2021 related to one-time expenditures, which accelerated some of our technology integration platform work. We anticipate these infrastructure projects and continue to see successful sell-through and the launch of our new conversational intelligence products and channel initiative, we will continue to see a positive impact on service costs as a percentage of revenue over time. Sales and marketing costs were $3.7 million. This amount was flat from the year ago period, and reflected a more normalized sales and marketing expenses compared to the second quarter of 2021. Product development costs were $3 million and were down as a percentage of revenue compared with the third quarter of 2020 and the second quarter of 2021, reflecting in part as efficiencies gained from the technology platform progress. Moving onto profitability measures. Adjusted operating loss before amortization for the third quarter was $300,000. Corresponding adjusted EBITDA was a positive $13,000 improving from the second quarter of 2021 EBITDA loss of $500,000. GAAP net income from continuing operations was $3.3 million for the third quarter of 2021 or $0.07 per diluted share compared to a net loss of $3.7 million or $0.08 per diluted share for the third quarter of 2020. Third quarter 2021 GAAP net income reflects the benefit of the federal CARES Act loan forgiveness of $5 million. Adjusted non-GAAP loss from continuing operations was $0.01 per share for the quarter compared to adjusted non-GAAP loss from continuing operations of $0.06 per share for the third quarter of 2021. Additionally, we ended the third quarter with approximately $28 million of cash on hand. Now turning to our outlook. We continue to be optimistic about our internal momentum and believe that this momentum will add to our future growth prospects. For the fourth quarter of 2021 similar to past years, we expect a seasonal decline in revenue compared to the third quarter. This period typically represents lower sales volumes for many of our customers as call volumes declined during the holidays. However, even accounting for seasonality, we anticipate that our new sales traction will lead to similar growth on a year-over-year basis to our third quarter progress when completed the fourth quarter of 2021 with adjusted core analytics and solutions revenue of $12.3 million. Additionally, as we continue to see sell-through of our new products, we believe that we will be at or near adjusted EBITDA breakeven for the fourth quarter. The conversational intelligence and sales engagement markets represent a large and very significant opportunity for Marchex and validation of our investments with customer renewals, expansions, and increase adoption. There is also growing industry recognition of our leadership and product innovation, which further supports our expanding pipeline of growth opportunities. Towards this progress, we believe that we can see additional operating leverage, expand gross margin and achieve a healthy profitability profile that will enable increased flexibility to invest in accelerating growth. We look forward to building on our internal momentum and over the coming months, we will expect to have more news to share regarding new products, new relationships, and our expanding AI capabilities. I want to thank all our employees for their dedication and continued efforts. There's much more to come. With that, operator, I will hand the call back to you.

[Operator Instructions] The first question comes from Austin Vetterick of ROTH Capital Partners. Your line is open. Please go ahead.

Hi. Thank you for taking my question. Hope you all are doing well. And congrats on the quarter. first question, I was curious if you could expand on some of the types of customers that you're targeting with this new integration, whether it's large enterprise customers or more mid-market focus, with an integration such as Twilio Five9, RingCentral, for example. And then kind of along that note, if you could, kind of go into depth on what the impact would look like from those moving forward.

Hey, Austin. It's Russ. Thanks for the question. The Marchex Anywhere strategy and our increased investment in integrations, we look at is really core and hits on a broader theme that we've seen, which is we've been able to really validate the value impact and unique capabilities of our products with a lot of market-leading companies in some major verticals. And one of the elements we thought about is how do we expand our opportunity footprint and channel strategy and remove the friction and kind of increase the ease of adoption to get those benefits. And that's what's really led to the integration strategy, bring the products and capabilities to where the customers already are into the systems they already use. And so, when we think about the profile of those customers, it falls into our core verticals. You think about auto, auto services, home services, real estate, certain segments in healthcare, hospitality, et cetera. But we think it can broaden from there, right, and given the applicability, extends beyond those as well. And this'll be the most cost efficient and scalable way to do it. You hit on some of the examples, the RingCentral, the Twilios and others, where we know that we can expand our customer base and accelerate integration and growth with us. So, as we do that, given the nature of software, we think we get increased scale and leverage on an operating basis. And then that can lead to some margin expansion as well. Hopefully, I was able to answer all of the elements, I didn't miss anything.

Absolutely. Yeah. I appreciate that. And I do have another one with -- one of the CRM integration yielding in terms of prospects, pipeline expansion, and revenue in the near-term, as well as the immediate term next couple of quarters.

Yeah. Great question. The -- in the spirit of the same theme in terms of bringing the capabilities into the systems our customers already use, it's really accelerating. The -- you talked about kind of what's the meaning to prospects, it's significantly increasing the active prospects and the conversations that we're having. So, we talk about auto. I think for the folks who are invested in Marchex, they know that we've got pretty much -- most, if not all of the major auto OEMs and that's extended into a significant dealer footprint. And so, by integrating directly into the CRMs and easing -- again, integration, adoption, and benefit, that's a real accelerant for us. So, once again, we think we've got a ton of head room. When we look at these vertical opportunities, we think we're creating a replicable template of what we can do and other verticals like home services and beyond, and again, it's accelerating our opportunity and we think it'll meaningfully contribute to our growth.

Perfect. I appreciate it. And just -- sorry, go ahead.

No, no, no, no, you go ahead please.

Just a quick, last one for me. How should we think about P&L impacts due to the economic recovery versus additional outreach, new product offerings and integrations? Said another way, what I'm really getting at is, do you see any additional COVID headwinds moving into the next quarter or so in terms of like call volumes and so forth?

Hi, Austin. This is Mike. So, when we think about the unraveling of COVID that we started to see in the timeframe of this year, we saw uplift from consumer to business engagement, and those conversation volumes started to increase in March, April, May, and June, and even in July. And we definitely saw that in our business with our customers and the activity that they were seeing. There was a resurgence. We saw more of that in the August and September timeframe. It's still a residual as part of the operating activity today. We think as we progress, there may be movements up or down, but as the unwinding occurs, the unraveling, it will be expected with our customer base that we will get a lift. And we think some of that will come in 2022. If not all of that, we do think that's going to be a base point. We think the other things that are keenly manifesting themselves in terms of our opportunity today, we mentioned on this call our enterprise pipeline is still working. They are having their teams engaged with new solutions, which is different than what was happening in 2020. So, the last number of months, we still have engagement, even in August, September and October, from enterprise customers, looking at new solutions, our enterprise -- or pipeline for the enterprise customers is building. We think about the new products and the initiatives. Russ just talked extensively about Marchex Anywhere. We believe that can be a catalyst for 2022 and beyond. But we also mentioned on this call, a very important facet, which was we've extended, renewed, and created extension opportunities with some of our existing customers that are large. And then the OEM side in particular, we've got three relationships, one significant one that we renewed, but two others that are meaningful that we've created expansion opportunities and are growing now as we sit here in the fourth quarter, but more importantly are setting the stage for a greater level of possible growth in 2022. And we think that can be, especially in the near and intermediate term, a key driver of the overall opportunity.

Great. Thank you. I appreciate that. Well, that's all for me. Thank you again for taking my questions and congrats again on the quarter.

Thanks. Thank you. Be well.

[Operator Instructions] Our next question comes from Sharon Courbet [ph] of Northland Capital Markets. Your line is open. Please go ahead.

Hi, guys. So, my question for today is on Marchex Anywhere. So, what prompted Marchex Anywhere? Is it the customer request or the platform companies asking for integration?

Excellent question. It's really been a combination of both, but I would emphasize first and foremost that, this was customer-driven. When we look at who our existing customers are, and as we've introduced new products and as we've evolved from more traditionally being a call and then conversation analytics company into sales engagement, we had certain selective customers that we're seeing significant measurable value impact, and they've wanted to extend it beyond a limited volume of the inbound customer conversations they were receiving and kind of operationalizing that a collaboration around integration with one of their core providers. And as we went through that process and we're able to validate the product utility and they are being able to at that point more expansively apply it, it became clear to us that there was broader opportunity based on an integration strategy, which in turn has led to some strategic relationships with those underlying integration partners, which we think we're just getting started with. So that really kind of lays out the genesis of it. We think we're on the very front end of what this can mean for our business. And again, we're creating a replicable template, but we are close enough and we've been able to validate it with some early adopters. So, we do think it's tangible and we'll start to see some impact from it.

Okay. Great. So, the next question is, you have specialized in sales engagement, but Marchex seems to bring you more into customer service. Do you see a pull there?

We really looked at the applicability of our solutions fairly broadly, but we also try to sequence this. And one of the things that we've learned over time with our customers is that, insights alone had value, but it was limited if we weren't providing the automation and tools to act on those insights and harvest the potential value of that -- in a lot of cases was being missed. So, a lot of our efforts have been into solidifying the uniqueness and impact of our sales engagement solutions. We do see opportunities more broadly with conversations across the spectrum. But as I mentioned, we're trying to sequence this and kind of looking at our heritage around coming in through the marketing department, as well as building relationships across the sales organization. And so, we do view our opportunity as being much broader, but in terms of accomplishing our goals around increased penetration with existing customers, expansion of opportunity with new customers by, and kind of beyond that, that we can accomplish our goals with our existing opportunity around sales engagement and insights. And then similar to what we did with integrations, what some of our early adopters extend those solutions more broadly in the conversations and search and other potential areas.

Okay. I got it. And so, my last question is, do most of your deals now include the voice and messaging analytics?

This is Mike. So, in terms of voice, and just the communications via the conversations that are coming through phone calls, that is the substance of majority of our conversation volumes today. As you know, we ingested and acquired a technology that enabled us into the texting space a number of years back, that is one of the opportunities that we actually see as propelling us to accelerate our opportunity in 2021. It's still a small portion of our overall conversation volume. But we do see that as an accelerant and part of our opportunity for a meaningful growth.

Okay. Thank you.

And just to add one thing, the combination of voice and text as the foundational capabilities with multi-channel as Mike hit on is -- with these existing customers and new it's what's expanding that opportunity set, when you look at, moving to broader conversations and broader applicability, and opening up new volumes for us with a lot of these customers that translates to the growth opportunity. So, the combination of voice and text as part of our multi-channel sales engagement solutions is a definite catalyst when we look at new products and adoption.

Okay. Got it. Thank you.

Thank you.

There are no further questions on the telephone line. So, I'll hand the call back over to Trevor.

Thank you, Charlie. And thank you everyone for joining us for today's call. We look forward to updating you in just a few months.

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