Good afternoon. Thank you for attending today's Marchex' Second Quarter Earnings Conference Call. My name is Tamia, and I will be your moderator for today. [Operator Instructions] It is now my pleasure to pass the conference over to our host, Trevor Caldwell, Senior Vice President of Investor Relations and Strategic Initiatives. Please proceed.

Thank you, Tamia. Good afternoon, everyone, and welcome to Marchex' Business Update and Second Quarter 2022 Conference Call. Joining us today are Michael Arends and Russell Horowitz, our co-CEOs. Before we get started, I would 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 or 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. Earnings press release is also available on the Investor Relations section of our website. At this time, I'd like to turn the call over to Mike Arends.

Thank you, Trevor, and good afternoon, everyone. Thank you for joining us today. Despite the fluid macroeconomic environment in the second quarter of 2022, we continue to see growth in existing customer relationships and validation our focus on building products that address critical needs for our customers. Right now, businesses are seeking to navigate and ultimately thrive in a climate with economic challenges and uncertainty. And we know how to help them. Our customers' ongoing commitment to us and our growing suite of conversation intelligence capabilities created an opportunity in the second quarter to expand some of our largest relationships. We consistently hear feedback from our customers that our dedication to innovation is what differentiates Marchex from others in the market, and we are seeing that reflected in our sales progress. We are expanding relationships with Fortune 500 customers as they uncover what Marchex' conversational intelligence product suite can do to help them understand and react to the needs of their customers and prospects from the brand level, all the way to hundreds of thousands of customer touch points at thousands of store or franchise locations. Even though inflationary pressures, inventory issues and other factors continue to impact our customers' businesses, I am pleased to share that we were able to grow our customer base across multiple verticals. We are now engaged in active dialogues to expand relationships with some of our largest Fortune 500 customers, including in the auto, home services and health verticals. Having said that, challenges with inventory availability remain persistent last quarter in some of our largest verticals such as auto. Inventory was down on a year-over-year basis for many of our customers, and as a result, there were fewer cars available to sell, which impacts conversation volumes. I want to take a moment here and…

Thank you, Mike. Today, we see significant long-term opportunity in Marchex' ability to disrupt the siloed sales and marketing funnels for enterprises to create better buying and also customer service experiences. Over the past 2 years, we methodically focused on building a suite of software products that has fundamentally altered the way businesses can reach and interact with consumers. And as Mike mentioned, transform marketing, sales and customer engagement. We have seen the impacts in our customers' businesses and it's what motivates us to keep building the product capabilities needed. While we're pleased with the progress we're making in our overall market opportunity, as a management team, we're mindful of the changing economic dynamics of the world in certain industries. We've been through economic cycles before and manage our business prudently for many years. Today, our business is diversified and has a strong balance sheet with a financial profile that enables us to invest aggressively as a market leader in conversational intelligence. Our base of large enterprise customers, including some of the largest Fortune 500 brands are leaning into Marchex to solve their critical business challenges. Marchex solutions can be both cost cutting and revenue growth drivers for enterprises as they seek to leverage the benefits of our conversational intelligence products. Based on our expanding customer relationships and points of impact and opportunity, we believe Marchex is well positioned for the future in a variety of scenarios. We feel good about how Marchex is situated to take advantage of this market, and we can continue pursuing this while also maintaining our financial discipline. And with that, I will hand the call back to Mike.

Thank you, Russ. Our second quarter of 2022 results saw modest growth from the first quarter of 2022. This was a slight decline from the second quarter of 2021 as overall, there continues to be influenced from macroeconomic factors caused by pandemic and global events, which are suppressing overall conversation volumes. More specifically, on a year-over-year basis, our volumes in several verticals continue to be impacted by pandemic and geopolitical-related shifts, which are suppressing inventory levels causing continued supply chain disruptions, limiting parts availability and creating inflationary pricing pressures. As we have previously communicated, these factors may take time to unwind even as we grow, add new customers and scale a number of our existing relationships in some of our largest verticals. On a sequential basis, we did see some modest increases, largely due to the expansion of relationships with some of our largest Fortune 500 customers, and we did see some progress in adding new customer relationships across multiple verticals. We believe that over the remainder of this year, we will continue to make progress through our momentum and sales wins with new customers in verticals such as health care, home services and an ongoing relationship expansion with several big customers. Looking more closely at the second quarter of 2022. As the quarter progressed, we saw a modest uptick from January 2022 levels. But due to the factors outlined, we did not see the robust conversation volume growth that we saw last year during the second quarter when the economy rapidly expanded coming out of the first pandemic wave. However, looking at the more favorable takeaways from the quarter, we continue to see consistent traction with new product sell-through to new and existing customers. Our long-term customer and prospect pipeline is growing, and we believe it has an opportunity…

[Operator Instructions] The first question comes from the line of Mike Latimore with Northland Securities.

This is [Logan Hannan] speaking for Mike Latimore. And then we got 3 questions for you guys on this call today. And the first one is how has the auto sector began to improve from low related supply chain near the end of Q2, at beginning of Q3?

Thanks, Logan, it's Russ. Yes. On the auto front, what we've seen is these inventory issues or lack of available inventory has impacted conversation volumes. The inventory is just not there to fully support the consumer demand. And so that has been a factor. We talked about it as part of kind of the broader macroeconomic headwinds. And auto for us is our biggest vertical when you've got auto OEMs and auto services. Where we're really optimistic is kind of beyond the moment. We continue to see a successful expansion of relationships with our existing customers, and we've also continued to add new ones, both on the OEM side and on the dealer side and get deeper adoption of a variety of our products. And so that's been a positive trend. But the inventory issues are suppressing conversation volumes. But when we look at the customer product progress beyond your question relative to kind of Q2 and the Q3, we do think these are good pulse metrics of ultimately what's possible when things normalize. So we think we've done a lot of the work that sets the stage for us to see growth and opportunity when the environment normalizes and some of these supply chain issues start to [thaw].

Perfect. And then should gross margins, should we expect them to be stable for the rest of the year?

Thanks, Logan. This is Mike. At this point, yes, we think that our service costs or cost of sales from that perspective has been improved in the last year, in the last 2 years, in large part because of our technology infrastructure efforts. And we see that condition or the benefit that we've been able to obtain from that during the very recent months continuing throughout the rest of the calendar 2022 year. Additionally, if we see room for opportunity for growth, particularly if we look out into 2023 and beyond, the way our technology infrastructure has been set up now with cloud-based environment, we should actually look forward to some operating leverage and some margin expansion in that arena.

Okay. Perfect. And then what is the head count actuarially? And where do you guys expect that might go towards the end of the year -- by year-end?

Thanks, Logan. It's been fairly consistent with how we've been operating over the course of the last year and a little bit or so. It's a little over 200 FTEs, full-time equivalents. We do use some key members in some jurisdictions from a contracting perspective here across the U.S. and Canada. And those team members from an FTE perspective, would round you up to a little north of 250 total.

The next question comes from Darren Aftahi with ROTH Capital Partners.

This is Austin on for Darren. I just have a few for you. First, I mean, you guys already touched on kind of auto industry, and it sounds like that may be a bit of a laggard at least for a couple of more quarters until we can start seeing some inventory upswing. But aside from that, I'm more curious on what level of resiliency you kind of see, given the economic backdrop with some of the other verticals you operate in, like health care and home services and so forth.

Thanks, Austin. It's Russ. I mean you really hit on our core largest verticals. Obviously, we've got a variety of verticals that we see as significant opportunities. But if you had on auto, home services and health care, those are clearly 3 of them. And you do see some supply chain challenges also with home services, just given the nature of the seasonality and what's going on. But when you look beyond the moment and you look at our customer footprint, similar to auto and expansion opportunities, we do view it as a catalyst for growth acceleration going forward. Health care. We've had some key relationships where we've also seen some expansion. So similar thing to what I said before talking about our observations on auto. We feel like we've done the work to develop the right products to solve kind of key pain points for customers. We feel like they've recognized that, they've been leaning in to adopt those. And really, the key element behind that is do they have the inventory and availability and capacity to support the consumer demand. And so as that improves, we think we're well positioned to see that last step be growth and flow-through.

Got it. I appreciate that. Second question. You guys have done a very good job at implementing some of these cost controls. I'm just curious how that kind of plays into launching new products and whether there are any major expenditures associated with launching these new products that could deviate away from kind of expected OpEx levels.

Thanks, Austin. This is Mike. We have invested significantly over the course of the last 2.5 years, even during the COVID environment in development, research initiatives. And a lot of this is stemmed off of some of the customer framework. We're giving feedback from the customers and routing that into our product road map has translated into a variety of new initiatives that has led to some of the things that we've been fortunate to win some of the awards for here more recently. Those innovations are not done. They're continuing. And I think anytime you're in the development arena, obviously, you're ripe for the potential for upset. But just the program that we've developed, the technology infrastructure and the move to the cloud-based systems. We do feel that there's tangibility to some of the initiatives, especially in the road map over the next 12 to 18 months, and that we can manage through that productively to actually produce results in the product and update it in the way that we see fit with those innovations and bring to market the things in a reasonably credible fiscal responsible manner as part of at least what we see in the near and the intermediate term. So long term, obviously, development is always a risky endeavor, and that's part of the prowess of the opportunity. But certainly in the near and the intermediate term, we feel pretty good about just the discipline we have with the product road map that's out there and what we have slated from a financial perspective in terms of outlay for that.

Got it. I appreciate that. And then just last one for me. Just curious aside from the major verticals of health care, home services, autos, are there any other verticals you guys are tapping into that you're starting to see traction with that could be pretty notable moving forward?

Yes. Real estate is a vertical that continues to be important for us. It is a variety -- this is kind of beyond the vertical, but texting continues to be a catalyst across a number of verticals, when you look at the combination of voice and text. So those are just a couple of tidbits. Health care, I mentioned -- you mentioned beyond kind of auto and home services. And even within auto, we talk a lot about the OEMs. But auto services, we think, is a significant opportunity in its own right.

Got it. Great. Well, I appreciate that. Congrats again on the quarter.

Thank you.

There are no further questions in the queue. So I will pass it back to the management team for closing remarks.

Great. This is Russ. Just to give you some -- just to share some closing thoughts. To put emphasis, the trend toward conversational intelligence, it's real, it's meaningful, and it's a recurring theme among our largest customers. Businesses want to use technology to improve the consumer path to purchase. And this will be a major theme when we look out over the next several years. We think we've really got the proof points around that. Marchex is well positioned by virtue of the investment we made in the strategic aspects of our business. We've hit on a lot of those details today, and those are recurring themes from our new cloud-based technology platform, to expanding the product suite to help businesses leverage conversational intelligent software to really drive growth and also for the opportunity to save as well. Given the customer progress we've made with both relationship expansion and adding new customers, we believe Marchex can be successful as we look to the future, regardless of economic outlook. Our products continue to be recognized as best-in-class. And we really believe that with normalization in any of our key verticals like auto, this could be a further catalyst for growth acceleration in our business. And obviously, we look forward to when this happens as well. So we really want to thank you all for participating in the call and continuing to be involved with us. And look forward to updating you as we go forward as well. Thank you.

Thank you, everyone.

This concludes the Marchex' Second Quarter Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.