Marchex Inc's CEO Discusses Q4 2013 Results - Earnings Conference Call

Feb.19.14 | About: Marchex, Inc. (MCHX)

Marchex Inc (NASDAQ:MCHX)

Q4 2013 Results Earnings Conference Call

February 19, 2014 /5:00 P.M. E.T.

Executives

Ethan Caldwell – General Counsel, CAO, Corporate Secretary

Russell Horowitz – CEO, Chairman

Mike Arends – CFO

Analysts

Mark Zgutowicz – Northland Capital Markets

Andre Sequin – RBC Capital Markets

John Campbell – Stephens Inc.

Operator

Good afternoon. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Marchex Fourth Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions) I would now like to turn the conference over to Ethan Caldwell, General Counsel. Sir, you may begin your conference.

Ethan Caldwell

Thank you. Good afternoon, everyone, and welcome to Marchex's business update and Fourth Quarter 2013 conference call. Joining us today are Russell Horowitz, Chairman and Chief Executive Officer, Peter Christothoulou, President, and Michael Arends, Chief Financial Officer. During the course of this conference call, we will make forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical fact, included on this call regarding our strategy, future operations, future financial position, future revenues, and other financial guidance, acquisitions, projected costs, prospects, plans and objectives of Management are forward-looking statements. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions, and expectations disclosed in the forward-looking statements we make. There are a number of important factors that could cause Marchex's actual results to differ materially from those indicated by such forward-looking centers as are described in the risk factor section of our most recent periodic report and registration statement filed with the Securities and Exchange Commission.

All of the information provided on this call is as of today's date and we undertake no duty to update the information provided herein. During the course of this conference call, we will also reference certain non-GAAP measures of financial performance and liquidity. A reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is contained in today's earnings release, which is available on the Investor Relations section of our website. Definitions of these measures as used by and the reasons why we believe these measures provide useful information are also contained in today's earnings release. At this time, I'd like to turn the call over to Russell Horowitz.

Russell Horowitz

Thank you, Ethan. Thank you, everyone, for joining today's conference call. Marchex had a strong fourth quarter and delivered our third consecutive quarter of more than 20% year-over-year revenue growth. Over the past several months, we've seen greater advertiser demand for our call-driven products and services. This demand has made it increasingly clear that advertisers going after mobile consumer need something from us that they're not getting anywhere else. What they need boils down to one word: performance. Marchex is on the cusp of a seed change in the advertising industry.

Advertisers who may have had success in online advertising now need their budgets to measure against real consumer outcomes in mobile. They need performance. This need has created a new and emerging market that we bet on years ago; a market that values phone calls as the ultimate connection and vehicle for businesses to acquire new customers. The mass (inaudible) in mobile means there's now a telephone in everybody's hand. As a result, consumer to business calls are accelerating at a rate faster than ever before. Calls are a multi-billion dollar global market sought after by businesses of all sizes, from large multi-nationals to small local businesses. In fact, media research firm BIA/Kelsey found that, in the US alone, businesses spend $68 billion annually on media to drive calls as outcome.

We believe the international opportunity may be just as big. BIA/Kelsey also forecast that the primary consumer response to a mobile ad will be a phone call. They estimate that by 2015, consumers searching on mobile phones will generate 50 billion calls. Given the proliferation of sources consumers use to seek out business information, put to social media and maps just to name a few, believe total number will be even larger. The mass adoption of smartphones has also completely changed the advertising measurement game. That's because the mobile channel is vastly different from desktop and has unique challenges in understanding the conversion pipeline. On a mobile phone, a call, not a click, is the most likely consumer action from a search.

This creates new set of questions and opportunities. For example, how does an advertiser know how many calls are driven from mobile ads when desktop measurement technologies no longer apply? How can an advertiser determine if calls are new leads or simply customer service calls? In mobile, advertisers also want the same level of insight as they've had in other channels, but they now need to account for variety of new issues to understand actual performance and how to optimize in this channel. These are just a sampling of the barriers advertisers are up against in mobile. Barriers that our technology solves for. Our call analytics platform, which has been the focus of our technical investment for more than four years, is designed specifically to address the complex challenges of attribution, targeting, spam, and ad optimization.

We're able to measure consumer to business conversations at a [de-strategic] level. These insights allow advertisers to drive calls that produce consumer outcomes with high return. Our call analytics gives us the power to make mobile advertising work. In recent months, we released two new products to our platform: Call DNA and Dynamic Tracking. Both products significantly lower customer acquisition costs for advertisers by providing insights on which calls convert into sales. Call DNA, in particular, helps advertisers understand the quality of a call in realtime and distills the dialogue between the customer and the call center. This is especially important given the growing number of national advertisers funneling money back into their call centers; an investment that directly corresponds to the increase in calls coming from mobile advertising.

Even companies that spent the last decade discouraging customers from calling and trying to drive them to web forms are evolving their strategy based on this trend. Companies are recognizing that, in this emerging mobile world, live phone-based connections are the most important lead form in their reinvesting in their call centers. Clearly, Marchex is well-positioned to lead in this market of driving quality phone calls in a mobile environment and our metrics prove it. In 2013, our Call Marketplace and Call Analytics products facilitated and measured more than 300 million conversations. This scale gives Marchex a vibrant feedback loop that allows us to share insights with advertisers and develop new products as the market grows. We are deeply invested in fighting spam and its detrimental impact on businesses. Our clean call technology instantly blocks call spam from connecting with advertisers. In fact, we recently released data showing that US small businesses lose nearly $0.5 billion a year in productivity handling unwanted calls from telemarketers, robocallers, and other spam dialers.

In 2013, we blocked about 40 million spam calls to local advertisers, saving them valuable time and money. We're building intellectual property on these products and others and we have more than 30 patents issued or pending. We're solving problems that others haven't begun think about at every stage of the conversion pipeline. Recognizing that we're very early in the market adoption cycle, we're focused first and foremost on growing existing customers and winning new ones while demonstrating the value and strategic benefits we deliver. In 2013, our business gained significant momentum as we expanded our advertiser footprint with many of our advertisers embracing mobile performance advertising for the first time.

Given our success for retaining advertisers and growing their budgets over the last several years, we expect the relationships we began last year to fuel our growth in 2014 and beyond. As a result of our early success, we believe Marchex can be an accelerant in the adoption of mobile and call advertising by advertisers and publishers. The opportunity is significant and we're aggressively positioning Marchex for leadership in this dynamic and emerging market. With that, I'll hand the call to Mike to discuss our fourth quarter results and our outlook for 2014.

Mike Arends

Thanks, Russ. For the fourth quarter, call-driven and other related revenues were $34.5 million. Total revenue was $38.1 million, excluding domain sales. Year-over-year quarterly call-driven revenue growth was 21%. The outperformance of our call advertising products, combined with a number of new advertisers added over the course of 2013 led to our continued strong growth. Given our traction with our mobile call advertising products, we continue to invest in product development and in building our teams. Over time, we believe we can capture additional efficiencies and increase margins in these products, as we gain additional scale. For the fourth quarter, including domain sales, Archeo revenue was $5.3 million.

Domain sales were $1.6 million during the quarter. Total operating costs were $35.4 million for the fourth quarter of 2013. This total reflects continuing operating costs and excludes stock-based compensation, separation costs, amortization of intangible assets and domain sale costs. Sales and marketing costs excluding stock-based compensation were $2.7 million. In the near-term, we expect our marketing expense may modestly increase from current levels in support of continued growth of our sales and customer support teams. Excluding domain name sales, adjusted operating income before amortization from continuing operations for the fourth quarter was $2.7 million. Adjusted EBITDA was $3.7 million excluding these items.

GAAP net income from continuing operations was $597,000 for the fourth quarter of 2013 or $0.02 per diluted share. This compares to a GAAP net loss from continuing operations of $33.5 million for the same period of 2012 or $1 per diluted share. Excluding domain name sales, adjusted non-GAAP income per share from continuing operations, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.04 per share. During the fourth quarter, we generated $6.1 million in operating cash flow and had more than $30 million in cash on hand as of December 31, 2013. Now, turning to our initial outlook for 2014 and the first quarter. Before we begin, I'd like to note our business is being driven by our call-driven products and our investments are centered on maximizing market adoption. Given the relative contribution of our call-driven products and magnitude of our opportunity, we believe focusing on call-driven revenues and profitability measures is the most appropriate way to communicate our business progress and guidance going forward.

Given this and the variability inherent in Archeo and domain sales, we are not providing financial guidance on any Archeo operating results today. Archeo operating results would be incremental and additive to our call-driven revenue, profitability, and other measures provided in our guidance. Looking first at our call-driven revenue guidance for 2014, for the year, we expect call-driven revenue to grow to $162 million or more, which represents more than 20% growth over 2013. Additionally, for the first quarter of 2014, we anticipate call-driven revenue of $40 million or more, which represents approximately 30% growth over the first quarter of 2013. We are focused on maximizing client adoption and product innovation. In many cases, we are still seeding the market in some of the most valuable verticals such as insurance, home services, professional services, travel, and many others to help accelerate adoption of performance-based call advertising. Our progress in bringing in new advertisers throughout 2013, as well as the continued outperformance of our call advertising products, relative to other options for advertisers, helped us make significant progress during the 2014 advertiser budget planning season.

While advertiser budgets can change and we can experience period-to-period variability based on a variety of factors, we are excited about the ongoing progress we are making in our business. Next, looking at call-driven adjusted OIBA and EBITDA margins: for 2014, we are projecting $7.5 million or more in call-driven adjusted operating income before amortization and $11.5 million or more in call-driven adjusted EBITDA. These amounts exclude any contribution from the Archeo assets and domain sales. This initial guidance implies year-over-year call-driven adjusted OIBA growth of near 20%. This approach reflects fully burdened call-driven results under a standalone model. For the first quarter, we anticipate a range of $1 million to $2 million in call-driven adjusted operating income before amortization and a range of $2 million to $3 million in call-driven adjusted EBITDA. It is worth noting that there are many adjustments, including compensation and personnel-related items and certain professional fees, that flow through disproportionately in the first half of the year versus the second half.

We made significant progress with our customers and our products in 2013. A key area of focus for us is to continue to invest in building our technology and support our partners as they expand their footprint with us in 2014. We are highly focused on capitalizing on our early mover advantage and performance-based call advertising and we will continue to invest to support our growth opportunity. While we believe there is significant margin leverage in our business over the long-term, we are focused on becoming leaders in this emerging market and supporting the momentum in our business in the near-term. With that, I'll hand the call back to Russ.

Russell Horowitz

Thanks, Mike. We believe that calls are the currency of mobile advertising. The advertising technology companies that will win in mobile will understand calls better than anyone else. Given our investments over the last several years and the significant progress we made in 2013 and so far in 2014, we believe Marchex is uniquely positioned for leadership in this emerging market. I want to thank our employees for their hard work and dedication. We look forward to updating you again soon. With that, I'll hand the call back to the operator for Q &A.

Questions-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Mark Zgutowicz from Northland Capital Markets.

Mark Zgutowicz – Northland Capital Markets

Good evening, guys. Nice results. I'm curious – you've got, obviously, a pretty big sequential uptick in Q1. Just curious if you could maybe talk about what's driving that? Maybe quantifying how much Call DNA and Dynamic Tracking is contributing to the pipeline. Broadly speaking, as you now, I guess are seeing some pretty good national business across some key clients, what's your visibility today across your call-driven revenue relative to a year ago? How do you see that visibility trending over the next year? Thanks.

Russell Horowitz

Good questions. When we look at how we really see growth driven, there's three layers to it. One is, those advertisers and clients with whom we built a certain level of strategic trust and scale and how those grow and the incremental budget we get from them is, call it, layer one. The second are customers we won over the previous year where we've been able to perform and show the differential value that we can drive for them and reaching that point of institutional adoption, which translates, again, to increased commitments as well. The third is, new customers who we bring onboard who, as we perform, can increase and allocate us more budget as we work through the year. We look out what's happening in Q1, as we come through the late part of any given year, like we did in 2013, we reach a place that we work with our key strategic partners on their planning for the perspective budget cycles.

As part of that and as a byproduct of the performance and importance we've gained with our clients, we just saw significant increase in their contributions in terms of budgets to Marchex. Across all three buckets right now, we see very favorable trends which is leading to accelerating growth and we think carry through. To hit on your second question, the combination or the byproduct of that process also is to increase our visibility into the business performance in our outlook. Our business is, call it, 50% driven through resellers to small business and 50% growing with direct national customers. We have a lot of visibility as it relates to supporting small businesses to resellers. As we work through those cycles with those national advertisers, we've seen visibility increase and think that trend continues as we go forward.

Mark Zgutowicz – Northland Capital Markets

Great. That's very helpful. Appreciate that. Mike, on the expense side, you touch on a little bit, but in terms of investment, is that mostly front-end loaded or is there some linearity there in the R&D and sales and marketing side of things?

Mike Arends

Let's start with the sales and marketing. We do think there's going to be a little bit of uptick in the sales of marketing from a modest perspective over the course of the year, but a lot of this has to do with – it looks like the adoption is accelerating. It looks like our growth rates are accelerating. From that standpoint, we're trying to invest along with that to make sure that we can take advantage of the opportunity because it's still in the very early stages of the opportunity. That goes hand-in-hand with the product development side of this stage of the equation as well. We're definitely out there looking to continue to further all of those product innovation initiatives.

Mark Zgutowicz – Northland Capital Markets

Okay. And then on the R&D side?

Mike Arends

On the engineering components, think about those from our product enhancements as well as some of the innovations that we have. We think those are also going to be scaled over the course of the year. Whether they're linear or not, I think that's a large part of just we onboard folks and the timing of when we can bring folks on to the team. There may be steps that may be linear, but over the course of the year, I think there's definitely a buildup in that absolute dollar equation. A lot of this is still absolutely focused on driving the acceleration of the revenue opportunity that we see in front of us right now.

Mark Zgutowicz – Northland Capital Markets

Okay. Super. Thanks, guys. Appreciate it.

Operator

And our next question is from the line of Andre Sequin of RBC Capital Markets.

Andre Sequin – RBC Capital Markets

Thanks for taking my question. To follow a little on the previous question, we've talked a lot over the last few months about how, in the most recent budgeting cycle, you were finally invited to the table for the first time with several customers. Maybe you can comment on any takeaways from that? Secondly, you've been pretty actively launching new, call it, analytic product. How should we be thinking about how and also when those new products will be impacting your results? Thanks.

Russell Horowitz

Thanks, Andre. Good questions. I'll hit on the second one first, as it relates to new products. For us, I call it the theme as an opportunity to really deepen the value that we can deliver and differentiate, really our value proposition. For advertisers who are looking at mobile and understanding at this point, it's a must-have as it relates to customer acquisition strategies. We look at Call DNA and Dynamic Tracking and Clean Call. These are important products that enhance and create a deeper wider moat around the lead and advantage we've created so far and really reinforce our ability to drive performance in mobile for these very large-scale sophisticated clients.

As we launch these products and as we talk about this functionality, think about it through that lens knowing that this is what helps us become institutionalized with these customers, which translates there to bigger commitments kind of on a perspective basis. When we look at our process of going through the budget cycles, we're just at a place where mobile's crossing the tipping point. Most folks talk about it as being one-third or more of their traffic. You obviously have a whole new world or ecosystem when you think about mobile and increased fragmentation. For advertisers, it's very complex.

The technology's needed to effectively and strategically approach it through customer acquisition is something new to them. This year, the depth of conversations we had as part of that budgeting cycle really translated, as I've characterized it, as a must-have. The simple scale of consumers in this channel and our ability to go access perspective customers in the markets they serve looking for what they offer is unique. The combination of those factors is what's really served as catalyst for the increased commitments.

Andre Sequin – RBC Capital Markets

Okay. Great. Thanks. Nice quarter, guys.

Russel Horowitz

Thanks.

Operator

And your next question comes from Jean Munster [ph] with Piper Jaffray. I’m sorry that question was withdrawn. Your next question comes from the line of John Campbell with Stephens Inc.

John Campbell – Stephens Inc.

Congrats on the great quarter and impressive guide. Can you guys just give us a quick update on agency front? Mainly just how much of that, if any, is factored into the 2014 guidance? In general, are you guys allocating a lot of capital and headcount towards further building that out in 2014?

Russell Horowitz

We think about our strategy with large national enterprises, those direct relationships and places where we support them through their agencies, right now, we think deeper penetration to agencies is a catalyst. While we factored some contribution from that, real strategic penetration is a source of upside from where we sit today. Some months back, we added Clark Kokich onboard as our Chief Strategy Officer. He, obviously, is one of the most experienced and respected people in that field. Him coming onboard has really been a catalyst for us to deepen those conversations and hopefully unlock some of the opportunity that exists there. Today, again, we've got deep relationships with a lot of the key world class digital agencies, but we think plenty of upside as we continue to penetrate those relationships.

John Campbell – Stephens Inc.

Okay. Great. First, how have call volumes turned over the last several quarters as you think about a same-client or a same-store basis? Second, how are the conversion rates looking at those same customers, same calls? How have the conversion rates trended over time?

Mike Arends

This is Mike. Thanks for the question. It's a very good one. On the first one, it's very much a volume-based equation. As the revenues have moved ahead, it's not pricing that's changed, it's very much volume and increases from that perspective. In large part, that's directly in correlation to conversion rates. Even with higher spends, the return on investment on the conversion rates that are playing through there are translating consistency and healthy return on investment rates relative to other media spend areas. Our technology is driving the insights in terms of providing greater performance than some of those other media spend areas. Those insights are what are translating into the advertisers building trust with us and expanding their budgets.

John Campbell – Stephens Inc.

Okay. Great. Thanks for taking our questions, guys.

Operator

We have no further questions in queue at this time. I would like to turn the call back over to our presenters.

Russell Horowitz

We appreciate your participation on the call. We look forward to updating you as we make progress through the year. Thanks, again.

Operator

Thank you. This does conclude today's conference call. You may now disconnect.

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