Marchex's (MCHX) Management on Q3 2017 Results - Earnings Call Transcript

Marchex, Inc. (NASDAQ:MCHX) Q3 2017 Earnings Conference Call November 2, 2017 5:00 PM ET

Executives

Ethan Caldwell – General Counsel

Mike Arends – Chief Financial Officer

Russell Horowitz – Executive Director

Analysts

Blake Anderson – Stephens

Dillon Heslin – Roth Capital

Operator

Good day. My name is Skinner, and I will be your conference operator. At this time, I would like to welcome everyone to the Marchex Third Quarter Conference Call. [Operator Instructions]

I’d now like to turn the call over to Mike Arends, General Counsel. You may begin your conference, sir.

Ethan Caldwell

Thanks. This is Ethan Caldwell, General Counsel. Good afternoon, everyone, and welcome to Marchex’s business update and third quarter 2017 conference call. Joining us today are Michael Arends and Russell Horowitz.

Before we get started, I’d like to take this opportunity to remind you that our remarks today will include forward-looking statements, including with respect 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 or quarterly report filed with the Securities and Exchange Commission. 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 marchex.com.

At this time, I’d like to turn the call over to our Chief Financial Officer, Mike Arends.

Mike Arends

Thank you, Ethan. Good afternoon, and thank you, everyone, for joining us today. During the third quarter, we continue to make overall progress while developing new opportunities to reopen the door for long-term growth. This progress is a result of our relentless focus on our customers. Marchex is highly focused on making marketers successful in today’s fast changing, digital advertising landscape. We help businesses drive more calls, understand what happens on those calls and most importantly, we help them convert those calls into customers.

Businesses have come to rely on our call intelligence to deeply understand their most important customers. In fact, we are now on a more stable path because more and more marketers are recognizing the value of what we provide, which is a 360-degree insights that boost the return on their investment and provide actionable intelligence for some of the largest brands in the U.S. And increasingly, they want more of it. As a result, we’re making strategic investments to expand our suite of analytics products.

We’re also implementing internal changes, such as adding sales support to our Call Marketplace, a product area that has been underserved in the past. Our goal is to enhance relationships with existing customers through deeper integrations while cultivating opportunities with new ones.

I’d like to also talk for a moment about our product progress, specifically in our Call and Speech Analytics product areas. In less than one year, we have dramatically expanded our product portfolio and launched five new products. The technology we have now gives marketers a breadth of insights on how their media spend should be allocated across social, site, display, video and search.

We’ve also released unique new Speech Analytics capabilities, built off of our own proprietary system that can deliver an array of critical operating insights. For example, we now have a lost opportunities dashboard for our customers. Users can see via steaming visual map that constantly analyzes and interprets data, the number of incoming calls, certain quantifiable metrics associated with each call, and how often a call was abandoned or sent to voice mail. It can even track agent sales scripts and create searchable transcripts. This information allows marketers to quickly understand how to improve and capture leads. It also shows them how much money they’re losing by not making these adjustments.

Furthermore, our Speech Analytics product can now accept user input on artificial intelligence predicted outcomes. The direct in-app feedback from customers will allow Marchex to continually improve the overall accuracy of our speech recognition technology as we continue to on board new customers. These types of innovations have already led to meaningful improvements and expanded the capabilities of our Speech Analytics product despite been in the market for only a few months.

In addition to our exciting Speech Analytics innovations and product expansion, we’ve released new audience targeting capabilities that measurably boost the number of high-quality leads to businesses. With an expanding proprietary data sets, we expect our audience capabilities will similarly expand over time. Together, our new products are helping us create an industry-leading conversational analytics platform to serve marketers of all types, and we continue to focus on further opportunities to innovate and differentiate ourselves.

Now why is call intelligence so important? Because more than $100 billion calls are forecast to reach U.S. businesses this year, and there has never been a more critical time for businesses of all sizes to better understand how to handle their customers over the phone. Customers that call businesses are often a brand’s most valuable and engaged customers. They can work faster and they’re more loyal.

Furthermore, when businesses handle customers over the phone with the proper care and attention, they spend more money and keep coming back. Our data shows this is true across all verticals, but it’s especially true in the multibillion-dollar auto industry, which is a high priority for us and where we see numerous opportunities.

Recently, we took a deep dive into our auto data set and analyzed more than $8 million calls made to some of the largest brands in the U.S. Nearly 20% of all calls went unanswered or were abandoned. Our researchers found that auto dealers lost nearly $1.6 million sales opportunities in the first half of the year alone. This represents a significant amount of potential lost revenue. Marchex can and is now working with some of the largest auto manufacturers to help them understand and address this challenge. Insights like these translates into leads for our sales force. And already, this year, we’ve seen a growing pipeline of trials with new customers. We’ve added more than 30 new clients year-to-date, and we’re currently engaged in more than 5 trials with new potential customers across our broadened product suite. Our Speech Analytics product is getting positive feedback and early adoption.

With that, I’ll turn the call over to Russ.

Russell Horowitz

Thanks, Mike. As Mike mentioned, we’ve accelerated our product innovation and revitalized our sales and customer efforts across the organization. We’ve also remained financially disciplined while continuing to invest to support our customer’s success. This has not been an easy process, nor is our job complete.

We made significant strides to optimize our cost structure to support our current revenue levels. Each of our product areas had unique operating characteristics. We’re thoroughly evaluating each one and we’re focused on expanding where we can win and pulling back in places with longer payout windows that don’t make physical sense for us right now.

As a result, we’ve concentrated our investment in areas where we have customer momentum and product differentiation. This focus and discipline has enabled us to return to a positive cash generating company for the second quarter in a row, and puts us in a position to capitalize on the opportunities in front of us now.

The growing balance sheet empowers us to better support our customers and think strategically, which in turn, can fuel our long-term growth through both internal and external strategic initiatives. As we make progress in our business, we’re still working through our strategic review in evaluating all of these initiatives, which could include acquisitions, as well as options related to a potential partial return of capital to shareholders. This is an area we’re refocused on making progress on in the near term.

Although, there’s still work to be done, and we’re in the midst of budget season for many of our current advertisers, we are focused on improving our financials, gaining greater clarity, making strides to stabilize the business and seeding opportunities to return to growth.

And with that, I’ll hand the call back to Mike.

Mike Arends

Thanks, Russ. For the third quarter, revenues were $22.1 million. We know some of you track our growth without YP, so to help models with this framework in mind, Enterprise revenue in the third quarter excluding YP was $17.5 million compared to $24 million for the third quarter of 2016. As a reminder, YP was recently acquired by Dex, and in the future, we will discuss this framework in light of that evolved customer relationship.

Also of note in the third quarter, we recognized $400,000 of revenue related to services provided and expenses incurred in prior periods, which we do not anticipate to be recurring. On a year-over-year basis, the third quarter revenues without YP were primarily influenced by a decrease in budgets from customers who were the subject of acquisitions and from trends with a limited number of Call Marketplace customers mentioned in prior calls. Each of these are factors we expect to flow through the balance of the year.

As discussed earlier, we are starting to see some favorable impact from building a customer trial pipeline, particularly in several of our analytics products launched this year. Many of these trials are small and it will take time to determine the scope of the fully ramped relationship. While this expanding sales pipeline, along with an expanding product queue, may have a meaningful impact on our long term growth. They are not yet at a scale that is impacting our financial profile in the immediate term.

Now looking further down the P&L for the third quarter. Excluding stock-based compensation, total operating cost for the third quarter were $21.8 million. Service costs were $11.8 million, down from $18.3 million in the third quarter of 2016. Sales and marketing and product development costs were $3.3 million and $4.1 million, respectively, which were down year-over-year.

Moving to probability measures, adjusted operating income before amortization for the third quarter was $286,000. Adjusted EBITDA was $1.1 million. GAAP net loss was $811,000 for the third quarter of 2017 or $0.02 per diluted share, compared to GAAP net loss of $5.9 million or $0.14 per diluted share for the same period of 2016. Adjusted non-GAAP income per share was 0 cents per share, which compared to a loss of $0.06 for the third quarter in 2016. We ended the third quarter with over $104 million in cash on hand.

Now turning to our outlook for the fourth quarter. First, let’s discuss revenue. For the fourth quarter, we expect revenue of $21 million or more. In addition, during the fourth quarter, we may recognize over $500,000 related to an analytics customers we piloted in prior periods. If we do, we expect the $500,000 to be incremental to our revenue guidance and to represent likely conversion of that customer into $1 million-plus annual analytics relationship going forward.

We’re encouraged by the growing customer pipeline, particularly with our analytics products. Many of the new products we’ve launched this year are contributing to our sales initiatives and while many of the new potential customers are in trials, we believe we’re making progress. While it is too early to comment on the scope of potentially fully ramped relationships from many of the new larger brands we’re engaging, we’re increasingly confident that we’re making progress in our initiatives to stabilize the business, while laying out foundation for long-term growth.

Next, looking at adjusted OIBA and EBITDA. For the fourth quarter, we’re forecasting adjusted OIBA to be a loss of $500,000 or better. Consistent with prior years, it is worth noting that there are adjustments including compensation, personnel related items and certain professional fleet fees that flow through disproportionally in the first half of the year compared to the second half, and, in particularly, the fourth quarter.

For adjusted EBITDA, we’re forecasting a positive $500,000 or better and another quarter of positive operating cash generation.

Our initiatives this year to align our investments and cost structure with our current revenue levels continue to pay off in the third quarter. We expect these initiatives can also put us into a position so that our future growth can drive greater operating leverage. We’re highly focused on returning Marchex to growth over time. As we see traction from sales and marketing initiatives, to grow our customer base and scale some of the customers we’re currently piloting with, we believe we’re putting the pieces together to reopen the door to long-term growth.

Thank you to all of our employees for your hard work and for your continuing to focus on our customers’ needs. And with that, I would like to hand the call back to the operator to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Brett Huff from Stephens.

Blake Anderson

This is Blake on for Brett. For the customer that I think you said potentially could contribute $0.5 million in the 4Q for analytics and then that can turn to $1 million-plus contract. How long were they in pilot? And then, what products are they using for you to get that estimate of $1 million-plus?

Mike Arends

So Blake, this is Mike. Thanks for the question. We’ve had a pilot with them for in excess of six months at this point in time. We’ve been working with them with a bunch of the different suite of products that we have on analytics side of the equation. So it includes some of the basic Call Analytics and include some of the speech components as well as some of the overall omni channel aspects. And It’s almost a full incorporation of all those different new products that we’ve introduced, plus some of the legacy analytics products. And yes, we are hopeful that it’ll end up converting into a long-term relationship that’s more than $1 million annually.

Blake Anderson

Okay. That’s good to hear. And then, you mentioned adding 30 clients year-to-date. Can you talk about, may be, how many of those are generating revenue versus still in just pilots? And then any potential for those to be in a situation like the one you just talked about?

Mike Arends

Absolutely. So in terms of the 30, for most part those are all customer that we’ve consummated as well as on-boarded and are actually revenue-generating. Incremental to those 30, we have another 5 that are in trial mode right now primarily with our analytics products. And I would say, obviously, not all 30 are Fortune 500 enterprise-type customers, but there is more than a handful and all of those ones that are more than a handful, we think there is good opportunity for not just tens of thousands, hopefully at least hundreds of thousands of annualized relationship, and a few of those million or multimillion-dollar relationships. And that would go the same, included in to the product trials that we’re working on today. Especially as we can expand into more of the total suite of products that we have as offerings. Hopefully we can get into those kind of customer relationships being hundreds of thousands on an annualized basis, if not $1 million-plus relationships.

Blake Anderson

All right. And then you talked about the analytics products, I know at least eventually having higher contribution margins. With those margins be at that higher, I think you called it maybe 60% level, would they be that high in the initial go-live phase? Or would those take a while to ramp to get that high?

Mike Arends

It’s a good question. I think any time we’re in an on-boarding situation with a brand-new product, there’s probably some effort in terms of people and resources as well as just the functionality of the product, to tweak things, to make sure that we’re aligned with the customer. And so maybe it may not scale on day one to that 60-plus percent range. But we do think in time, yes, that framework can live in those kinds of customer models on an ongoing basis. So it’s more a question of when we think we could scale into that kind of a model.

Blake Anderson

All right. And then, your cash levels are still pretty stable here. Do you have any plans to deploy that, may be on your new product investments or anything like that?

Russell Horowitz

This is Russ. Good question. Kind of hitting on the themes of our strategic review, we look at what our various considerations are, may include internal investment to some degree, we message – we continue to make that and consider other areas. The second is external investment. In terms of where their might be complimentary acquisitions that could continue to differentiate us and be catalyst for growth and scale. And then the others – other potential considerations around things that this company has done historically. We’ve paid dividends before, we’ve done buyback before. We’ve got assets that we think aren’t being appropriately valued today. And so, we would like to both execute our way and look at what other considerations can help that be recognized, and we want to continue to look at the actions and tactics that we can take to increase the value of those. So all of these things are in the current considerations set and we’re looking at various scenarios, some of which might be actionable in the short-term.

Blake Anderson

Okay, that’s really helpful. And then last one from me would be, any update you can give now, I think you said you might talk about this later, but to be Yellow Pages contract given their acquisition, plans on that maybe?

Russell Horowitz

When we look at the YP relationship and Dex’s acquisition of YP, this is the space that’s consolidated. And we feel that out of all the companies that may have been the acquirers of YP, Dex acquiring them is really good. It makes strategic sense, kind of independent on Marchex for Dex to consolidate YP. And our management team and executive team has a lot of history with the Dex executive and senior management teams. So we’re big believers in what Dex is doing in that space. And we think from a strategic perspective, their approach is the right one. So we’re glad to be connected with them, and we’re glad to be collaborating with them, but as it relates to the existing products and potentially other ways that we can be helpful to them on a go forward basis. So contractual elements around existing products aside, we think Dex/YP is positioned to be the winner in that space, and we think there is opportunities in that relationship overtime.

Operator

[Operator Instructions] Our next question comes from Darren Aftahi from Roth Capital.

Dillon Heslin

This is Dillon on for Dan. Related to those 5 points that are in trial with the analytics product. I was wondering if you could talk about a little bit the timeframe it may take for them to decide if they’re going to stay, like – as you mentioned the potential for that million-dollar post contract has been in pilots for like six months. Is that sort of what you expect when you get NetZero? Or just some color there and then I have a few follow ups.

Mike Arends

Dillon, this is Mike, Thanks for that question. I think, in part it depends on what specific product features that the customer is focused on. If it’s a very basic analytics type of a product, the trial could last as little as three months. In some of the other cases where the use in the implementation of whatever the set of product suites may be, and it affects different constituents at the customer, it could take as much as 9 months in the experience that we’ve had so far. So anywhere in between in that range. And then there’s sometimes in evaluation period, where we spent a little bit of time interacting with the customer to engage with questions and answers and follow-up, and just use cases of how to benefit them the most in those scenarios. Although, we’ve been in the fortunate position where, to date, almost all of the trials are in a place where we’ve actually converted them or looking positively on a go forward basis.

Dillon Heslin

And then, with that, on the same realm, when you come long-term to maybe expanding into other verticals, I think you mentioned like travel in the press release, travel from auto where it’s at now. Is that sort of - do we expect those lead times to slow down – not slowdown, but shorten a little bit since you have more – a little bit of more experience under you belt or would they still be about the same?

Mike Arends

I think if it’s within the same vertical, and again, this more customers specific, not necessarily depended on us, but more customer-specific. The more complex geographically dispersed, multiple system-oriented customer there are, the longer a trial generally takes. So I don’t necessarily see that changing for a different vertical. I do think, the more that we can get adoption within the specific vertical, there’s going to be learnings within that industry, there’s going to be more of a comfort level with some of the new products that we’ve introduced and so that may accelerate and reduce some of the timeline on the trials.

Dillon Heslin

That’s helpful. And then when you look at your guidance and staying profitable, how do you still plan to invest in some of these analytics products while, sort of controlling the cost to – I mean, where does the leverage show up as – while you’re still able to, I guess, get these products to market?

Mike Arends

The leverage will primarily come in the sense of just the revenue generation and returning back to growth. Again one of the thing that we’re very focused on today. But if you think about some of the trials that we’re doing, which do not encompass the full suite of products, we also have ability to expand the relationship, add-on products to those exiting relationships as well as add-on volume, particularly if we start within certain geography for a customer. For instance, if they’re operating on the trial and they are operating within the Northeast and they have operations that are across the U.S. We could expand from a volume perspective and there is significant leverage in the model because of the contribution that drops from every incremental dollar of revenue on an analytics product. So those will be a couple of the ways out of we can see some of that positive operating leverage.

Dillon Heslin

Great. And then last one for me on YP. It looks like the decline sort of decelerated on a year-over-year and sequential basis. Do you have anything that you can attribute to that? Was it a little bit more sales effort in that area? Any color on that would be great.

Mike Arends

This is Mike. So I’ll go to the financial profile. I think with Dex taking over, we’re going to see how the future holds. There’s some good productive conversations going on about how we can help Dex on a go forward basis. I wouldn’t look at the trajectory as anything different at the present time frame. We’ll see how some of those conversations go, and I wouldn’t read anything more in terms of the analysis of what the trajectory is from one quarter to the next. We look forward to providing more updates. We’re obviously, very interested in displaying our wears with Dex and see how we can help them and there is more to come on that.

Operator

At this time, we have no further questions. I’m now going to turn the call back over to our presenters.

Mike Arends

Thank you very much, everyone, for joining us today. We appreciate the time and we look forward to updating you at our next earnings conference call. Thank you.

Operator

This does conclude today’s call. You may now disconnect. Thank you very much for your participation.