Marchex, Inc. (MCHX) CEO Michael Arends on Q4 2020 Results - Earnings Call Transcript

Marchex, Inc. (NASDAQ:MCHX) Q4 2020 Earnings Conference Call March 2, 2021 5:00 PM ET

Company Participants

Trevor Caldwell - Senior Vice President-Strategic Initiatives & Investor Relations

Michael Arends - Co-Chief Executive Officer & Chief Financial Officer

Russell Horowitz - Executive Chairman & Co-Chief Executive Officer

Conference Call Participants

Mike Latimore - Northland Securities

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Marchex Fourth Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today Mr. Trevor Caldwell, Senior Vice President of Strategic Initiatives and Investor Relations. Thank you. Please go ahead sir.

Trevor Caldwell

Thank you, Jamaria. Good afternoon, everyone. And welcome to Marchex's business update and fourth quarter 2020 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 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 take 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.

Michael Arends

Thank you, Trevor. Good afternoon and thank you everyone for joining us today. In November on the back end of our strategic evolution and following the separation of our media assets, we moved to realign our operations in order to take advantage of the significant opportunity in conversational analytics and sales engagement solutions.

This included moving aggressively to accelerate our robust product development cycle since the organization was able to focus exclusively on this core opportunity. We expect these efforts will be a key driver of progress this year.

As we reflect on the last few months, we recognize the ongoing impact of the pandemic and a massive disruption on many of our customers over the past year as well as its resulting impacts on us. However, because we made the early strategic bet to focus on conversational intelligence built upon aggregating and anonymized data of hundreds of millions of sales conversations between global brands and their customers, including both voice and text, we now find ourselves at a unique advantage as we approach an inflection point in our opportunity.

We can help our customers understand what is happening during these conversations at a deeper level than ever before. With our growing capabilities, our customers foresee us more and more as a critical partner to help them engage more prospects, grow their customer base and close more business. These early investments have created a significant market opportunity that is transformational for Marchex and has given us room to both grow with our existing base of customers and expand that base meaningfully.

Pieces are coming together in multiple ways. For example, in the fourth quarter, we launched the first of our planned product rollouts Marchex Marketing Edge. This solution enables brand marketers and agencies to tie revenue-generating conversations back to the specific marketing campaigns that generated them.

Marchex's Marketing Edge captures conversational data across multiple communication channels, including calls, text and chat as well as web form completions. Then uses AI-powered conversation intelligence to identify and classify the conversations that are driving sales.

By tying these high-value conversations back to their marketing sources, we empower businesses to make smarter media buys that deliver more high-value conversations to their sales teams. So the sales conversation feel to convert our customers need not worry. The products integration with Marchex Sales Edge Rescue means they can immediately receive an alert to reengage the prospect and rescue the sales opportunity before they call a competitor.

Marchex Marketing Edge was recently awarded the Gold Stevie Award for the marketing Solutions category. The Stevie Awards for sales and customer service are among the world's top honors for customer service, contact center, business development and sales professionals.

The award noted that Marchex Marketing Edge is an innovative solution that enables marketers to make better data-driven decisions while increasing customer reach. This is another point of meaningful validation as we prepare for a post COVID world. Many businesses are still adapting to the new normal and navigating the changing environment created by the pandemic.

One of the ways we are helping our customers is by integrating texting solutions into our conversation platform. Adding text conversations has been a significant task, but there is urgency for our customers to broaden their real-time insights across high priority consumer communications paths, as they look to improve the customer experience, while engaging consumers in the ways they want and in their communications channels of choice. We have added numerous customers to our texting solutions across core verticals since the start of the year and expect we will continue to make progress adding more customers as we integrate our texting solutions throughout our new product pipeline.

To help our customers emerge stronger from this period, we dove into the data and wanted to understand at a deep level, just how much the pandemic has impacted consumer behavior. This led us to release our most ambitious consumer study yet. We chose to focus on the auto industry first given our continuing penetration and significant growth opportunity in this vertical. We surveyed 1,700 in-market auto buying customers and analyze 250,000 sales calls for conversational telecom's technology. The data was aggregated over the course of 2020 and revealed significant and surprising insights for dealers.

The study found for instance that five potential buyers reached out to a dealer and they're ready to close quickly on purchase. In fact, our data found that 75% of these shoppers who contact a dealer are ready to buy a car within three weeks, but only if they feel a high level of trust with the dealership. Additionally, 83% of consumers are researching and qualifying dealers more so than before. 71% report visiting fewer showrooms than before the pandemic and prefer to do much of the transaction at home. The study also revealed that nearly 40% of consumers use a phone to call or text the dealer to make initial contact making the phone the leading channel for consumer outreach. This far outpaces any other form of [Technical Difficulty] concept including [Technical Difficulty] e-mail or fax.

Here are just some of the findings the auto industry needs to understand in order to sell more cars in this new normal. Marchex has witnessed many of these changes in the last year utilizing our conversation with analytics technology on behalf of our customers as the pandemic has altered the consumer path to purchase across several verticals. And now through our various innovations they are providing paths for many key industries to adapt and thrive in the future.

With that I'll hand the call to Russ.

Russell Horowitz

Thanks, Mike. While we're still navigating an uncertain environment for many of our customers, we have focused on making significant progress across our organization on everything from our products the underlying technology and the realignment of our organization to take advantage of our opportunities. Today, through these efforts, Marchex is a leaner more focused and innovative company with world-class customers asking us to do more than ever before. And our early bets are paying off positioning Marchex for the post-pandemic world where we're capable of solving a wide array of mission-critical problems for our customers and prospects with highly innovative market leading products.

Over the last several years, we have invested in our core technology platforms and its strategic initiatives to add valuable conversational data across new verticals such as home services and health, while going deeper in rich verticals like auto and auto-related services. These decisions have set up where with an effective and successful execution on our planned product releases and sales opportunities. We believe we will see acceleration of growth sequential progress with adoption from both existing and new customers and increased overall momentum, while establishing and extending leadership. Leaving the pandemic aside we feel we are well positioned to make progress on advancing the business and continuing to both expand and harvest our large opportunity.

With that, I'll turn the call back to Mike.

Michael Arends

Thank you, Russ. For today's commentary, I will largely focus on our financial results from continuing operations. On that basis, revenue in the fourth quarter was $12.7 million. Core analytics and solutions revenue, excluding the contribution of the disrupted auto customer, who was previously referenced on the second quarter 2020 earnings call, would be $12.3 million.

The fourth quarter continued to be characterized by the events of the COVID-19 pandemic. We saw the typical seasonal flow of call volumes for some customers declining around the holidays, but we also saw greater suppression in volumes in December and in January, likely based on government directives including lockdowns.

We're seeing this latter trend begin unwinding in the latter part of February with volumes more recently increasing. [Indiscernible], we did see the stifled new business environment witnessed earlier in 2020 begin to open up in the fourth quarter, as we have had a recent uptick in new customer additions.

This is partly due to the launch of our Marchex Marketing Edge product, but also because some prospects and customers began to reinitiate onboarding and pilot programs. It remains apparent that many prospects and customers continue to wait on deployments of new technology applications, although our most recent conversations suggest growing interest for launches as we move through 2021.

As we have mentioned on prior earnings calls, during the fourth quarter, we continued to see the financial impact flow-through from a series of initiatives to support our customers during the pandemic, including discounts, payment timing and other relief and in certain cases waived minimum package commitments. We also had some customers close their doors or curtail their operations due to the pandemic.

While we expect COVID-19 uncertainties may continue to be with us for some time, we and our customers are adjusting to the extent possible. Over the course of 2020 and through the first quarter of 2021 to-date, we focused on making progress with our analytics products and sales engagement solutions and believe this will benefit Marchex in the intermediate and long-term. We are also encouraged by the pickup in the sales pipeline we have seen so far this year.

Now in looking at the P&L for the fourth quarter, excluding stock-based compensation amortization of intangible assets and acquisition disposition related costs, total operating costs from continuing operations for the fourth quarter were $16.4 million compared to $15.4 million in the fourth quarter in 2019.

Service costs were $5.5 million, up from $4.3 million in the fourth quarter of 2019. Service cost increased as a percentage of revenue on a year-over-year basis, largely due to our infrastructure initiatives, which include cloud migration initiatives, certain platform integrations and other initiatives.

We continue to anticipate that as we complete some of these infrastructure initiatives and we launch our new analytics products and sales engagement solutions and they begin to contribute, we can see a positive impact on service costs as a percentage of revenue over time.

Sales and marketing costs were $3.4 million. This amount was slightly down from the fourth quarter of 2019. Product development costs were $5.1 million and were up as a percentage of revenue compared to the fourth quarter of 2019 reflective of our increased investment in our product infrastructure initiative or acquisition.

Moving to profitability measures, adjusted operating loss before amortization from continuing operations for the fourth quarter was $3.7 million. Corresponding adjusted EBITDA was a loss of $3.2 million.

GAAP net loss in discontinued operations was $5.4 million for the fourth quarter of 2020, or $0.12 per diluted share. This compares to a net loss of $414,000, or $0.01 per diluted share for the fourth quarter of 2019. GAAP net loss from continuing operations was $5.6 million for the fourth quarter of 2020, or $0.13 per diluted share. This compares to a net loss of $2.8 million, or $0.06 per diluted share for the fourth quarter of 2019.

Adjusted non-GAAP loss from continuing operations was $0.06 per share for the quarter, compared to an adjusted non-GAAP loss from continuing operations of $0.04 per share for the fourth quarter of 2019. Additionally, we ended the fourth quarter with approximately $29 million in cash on hand, net of current debt obligations and after completing the tender offer in October.

Now turning to our outlook. The current environment remains highly fluid. As noted, there is uncertainty in the near term, but we are seeing quality engagement from customers and prospects that we believe will positively impact the intermediate term and beyond.

Looking at the first quarter of 2021. While the fourth quarter saw partial recovery in certain verticals for many of our customers, sales conversation volumes are still down on a year-over-year basis and in some cases meaningfully. This fact continues to permeate our customers' thoughts as they approach the early part of 2021 and many have expressed the continued need for flexibility in rolling out new technology and trials. Still we are encouraged by the dialogue we're having with customers and new prospects across several verticals about deploying our products this year. We believe that these engagements along with the new product releases and other growth initiatives sets the stage for financial progress as the year unfolds.

To that end, excluding the contribution from the disruptive auto customer we discussed in prior calls, we expect core analytics and solution revenue can grow sequentially as we move through 2021. While indicators reflect an invigorated sales pipeline, there are still various pilots that remain on hold. Although, we are getting more customer feedback that they will reinstate trials in the coming periods. It is still a challenge in the short-term to forecast when these growth opportunities will meaningfully impact the business, yet we believe we should make substantial progress toward our goal of moving towards double-digit revenue growth run rates at some point this year.

In the meantime, we will continue to be mindful of our balance sheet and financial liquidity. Over the intermediate term as some of our new products sell-through and favorably impact the P&L, we believe we should make progress toward our goal of reaching breakeven or better on an adjusted EBITDA basis before the end of the year. In this regard, we also believe that each quarter over the next several quarters, we will make sequential improvement with our profitability measures.

We believe our opportunity in the conversational analytics and sales engagement market is significant. In the last several months, we have taken significant steps to position Marchex to best capitalize on this opportunity. We are actively developing new conversational intelligence and sales engagement solutions, some of which we have already begun to deploy in certain channels and in trials with customers. We expect to see the benefits of these initiatives to begin this year. In addition, we are continuing to invest in our infrastructure initiatives, which will help Marchex extract key signals of consumer intent and support predictive analytics and the development of artificial intelligence-driven use case specific applications.

We believe these investments in our infrastructure initiatives will provide a solid foundation to support our future product innovation and expanding AI capabilities. We believe over time that these initiatives will support our strategic position, our enhanced growth profile and our compelling financial position that has significant intermediate and long-term operating leverage.

In the meantime, we have been active purchasers of our own shares based on our view of our forward-looking progress and our ability to drive growth and value in the future. We are just beginning to see the benefit of leveraging our industry-leading conversational data to develop innovative conversational AI products.

Additionally, while risks always must be acknowledged and the impacts and uncertainties of COVID continue, we think our upside is meaningful. And over the coming months, we expect to have more news to share regarding new products and progress with customers. To all of our employees, we thank you. Russ and I are very appreciative of your hard work and dedication.

And with that operator I'd like to hand the call back to you.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question will come from Mike Latimore. Please proceed.

Mike Latimore

Hi. Yes. Thanks a lot. Thanks for all the info here. In terms of the call volumes that Marchex had in 2020, can you quantify that a little bit, just maybe absolute number? And then just -- did it decline grow kind of in 2020 versus 2019?

Michael Arends

Thanks Mike. This is Mike. So total call volumes were down on a year-over-year basis, but there was a lot of progression and movement. And in particular, if you look at the early part of the year in March and April, volumes were down significantly. On a year-over-year basis just for those months, there was trending declines that in some verticals whereas much as near 40% decline on a year-over-year basis.

Mike Latimore

Okay.

Michael Arends

There was a progression from there. And although there was still decreased call volume in May, June and July there were increasing levels and progress from those points forward. If you look at starting in end of November, call volumes again started a downward tick relative to what you would expect from a seasonal flow in a year-over-year comparative. That continued into the early part of January and the first the very beginning of February.

And we believe that some of the pandemic influences as well as potentially the cold weather in certain parts of the country may have affected that. What we have seen in the last few weeks is actually a resurgence and call volumes coming back and increasing productively to more expected and normalized levels here.

Mike Latimore

Yes. Got it. And maybe just help me understand if you look at some of these big kind of call center companies like Teleperformance or Qtel their volumes are growing pretty nicely and benefiting from COVID just more communications going on. I think there are more maybe customers -- maybe the difference is the customer service you're more sales focused. But help me understand the difference there between the call volumes you see kind of in some of the big call centers versus kind of what you guys are seeing?

Michael Arends

I think one of the best examples is just thinking about the customer base. So auto dealerships people stopped purchasing cars. And the auto dealerships the OEMs actually stopped manufacturing for many months, as part of their processes given what consumers were doing.

That was indicative in a number of different industries. So it's very much more a mix of what the customer base is and the protocols. There are pockets of customers. And I'll give you another great example of just very low volumes.

Travel and hospitality for us, and our customer base in that arena was down very significantly on a year-over-year basis. But there were pockets an example would be, cable television, the area of cable. And certain of home services customers, HVAC, furnace type of providers were actually had some spikes in volume at different points in 2020, relative to what you would normally expect.

Mike Latimore

Okay. Got it. And then, you talked a little bit about, maybe seeing sequential growth throughout the year. I guess, what would be the top sort of verticals driving that?

Russell Horowitz

Hey, Mike, yeah, this is Russ. As we think about how the year unfolds, and where some of our growth levers are, we talked about the vertical focus. You've hit on that. And auto is one that we continue to look at as a meaningful opportunity. And that's both with the OEM relationships and the dealer direct products.

And then, all those services as well, can be a catalyst. Overall, the service economy has been more suppressed by COVID than other areas. And given our customer base and how that's exposed to the service economy, we think we may benefit from that as COVID thaws.

And then, beyond that, we also look at leverage from our texting products where we see increased adoption as well as our other evolve products that include the combination of voice and text. So auto and auto services health and home services continue to be levers for us.

And then also where we're looking at expanded application of our texting products and integration of our texting products with our voice products, all of those we view as levers for acceleration and sequential growth.

Mike Latimore

Okay. Got it. Got it. And then, on gross margin, is the gross margin in the fourth quarter on the core business is kind of a good sort of barometer for next year as well?

Michael Arends

It's a starting point for 2021. In some of our remarks -- prepared remarks that we made earlier, we did talk about the infrastructure initiatives coming to more substantial completion at some point in 2021. And we expect that with additional scale, there can be many meaningful operating leverage there.

Mike Latimore

Okay. Great. All right. Thanks a lot. Good luck for future.

Michael Arends

You too.

Russell Horowitz

Thank you.

Michael Arends

We wanted to thank everyone on the call today. And we look forward to providing updates in the coming quarters of our progress as we move throughout the year. Thank you.

Russell Horowitz

Thank you everybody.