Marchex Inc (MCHX) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Marchex third quarter earnings release conference call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Ethan Caldwell, Chief Administrative Officer. Sir, the floor is yours.

Thank you. Good afternoon, everyone, and welcome to Marchex's third quarter 2005 conference call. Joining us today are Russell Horowitz, Chairman and Chief Executive Officer, John Keister, President and Chief Operating Officer, Michael Arends, Chief Financial Officer, Peter Christothoulou, Chief Strategy Officer and Cameron Ferroni, Chief Technology 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 facts included on this call regarding our strategy, future operations, future financial position, future revenues, acquisitions, projected costs, prospects, plans and objectives of management are forward-looking statements. We may not actually achieve the plans, intentions, or expectations disclosed on our forward-looking statements and you should not place undue reliance on 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 vary materially from those indicated by such forward-looking statements as are described in the Risk Factors section of our most recent periodic report and registration statements filed with the Securities and Exchange Commission.

All of the information provided on this conference call is as of today's date. We undertake no duty to update the information provided herein.

During the course of this conference call, we also reference certain non GAAP financial measures of financial performance and liquidity, including [OIBA], adjusted OIBA, EBITDA and adjusted non GAAP EPS. The reconciliation of these non GAAP financial measures to the comparable GAAP financial measures is contained in today's earnings press release which is available on the Investor Relations section of our web site. Definitions of these measures as used by us and the reasons why we believe these measures provide useful information to investors will be referenced during this conference call and are also contained in today's earnings press release.

At this time I would like to turn the call over to Russell Horowitz, our Chairman and Chief Executive Officer.

Thank you for joining us today on our conference call.

On today's call, we will review the top-level financial and operational progress made in the third quarter, provide insight into our progress, growth drivers and recent developments in our key business areas, and summarize our primary areas of focus and investments for the fourth quarter in 2006.

While Mike Arends will discuss our financial results in detail later on this call, I wanted to take a moment and highlight our progress this quarter.

The third quarter remained a period of active investment for Marchex,m as we continued our focus on enhancing our products and adding resources to support our strategy. Our operational progress led to strong financial results that included revenue of $25.6 million which was a 110% increase over the prior year period, adjusted operating income for amortization of $6.8 million, which represented a 27% margin compared to a 14% margin in the prior year period; earnings before interest, taxes, depreciation and amortization -- or EBITDA -- of $8.1 million, GAAP earnings per share of $0.00 per share and adjusted non GAAP earnings per share of $0.09.

Marchex's mission is to be a leader in delivering vertical and local online traffic to merchants. Our focus this year and next is on building a substantial base of traffic for our merchant advertisers across both proprietary and partner distribution sources.

As of September 2005, our proprietary traffic base grew to more than 24 million unique monthly visitors according to internal logs. During the quarter, revenue attributable to proprietary traffic sources substantially all arising from the names of [Elman and Pike] asset acquisitions was $7.7 million.

The three factors underlying our financial progress this quarter were 1, traffic to our proprietary network of websites increased which subsequently increased our monetization opportunities; 2, the addition of quality distribution relationships led to incremental advertising opportunities for our merchants. These advertising opportunities included a broader integration of our own advertised results on our proprietary traffic network, an integration of IndustryBrains advertisers across Marchex's partner distribution and additional distribution options added through the acquisition of IndustryBrains such as Bank Rates, Forbes.com, Travel and Leisure, USA Today and others. And the third factor underlying our financial progress this quarter was the increased penetration of local merchant relationships by the super aggregator partners who utilized our outsource search marketing platforms, which led to increased aggregate marketing spending for Marchex.

In terms of an update on our proprietary traffic initiatives in progress, over the last several months we achieved a number of milestones regarding our base of proprietary traffic. First among those milestones was the initial completion of a flexible publishing platform that allows us to release new templates across our entire network of websites. Our platform provides for the dynamic support of various elements on a single web site or category of websites, such as managing diverse user interfaces while supporting numerous partner data feeds and various advertising types.

The major point of emphasis here is that this platform will streamline the process of rolling out enhanced websites and integrating new content and advertising partners in the coming quarters.

Second, we launched a beta user interface on 52 of our zip code websites. Primary goals of the beta website included establishing user feedback in order to improve page utility and driving traffic growth. While we are cautious not to read too much into a limited data sample, we are encouraged by the early user feedback in traffic and monetization results.

Highlights from our internal beta test analysis include 1, user surveys to emphasize the importance of including detail of local data coupled with the ability to provide user-generated information. Over the coming months and quarters, we expect to integrate feeds such as local traffic data, local arch and information, local movie theater listings, local restaurant information as well as other types of information and feeds. Building former relationships with key content and advertising providers will be an area of focus over the next 12 months within our direct navigation group.

The goal will be to first focus on adding relationships that will help to improve utility and monetization on our network of websites.

And, 2, traffic to these websites on average increased by multiples from previous levels. We believe this is primarily due to increased relevance and placement in algorithmic search results. While this may not be indicative of future results, as search algorithms change frequently, we are pleased with the data today.

In addition, today we announced that we have launched a beta version of our approximately 74,000 zip code websites. We are focused on executing a product strategy that will include enhancements to these sites over the coming months and quarters, as well as new templates across all of our vertical and local websites.

Third among the milestones is a deeper integration of our advertiser listings on a proprietary network. In other words we now have more advertiser listings from our pay-per-click and contextual networks integrated onto our website in addition to data [free] from other partners.

Our goal is to rank among the most highly trafficked proprietary networks on the Internet. While we are pleased with the growth in our proprietary traffic base to more than 24 million unique monthly visitors, we are still in the early stages of executing our strategy. Over the next several quarters we intend to launch additional enhanced locally focused websites like Seattleinsurance.com, Miamijobs.com and Chicagodoctors.com, just to name a few. After we have successfully launched these local and vertical websites, we intend to release high-utility category level websites like debt.com, invitation.com, hermodeling.com and beijing.com.

We believe that the upgrade of the sites will have a positive impact on traffic and monetization over time.

Next, I would like to address our progress in local search. During the quarter, our super aggregator partners experienced continued success in selling local search marketing in packages to their base of local merchants. As we have previously discussed, our super aggregator partners such as Yellow Pages.com, SBC and BellSouth use Marchex's platform to fulfill their local merchants' search packages across several online distribution points including Google, Yahoo! and Marchex's network.

The growth in local merchant relationships increase the amount of online local marketing expenditures taking place through Marchex as a fulfillment partner.

It is important to note that our efforts in building a locally targeted base of traffic are complementary to our fulfillment of search packages for local super aggregators. To the extent we are successful in building our local traffic data base, we believe that large aggregators will look at Marchex as both a technology provider and a source of high-quality local traffic. As the growth of local merchant spending on Search continues, we believe our proprietary traffic network will be in a position to benefit from this increased advertising spending.

Turning to our progress in Search marketing, we continue to invest in new services that we believe are important to meet the needs of online advertisers as the search marketing landscape continues to evolve. With the addition of IndustryBrains we believe that Marchex now has a leadership position in the contextual advertising space -- an area that we expect to deliver solid growth over the next several years.

IndustryBrains also allows us to further enhance the monetization of a proprietary network for vertical traffic as IndustryBrains has premium advertisers and premium rates. Finally, IndustryBrains brings Marchex more than 100 high-quality vertically focused distribution relationships, which are gradually being included as distribution options for all Marchex advertisers.

Separately our new distribution partnerships with MSN, Ask Jeeves and Become.com are part of our effort to continue to offer a unique base of third party distribution. In the cases of MSN and Ask Jeeves, we can now offer Search distribution and advertising opportunities for all Marchex merchant advertisers. Through our new relationships with MSN Shopping and Become.com, we now have relationships with ten of the leading commerce shopping portals online, representing one of the largest footprints of commerce shopping distribution available in the Search marketing industry.

The commerce shopping channel remains a strong avenue for customer acquisitions for our merchant partners.

In addition, as Marchex continues to build its own footprints of vertical and local traffic, we are also focused on deepening and adding new relevant third party distribution relationships. In the third quarter we announce a new contextual distribution relationship with Investors Business Daily and an expansion of our existing relationship with Fodor's. These relationships increased our reach in the finest in travel vertical markets and will be an integral part of the contextual solutions we offer to our base of national and local advertisers.

As the Search marketing landscape continues to evolve and become increasingly fragmented and complex, we see a great deal of value in offering merchants a single point of access through all major distribution channels. We believe that by maintaining our commitment to building technology-based Search marketing solutions and expanding our unique base of distribution, Marchex is in a strong position to be part of any merchant's online search marketing budget.

We believe our footprint of traffic sources within Search engine directory, commerce shopping portals and direct navigation represent a unique value proposition for merchants looking to drive online transactions.

I would now like to turn the call over to John Keister, our President and Chief Operating Officer to summarize how our primary areas are working together in our areas of investment for the fourth quarter in 2006.

Since our inception it has been our intent to create opportunities that allow each of our business areas to leverage one another, thereby creating growth opportunities, operating leverage, and business defensibility. In recent months, we have reached the point where this goal is starting to become a reality. Today there are several important ways in which our business areas are working together in a complementary fashion.

For example, 1, our Search marketing services now send listings to both our proprietary network and our third party network. 2, our local relationships driven by two pro aggregators like Yellow Pages.com, SBC, and others deliver listings to both our third party networks and our proprietary network. 3, in addition to supporting our advertisers our proprietary traffic network offers distribution opportunities to large third party advertiser listings providers such as Yahoo! And 4, we will begin to increase the delivery of Marchex advertiser listings for our contextual network and, in turn, fully integrate IndustryBrains vertically focused advertisers into our proprietary traffic network.

As we continue to make progress in building a tighter integration between our business areas we believe there are significant opportunities for growth. Furthermore, as we drive more and more quality traffic from our own proprietary network, we become a stronger company that can fulfill a greater percentage of our clients' add spends within our own network.

To continue on our growth path we have outlined the following goals for the fourth quarter and for 2006. 1, continue to grow our network of proprietary traffic. At more than 24 million unique visitors for the month of September we are off to a good start and we are focused on growing this number meaningfully. 2, continue to build our position in local space by supporting the growth of partners like Yellow Pages.com and the Houston Chronicle and entering into new agreements with additional super aggregators. And 3, continue to execute our Search marketing strategy by 1., adding quality third party relationships as we have done recently with MSN, Ask Jeeves. Become.com and Investors Business Daily and 2., increasing the number of advertisers using Marchex's services while further penetrating existing relationships.

At this time I'd like to hand to call over to our Chief Financial Officer Mike Arends to discuss our financial progress in more detail.

In looking at our third quarter results in more detail, revenue was $25.6 million a 110% increase over our year ago results of $12.2 million. Total operating costs excluding stock-based compensation and amortization of intangible assets for the third quarter of 2005 were $18.8 million. In the year ago period, total operating costs excluding the previously mentioned items as well as acquisition-related retention consideration and facility relocation fees -- which were no longer in effect in the most recent quarter -- were $10.5 million.

This quarter, our operating expenses included increased service cost compared to a year ago as well as increased technology infrastructure costs, additional investments in sales and marketing personnel and other initiatives, and certain increased costs related to being a public company compared to last year.

Adjusted operating income before amortization for the quarter was $6.8 million or a margin of 27% which represented a 285% increase over the $1.8 million or a 14% margin in the year ago period. Income before interest, income taxes, depreciation, amortization and stock-based compensation expense or EBITDA for the third quarter was $8.1 million which represented a 340% increase over $1.8 million in the comparable period last year.

Adjusted operating income before amortization and EBITDA are two of the principal metrics we use to measure the progress of our business, liquidity and our ability to generate cash.

Adjusted operating income before amortization includes a reduction for depreciation charges and excludes amortization costs and costs related to our acquisitions, as well as other nonrecurring charges.

GAAP, net income applicable to common stockholders for the quarter was $27,000 or $0.00 per share compared to $144,000 or $0.01 per share in the third quarter in 2004. Going toward, our GAAP results may be impacted by a number of factors, including increased amortization costs associated with our Name Development and Pike Street Industries' asset acquisitions, our acquisition of IndustryBrains, other potential future acquisitions, stock-based compensation, our preferred stock dividends, and increased public company costs which will also impact our adjusted operating income before amortization and EBITDA results.

Adjusted non GAAP earnings per share -- an estimate some Wall Street investors utilize as a supplemental measure of our operating progress -- was $0.09 for the third quarter. Adjusted non GAAP earnings per share represents adjusted net income divided by weighted average fully diluted shares outstanding for adjusted non GAAP EPS purposes. Adjusted net income generally captures those items on the statement of operations that have been or ultimately will be settled in cash, exclusive of certain non-recurring items and represents net income available to common shareholders plus stock-based compensation expense, amortization of acquired intangible assets, acquisition-related retention consideration, facility relocation expense and other income or expense.

Turning to the balance sheet, we had approximately $57 million cash on hand as of September 30, 2005. During the quarter we used our cash to help finance our acquisition of IndustryBrains in July, as well as to invest in certain initiatives we believe will strengthen our position within direct navigation and local Search marketing.

Going forward, we anticipate that we will use our cash to continue investing in long-term growth initiatives, including internal product development and sales initiatives and selected acquisition opportunities.

IndustryBrains accounted for approximately $1.9 million in revenue in the quarter and did not meaningfully contribute to our adjusted operating income before amortization. The inclusion of IndustryBrains for a partial quarter in Q3 along with its sales and marketing costs led in part to a sequential ramp in our overall sales and marketing for the quarter. We are still are a relatively young company compared to many of our peers and expect to continue investing heavily across our key business areas and the underlying components, which help us grow our base of advertisers and distribution opportunities to support us achieving our long-term goals.

I would now like to turn the call back over to Russ.

I would now like to discuss our outlook for the remainder of 2005.

While the majority of the investment decisions we have made throughout 2005 have been designed to position Marchex for the long-term, we continue to realize current benefits as well. As a result, we are raising our 2005 revenue guidance to $93 million -- up from our previous guidance last quarter of $91 million or more. In addition as Mike mentioned, the timing of our investments in IndustryBrains will factor in for a full quarter beginning in Q4 along with our continuing investment initiatives.

As a result, we estimate adjusted operating income before amortization margins will come in between 26 and 28% for 2005. In addition, we are maintaining our long-term target for adjusted operating income before amortization margins of 30% or more as we expect that will realize benefit from our investments over time. It is our current plan that on our Q4 conference call, we will provide our initial 2006 guidance.

2005 has been an important year for Marchex. For a company that is less than three years old we believe we have had a number of accomplishments. We are amongst the leaders in search engine and contextual marketing. We have built leadership positions in two important growth areas -- local search and direct navigation. We have a large and growing base of proprietary traffic. And we have the financial characteristics of a market leader while still investing heavily in the key aspects of our business.

At this time, Operator, we would like to give the call back to you to take questions from the audience.

(OPERATOR INSTRUCTIONS) Clay Moran.

Stanford Group. Couple of questions, I will try to limit myself. I want to focus on the direct navigation site. Can you talk a little bit about the initial performance of the enhanced sites, excluding the second site and then also maybe give us an idea of the completion of those initial 100,000 or so direct navigation sites? And lastly, on your long-term OIBA margin goal can you give us an idea of what long-term means there? Is that mid-next year and any sense of what the timing really is to achieve that goal?

As it relates to the continued product development initiatives with our direct navigation business area, as we've communicated we are really focusing on two elements here. 1, our global improvements that apply at the universal level and then, 2, are looking at more specific implementation for websites that have common characteristics or unique characteristics and [odd] to get a more unique approach to their ongoing build out.

So we have made universal product development initiatives. Not all of those are things we publicly announce although we have been specific in terms of announcements of the launch of our beta zip code web sites and the strategy there has been to really look at primarily three buckets which are the zip codes, then the local vertical sites, then the premium brand sites. And we gave examples of some of those in previous communications as part of today's script.

Now the answer is these will never really be done because we'll constantly look at ways that we can optimize these sites through integrating new data that can drive increased utilities or potentially drive increase monetization. The main thing that we are focusing on today, and we think is important for others to note, is that the progress we have made with our web publishing platform will allow us to continue to condense the cycles on our ability to release new products.

And so the fact that we've been able to launch the zip code network today which we previously said would be done before the end of Q4 will now allow us to more rapidly integrate new data feeds into zip codes and move ahead with a focus on local verticals, and in turn those premium brand domains as well. So that's really the main thing we are focusing on is the combination of universal product changes in conjunction with specific development of domains of specific characteristics or common characteristics.

In terms of the long-term target on OIBA margins, Mike Arends, I will allow you to step in on that one.

I think just to give some feedback on that we haven't time bounded the long-term OIBA margins. What we have indicated though is that during the next conference call will give some more feedback in terms of guidance. We expect to give feedback in terms of guidance for 2006 and we will give some more specifics about 2006 in that regard, including our expectations for OIBA in 2006.

The other thing I think we can add is we are in a fairly heavy investment mode. We've been in investment mode with some of the local initiatives, the direct navigation initiatives. We are in some of the investment mode with respect to the recent acquisition with IndustryBrains; and we expect some of that to play out in the remainder of 2005 as well as 2006.

Safa Rashtchy.

Piper Jaffray. Congratulations on a great quarter. Couple of questions and I might have missed this. We had to kind of reconnect on the line here. Could you talk about what was your organic growth for both the search market and direct navigation business?

I think what we have given in the information table -- there's an attachment to the press release -- is some information on pro forma revenues as though the acquiree is the acquisition of the assets were done as of the beginning of the year and as well as of the beginning of the prior year. So if you look at that on a year-over-year basis it's an approximately consolidated growth rate of about 40%. So I think that is the best way of describing the impact there.

The underlying details are available in those exhibits attached to the press release.

Sameet Sinha.

Kaufman Brothers. Could you talk about your -- the other businesses [enhance traffic leader] and [gold plate]. What are some of the dynamics that you see out there specifically on the competitive front and while you are at it, your datas and some of your larger clients like Best Buy and Nordstrom?

The thing we really focus on across our business are the three primary areas -- search marketing, direct navigation and local. So as John Keister talked about in the course of the conference call, increasingly, we have integrated products that allow advertisers to effectively buy all of what we sell or pieces of what we sell. And so when we think about across our business increasingly that synergistic element really pervades. So that kind of is a backdrop to the question of what we are seeing. Hence, the overall trends that we have seen continue to be opportunities to take existing advertisers and increase their spending, and more and more embracing of new channels of advertisers are coming on line like in the local channel.

So those trends have been favorable for us and, clearly, people know Q4 is a seasonally strong one in general and one that continues to be impacted by more and more retailers committing to online as a strategic channel. So without getting into the specifics of names, the work we are doing would be existing customers, is translating to favorable relationships. And we think that bodes well for Q4 and beyond.

[Peter Speer].

Delafield Hambrecht. Distributors of the integration -- the properties and the timeline you see for that into '06 and what really is the strategy for driving traffic to the direct navigation sites and the zip code sites? I am just curious about your -- maybe a specific example of how that might work?

The integration strategy is an ongoing one. Again our belief is as the industry gets more complex and more fragmented, having a truly integrated solution is an important value proposition for advertisers who are online or coming online. And it is an opportunity for Marchex to really differentiate ourselves by virtue of having the greatest breadth of services and allowing advertisers the greatest breadth of distribution, as well.

And in thinking about, again, distribution -- we define through third party relationships and our proprietary traffic. And as we've noted in terms of our proprietary traffic strategy, we see a variety of catalysts. 1, we are in an industry that grows faster than most industries in our economy so the macrotrends are favorable and we believe that manifested itself in our proprietary traffic as well. At the same time we see significant opportunities for product enhancements, which we believe could translate to users coming back more often and benefiting from the viral element of the Internet when you deliver useful applications or content and the third part is, really looking at search engines as a complement to our strategy and knowing that as we add utility to our web site we have opportunities to grow through the traditional search channels where Marchex has core expertise including algorithmic conclusions. So those are the primary drivers.

Christa Quarles.

It's Scott for Christa, at Thomas Weisel Partners.

Just curious if you could say what your CapEx was specifically what was for URL acquisitions? Secondly you had a decent bump in sales and marketing. Is that more related to the direct navigation business or is that more for the marketing services and is that a level that will be sustained going forward?

On the second part of the question, sales and marketing is something that is very strategic for Marchex overall. So while there are opportunities based on our buildout and direct navigation, we are really looking at sales, business development and marketing initiatives supporting all three business areas. And so, again, between people and other forms of exposure, this is an area that we have to begin to increase investment in addition to layering in IndustryBrains where historical spending on sales and marketing was higher than what Marchex's had been.

So the combination of industry veins in conjunction with us making a decision to invest in this area more aggressively to support our longer-term growth initiative is something that you will see continue. In terms of the CapEx elements, Mike Arends will step in.

Scott, just some feedback on that. I think you've seen some of our past acquisitions strategies in the last couple quarters with some of the domains. We still did go out and acquire a number of domains this quarter. It is less than what we have done in the past. Some of the exact specifics will be forthcoming in short order in our quarterly reporting; but I think what we can say is with the cash on hand we have disclosed that there is 57 million of cash on hand.

So you can back in by virtue of that to a number that is quite a bit lower than what it has been in the most recent quarters. Again, more specifics forthcoming in short order in the quarterly reporting.

Sameet Sinha.

Looking at your guidance, do you think you are going to do 96 million for the year? If not at least 93 million. Correct?

Yes. We just -- the guidance we gave was 93 million as our updated guidance based on where we are in the year. Correct.

That implies a sequential -- just a couple of million increments and that is about 9% and this quarter obviously has the full course of benefit of IndustryBrains. Could you speak to why you are being conservative? Or is that being conservative?

We are giving guidance. I think with a consistent methodology in terms of how we've done it in the past and, clearly, our focus is on performing and attempting to exceed the guidance we have given in the past. That is something that we have done and that's something that we would like to continue to do. But, again, our focus has been on annual guidance less so than on quarterly increments -- although we do understand why people do need to focus on the quarterly increments as measures of progress. But again the guidance is one that was raised a couple of million dollars and at the same time, I believe it is consistent with the methodology applied in the past, and one that we are focused on doing our best to exceed.

Safa Rashtchy.

Just a housekeeping question. I believe you mentioned in the beginning comments, the revenues derived from direct navigation but I missed it.

The revenues for the quarter derived from the direct navigation area were $7.7 million and that compared to $6.3 to $6.4 million in the previous quarter. The 6.4 million was a pro forma number as if we had owned the Pike Street asset for the entire quarter so that would be a pro forma comparison. 7.7 this quarter and 6.4 last quarter.

So is the growth of the direct navigation part comparable to the 40% figure that you mentioned during my -- in response to my earlier question?

In terms of the year-over-year comparison?

Right.

Just looking at, when you are looking at a lower base, you can potentially get an even larger percentage base. We haven't specifically disclosed out what the prior year proprietary traffic numbers are. So we can't get into more specifics but, again, I think the key fact that we do want to portray is that there are growth year-over-year across all the businesses and business areas.

Sequential growth in that area was higher than the average and at the same time, to Mike's point on the annual, the trends were very favorable.

Roxanne Prevhity.

Susquehanna. How should we think about the seasonality on direct navigation? Would you expect to see the same kind of fourth quarter uptick that we noticed in other search businesses?

There are really two elements that impact seasonality. In direct navigation, we view as a subset of the search industry. So we wouldn't view it as disconnected really from what you would expect in search. And in search what you see are favorable seasonal trends on traffic, starting with January when you have the back to school period. They tend to stay that way until you get into the late spring, kind of coming out of your school year, flatten out over the summer, pick back up with back to school in September and in turn start to flatten off as you get into the holidays. You overlay that would seasonal trends in retail spending where you tend to see a predominant focus on very late Q3 and Q4. And for us, we think kind of overlaying those trends applies in a similar manner to search in general, and direct navigation, specifically.

There are no further questions, gentlemen. Did you have any closing comments?

We appreciate everyone's participation on this call and we look forward to updating you on our progress in the coming months and look forward to convening at our next quarterly call for Q4. Thank you all.

Thank you. Ladies and gentlemen, this does conclude today's conference call.