Marchex Inc (MCHX) 2009 Q3 法說會逐字稿

Good evening, ladies and gentlemen.

My name is Tina and I will be your conference operator today.

At this time I would like to welcome everyone to the Marchex third quarter earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Mr.

Caldwell, General Counsel and Chief Administrative Officer.

Mr.

Caldwell, please go ahead.

Thank you.

Good afternoon, everyone, and welcome to Marchex's business update and third quarter 2009 conference call.

Joining us today are Russell Horowitz, Chairman and Chief Executive Officer, John Keister, President, Peter Christothoulou, Chief Operating Officer, Michael Arends, Chief Financial Officer, Matthew Berk, Executive Vice President of Product Engineering, and Brent Turner, our recently joined Executive Vice President of Call Products.

During the course of this conference call we will make forward-looking statements that involve substantial risks and uncertainties.

All statements other than the 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 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 statements, 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 conference 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, including OIBA, adjusted OIBA, adjusted EBITDA and adjusted non-GAAP EPS.

A 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 website and decimations of these measures as used by us and the reasons why we believe these measures provide useful information 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, Ethan, and welcome, everyone.

On today's call I'll start by providing an overview of our third quarter.

Mike will review our financial results.

And I'll conclude the call by covering our ongoing product, operational and customer progress before opening it up for Q&A.

I'll begin with a few key takeaways from the quarter.

Our theme this quarter was really about strong internal execution.

At a macro level, internal execution is a Company theme we have been and will be continuing to focus on for a while.

Our goals are in four categories and include, first, products.

We're going to continue innovating across our product platform.

Second, customers.

We're going to continue increasing our footprint of customer relationships while continuing to grow our business with existing customers.

Third, employees.

We're going to proactively expand the base of talent across our organization and continue investing in our people through performance oriented compensation, competitive benefits and personal development opportunities.

And fourth, costs.

We'll continue unlocking efficiencies in our business through better organizational alignment and operational focus while continuing to invest in the initiatives that will drive Marchex's long term growth.

I'm happy to say that we made very good progress on all of these goals in the third quarter and we expect this momentum to continue in the next quarter and throughout 2010.

While the speed of the economic recovery remains uncertain, we're beginning to see some benefits from our focus throughout the year on the products that we believe will define Marchex's future, including Marchex Connect, which is our suite of performance advertising products for small business, our call products, which include Pay-For-Call and Call Analytics and our click products, which includes all of our Pay-For-Click products.

Our current progress continues to make us confident in our ability to realize our long term potential in local call and click-based performance advertising.

During the third quarter we saw growth from small business advertising budgets as well as from large advertisers.

While our overall advertiser count remains similar to second quarter levels, I'd note that we did see advertiser trends improve throughout the third quarter.

And we believe that our strength in sales and account management will translate into growth in our advertiser totals for the balance of the year.

All of our performance advertising products are increasingly well positioned to benefit from the [performances mandatory message] we're seeing in the marketplace and provide us with a firm foundation for future growth.

With that backdrop, I'll hand the call over to Mike.

Thanks, Russ.

During the third quarter, focus and execution on key investment areas as well as continued expense management led to financial progress.

On the revenue side, focus and execution on Marchex Connect and our performance advertising products led to sequential revenue growth in the third quarter.

Additionally, while the overall advertising environment stabilized in the third quarter, we maintained good expense management and continued to drive operational efficiencies.

As a result, we continue to generate meaningful cash flow during the quarter and are increasingly in a position to realize operating leverage over the long term.

Turning to details, revenue for the third quarter was $22.2 million.

Revenue from local advertising services was $15.9 million.

Revenue from publishing, otherwise known as our proprietary traffic sources, was $6.3 million.

Looking at local advertising services, while the current economic environment continued to impact advertisers' budgets on a broad basis compared to a year ago, we did see some leveling of budgets on a sequential basis, with selective improvement in certain categories like auto, finance and information technology, as well as in the new categories we have entered, including home services and professional services.

We also saw specific momentum build with core products like Marchex Connect and our Call related products, which we believe are key components to driving our growth over the long term.

As we mentioned last quarter, we have been proactively concentrating resources on our most strategic opportunities while winding down areas of potential risk.

Specifically, Yahoo Search Submit Pro, also known as paid inclusion, is an area we had recently identified as not core to our strategic initiatives.

As a result, we began to deemphasize the product during the third quarter, leading to Yahoo paid inclusion accounting for less than $1.5 million in revenue during the third quarter, which was down from less than $2 million in the previous quarter.

As most of you know, Yahoo very recently announced it would be ending this business at the end of 2009 and accordingly, we will exit this business at the end of the year.

Looking at our publishing revenue, trends in the third quarter remained largely similar with the second quarter.

We made good progress in lowering our dependence on certain financially challenged customers in the first half of the year.

At the same time, throughout the course of 2009, we have been consolidating resources while expanding sales efforts to diversify our advertisers in this channel.

As we move forward in subsequent quarters, we will update you on our progress.

Excluding stock-based compensation and amortization of intangible assets, total operating costs were $20.3 million for the third quarter of 2009.

In looking at the mix in operating costs for the third quarter, excluding stock-based compensation, our service costs increased as a percentage of revenue on a year-over-year basis, largely due to the shift in our revenue mix, which led to a larger proportion of revenue coming from local advertising sources.

Excluding stock compensation expense, sales and marketing was $3 million.

During the quarter we largely maintained our marketing expense levels.

It is important to note that we may spend more in ensuing quarters in support of recently launched product initiatives such as the enhanced Marchex Reputation Management product for local businesses.

Adjusted operating income before amortization for the third quarter was $1.9 million.

Adjusted EBITDA was $3.4 million.

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

GAAP net income applicable to common stockholders was $743,000 for the third quarter of 2009, or $0.02 per diluted share.

This compares to a GAAP net income applicable to common stockholders of $1.3 million for the same period of 2008, or $0.04 per diluted share.

Adjusted non-GAAP earnings per share, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.03 per share.

During the third quarter we generated $5.2 million in operating cash flow and had approximately $33 million cash on hand as of September 30th, 2009.

Additionally, during the quarter we sold a small number of nonstrategic domains that yielded more than $1 million in incremental cash flow.

During the quarter we saw demand for high quality domains increase.

Although we expect domain sales to be lumpy, we continue to believe that there is robust demand for high quality domains and that will remain the case going forward.

Based on this, we believe we will be able to add millions of dollars of excess balance sheet flexibility to our capital structure going forward through domain sales.

During the quarter we acquired 210,000 common shares for a total price of approximately $930,000, bringing our total shares acquired under our repurchase program to 8.1 million shares, or 22% of our common shares outstanding.

While we will continue to be opportunistic with respect to share repurchases, we believe it is also important to keep a significant cash position for financial flexibility.

As previously mentioned, given we are still in a period of shorter term visibility with regard to advertisers' budgets compared to previous years, we are not providing guidance today.

However, consistent with our approach in previous quarters, we will provide some color.

First, in looking at fourth quarter revenue we are seeing stabilization as well as modest increases in advertiser budgets with Marchex Connect, our call and click-based performance advertising products, and stable budgets from our publishing network partners.

We do expect results for the fourth quarter to be offset to some degree by the departure of paid inclusion by the end of the year, as advertisers begin to shift these dollars to new sources ahead of its official closure at year-end.

Second, in looking at the cost side of the equation, we continue to watch our costs closely and are focused on driving greater efficiencies in our business longer term.

At the same time we continue to invest significantly in the initiatives that are critical to Marchex achieving leadership in the call and click-based performance advertising market.

We believe that there is a substantial opportunity for Marchex to continue taking market share in the coming year and beyond and are committed to investing in the core products and people that will make that vision a reality.

That being said and consistent with our commentary last quarter, we expect that we will realize benefits and gain efficiencies as we see increased growth in our business, even if, in the near term, we see margins stay in a stable range.

We are continuing to evaluate the business opportunities that will inform our long term cost outlook and this is something we will continue to update you on in subsequent calls.

And third, despite the fact that we remain in investment mode in many of our key product areas, we expect that our current business progress will result in Marchex continuing to generate significant cash flow for the fourth quarter and beyond.

And with that I'd like to turn the call back to Russ.

Thank you, Mike.

Over the last few years the pieces have been slowly put in place from a product and business model perspective to help accelerate the migration of local advertising dollars to call and click-based performance advertising models.

We're seeing evidence of this transition in our own business and believe the progression of local advertising to call and click-based models will be one of the most significant trends in advertising over the next three to five years, given their efficiency and measurability in delivering new customers to both small and large advertisers targeting local consumers.

Marchex is increasingly at the center of this transition.

As an example, during the quarter we saw momentum build in both Marchex Connect through new partner wins and product launches and in our call-based products through new customer wins, increased existing customer budgets, and strong fulfillment across the growing mix of online, offline and mobile sources.

During the third quarter Marchex Connect was awarded the Best Search Engine Marketing Technology Platform for SMBs from Search Engine Strategies for the second consecutive year.

This is a great third party recognition of the investment we've made in supporting our partners and delivering industry leading products for small and medium sized businesses.

It's also recognition of the product and feature advancements we continue to make on Marchex Connect year over year, including Reputation Management and self-serve capabilities.

Our ability to service large SMB advertiser resellers was also further validated with our recently announced multiyear partnership with Yellow Pages Group of Canada.

YPG is the leading yellow pages company in Canada, with more than 400,000 advertisers and 1,500 sales representatives, and begins to give Marchex an international footprint as well.

YPG and our other resellers, such as Dunn & Bradstreet, who we also began working with us during the quarter, will continue to be key players in fueling the growth of the local advertising opportunity and in growing the number of advertisers utilizing Marchex's suite of products.

Furthermore, we continue to innovate across our product lines, as we've recently launched a number of new products and features that we believe will continue to open new market opportunities.

And these include, first, our recently announced update to Marchex Connect that's designed to support [two Marchex] partner profiles from those who want to offer self-provisioning capabilities, companies who sell their products to SMBs predominantly through an online channel, and companies that want to complement their feet-on-the-street SMB sales force with an online offering that can support their direct marketing.

With this new offering, SMBs can sign up for call and click-based advertising programs quickly and easily on a Marchex Connect partner website, providing partners with a highly efficient way to sell and support performance advertising products.

We expect this new self-serve capability will allow us to add new reseller partners in the coming months.

Second, the beta launch of the Marchex Reputation Management product, which is a simple to use, comprehensive, online marketing product designed to help local businesses understand, manage and take action on their digital footprint.

Marchex Reputation Management provides an intelligent, aggregated view of the business's reputation, while providing the capability to easily compare themselves with other businesses and manage the accuracy and coverage of their online listings.

This product, which covers more than 8,000 data sources, has been built using our proprietary open list local search technology.

In simple terms, this product allows a business to see all of their reviews and listing information from around the Web in one simple dashboard.

In addition, the business can respond to or update various information they see on this dashboard.

We expect that Marchex Reputation Management will launch in full in the first quarter of 2010.

It's important to note that this product will be sold on a subscription basis through select Marchex Connect reseller partners.

These initiatives and our ongoing development of call-based products give Marchex a broad range of performance-based product offerings to add to our momentum.

As a result, we believe Marchex is ideally positioned to continue emerging as a focused, market-leading company that delivers both growth and meaningful financial leverage.

We appreciate your participation in our call today.

And at this point, Operator, we'll hand the call back to you for questions.

(Operator Instructions).

Our first question will come from the line of Ross Sandler with RBC Capital Markets.

Hey, guys, good quarter.

A couple of questions.

First two are on Yahoo related stuff and the last one on some of these new aggregated deals.

So, first is on Yahoo with regards to smart pricing.

They've been making a lot of changes lately with some of their relationships, some other industry participants are seeing negative CPC trends starting to hit in 4Q.

So are you guys being impacted at all on the payouts on your O&O sites?

And I know some of the -- some of these impacted parties may also be advertisers in the Marchex network.

Are you seeing any impact there?

Thanks for the questions, Ross, at least the first one.

We have a very good relationship with Yahoo.

We're aware of what they're doing with smart pricing.

Whatever it is, it's inconsequential to us.

Okay, good.

And then the decision on eliminating paid inclusion, thanks for quantifying that.

Is there any impact to your -- the legacy traffic leader business outside of what you've been doing in paid inclusion, like, is it a bundled service where there's other kind of SEM stuff that may be deemphasized now that paid inclusion's out of the picture?

No, it's over.

It's pretty simple.

That's it.

Okay.

And then when you sign a new aggregator deal like the YPG in Canada, how long does it typically take to get -- to start generating meaningful traction with their advertiser base?

And you guys have been outing some of these aggregator relationships over the course of the past year.

When do they start kind of hitting critical mass?

Is it -- I know it's different for each one, but is there some metrics or a timeline you can help us with?

That's it.

This is an area we do really well in.

Our customers make us better.

YPG gets it.

They're committed to going out and really selling these products effectively.

We'll launch sometime early in the year with them and it'll start to contribute.

And we think it can build meaningfully throughout the course of the year and we can continue to extend and make that a very successful product for years to come.

Thanks, guys.

Our next question will come from the line of Christa Quarles with Thomas Weisel Partners.

Hi.

First question is on the yellow page exposure.

I think in the second quarter you guys indicated it was 19%.

I was wondering if you could update it for the third quarter.

And then as you look at this new Reputation Management product, I was wondering if you could, I guess, discuss in more detail some of the pricing and then how you expect it to get distributed and how that might lead into additional sales and marketing costs.

And then the third question is just curious if you guys can give a broad overview of what the most successful products are on the platform today, where the momentum is, just from a mix perspective.

Thanks.

Christa, this is Mike.

I'll answer the first part.

The yellow page figure in terms of the total was about 18% this quarter.

And as you mentioned, it was 19% in the second quarter.

And on -- I'll take the second and third questions.

This is Russ.

Yes, with Reputation Management, we're going to price it on a subscription basis (inaudible) for business.

And then resellers will be able to sell it on a bundled basis with other products or selectively a la carte.

And we're looking at sales and marketing as a means to really go in as a partner with them and gain rapid penetration of those customer bases.

Because we think the value proposition of Reputation Management stands on its own, but the combination of the suite of products that we sell, when you look at performance advertising around calls and clicks in combination with Reputation Management, can create a very sticky relationship with those small businesses.

And so we want to make sure we're supporting that to gain real traction and penetration.

As it relates to what our most successful products are, at this point our Call products are seeing very successful trends.

Our customers are happy and they're spending more with us.

And the great news is that they see the benefits from Call Analytics and Pay-For-Call.

We don't have to educate them on the value of calls.

They get it.

And on the other end of the spectrum, we don't have to change consumer behavior since the telephone is something we all know how to use, particularly as it relates to reaching out to businesses.

And then Marchex Connect also continues to be very well positioned, given that we're doing a great job for our customers and making meaningful product advancements that I think can lead to greater market share wins.

So combination of Call products and Marchex Connect I think really lead the way.

Got it.

Thanks.

Our next question will come from the line of Robert Coolbrith with ThinkEquity.

Good afternoon.

Thank you for taking my questions.

First off, just wanted to ask your [tone], I guess.

Exiting Q2 and talking about potential trends for Q3, seem to be a little bit more conservative relative to where Q3 ended up being.

Just wondering how trends built throughout the quarter, if it was mainly back half improvement.

And then second, if there was anything of a onetime nature or particularly you referenced some strength in automotive.

Has that reversed at all in Q4 with the end of the clunkers program?

And then just a housekeeping issue.

Wanted to ask, not sure if you mentioned it already, how many domains were sold.

Thank you.

Make sure we get your address so we can send you the prize on asking a Cash for Clunkers question.

So --

Thank you.

No onetime items.

Everything was built around recurring relationships.

As it relates to kind of pronounced trends, we saw progress build.

We're clearly in an environment that -- where I think dictates some prudent conservatism in terms of outlook, given that visibility isn't what it's been in the past years.

Clearly we're happy with our trends.

We think our products and relationships are very forward-looking at this stage.

And we feel very good about our business in Q3 and particularly as we set the stage for 2010.

In the autos category, Cash for Clunkers helped.

But autos kind of normalized.

That continues to do pretty well.

And then I think, Robert, your last question was the number of domains.

This is Mike.

So we sold 30 domains this past -- in the third quarter.

Thank you.

(inaudible) with Craig-Hallum.

Congratulations on the quarter.

Operating expenses continue to decline.

Have we troughed yet and what do you see as your run rate?

I think your question is mixed there because it comes -- there's some costs that are variable and tied to revenue and then there's other costs, like the G&A and some of the product development, that aren't necessarily as tied to revenue.

Part of it is the administrative costs go with the ebb and flow of being a public company, and then the product development is the investment decisions that we make, particularly on the research side.

Those costs we see as relatively stable in the near term and we see them actually on the product development side increasing as we make progress on the revenues into 2010.

The sales and marketing specifically we do see in the ensuing quarters -- with some of the new product launches, we do see some uptick in terms of the sales and marketing.

And what we have done over the last year is actually moved a lot more of our sales expense to a performance oriented model, which means that as revenue moves up or down, the sales and marketing expense moves along with that.

And then the service cost is very much more a variable cost and more of a function of the revenue streams.

So hopefully that helps give some context.

Okay.

And then finally, what was CapEx in the quarter?

CapEx was $500,000 for the third quarter.

Thank you.

Our next question comes from the line of Gene Munster with Piper Jaffray.

Good afternoon and congratulations.

Russ, if you could talk a little bit about potential for other resell partnerships in the pipeline that could hit next year in terms of kind of broadening your distribution of your products.

And also, it seems like your strategy with the domain names [inaudible - microphone inaccessible] use that as a source of cash.

I guess maybe longer term, is there any chance you just might eliminate the entire portfolio?

I guess in other words, what's your commitment to the publishing side of the business?

Sure.

As it relates to Marchex Connect partners, we feel we're really well positioned now to support fully the market needs of the most important channels with the recent addition of the self-serve capabilities.

So again, whether it's a reseller who has feet-on-the-street or whether it's a reseller who's more focused at driving direct marketing customer acquisition, we now have these kind of very important large channels opened up.

So we obviously can't share names but we feel very optimistic about our ability to go out and win new relationships.

An example we referenced today is Dunn & Bradstreet, as I think a pretty good reference point on a self-serve opportunity with Marchex Connect.

There'll be a lot more customers that we think fit that profile.

When you look at our domain assets, we're on record.

We think we have some hundreds of millions of dollars worth of assets here.

Increasingly, as we look at calls being an important part of what we sell on a performance basis, we've been looking at how we optimize our traffic and our websites to help with call fulfillment in addition to click fulfillment.

We tend to be more aggressive now with sales.

We do focus on nonstrategic domains.

I think those domains [as built out] premium websites really focused at optimized fulfillment for our call and click-based products is an important ongoing synergistic part of what we're doing.

But at the edges, we think we can continue to add tens of millions of dollars of incremental cash flow to our balance sheet without compromising that whatsoever.

Great.

Thank you.

Our next question will come from the line of Sameet Sinha with JMP Securities.

Yes, thank you very much.

Question on the paid inclusion product.

Can you talk about what the margins were on that product?

That's number one.

The second is in the past you've been -- you've spoken about how yellow pages customers, some of the troubled relationships versus the non-troubled.

If you can give some breakout.

And third, Russ, did in the beginning of the call you mention something about increasing number of employees or was it just investing in current employees?

I'll answer the last one first.

No, we're talking about investing in current employees.

We selectively add but we're in a similar employee level as we have been over the last two, three quarters, right around 300.

And as it relates to the characterization about troubled companies, I think there was a prior question kind of quantifying yellow pages.

But outside of doing that, just for the sake of making sure we're providing as much transparency as possible, I think we feel pretty good about who our customers are and our ability to support them and grow with them over the long term.

Mike, anything you'd like to add?

I think the one -- the first part of the question was about paid inclusion and the contribution.

We don't disclose the exact revenue share that we have with our partner or with any other partners.

But the contribution from that product was not a -- was not a meaningful contribution overall to us.

Shouldn't really be relevant to how either we're viewing the business or you should going forward.

Thank you very much.

Our next question will come from Clay Moran from the [Banmark] company.

Thanks.

That's Benchmark Company.

Just in terms of the color you gave around the fourth quarter, sounded like stable to modest trends minus any wind-down of search submit.

Just wondering if the stable is sort of inclusive of a seasonal impact or after a seasonal -- how does it -- how does it relate to the seasonal uplift you typically see?

I think our trends -- seasonality helps us, obviously helps everybody who's kind of in businesses like ours.

I think the trends we're seeing are transcending seasonality.

It makes us optimistic for 2010.

And it's why net-net we think the combination of Marchex Connect and our call and click products probably grow in Q4 and some of that may be offset with solution of paid inclusion.

But directionally, we feel good about it, ex-seasonality.

And if seasonality helps us out a little bit, we'll take it.

So the color you gave sort of doesn't assume a seasonal uplift, it's just sequentially stable to modestly up.

We know it's Q4 and we know there's some seasonality.

But today we're really giving directional perspective and we feel good about it, with and without seasonality.

Okay.

And one more question.

Since you've had good success on selling domains, why not accelerate that part of the business?

Well, look, in the grand scheme of guidance, I won't be specific on domain sales but I think they'll be higher in Q4 than they were in Q3.

Okay.

Thanks.

We have a follow-up question from Ross Sandler from RBC Capital Markets.

Just one quick follow-up question just on kind of philosophy around business models in local.

So Marchex's approach has been to partner with local sales forces via the yellow pages and other aggregators versus some of the other companies in this space, like [a reach local] or [a Yodel], for instance, who've taken more of a direct sales approach.

So can you talk about why you believe that your approach is the right one longer term?

And assuming the macro was a little bit more favorable, fast-forward, like, 12, 18 months, do you think it would ever make sense to move to a direct sales approach in addition to what you're doing with aggregators?

Well, Ross, I appreciate you coming back and asking that question so we can hopefully clean up a misperception about Marchex.

At Marchex we support really two profiles of customer; there's small guys and big guys.

And we've chosen to sell to small guys through reseller partners because we believe it's the most efficient way for us to get to them and where we can leverage their kind of historical relationship and trusted relationship.

But as it relates to big guys, we sell them direct and we're going to keep selling them direct and we're going to grow that business.

And so as it relates to embracing a combination of direct and reseller strategy, we've made that based on customer profiles and channel strategies.

I hope that helps clear it up.

Yes, it definitely does.

Is there -- I mean is there a specific line where you think a customer is deemed (inaudible - microphone inaccessible) $1,000 a month in spend that that classifies (inaudible - microphone inaccessible) below that would be a small guy and someone -- is there -- is there any, like, real number that you guys use internally?

Again, this is directional.

I think small guys spend what's measured in -- it really depends on the product but small guys spend thousands to tens of thousands of dollars per year and big guys spend upper five figures to six or seven figures per year.

That's probably a directional cutoff, if that helps.

Very helpful.

Thanks, guys.

Thank you.

And there are no further questions at this time.

Do you have any closing remarks?

We appreciate everyone's participation and we look forward to updating you on our progress with our fourth quarter call.

Thanks, everyone.

Ladies and gentlemen, this does conclude today's teleconference.

You may all disconnect.