Marchex Inc (MCHX) 2009 Q4 法說會逐字稿

Good afternoon.

I will be your conference operator today.

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

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions) Thank you.

I'll now turn the call over to Ethan Caldwell, General Counsel.

Sir, you may begin your conference.

Thank you.

Good afternoon, everyone, and welcome to Marchex's business update and fourth 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, 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 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 the 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 Factors section on 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 definitions 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 fourth quarter.

Mike will review our financial results, and I'll conclude the call by covering our priorities for 2010 before opening it up for Q&A.

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

The fourth quarter was another quarter of solid execution for Marchex as we continued to deliver across the key categories that are driving our business.

The first category is our products.

We maintained our focus on product innovation and have established a strong product pipeline for 2010 beginning with the launch of Reputation Management for small businesses which will be available to partners and prospective partners at the end of this quarter.

We'll also continue to be a leader in the evolution of the call-based advertising industry with products that drive high return on investment and increased transparency.

Second is our customers.

During the quarter, we concentrated on growing our business with existing advertisers while leveraging our product pipeline to gain valuable direct advertiser relationships through new products like Pay-For-Call.

Third, is our employees.

We were active in the fourth quarter in recruiting great talent to help both increase our product development momentum and sell our products to a broader customer base.

We'll continue to strengthen our team throughout 2010.

And fourth, is costs.

As our financial progress demonstrated, we continued to balance our investment in growth opportunities with fiscal discipline.

Going into 2010, we have a very clear view of our long-term opportunity and the initiatives that will get us there.

You will see our business and product focus concentrated on two key industry beliefs.

One, that call-based advertising products will become ubiquitous.

And two, that small businesses will increasingly look to unified marketing products to help them grow and manage their business and customer relationships.

All of our initiatives will focus on executing on these things, and I'm happy to say we're off to a good start so far this year.

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

Thanks, Russ.

During the fourth quarter, financial progress across our key investment areas lead to a second consecutive quarter of sequential revenue growth, while our discipline with costs enabled us to continue driving operational efficiencies and significant cash flow.

Total revenue for the fourth quarter was $23.4 million.

Revenue from local advertising services was $16.4 million.

Revenue from publishing, otherwise known as our proprietary traffic sources, was $7 million.

First, in looking at advertising services, focus and execution across our call products and our suite of marketing products for small businesses were significant drivers of sequential growth in the fourth quarter.

We saw a modest pick-up in advertiser demand with a slightly better environment in certain categories like home and professional services.

Furthermore, as we mentioned last quarter, throughout 2009, we proactively concentrated resources on our most strategic opportunities while we wound down other non-core areas.

Specifically, Yahoo Search Submit Pro, also known as paid inclusion, is an area we had identified as not core to our strategic initiatives, and we began to de-emphasize this product over the past year.

As a result, paid inclusion-related services accounted for less than $1.4 million of revenue in the fourth quarter and approximately $7.5 million for the year.

Yahoo announced it would be ending this business at the end of 2009, and accordingly, we have exited this business.

During the fourth quarter, growth in our call-based marketing products and our suite of marketing products for small businesses more than offset the impact of unwinding paid inclusion.

Looking at our publishing revenue, there was a modest pick-up sequentially as demand for traffic increased from existing advertisers.

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

Excluding stock based compensation and amortization of intangible assets, total operating costs were $21.3 million for the fourth quarter of 2009.

Sales and marketing, excluding stock-based compensation, was $3.2 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 product initiatives such as the further evolution of our small business marketing products including our Reputation Management product.

Adjusted operating income before amortization for the fourth quarter was $2.1 million.

Adjusted EBITDA was $3.6 million.

Adjusted operating income before amortization and adjusted EBITDA are two of the principal 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 $36,000 for the fourth quarter of 2009, or $0.00 per diluted share.

This compares to a GAAP net loss applicable to common stockholders of $129 million for the same period of 2008, or $3.66 per diluted share, which included a $177 million non-cash goodwill and intangible asset impairment charge related to prior acquisitions.

Adjusted non-GAAP earnings per share, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.04 per share.

During the fourth quarter, we generated $3.6 million in operating cash flow and had approximately $33.6 million cash on hand as of December 31, 2009.

It's important to note that during the quarter, we were able to take in additional shares as part of our share repurchase program and had an incremental $600,000 in CapEx related to the relocation and consolidation of our offices in Seattle.

Additionally, during the quarter, we saw demand for high quality domains increase, and we sold a small number of non-strategic domains that yielded $2 million in incremental cash flow.

Although we expect domain sales to be uneven from quarter to quarter, we believe that the robust demand for high quality domains will continue, and that this will enable us to add millions of dollars of excess balance sheet flexibility to our capital structure going forward.

During the quarter, we increased the size of our stock repurchase plan by two million shares and acquired approximately 700,000 common shares for a total price of $3.2 million, bringing our total shares acquired under our repurchase program to 8.7 million shares or 24% 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.

Turning to our outlook for the first quarter, we anticipate revenue to range from $22 million to $23 million.

As a reminder, this factors in the sequential impact from the discontinuation of paid inclusion which accounted for less than $1.4 million in revenue in the fourth quarter.

Excluding paid inclusion, we expect continued strength in our call products and in our small business marketing products to result in sequential and year-over-year organic growth in our local advertising services revenue line.

Additionally, while we expect revenue volatility from proprietary traffic sources due to the nature of large advertiser spending, for the first quarter, we expect it to be in a similar range to the fourth quarter of 2009 as we continue to build our efforts to diversify advertisers in this revenue source.

For color on the mix of operating costs, we are continuing to make the financial committment to invest in product initiatives that underline the two themes Russ highlighted.

Specifically, around our call-based products and our suite of marketing products for small businesses.

Throughout 2009, we concentrated a significant amount of our investment dollars to support these themes which translated to new product launches such as Pay-For-Call, which launched in the second quarter of 2009, and our Reputation Management for small businesses beta which launched in the fourth quarter of 2009.

As our penetration into these developing markets increases in 2010, we expect growth in our overall business and increased efficiencies as we accelerate beyond the fixed cost components of these initiatives even if in the first quarter and near-term, margins stay in a consistent range.

Although the early stage nature of some of our growth products makes it difficult to forecast specific revenue and profitability targets for the full year, the investments we are making are paying off, and we expect the continued momentum from both our call and small business advertising products to result in accelerating revenue gains in 2010.

We expect our business progress will result in Marchex continuing to generate significant cash flow in 2010.

We feel good about the progress we are making, and we look forward to updating you throughout the year.

With that, I'd like to hand the call back to Russ.

Thank you, Mike.

On the thematic, if you look back at cost-per-click advertising, it grew and really came to dominate the overall online advertising market over the last decade.

And we believe that the opportunity for call-based advertising in small business marketing products will really evolve significantly in a similar fashion.

We believe 2010 will be a critical year as advertisers of all sizes begin to shift their focus toward more transparent performance marketing vehicles.

We're beginning to see this trend among both existing and new potential large strategic partners as well, as with the smaller advertisers who are just starting to recover from the economic challenges of last year.

As we watch these trends and recognize disproportionate growth across specific areas of our business, we've laid out certain priorities for 2010.

The first priority is to grow our suite of marketing products for small businesses through product innovation.

There are literally dozens of solutions aimed at empowering the consumer to find and interact with local business information.

But the problem with local search has not been solved from the perspective of the small business owner.

We want to enable small businesses to understand the changing dynamic of how consumers are using local business information to drive their purchasing decisions in providing them with the tools to effectively manage their online presence, communicate with their customers, and acquire new ones is central to our mission.

We will do this through continued evolution of our small business marketing products and the launch of our Reputation Management product.

Our Reputation Management product, which leverages our proprietary Open List search technology, is getting strong positive feedback, and we expect this product to be available to partners and prospective partners by the end of the first quarter.

This is the first step in a product roadmap that will see us provide small businesses with a true information advantage and enable them to cultivate deeper customer relationships.

Our second priority is to drive the evolution and penetration of our call advertising products such as Pay-Per-Call and Call Analytics.

While these products are still early in their life cycle, we believe that the convergence of technology with the needs of millions of advertisers who use calls as their primary means of acquiring new customers presents a transformative opportunity.

We believe we're uniquely positioned to benefit from this significant opportunity, given we own the infrastructure to provision, track, and analyze calls, and we also have the capability and supply channel to generate new leads from calls across online, mobile, and offline sources.

And our third priority is to capitalize on our ongoing product and business development momentum.

Maintaining our product momentum in pace of innovation is important as we launch new strategic relationships, like the one with Yellow Pages Group of Canada here in the first quarter.

As a reminder, 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.

YPG has a strong history of executing on delivery of new interactive products to their customer base at scale, and we look forward to partnering with them on this multi-year initiative.

In 2010, we expect to add several relationships with new strategic reseller partners in the local advertising sector, and we will add new product initiatives with existing resellers as well.

Similarly, our call products, while they may be early in development, are allowing us to build high value direct relationships with large agencies and national advertisers alike, and we expect this progress to accelerate in the year ahead.

Each of these priorities brings greater simplicity and clarity to Marchex's mission and will support our growth in 2010.

With that, Operator, we'll hand it back to you for questions.

(Operator Instructions) Your first question comes from Eric Martinuzzi.

Thanks, I have a question, first of all, just on the guidance.

That range of $22 million to $23 million, breaking it down by segment, I understand the local ad services -- you expect that to grow sequentially and year-over-year.

That's after adjusting the paid inclusion out, so the $16.4 million from Q4 is really starting from a base of $15 million.

Is that thinking about that correctly?

That is correct, yes.

Okay, so the $15 million pro forma for Q4 grows sequentially.

And then, the comment about the publisher side.

That that's $7 million of proprietary roughly flat sequentially?

Correct.

Okay, and then just shifting over to a couple of housekeeping items.

The CapEx in Q4, you talked about a $600,000 I think of facilities there.

What was the total CapEx number for Q4?

The total CapEx was $1 million, and $600,000 of that was related to the office consolidation in Seattle.

Okay.

And then just at a Board level, has there been any discussion about the dividend?

We're running about $3.2 million annually committed to the dividend.

Has that been discussed at all?

Or is that sort of untouchable as of now?

Well, nothing is untouchable, but the dividend is an important part of how we reward shareholders and encourage long-term investment thesis.

We have a lot of excess cash that allows us to fund investments, buy back shares, and give a small portion of it back to shareholders.

We anticipate expansion of our cash flow, and when you look at the supplement that comes through domain sales, we feel we have a lot of financial flexibility to continue on the program of erring on the side of over-investing to support our growth initiatives.

Paying out dividends as well as buying back our shares, and then keeping a cash balance that can support opportunistic strategic activity should such opportunities emerge.

Fair enough.

Last question.

I understand you're working on the Reputation Management product.

In talking with customers who are interested in it, what is the urgent need that gets satisfied for them?

Because this is another service for businesses.

Small businesses are already pretty well stretched coming out of the recession.

What is it that's pushing them over the edge to commit to this?

It's not just another service for a small business.

In a world where small businesses thought they had finally figured out the rules to the game a year ago when they could find their business listing on Google, up comes Twitter and Facebook and all sorts of new social media that are impacting how the consumers they target are accessing information and making purchasing decisions.

And they can't even begin to fathom how to access, comprehend, and -- let alone participate in the conversation.

So when you look at digital footprint, or presence, as one of the key components that drives a small business, we view that as a prerequisite to understanding the new rules of the game.

And given that it's hard enough for them to extend their business to start with, they need a company like Marchex to make that easy and provide a very cost-effective way to play.

Beyond that, it effectively becomes a means for them to efficiently communicate across all channels, whether it's search, social media or others.

And it becomes a natural extension into customer acquisition as well.

So Reputation Management, we think, to a large degree is a missing product in the value chain that can really make online make sense for small businesses.

And so for us, we think it's not just another product.

We think it's a foundational piece that's relevant to every small business whether they do acquisition-based marketing or not.

Let's say there was an issue with the Reputation.

Don't you wind up in a consulting services business now?

Isn't that the next leg of -- you've got the information, what's happening?

But then, they are going to turn to you to fix it, right?

Well in this case, we're empowering them with the tools to be able to, again, participate in this new world.

Provide them with an effective, integrated means to gain leads.

And if we can do that for -- without being specific on price, what's probably a monthly cost that's less than an hour of their time, when you look at other time that's valued.

We think that's a pretty compelling value proposition.

(Operator Instructions) Your next question comes from Ross Sandler.

Hello.

Sorry, I have three questions and then two housekeeping questions.

The first one is just strategic, high level stuff.

Have you ever looked at the gross amount of local ad spend that Marchex is facilitating through its search, call, and other local products?

I'm trying to get an apples-to-apples comparison with ReachLocal, and I know some of this is reported on a net basis for you.

Second question is just a follow-up to the previous.

How is the Reputation Management product priced?

And how is the revenue recognized?

And then third, you mentioned that the call products area was larger than the $1.4 million in paid inclusion in the fourth quarter.

Can you help us a little bit with some color on growth rates since these are fairly new?

Or some metrics in that area?

And then, I'll follow-up with the two housekeeping questions for Mike after.

Sure you don't want to throw those out now, too?

Sure.

As it relates to effectively marketing spend and Marchex manages, it's more than $0.25 billion on an annual basis.

And again, we see catalyst to see that number grow.

So we've got nice scale as it relates to the marketing budgets we support, and as you noted, within our model, we have a combination of net recognition as well as growth.

But that's the total.

When you look at pricing around Reputation Management, we haven't announced specific pricing but our focus initially to really maximize market penetration is to work with our reseller partners.

And we're approaching that with a model of per seat per month.

And we're also trying to set parameters where the value proposition and price point are so compelling that it can really accelerate the adoption of this product across the market.

So we're erring on the side of trying to be lean on pricing and do it under a per seat, per month model which is the basis of our discussion.

In terms of metrics around call growth, I can let Mike jump in as it relates to on a part of that.

But on the metrics front, this is an area that as it relates to calls and our business overall, we aren't announcing any new metrics today.

But prospectively, we're considering the best way to inform investors on understanding really the pulse elements that drive our business.

So nothing to share today, but it is on our radar.

Mike, anything as it relates to the color of call growth over paid inclusion?

So just to complete the thought, Ross, in terms of where the growth came from sequentially, third quarter to the fourth quarter, the call products would be the predominant growth in the local advertising services from that period to the fourth quarter.

And was the -- more than offset the $1.4 million?

Is that basically saying it grew faster and is larger than paid inclusion at this point?

Is that a fair characterization?

Correct, yes.

Okay, and then the two housekeeping.

The other non-current liabilities was $1 million in the fourth quarter.

What does that represent?

And then just a higher level question.

So margins have been pretty stable around 14.5%-15% for the last three quarters.

You're going to have -- you have already talked about Q1 with paid inclusion coming out, a similar run rate.

Where do you think the full-year 2010 margin outlook might shake out, or just some ranges?

Thanks.

So the first question, the other non-current liability.

That actually, again, relates to our office consolidation and the long-term lease that we entered into.

And that's effectively a deferred rent balance that's built in there.

On the other question in terms of where our margins are for 2010, we haven't given specific guidance in terms of the margin.

What we have done is given context to -- as we move through fixed costs and with that growth, if you look at our cost structure, 50% or so today are still fixed.

50% are variable.

And with growth, and clearly, we see some accelerating gains in that revenue growth in the call products and the suite of small business products throughout the year, we do expect that margins have the potential to expand, especially as we move through those fixed cost components.

Thanks.

Thank you.

Your next question comes from Clay Moran.

Thanks.

Good afternoon.

Could you talk a little bit about what else is in the product pipeline for small businesses?

I think you mentioned a couple times the suite of small business products.

What else might we expect?

And then, just a few numbers -- Search Submit, can you confirm that there's zero revenue in the first quarter?

And then Yahoo and the Yellow Pages -- what's their percentage contribution to revenues now?

Thanks.

Sure, I'll answer the first one, and I can let Mike follow up on the second.

When you look at the needs of small businesses, differentiate between products and features.

At a product level, there's presence, communications, and customer acquisition.

So Reputation Management, effectively, is a product that will embody the ability for a small business to manage presence, to be able to communicate and manage the interactions with our customers and prospective customers.

And we already have the leads-based products that we're continuing to evolve focused on a combination of clicks and calls and other consumer actions that can extend them on a category and location basis depending on the business they operate and where they reside.

So we really look at those as the three key pillars of the stool, and having a unified product that on an integrated basis works cohesively between Presence Management, communication, and customer acquisition, we really think is one of the key elements to unlocking adoption across a much bigger part of the small business universe.

Historically, you've seen the universe of small businesses that have bought directory page listings that migrated into a subset buying Internet Yellow Pages.

And then a subset of those that might buy search-based marketing.

We think Presence Management applies to every business and becomes a natural integration point when you look at the communications platform and customer acquisition elements.

So we think it applies to a much broader part of the market than our industry understands today.

Mike?

And so a couple of the other questions, Clay.

On the Search Submit or the paid inclusion, we did exit that at the end of the year.

So we can confirm that it moved to zero.

I think your other questions were Yahoo and the Yellow Pages Group as they relate to our publishing revenues.

Yahoo was approximately 11% of our revenue for the fourth quarter which is in the similar range to what it was in Q3.

I believe Yahoo was just under 12% at the end of the third quarter.

And then, the Yellow Page category was just under 20% for the fourth quarter, and that ranged to about an equivalent of 18% in the third quarter.

Okay, thanks.

Your next question comes from Robert Coolbrith.

Good afternoon.

It's been, I think, a couple quarters since you reported on number of advertisers, and your target for the number of advertisers for 2009.

Wondering if you are comfortable giving us an update on that?

Or maybe where you're thinking in terms of a target for 2010?

Also, with respect to your aggregate, I was just wondering, the number of advertisers that you represent currently.

What percentage of penetration of their total customer base do you think you're at right now?

And then I have one more question.

This is Mike.

I'll start with the advertiser question.

We actually did put out more than 70,000 advertisers in the fourth quarter.

And we also think that we are growing that.

If you look at some of the relationships we have, we do think that there's net additions commencing now in 2010, and we expect net additions throughout 2010 to grow that base by the end of the year.

And hopefully, there's actually accelerating growth as we go through the year.

And then in terms of the second question?

Yes, look -- when you look at penetration with existing resellers, we think our product innovation can lead to increased penetration.

Today it's less than 10% when you look at who our resellers are, and you look at the other historical products they have sold their customers.

And given the evolution of the industry and the needs of small businesses, these are here and now products that we feel are increasingly understood by our reseller partners in terms of delivering them out to the small business customers and increasing that penetration rate.

So we do think there's a chance to see that number climb significantly this year and next year.

And I guess I'll ask two more actually.

I don't think you've ever provided a revenue split between resellers and direct relationships with respect to local advertising services.

But wondering if you can characterize that?

And then also, with respect to your roadmap going forward -- beyond Reputation Management and calls -- where else do you think you can go?

Is display an attractive opportunity for you?

Or just -- I don't want you to, obviously, have to pre-announce products, but --?

On the split between direct and reseller-driven revenue, it's about 50-50.

So at least to give you an idea, it's pretty evenly split.

And when you look at -- if you could repeat your second question?

Well, just where else do you think you can go with your product roadmap beyond Reputation Management and calls?

Is display an attractive opportunity?

Or just generally, where else do you think you can go?

Well, we think we've got the right focus, and these are the two customer sets and products to focus on.

As it relates to different creative types that help us drive calls, we use a variety of forms given that we have a multi-channel strategy on fulfillment that spans online mobile and offline.

So in that regard, that's one of the core differential parts of our product, and our value proposition is our expertise on understanding what creative and which distribution channels most effectively drives us to leads they're looking for.

But we'll keep these areas, really -- we will keep a narrow focus around these areas because we have a pretty clear understanding that we're in a sweet spot.

Great.

Thank you.

Your next question comes from Sameet Sinha.

Yes, thank you.

A couple of questions.

First question would be, which segment of the small and medium business do you target?

What's -- if you can give us a sense of what your monthly ARPU is from -- ARPU per advertiser is.

Secondly, obviously a lot of things happening at the domain portfolio.

You seem to be selling off some of the URLs as well as the changes made at Yahoo.

Can you talk about that in your strategic vision in the near-term?

And third thing is, when you speak about -- I think in the press release you mentioned that growth -- anticipate seeing increased growth in overall business in 2010.

Are we talking about increased year-over-year because you have some paid inclusion revenues in 2009.

Do you expect that to grow despite tough comparisons?

Well, I think we'll grow with and without it.

And we're not quantifying that today, but we do see catalyst to grow on a pro forma basis ex-paid inclusion and on an absolute basis as well.

When you look at our domains and our websites, they continue to be a very valuable part of what we do here.

They're a real test bed for call fulfillment and a variety of advertising types to really drive our value proposition of delivering leap to small businesses through resellers and on a direct basis to some of the large relationships.

We sold 30 domains for $2 million.

So again, it's a drop of sand on the beach when you look at the value we've got.

So we're able to really take a forward-looking strategy with our publishing assets as a means of differentiating our fulfillment and value proposition to advertisers and supplement our cash flow fairly meaningfully with domains that we barely even know we own.

Okay, great.

Thank you.

Thank you.

Your next question comes from [Dan Solomon].

Hello.

Most of my questions have been covered.

I'm all right, thanks.

(Operator Instructions)

Well, we appreciate everyone's participation today.

We think 2010 should be a very positive year for Marchex, and we appreciate your continued interest.

Thank you.

This concludes today's conference call.

You may now disconnect at this time.