Marchex Inc (MCHX) 2010 Q1 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good afternoon, ladies and gentlemen, and welcome to the Marchex First 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 will now turn the call over to Ethan Caldwell, General Counsel and Chief Administrative Officer.

  • Sir, you may begin.

  • Ethan Caldwell - General Counsel

  • Thank you.

  • Good afternoon, everyone, and welcome to Marchex's business update and first quarter 2010 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 our 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.

  • Russell Horowitz - Chairman & CEO

  • Thank you, Ethan, and welcome, everyone.

  • On today's call, I'll start by providing an overview of our first quarter and recent events, Michael will review our financial results, and I'll conclude the call before opening it up for Q&A.

  • Let me begin with a few takeaways from the quarter.

  • We had a good first quarter, characterized by continue progress in the key categories that drive our business.

  • The first of these is our products.

  • During the quarter, we continued to execute on developing new products, enhancing existing products and improving our infrastructure to support growth.

  • For example, our reputation management product for small and medium size businesses, also known as SMBs, launched on schedule at the end of the quarter.

  • We doubled our reputation management content footprint to nearly half a billion pieces of local business listing information and added several features designed to create engagement, including customized alerts.

  • We're currently user testing several forward looking product elements such as two way communication between small businesses and their customers across social media and email including the ability to create, broadcast and manage promotional offers.

  • We evolved our pay per call capabilities to support customers with tens of thousands of business locations, and we strengthened our call analytics platform to handle significantly greater capacity.

  • Next is our customers.

  • We achieved a number of significant customer accomplishments in the quarter.

  • First, we continued to grow the number of new partners selling our small business marketing products.

  • Specifically, we entered into partnerships for Marchex Reputation Management with Dow Jones Local Media, City Squares, Nile Guide and Measure Up.

  • These agreements cover reselling our Reputation Management product, providing content to it or both.

  • We also entered into new agreements with NBC and Demand Media to sell our Marchex Local Leads product.

  • Formerly known as Marchex Connect, Marchex Local Leads is a performance based light label offering that allows companies with local business customers to sell search and call based marketing and analytics under their brand.

  • Marchex Local Leads delivers targeted marketing campaigns and reports on consumer actions resulting from such campaigns including phone calls, form submissions, emails, video plays, map interactions, clicks to the advertiser website and many others.

  • Second, our call advertising direct sales efforts are accelerating.

  • Several new advertisers across a number of key categories joined our pay per call program including Sylvan Learning Centers and KinderCare in education, Nationwide in Insurance and PRIMEDIA in real estate, and we added 10 new mobile online and offline publishers to our distribution footprint.

  • We also saw momentum build in call analytics with several key customer wins include Just Dial, a free operator assisted toll free concierge service.

  • And lastly, we entered into a strategic and exclusive long term relationship with AT&T Interactive covering their search based performance marketing programs.

  • We've worked with AT&T Interactive on delivering local leads to their advertisers since 2004, and this agreement means we'll be working with them through mid-2015.

  • We feel very fortunate to be working with an innovative leader like AT&T and we look forward to seeing this relationship expand over time.

  • AT&T Interactive is our largest partner and has the largest footprint of local sales people and advertisers in North America.

  • Michael will touch on the financial aspects of this expanded relationship in a moment.

  • The next item is our employees.

  • We're very focused on recruiting great people as well as advancing and mentoring exiting employees as a means to invest our business and products.

  • The strong hires we made in the last 12 months have absolutely contributed to the momentum and growth we're beginning to see in our business.

  • Our plan is to continue these efforts to strengthen our team for the foreseeable future.

  • Finally, our costs - we continue to see the benefit to maintaining focus on our cost structure while investing appropriately on our growth opportunities.

  • Michael will touch on this more in a moment.

  • Our ability to execute in each of these categories has enabled us to capitalize on the opportunities we see to build market leadership and drive growth.

  • As we mentioned last quarter, the Company's entire energy is concentrated on two key industry beliefs - first, that performance based call advertising products will become ubiquitous, and second, that small businesses will increasingly look to unified marketing products to help them grow and manage their business and customers' relationships.

  • The combination of these two beliefs forms our core business focus, which is to unlock local commerce everywhere by helping advertisers reach customers wherever they may be.

  • Our strategy is to develop industry defining products against our two beliefs, which we can take to market both directly and through industry leading partners.

  • We made significant progress towards our core business goals today with the expansion and extension of our relationship with AT&T Interactive.

  • Under our expanded agreement, AT&T Interactive will consolidate all of their SMB search based marketing programs to Marchex, which includes transitioning customers from other vendors.

  • This is a multi year relationship and it's effective immediately.

  • As part of the relationship, AT&T interactive will also be running many of their national performance marketing programs through Marchex, as well.

  • This is important for several reasons.

  • The first is North American footprint.

  • Between AT&T interactive and the Yellow Pages Group of Canada, as well as our many other Marchex reseller partners, Marchex has now established a significant North American footprint of partners who sell our small business marketing products.

  • Specifically, AT&T is the number one local advertising company in the United States and YPG is the number one local advertising company in Canada.

  • Between the two relationships, Marchex has thousands of feet on the street sales representatives selling search and call based performance advertising products to potentially millions of small businesses.

  • The second reason is financial impact.

  • This expanded AT&T relationship adds significant growth opportunities as we expect this relationship will contribute more than $100 million in revenue to Marchex over the next five years.

  • And the third is product validation.

  • While our small business marketing products have won numerous industry awards as best in class, this relationship expansion and extension provides further validation regarding our product leadership versus other industry offerings, including our product roadmap and innovations in the pipeline.

  • Let me hand the call over to Michael to cover the first quarter results and our thoughts on guidance.

  • Michael Arends - CFO

  • Thanks, Russ.

  • During the first quarter, momentum across our key investment areas led to another quarter of sequential revenue growth while our discipline with cost translated to our continued generation of meaningful cash flow.

  • Total revenue for the first quarter was $24 million.

  • Revenue from local advertising services was $17 million.

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

  • First, in looking at local advertising services, focus on execution across our call advertising and small business marketing products continue to drive our sequential growth.

  • Excluding the historical contribution of paid inclusion and related services, which we discontinued at the end of 2009, our year-over-year growth rate in this area was 37%.

  • For our publishing revenue, demand from advertisers remained largely consistent with the fourth quarter.

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

  • Excluding stock base compensation and amortization of intangible assets, total operating costs were $22 million for the first quarter of 2010.

  • Sales and marketing, excluding stock based compensation, was $3.7 million.

  • During the quarter, we increased our investment and small business marketing products initiatives.

  • While we expect to normalize those expense levels with a modest decrease in the near term, longer term, we expect to increase marketing expense in support of the further evolution of all of our products.

  • Adjusted operating income before amortization for the first quarter was $2 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 loss applicable to common stockholders was $68,000 for the first quarter of 2010 or $0.00 per diluted share.

  • This compares to a GAAP net loss applicable to common stockholders of $1.7 million for the same period of 2009 or $0.05 per diluted share.

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

  • During the first quarter, we generated $3 million in operating cash flow and had approximately $33.8 million cash on hand as of March 31st, 2010.

  • 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 $900,000 in CapEx related to the relocation and consolidation of our offices in Seattle.

  • Additionally, during the quarter, we continued to see very good demand for domain acquisitions.

  • We sold a small number of non-strategic domains that yielded $1.3 million in incremental cash flow.

  • Although we expect domain sales to be uneven from quarter to quarter, we believe that the robust demand for domain names 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 acquired 411,000 common shares for a total price of $2.2 million, bringing our total shares acquired under our repurchase program to 9.2 million shares or 26% 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.

  • Before turning to our outlook, I'd first like to highlight some of the details outlined in today's announcement surrounding our relationship with AT&T Interactive.

  • The deal, previously scheduled to expire in mid 2011, extends our search based performance marketing relationship with AT&T Interactive by more than five years from today to mid-2015 and adds exclusivity.

  • It's important to note that the agreement implies significant growth over its life as a result of adding tens of thousands of new advertisers, including thousands of its existing advertiser accounts that AT&T intends to migrate over to Marchex from its current other providers in the next 12 months.

  • Revenue from this agreement will be recognized in our local advertising services line item.

  • In the context of generating more than $100 million over the term of the relationship, we are providing an anticipated $9 million in near term investment incentives to AT&T to drive accelerated advertiser migration and adoption.

  • Almost all of the incentives, which may vary based on the rate of advertiser migration, will flow through as offsets to our local advertising services revenue line with the balance being additional cost in technology investment to accommodate the thousands of new advertisers on our product platform.

  • The $9 million in 2010 AT&T deal related investment incentives are estimated to break down to $5 million in the second quarter, $3 million in third quarter and $1 million in the fourth quarter.

  • In 2010, net of these incentives, we expect AT&T interactive revenue contribution of $11 million to $13 million for the local leads business.

  • In 2011, we expect more than 80 percent growth in revenue associated with this relationship with the deal becoming accretive beginning in the first quarter 2011 and scaling up thereafter.

  • Now, turning to our second quarter and annual outlook, for the second quarter, we anticipate revenue of more than $19.5 million, which includes the sequential impact of the estimated $5 million in revenue offsets related to the AT&T deal.

  • These offsets occur in our local advertising services revenue line.

  • Excluding these investment incentives, we estimate revenue would be more than $24.5 million.

  • Our anticipated growth also factors in our expectation of continued strength from our call advertising and small business marketing products, and as a result, we do expect revenue for the balance of the year to grow in each succeeding quarter.

  • Additionally, for the second quarter, we expect publishing revenue to be modestly lower than the first quarter due to lower overall budgets from advertisers.

  • As we previously mentioned, we expect potential revenue volatility from proprietary traffic sources due to the nature of large advertiser spending as we continue to build our efforts to diversify advertisers in this revenue area.

  • For the year, we expect revenue of $90 million to $95 million, which factors in the $9 million in offsets resulting from our AT&T relationship.

  • Excluding the investment incentives, we estimate revenue for the year would be in a range of $99 million to $104 million.

  • For adjusted operating income before amortization and adjusted EBITDA, first, we expect the AT&T investment incentive revenue offsets will have a corresponding dollar for dollar impact to adjusted operating income before amortization and adjusted EBITDA.

  • As a result, we expect a loss of $2.9 million or better in adjusted operating income before amortization for the second quarter, implying a loss of $1.6 million or better in adjusted EBITDA.

  • Second, we expect both adjusted operating income before amortization and adjusted EBITDA to increase sequentially each successive quarter in 2010 from second quarter levels and to return to our 2010 first quarter margin levels by the fourth quarter of 2010, setting a strong foundation for continued growth in 2011.

  • Third, excluding the impact of the $5 million in AT&T related investment incentives in the second quarter, we expect our current growth would lead to modestly higher sequential adjusted operating income before amortization and adjusted EBITDA.

  • The investments we are making in the key products and relationships that will define Marchex's future are now beginning to pay off and we expect the continued traction from both our call advertising and small business marketing products to result in our continuing ability to generate significant cash flow in 2010 while setting the table for strong cash generation and revenue gains in 2011 and beyond.

  • We feel good about the progress we are making in positioning Marchex for long term growth and look forward to updating you throughout the year.

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

  • Russell Horowitz - Chairman & CEO

  • Thank you, Michael.

  • You've now heard us talk about the importance of phone calls to advertisers for several quarters.

  • Phone call generation and small business market are the core focus areas for Marchex and will be key drivers of our growth for the foreseeable future.

  • Advertisers large and small understand that phone calls from consumers are the key to unlocking local commerce.

  • Today, advertisers are spending more than $35 billion annually across multiple media channels such as Yellow Pages, newspaper, radio and direct response television to drive phone calls to their businesses.

  • Although the methods by which consumers access information about businesses continues to evolve and change, the primary means by which consumers communicate with businesses, the phone, has not.

  • As smart phone and mobile usage take off and PC to phone conversions continues to gain in popularity, we believe that pay per call supply will blossom, making it both easier and more important for advertisers to leverage performance based call advertising as a customer acquisition opportunity.

  • In addition, the challenge for small businesses in managing and growing their customer relationships continues to change rapidly.

  • The ways in which consumers are interacting with business information is forcing small businesses to look beyond their Yellow Pages listings and websites as the primary means to grow their business.

  • Today, small businesses need help monitoring their online presence using products like Marchex Reputation Management, communicating with their customers and acquiring new ones across a diverse media set that includes social media, search, mobile applications and offline sources.

  • Here in 2010, we at Marchex are well positioned with these opportunities and our people are highly energized.

  • We look forward to updating you on our business progress throughout the year.

  • With that, I'll hand the call back to the operator for question and answer session.

  • Operator

  • Thank you.

  • (Operator Instructions.)

  • And your first question comes from Ross Sandler with RBC Capital Markets.

  • Ross Sandler - Analyst

  • Hey, guys.

  • Thanks for taking the question here.

  • First, on the local ad revenue in the quarter, so if I use $2.5 million or $3 million range for pay inclusion back in 4Q '08, I get somewhere in the high single digit year-over-year growth for local ad revenue, ex paid inclusion in 4Q '09.

  • Is that the right way to think about it?

  • And if so, that's a pretty big acceleration, high single digits up to 37% in 1Q.

  • So, which of the product areas that you mentioned before, Russ, is driving that acceleration in local ad revenue in the first quarter?

  • And then, I've got one follow up on the AT&T stuff.

  • Michael Arends - CFO

  • So, Ross, this is Michael.

  • Let me just share some of the specific data first.

  • So, the first quarter of 2009, the paid inclusion related services were $2.5 million.

  • In the fourth quarter of 2009, it was $1.4 million.

  • So, year-over-year, the growth rate without the paid inclusion excluding it would be 37%.

  • The key drivers both year-over-year as well as sequentially are the call products and the small business marketing products.

  • Ross Sandler - Analyst

  • And what was the -- do you guys have the paid inclusion number for 4Q '08?

  • I'm trying to get the year-over-year comp going from what was the year-over-year growth in 4Q '09 relative to that 37% in 1Q 2010.

  • Michael Arends - CFO

  • So, we haven't put it out specifically, but just to reiterate, for the full year 2009, it was $7.5 million.

  • It was $2.5 million in the first quarter of 2009 and it was actually larger than that in the fourth quarter of 2008.

  • So, your guess of about $3 million is in that range, yes.

  • Ross Sandler - Analyst

  • Okay, that's perfect.

  • That's what I need.

  • Okay.

  • And then, on the AT&T deal, so it looks like the accounting around this is going to be on a gross basis from what I gather here in the release.

  • And I guess what I'm trying to figure out is, is this going to look like what some of the other companies in the space are reporting in terms of -- if there's a $100 click package per month, do you guys recognize the $100 as revenue and then deduct the cost?

  • Like, how does the accounting work--?

  • Russell Horowitz - Chairman & CEO

  • --Actually, Ross, the accounting is the same as it has been under the existing AT&T relationship, which is we do net accounting.

  • And so, that $100 that might get spent, that's not our revenue.

  • That's AT&T revenue.

  • That comes into our product and we charge an agency fee for providing the product and fulfilling for the customer.

  • So, no change as it relates to the accounting of this relationship - it's just the consolidation of all their search based performance marketing products across all of their channels on an exclusive basis to Marchex, but the same accounting treatment.

  • Ross Sandler - Analyst

  • Okay.

  • Well, that -- then, my next question would be, Michael, you mentioned, it's kind of -- at least for this year during the account transition, a dollar for dollar revenue versus expense as you kind of ramp up and make these upfront investments.

  • What is the potential margin on that in the out year once we get beyond the investment phase?

  • Like, what would the AT&T deal represent in terms of margin to Marchex in theory in the out year?

  • Michael Arends - CFO

  • The contribution for the small business marketing products is still the same in the out years as it has been in the past, and it's always been one of our higher margin contributing areas.

  • So, it is north of 40% and it can get as high as 50% contribution.

  • Russell Horowitz - Chairman & CEO

  • Just to reiterate, net revenue recognition is the model we utilize with our reseller partners as a general standard.

  • Ross Sandler - Analyst

  • Okay, great.

  • Thanks, guys.

  • Russell Horowitz - Chairman & CEO

  • Thank you.

  • Operator

  • Your next question comes from Dan Solomon with BMO Capital Markets.

  • Dan Solomon - Analyst

  • Hey.

  • Good afternoon, guys.

  • In the income statement here, it looks like there were some domain sales again, and I may be missing it here in the release, but I was just hoping you could give us the details around that for this quarter.

  • Michael Arends - CFO

  • So, we sold, again, a small number of domains, a handful.

  • It was a little under 40.

  • And the cash proceeds yielded over $1.3 million.

  • Dan Solomon - Analyst

  • Okay.

  • And I know you've talked before about how much we can read into that on a per value basis and beyond.

  • Is there any sort of color around that you can give us how that sort of relates to the rest of the portfolio and sales going forward?

  • Russell Horowitz - Chairman & CEO

  • Look, it -- it's -- obviously, it's public investors' place to value Marchex.

  • We think that there's tens of millions of dollars of under or unappreciated asset value stacked in these domains.

  • And as we've said before, these are just sand on the beach.

  • We sell a few we didn't know we owned.

  • And it really doesn't even cut into what it feels like we own or what we view as our most valuable domains.

  • So, we think this will continue to generate meaningful free cash flow for us, and there's a lot of asset value.

  • And key parts of that asset base are being leveraged strategically to differentiate our collaboratizing and small business marketing products.

  • Dan Solomon - Analyst

  • Okay, that's great.

  • Thank you.

  • Operator

  • Your next question comes from Clay Moran with Benchmark.

  • Clay Moran - Analyst

  • Hey, good afternoon.

  • Just wondering what percentage of revenues come from the call base products at this point.

  • Thanks.

  • Michael Arends - CFO

  • So, Clay, this is Michael.

  • What we've shared before is still the same magnitude.

  • The call advertising products and the small business marketing products account for the substantial minority of our revenues.

  • And we expect by the end of 2010, that they will account for the vast majority of our total revenues.

  • Operator

  • Your next question comes from Robert Coolbirth with ThinkEquity.

  • Robert Coolbirth - Analyst

  • Good afternoon.

  • A couple questions - first, on the AT&T relationship, I think you said that your contemplating 80% year regrowth FY '10 to FY '11 in contribution from AT&T.

  • What kind of organic growth assumption is implied there versus pick up from expansion of the relationship and all the clients being on your platform?

  • And then, secondly, thinking about the domain portfolio, how do you think about -- well, if we could get an update on how many domains total you have in the portfolio at this point if you want to provide that number.

  • And then, also, how many of those do you think are sort of core versus non-core in terms of is it the 80/20 rule in terms of contribution of revenue to proprietary traffic versus ones that aren't being actively monetized by you?

  • Thank you very much.

  • Russell Horowitz - Chairman & CEO

  • Sure.

  • On the AT&T one, just based on the proprietary nature of some information as it relates to the partners, that's not specifics we can share given that there's a lot of variables that drive that growth estimates to Marchex.

  • As it relates to the domain question, Michael, why don't you step in?

  • Michael Arends - CFO

  • So, we still have over 200,000 domains in the entire portfolio, and I think your question was directed at how much of our current revenue stream relates to the core of the strategic domains, and it's almost all of it.

  • So, it's not even an 80/20.

  • It's well less than 10% and I would say a smidgeon less than 5% relates to the non-strategic domains.

  • And if I didn't -- if that wasn't the question, just let us know.

  • Russell Horowitz - Chairman & CEO

  • And I think you asked how many.

  • We have more than 150,000 domains overall.

  • Robert Coolbirth - Analyst

  • Okay, thank you.

  • Operator

  • (Operator Instructions.)

  • Your next question comes from [Brian Bargun] with [Craig Crim].

  • Brian Bargun - Analyst

  • Hi, guys.

  • Thanks for taking my questions.

  • Related to the AT&T, did you seek out them to extend the contract now, or how did that process get started?

  • Russell Horowitz - Chairman & CEO

  • We've worked with AT&T since 2004, and we've always looked for ways to expand the relationship.

  • And we know that they're a very successful company that understands the importance of digital products and embracing performance based models.

  • And so, it's one thing to build trust with a partner.

  • It's another to build confidence.

  • And over the years, we built a relationship that is very mutually valuable.

  • And as they began to look at the growth opportunities in this area -- as I noted, they have multiple channels they sell to and they have multiple performance based search products that they provide.

  • We had provided some of those products to some of those channels.

  • It made sense for both companies to look at kind of bringing the economies of scale to a single relationship and creating some cohesion across those products where both companies could benefit from the economies of scale that come with a single partner providing those.

  • So, when you look at the different products we offer, the growth of the relationship has been very organic and we work with them on, again, various products across this area.

  • So, it was a natural next step and one that we've been eager to see happen.

  • Operator

  • You have a follow up from Ross Sandler with RBC Capital Markets.

  • Ross Sandler - Analyst

  • Hey, guys.

  • Sorry to keep beating on the numbers here, but I'm just -- one clarification, and we can take it offline if necessary.

  • But, so you said you've got $11 million to $13 million in revenue related to the AT&T deal for 2010.

  • That reflects $9 million of the incentives.

  • So, on a run rate basis, you're looking at like $21 million-ish for 2010.

  • Then, you're going to grow that 80% per your comment in 2011 and you won't have the investment incentives on an ongoing basis in 2011.

  • So, the longer term margin goes up to 40%, as you mentioned before.

  • So, is that the right way to think about it, somewhere in the high 30s next year, the 40% margin from this deal?

  • Michael Arends - CFO

  • That is the way to think about it.

  • The other thing, Ross, just to clarify, we did say more than 80%.

  • Ross Sandler - Analyst

  • Okay.

  • Operator

  • There are no further questions in the queue.

  • Russell Horowitz - Chairman & CEO

  • We appreciate everyone's participation and look forward to updating you on our progress throughout the balance of the year.

  • Thank you.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.