Marchex Inc (MCHX) 2010 Q2 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Marchex second 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 Mr.

Ethan Caldwell, General Counsel and Chief Administrative Officer.

Mr.

Caldwell, you may begin your conference.

Thank you.

Good afternoon, everyone, and welcome to Marchex's business update and second quarter 2010 conference call.

Joining us today are Russell Horowitz, Chairman and Chief Executive Officer, John Keister, Executive Vice Chairman, Peter Christothoulou; Chief Operating Officer, Michael Arends, Chief Financial Officer, and Matthew Berk, Executive Vice President of Product Engineering.

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 revenue, 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 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 OIBDA, adjusted OIBDA, adjusted EBITDA, and adjusted non-GAAP EPS.

The reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is contained in today's earnings press release which is available on the Investor Relations section of our website, and the 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.

Thank you, Ethan, and welcome, everyone.

On today's call, I'll discuss our business progress, Mike will review our financial results, and then -- we'll then open it up for Q&A.

As we've highlighted for more than a year now, the company's entire energy is concentrated on two key 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 with the primary intent being to have their phone ring with new customers.

The common bond between all of our products is phone calls.

Nearly everything we do in some form relates back to this theme.

Call advertising is the central thesis for Marchex, and we believe that the next transformational opportunity in advertising will be centered on this for a few reasons.

The first reason is that we see consumer behavior evolving and with that new advertising inventory based on phone calls just starting to explode.

A few steps.

The first billion Internet-connected devices were PCs.

The advent of peer-to-peer architecture turned PCs into two-way communications devices.

Skype's the clear leader here with nearly 600 million registered users who leverage the PC to make calls.

We also share the belief with industry analysts that the mobile Internet is ramping faster than the desktop Internet did, and that the various forms of mobile devices will sell 10 billion units in the next several years.

So there are a few ways to think about this.

First, consumers are now call-ready.

Given the utility and ease of use of these relatively new devices and mediums, we see people consuming information and interacting in a very different manner than they did even a few years ago.

Second, whether advertisers like it or not, more people will be making phone calls and advertisers should think about how they take advantage of this very large rapidly growing new source of inventory.

And third, publishers of call distribution such as mobile advertising networks, carriers, Skype, and other publishers who are part of the phone call ecosystem are out there looking for an effective way to monetize their inventory and pre-existing ad formats may not perform as well for advertisers which will mean low yield for these publishers.

The second reason is that we believe advertiser demand for qualified phone calls is massive.

BIA/Kelsey estimates that more than $35 billion is spent annually in the US across multiple media channels, including yellow pages, direct response TV, and radio, with a specific intent to drive consumer phone calls to businesses.

Today, the vast majority of those advertisers are paying by subscription or impression, but not based on performance.

We believe it's time to give advertisers what they want, which is to pay only for qualified phone calls and for those phone calls to be as transparent, tracked, and readily available as other forms of advertising media.

The third reason centers on our observation that in today's marketplace calls are driving superior advertiser returns.

While the early years of search advertising created a windfall for advertiser return on investment, with years of continually rising pay-per-click rates in the maturity of this market, high return on investment really isn't a given anymore.

Instead, the conversion rates of inbound phone calls which can be five to 10 times that of search-driven clicks is starting to get advertiser attention, particularly with per-call prices in many categories being largely equal to per-click prices [and finding] a much higher return on investment with pay-per-call than with pay-per-click.

For example, in many categories, pay-per-click rates are substantial - insurance, mortgage, online education, loans, home financing, home services, professional services, terms can range from $6 per click to even $42 per click.

And many of these categories are focused on using search clicks to, in turn, drive a phone call which could take five to 10 clicks, if not more.

Marchex is investing to help drive the call advertising opportunity, from building core intellectual property to executing exclusive strategic relationships with unique distribution partners like Skype, to driving the performance advertising programs for the largest local advertising companies such as AT&T and the Yellow Pages Group of Canada.

Nearly everything we do in some form relates back to this theme.

Now, with that backdrop, I'll highlight second quarter progress against our product and customer initiatives.

In terms of our products, during the quarter, we announced the Marchex Pay-for-Call Exchange.

Our Pay-for-Call Exchange connects potential customers to advertisers through the phone and advertisers only pay Marchex for qualified calls.

We leveraged our telephony platform, campaign creation expertise, and call filtering technologies to create, manage, and optimize advertiser campaigns across mobile, online, and offline distribution partners.

Advertisers also benefit from rich call analytics and customer intelligence, while publishers can more effectively monetize their call-base inventory.

We think this product's really solving a problem and need for both advertisers who value qualified phone calls and the publishers with call supply looking for both better yield and relevance.

Although we're still in the early stages with this product, initial feedback has been very positive with advertisers experiencing significant return on investment including an average call conversion ranging from 20% to 30% for many advertisers and some seeing as high as 50%.

In terms of (inaudible) our progress with customers, Marchex has two primary customer segments.

The first segment is large national and global advertisers who we sell and support directly.

Examples here would be All State or HP.

And the second segment is channel partners who we work with and, in many cases, enable with our products to support the performance advertising initiatives of their small business customer.

Examples of our channel partners include AT&T, the Cobalt Group, eNom, NBC, Primedia, and the Yellow Pages Group of Canada.

The common theme in these two customer segments is the recognition of the value of a phone-based [plead].

Large advertisers who spent billions of dollars to create, manage, and operate call centers understand the importance of phone calls, as do small advertisers who buy CPM-based advertising in print, such as Yellow Pages, with the goal of making their phone ring.

Over the past few years, we have focused on launching leading small business marketing products that help solve the problems and challenges that small businesses face, and doing that has helped us achieve a value and extensive footprint of small business customer relationships.

In the coming months and quarters, we will talk more about how our small business marketing products can also help unlock our growing opportunity with Pay-for-Call, which is the lead source that small businesses care about most.

Our growing advertiser base across large and small business is helping us increase breadth and depth, which is, in turn, driving [length] with new and defensible sources of call distribution.

Consumers interact with business information in many different ways, and unlocking this opportunity means reaching beyond online to incorporate mobile and offline sources of customer calls.

In fact, since we launched our Pay-for-Call Exchange, our ability to formalize relationships with a diversified mix of publishers has been one of the key reasons behind the growth of our Pay-for-Call product.

An example of this is our recently announced relationship with Skype, one of the world's largest call providers.

Marchex and Skype have a unique relationship.

Effectively, we're combining Skype's meaningful global reach of nearly 600 million users making phone calls and Marchex's call advertising intellectual property.

Specifically, Marchex is managing, operating, and selling click-and-call advertising with Skype directly to advertisers across the United States, Canada, and Western Europe.

Going forward, Marchex will continue to unlock the Pay-for-Call opportunity by trying to build relationships with other similar partners.

And with that, I'll hand the call over to Mike.

Thanks, Russ.

During the second quarter, we continue to make good progress in our most strategic investment areas, call advertising in small business marketing products, which were also the principal drivers of our fourth consecutive quarter of revenue growth.

Total revenue for the second quarter was $21.4 million.

Excluding the $4.2 million in incentives as part of our expanded and extended agreement with AT&T in May, revenue would be $25.6 million.

Revenue from local advertising services was $14.9 million.

And after excluding the AT&T incentives, revenue would be $19.1 million.

We continue to execute against our product, operating, and business development plans.

And excluding the AT&T incentives and the historical contribution of discontinued paid inclusion and related services, our year-over-year growth rate in local advertising services was 52%.

Revenue from publishing was $6.5 million.

Demand from customers for this traffic remain largely consistent with historical trends as we entered the summer months.

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

Excluding stock-based compensation and amortization of intangible assets, total operating costs were $23.2 million for the second quarter of 2010.

Sales and marketing, excluding stock-based compensation, was $3.3 million.

During the quarter, sales and marketing expense levels were down modestly, consistent with expectations.

We expect sales and marketing to normalize around current levels in the near term, and longer term we expect to increase marketing expense in support of the further evolution of our products.

Adjusted operating loss before amortization for the second quarter was $1.8 million.

Adjusted EBITDA was a loss of $542,000.

And after excluding the AT&T incentives, EBITDA would be $3.7 million.

As a reminder, AT&T investment incentive revenue offsets have a corresponding dollar-for-dollar impact to adjusted operating income before amortization and adjusted EBITDA.

GAAP net loss applicable to common stockholders was $3.2 million for the second quarter of 2010, or $0.10 per diluted share.

This compares to a GAAP net loss applicable to common stockholders of $1.2 million for the same period of 2009, or $0.04 per diluted share.

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

During the second quarter, we generated $1.3 million in operating cash flow and had approximately $33 million cash on hand as of June 30th, 2010.

Additionally, we sold a small number of non-strategic domains that yielded $700,000 in incremental cash flow.

As highlighted previously, we expect non-strategic domain sales to be uneven quarter-to-quarter.

During the quarter, we acquired 300,000 common shares for a total price of $1.5 million, bringing our total shares acquired under our repurchase program to $9.5 million shares, or 27% of our common shares outstanding.

We will continue to be opportunistic with respect to share repurchases while also maintaining a meaningful cash position for financial flexibility.

Now turning to our third quarter and annual outlook.

I'd like to take a moment to remind everyone of the details regarding our recently announced five-year extension and now exclusive relationship with AT&T Interactive.

To summarize once more, this relationship alone is expected to generate more than $100 million over the term.

We are also providing an anticipated $8 to $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 costs in technology investment to accommodate the thousands of new advertisers on our product platform.

As total investment incentives and offsets for the second quarter were $4.2 million, we are estimating $3 million in the third quarter and $1 million in the fourth quarter respectively.

Now moving to revenue guidance.

For the third quarter we anticipate revenue of more than $22.7 million, which includes the sequential impact of the estimated $3 million in revenue offsets related to the AT&T deal.

Excluding these investment incentives, we estimate revenue would be more than $25.7 million.

We continue to see momentum build in our call advertising and small business marketing products and expect revenue for the balance of the year to grow in each succeeding quarter.

Additionally, for the third and fourth quarters, we expect publishing revenue to be in a similar range with the second quarter.

As such, for the year we expect revenue of $93 to $97 million, which factors in the more than $8 million in AT&T investment offsets.

Excluding the investment incentives, we estimate revenue for the year would be in a range of $101 to $105 million.

For adjusted operating income before amortization and adjusted EBITDA, again, 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 more than $2.5 million in adjusted operating income before amortization for the year, implying more than $7.1 million in adjusted EBITDA.

Based on current progress, we expect both adjusted operating income before amortization and adjusted EBITDA to increase sequentially each successive quarter in 2010, some second quarters, and return to our 2010 first quarter margin levels by the end of the fourth quarter of 2010, setting a strong foundation for continued growth into 2011.

We are excited about Marchex's future.

We continue to see evidence that the investments in our products are paying off and that our business progress is laying a strong foundation for long-term growth in both revenue and cash generation.

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

Thanks, Mike.

In closing, I want to thank our employees who have been making incredible headway, from building great products to winning business and driving execution in support of our strategy.

We continue to focus on developing our employees as well as recruiting great people who can help us deliver on our mission.

We're off to a strong start this year.

And going forward, we believe progress will be driven by continued focus and execution.

With that, I'd like to hand this call back to the operator for Q&A.

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster.

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

Please go ahead with your question.

Hey, guys.

Just I've got four quick questions, if you don't mind.

First, on the Skype partnership, can you just talk to us a bit about how the economics worked?

Is it a rev share?

And how should we kind of model the revenue ramp?

I know you're kind of in a trial this year.

And how big could that be in 2011 or 2012?

And then I'll just -- I'll go on to the next one after.

Sure.

On the first question, as relates to the relationship with Skype, we're in-market now.

But as it relates to the details, we're not sharing any more specifics beyond those that Skype included in their press release announcing the partnership.

Clearly we do intend to share details respectively when we think it's something that can be very helpful.

Okay.

And, Mike, a modeling-type question.

So if I back out paid inclusion from a year ago and the AT&T incentives, I'm getting around just under 50% growth for local ad services, up from 38% last quarter.

Is that the right number?

And kind of can you talk about what areas are driving that the most?

So it is, Ross.

It's actually -- the exact calculation is 52%.

And, again, the call -- the areas that are driving us forward is the call advertising in particular.

And again, if you look at it on an adjusted basis, the small business marketing products grew again year-over-year, as well as sequentially.

Okay.

And the last one is reputation management.

You guys have got Dow Jones lined up there.

Have you added any new partners on that side?

And can you give us an update on how that product is ramping?

We have added other partners.

We have not publicly shared them yet, but we will.

And while it's early in the grand scheme of what we think adoption will look like, it's going well.

And we'll share the specifics on those partner wins - that will be forthcoming.

And we expect to continue to build momentum with new partners beyond those that have already made commitments.

Great.

Thanks.

Your next question is from the line of Nick Gerken with Craig-Hallum.

Please go ahead with your question.

I believe you guys had spoke, but I just wanted to confirm, do you expect the adjusted EBITDA to grow sequentially in the back half of the year and then expect that to be -- reach eventually the Q1 level again?

We do.

We actually expect sequentially the third and the fourth quarter to be successively increasing.

And then again, what we talked about was that we expect the first quarter to grow again from there, the first quarter of 2011.

Okay.

Great.

I've got a couple more then.

Can you talk about the progress you're seeing with migrating advertisers to Marchex from the AT&T Interactive relationship?

And are you still on target to be accretive in the first quarter?

So I'll answer the last part first.

Yes, we are still on target to be accretive.

And the migration has started.

So we are on track.

And we talked about before that it's approximately a 12-month full-transition cycle.

We are in process and we still expect -- I think there's maybe 10.5 months still to go.

Okay, 10.5.

Okay.

And lastly, I don't know if you answered the last one in regards to call advertising.

But now that you've partnered with Skype, are we expecting to see any additional partnerships in regards to call advertising?

Yes, we think Skype is clearly an important part of delivering a differentiated offering to advertisers.

And the problems we saw for Skype in allowing them to participate in the growth of performance-space call advertising is a problem that exists at a lot of other companies that we think we can solve it for as well.

So we do -- we do envision more relationships here.

Okay.

Thanks.

That's all I got.

Your next question is from the line of Clay Moran with the Benchmark Company.

Please go ahead with your question.

All right.

Thanks.

This is James Dobson for Clay.

I have another question on Skype.

Can you give us a little bit better description of the type of ad [units] and the locations the call-based advertising will appear?

Thanks.

Sure.

In the press release there's a link to a video that actually offers that.

That may be the best way for you to see it rather than get a long-winded description of it.

All right.

Thank you.

(Operator Instructions) We'll pause again.

And at this time there are no further questions.

Gentlemen, do you have any closing comments you'd like to make?

We appreciate everyone's participation in our call.

Again, I want to reiterate our appreciation to our employees.

And we're looking forward to a very successful back half of the year.

And this does conclude the Marchex second quarter earnings conference call.

We'd like to thank you for your participation.

You may now disconnect.