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.
My name is Michael 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.
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).
I would now like to turn the conference over to Mr.
Ethan Caldwell, General Counsel and Chief Administrative Officer.
Sir, you may begin your conference.
Ethan Caldwell - General Counsel and Chief Administrative Officer
Thank you.
Good afternoon, everyone, and welcome to Marchex's business update and third 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, Brent Turner, Executive Vice President of Call Advertising 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 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 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'll also reference certain non-GAAP measures of financial performance and liquidity, including OIBDA, adjusted OIBDA, 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 those measures as used by us and the reasons why we believe these measures provide useful information are all contained in today's earnings press release.
At this time I would like to turn the call over to Russell Horowitz.
Russell Horowitz - Chairman, CEO
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 open it up for Q&A.
As we've been messaging for some time now, nearly everything we do is driven by our fundamental belief that performance-based call advertising represents the next transformational opportunity in advertising, and our progress this quarter demonstrates that our focus on category leadership is beginning to pay off.
To reiterate from our prior quarterly calls, our belief in call advertising is based on four key factors.
First, advertising inventory suited to phone calls, or as we refer to it, call supply, is exploding in tandem with a revolution in consumer behavior.
With mobile Internet use predicted to outstrip desktop use by 2014 and peer-to-peer architectures significantly evolving how the PC is used as a communication device, it's clear consumers are now more call-ready than ever.
The phone call is already the most common way consumers connect with businesses, and in the future they'll be able to place more calls more frequently from more places than ever before.
The second factor is that significant advertiser demand for phone calls already exists.
Overall, 65% of advertisers say that phone calls are their highest-quality source of leads.
BIA-Kelsey estimates advertisers spend tens of billions of dollars annually in various media channels, including Yellow Pages, direct response TV and radio, with the specific intent to drive consumer phone calls to their businesses.
During the coming years, we believe advertisers will increasingly move their advertising spend to pay-for-performance models, paying only for qualified calls that are tracked and reported as readily and transparently as other forms of advertising media, including search.
The third factor is that calls deliver superior value to advertisers.
It's not hard to understand that the likelihood for a conversion is greater when an advertiser can talk directly to a potential customer versus a customer just clicking around a website.
In an environment where high return on investment from rising pay-per-click prices is increasingly challenging in competitive categories such as insurance, education and home services, advertisers are looking for new ways to drive superior returns, particularly when the goal of a click campaign is often to actually generate a phone call.
A call provides an advertiser with the opportunity to build a relationship with the consumer and more easily convert a sale.
At Marchex, for many of our pay-per-call customers we're delivering conversion rates of 20% and more.
The result of these high conversion rates is a dramatic reduction in our advertisers' cost per acquisition compared to their other marketing channels.
And the fourth key factor is that the technology is ready.
We have the ability to deliver calls to advertisers at high volume levels with a true performance-based model across mobile, online and offline distribution channels.
At the same time, we can provide transparency, analytics and intelligence for campaigns that highlight the true value of phone calls compared to the other forms of lead generation.
As our progress throughout this year demonstrates, Marchex has a clear strategy in place and we're well-positioned to take advantage of the opportunities created by call advertising.
With that as a backdrop, I'll highlight our third quarter progress within our product and customer initiative.
First, in terms of our products, during the quarter we launched Marchex Call Mining, which is part of our call analytics product.
Marchex Call Mining leverages speech transcription and proprietary search and data mining technology so that advertisers can learn new ways to optimize cross-channel marketing spend focused on generating phone calls based on actual customer conversations.
For example, an insurance company can now understand how many consumers are calling them regarding life insurance versus fire insurance.
A travel company can see the trends on how many calls they received about hotel rooms in Orlando compared to those relating to Miami.
And all customers can better track how many phone calls resulted in a transaction -- all of this done through one simple interface.
Marchex Call Mining gives advertisers the power of speech analytics, a tool that helps them understand exactly what drives successful customer calls.
An advertiser can track whether a campaign is successful based on such things as targeting, advertising creative, the source of the phone call or how a call itself was handled by a sales representative.
Second, looking at progress with our customers -- Marchex is focused on building strong, defensible customer relationships by targeting three customer segments.
The first is large national advertisers.
The second is reseller partners who serve small businesses across all categories.
AT&T or Yellow Pages Group of Canada would be examples.
The third is reseller partners who specialize in providing marketing services to specific vertical channels -- in this case, Primedia or the Cobalt Group would be examples.
There is tremendous and growing demand for phone calls across these three customer channels, and in the third quarter we continue to expand our customer base.
Large advertisers have spent billions of dollars to create, manage and operate call centers, and they understand the importance and opportunity with phone calls.
For small businesses, the phone is the primary way they do their business.
A recent BIA-Kelsey study found small business advertisers rated phone calls alongside in-person visits to store locations as their highest-value source of leads.
Marchex has always focused on launching products that help solve the problems and challenges faced by small businesses, and in the third quarter we made substantial progress in unlocking the growing opportunity for pay-per-call within the small business marketing channel, and we also won new strategic relationships with large resellers such as Cox Local Media.
During the third quarter we made substantial progress with advertisers big and small, and overall we added more than 10,000 new advertisers, bringing the total number of Marchex advertiser relationships to more than 85,000.
We expect to continue increasing the number of advertisers that use our products in the fourth quarter.
As Marchex gains the advantage of being one of the only companies focused on performance-based call advertising, we are building diversified call supply across mobile, online and offline sources, a winning business with new and defensible sources of call supply.
During the third quarter we announced an exclusive global relationship with Skype to manage, operate and sell its click-and-call advertising program.
While early, the sell-through into Skype is going well.
Over the coming months and quarters we expect our progress for the Skype program to accelerate as a component of the overall Marchex pay-per-call exchange.
We believe Skype and other partners will continue to support Marchex's expanding, unique and valuable call supply footprint.
Our ability to continue unlocking new sources of call supply across mobile, online and offline channels will remain a key to our success.
With that, I'll hand the call over to Mike.
Michael Arends - CFO
Thanks, Russ.
During the third quarter we continued to make significant progress with our call advertising products and customers.
Total revenue for the third quarter was $24.2 million.
Excluding the $2.6 million in incentives as part of our expanded and extended agreement with AT&T in May, revenue would have been $26.8 million.
Revenue from local advertising services was $18 million.
After excluding the AT&T incentives, revenue would have been $20.6 million.
We continue to execute on our product, operating and business development plans.
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 43%.
The growth in local advertising services was predominantly driven by the increase in the number of advertisers and by the size of advertising budgets, utilizing our call advertising and small business marketing products.
Revenue from publishing was $6.2 million.
Demand from customers from this traffic remain largely consistent with historical trends through 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 $23.7 million for the third quarter of 2010.
Sales and marketing, excluding stock-based compensation, was $3 million.
During the quarter, sales and marketing expense levels were largely consistent with the second quarter, in line with our expectations.
In the near term we expect our marketing expense to normalize with a modest increase.
Longer term we expect to increase marketing expense in support of the further evolution of our products.
Adjusted operating income before amortization for the third quarter was $455,000.
Adjusted EBITDA was $1.7 million.
GAAP net loss applicable to common stockholders was $547,000 for the third quarter of 2010, or $0.02 per diluted share.
This compares to GAAP net income applicable to common stockholders of $696,000 for the same period of 2009, or $0.02 per diluted share.
Adjusted non-GAAP income per share, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.01 per share.
We had approximately $32 million cash on hand as of September 30, 2010.
Additionally, during the quarter we sold a small number of non-strategic domains that yielded $2.6 million in incremental cash flow.
As highlighted previously, we expect non-strategic domain sales to be uneven quarter to quarter.
During the quarter we acquired 280,000 of our common shares, for a total price of $1.2 million, bringing our total shares acquired under our repurchase program to 9.7 million or 28% 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 the 2010 outlook, which includes our guidance for the fourth quarter.
For the year, we expect revenue of $95.5 million to $97.5 million, which reflects the impact of the estimated $8 million in revenue offsets related to our expanded AT&T deal.
We continue to see momentum build with our call advertising products that target both large national advertisers as well as small businesses.
Additionally, for the fourth quarter we expect publishing revenue to modestly increase relative to the third quarter.
This guidance implies fourth quarter revenue of between $25.9 million and $27.9 million, which reflects the sequential impact of the estimated $1 million in AT&T incentive offsets.
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 $2.6 million in adjusted operating income before amortization for the year, implying more than $7.5 million in adjusted EBITDA.
This guidance implies fourth quarter adjusted operating income before amortization of more than $1.9 million and EBITDA of more than $2.9 million.
We believe a leadership position in call advertising in the long term will be very valuable and we therefore intend to continue investing in the products and customers relationships that can help us achieve and defend this leadership.
So as we grow, a portion of the incremental contribution will be allocated to increased investments in our products, customers and other aspects of the business, and a portion we will flow through to contribute to expanding margins.
Based on current progress, we expect both adjusted operating income before amortization and adjusted EBITDA to increase sequentially into the fourth quarter of 2010 from third quarter levels 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 in 2011.
We are excited about the momentum we are building in our business.
We continue to see evidence that the performance-based call advertising opportunity is large and the investments we've been making in our products and customers are paying off.
We believe 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.
Russell Horowitz - Chairman, CEO
Thanks, Mike.
We feel very good about the progress we're making and feel strongly about our opportunity and focus on call advertising leadership.
I'd like to once again thank our employees for their continued dedication and hard work.
We look forward to updating you on our progress in the coming quarters.
With that, I'd like to hand this call back to the operator for Q&A.
Operator
(Operator instructions).
Your first question comes from the line of Gene Munster with Piper Jaffray.
Gene Munster - Analyst
Hey, good afternoon, guys, and congratulations.
I want to dig a little bit deeper, I would say, into the pay-per-call business here.
Can you give us more of a specific -- maybe I missed it, Mike, but the breakout as far as what percentage of revenue is actually pay-per-call at this point?
Michael Arends - CFO
In terms of our call-driven revenues, which includes our small business marketing products, it does comprise a majority of our revenues today, and clearly our call-driven products are what is driving all of the growth each of the last number of quarters.
Gene Munster - Analyst
Okay.
Is there any way to break out I guess the small business marketing side versus more the pure play pay-per-call, or is it strategically too tied together to break those two out?
Russell Horowitz - Chairman, CEO
This is Russ.
They are tied together, but pay-per-call as a product is the highest growth opportunity within the call-driven products.
Gene Munster - Analyst
Okay, so it's safe to say it's smaller in the revenue but the highest growth opportunity?
Russell Horowitz - Chairman, CEO
Directionally, today we're very comfortable sharing that with you and we do think there'll be opportunities to share more details prospectively.
Gene Munster - Analyst
Okay.
Second is you mentioned that -- you talked about the margins moving higher over time here.
Any perspective to think about how high they could go?
Then one final question.
Michael Arends - CFO
So Gene, what we have said in the past is that we expect them to scale above the 14% or 15%.
I think when you go into 2011 we could move the margins more significantly upwards.
We could move them, with some of the growth that we expect to come to -- closer to 20%.
I think one of the things that we also mentioned was we expect to take some of those dollars and reinvest them for our products and our customers.
And so it's unclear from our perspective today whether we will get to that 20% range in 2011, but we do expect margin expansion when you look at 2011 in total.
Russell Horowitz - Chairman, CEO
Gene, one last clarification point -- within our call-driven revenue, pay-per-call is the biggest contributor.
Gene Munster - Analyst
Okay.
That's very -- both of those are very helpful.
One final question.
In terms of Q1 of next year, I know you guys aren't giving any guidance but we would have anniversary, of the AT&T side of that at that point, so it won't have an impact on Q1.
Any thoughts just in terms of directionally you think that -- should that be an up sequential quarter or down sequential quarter from Q4 of 2010?
Russell Horowitz - Chairman, CEO
We haven't given the guidance yet, Gene, clearly, but we are seeing a lot of momentum in our call-driven products, and so from our standpoint we view that as a good thing.
Gene Munster - Analyst
Okay, great, thank you.
Operator
Your next question comes from the line of Ross Sandler with RBC Capital Markets.
Ross Sandler - Analyst
Hi, just a couple questions, guys.
The language around the AT&T deal, not sure if that changed or if this was what it said before, but it said over $100 million over the five years.
Is that new or was that the previous language?
Then, can you talk about the traction you're seeing with the new account ramps there and the web-visible account transitions, and like what products and price points are the S&Bs coming in at in terms of new accounts?
Then I've got a couple of follow-ups.
Russell Horowitz - Chairman, CEO
Sure.
The language as it relates to the AT&T relationship and opportunity has not changed, so that is the same language that we've communicated in the past.
As it relates to the growth of adding more than 10,000 advertiser relationships, we focus on the direct relationships with large advertisers and work with our strategic reseller partners to support those small businesses so, if we can grow the large advertisers a lot without a significant number of new relationships, as well as expanding the adoption of our products with the existing customers.
So a lot of that is driven by the growth in small business relationships, and that's predominately driven by those co-relationships with AT&T, the acceleration of the transition of accounts from their prior provider, the acceleration of the sale of our products, and really, the same story with YPG, as they both get a lot of momentum in the market and they see significant opportunities with the performance-based, call-driven marketing products.
So we think that trend continues into Q4 and we feel very good about that.
Ross Sandler - Analyst
Okay.
Google has just recently announced that they're going to roll out some new call analytics features.
Do you guys view Google as a competitor, or do you think their entrance into the call space is a validation or any risk to what you're offering, or is it just too early to tell?
Russell Horowitz - Chairman, CEO
Look, the adoption of pay-per-call is very early.
Clearly we believe it's a big opportunity, and Google entering the market in whatever form is a significant validator in our estimation.
It does come with some pros and cons.
The way we think about it is really threefold.
We've really been out as evangelists, educating people on this opportunity, and someone like Google getting involved, again, validates it and brings a lot of focus to it, which translates to two things that happen.
One, education of the primary participants on both the demand side and the supply side really accelerates, and we think that's very good for Marchex.
The other side, as it relates to adoption, same story -- the urgency of Google validating this market creates a lot of institutional urgency in matters that we think can accelerate more Skype-like opportunities for Marchex.
So on a net basis, when weighing the pros and cons, we do view it as a positive given where we are with our products and where we are with our customers, and the steepening of the opportunity curve.
At the same time, Google applying a solution that's specific to Google as one source within the online channel doesn't address that being successful with pay-per-call really requires you to understand how to bring quality and quantity from mobile online and offline channels.
We've got a couple hundred relationships across those three and growing, and so we think having that diversified approach and optimizing and delivering value is really one of the key components as well.
Ross Sandler - Analyst
Okay, and then just the last one -- we noticed in the quarter that Canada's Yellow Pages Group bought a couple of search marketing firms.
I think they're more focused on national advertisers, but any update there on your relationship with Canada Yellow Pages?
Russell Horowitz - Chairman, CEO
Yes, this relationship has been a valuable one.
Yellow Pages Group of Canada has a significant majority of market share in Canada, so it's been a nice opportunity for us.
Your interpretation of some of those acquisitions highlighting their focus on kind of a very high-end segment is consistent with ours.
At the same time, what lights up their business is call volumes for their customers large and small, and the good news is when you look at our progress with call supply across mobile online and offline as well as the Skype relationship, we think we can be a very relevant source both with the products that we support today as well as any other products they may bring to market.
Ross Sandler - Analyst
If I can squeeze one last one in, I know it's early, but any metrics can you guys share on how the early read on the Skype relationship is progressing and any --
Russell Horowitz - Chairman, CEO
Yes, look, simply put, sell-through so far is going well and we do expect Skype to be a growth catalyst in 2011.
Ross Sandler - Analyst
Okay, thank you.
Operator
Your next question comes from the line of Robert Coolbrith with ThinkEquity.
Robert Coolbrith - Analyst
Good afternoon.
Just wondering if you could elaborate on your comments on the role of call supply and catalyzing this market.
Just if you could help us with the identification of some of the key areas of call supply today, as well as the opportunities going forward, and your opportunity both to enable the call supply for sale and also to enable the demand to access that supply.
I realize that's a little bit vague, but any color you could put on it would be great.
Russell Horowitz - Chairman, CEO
Sure.
We look at the market through the lens of three distinct supply channels -- that's mobile, online and offline.
When you think about mobile publishers, this is going to be the fastest one of those -- amongst those three, the fastest growth opportunity.
I think that's pretty simple to understand, just given the mass adoption of smartphone and mobile devices that are occurring.
As you get into online and offline you think about folks like Skype, who are fundamentally changing the way PCs are used as communications devices and frankly, not going back too far, folks may not have understood how that could be a highly relevant opportunity to unlocking a pay-per-call opportunity.
So partners like Skype, across the online spectrum, we think are key drivers.
Search is a relevant driver a lot of folks use today.
For us, it's perhaps not as meaningful, but it is relevant in the grand scheme of the online focus when you think about consumer interactions and some call behaviors.
As you get into offline and you get into products like directory assistance and some of the traditional channels that have been used to drive calls like Yellow Pages, direct response TV and radio, these are all things that we think about and we're at various levels of adoption with.
But if you're going to focus on the meat of what drives growth, first and foremost mobile is the key market to focus on.
Today they're pretty balanced in their contribution to how we fulfill advertiser demand.
Robert Coolbrith - Analyst
Can you tell me a little bit more about your role in aggregating supply, to what extent fragmentation plays a role?
Are there other aggregators of supply out there with whom you have to integrate, or do these become closed platforms or open?
Russell Horowitz - Chairman, CEO
As I mentioned, we have hundreds of partners here that span those three distribution channels.
In a lot of ways it is too early to talk about, but as you noted it's a fragmented market and this ecosystem is no different from other advertising ecosystems where your ability to aggregate demands puts you in a good position to go out and win the key sources of supply and bringing breadth and depth to those folks in turn drives more opportunity with advertisers.
We feel like we're on that curve.
Robert Coolbrith - Analyst
Okay, thank you very much.
Operator
Your next question comes from the line of Dan Salmon with BMO Capital Markets.
Dan Salmon - Analyst
Hey, good afternoon, guys.
Two questions -- first, on the addition of 10,000 customers this quarter, can you give us a little bit of color on which partners that's related to, and then second question, Mike, in your comments, you mentioned with sales and marketing growth stabilizing but then growing again over time, can you maybe give us a bit of a time horizon, maybe not down to the quarter or anything but how we should think about that growth in that line?
Michael Arends - CFO
Let me answer the second part of your question, Dan.
This is Mike.
With sales and marketing, we do expect, particularly with some of the growth from our existing products as well as with add on product features and introductions in 2011, probably near the middle of 2011, that is when we would expect the sales and marketing, some of those investments to increase.
On a percentage basis, though, it may not increase.
The absolute dollars is more where the comment was coming from, and so there would be an increase there.
I think going back to the first part of the question you asked which partners in particular, and it is across the board.
AT&T clearly is a key one, Yellow Pages Group in Canada is another one, but we did have growth in terms of the number of advertisers and the accounts that we added across all of our call-driven products.
Dan Salmon - Analyst
Okay, thanks.
Operator
Your next question comes from the line of Clay Moran with Benchmark.
James Dobson - Analyst
Hello, this is James Dobson on the call for Clay.
I have a couple questions.
First, in regards to Skype, how do you attract advertisers for that channel?
Do you directly manage that relationship?
Could that lead to maybe adding some more sales in the future?
Russell Horowitz - Chairman, CEO
Yes, as we talked about, we focus on direct relationships with large advertisers and supporting small businesses to resellers.
The same model applies to how we sell Skype.
For those advertisers we support with our call advertising products, we focus on selling them directly into the Skype click-to-call program, and as it relates to the small businesses, we are focused on leveraging our reseller partner relationships to gain significant adoption by those small businesses that both we support and they more broadly support.
Skype, again, as part of the Marchex pay-per-call exchange, it's a key part that we can drive as an integrated product as well.
James Dobson - Analyst
Okay, great.
My final question -- I know in the past you guys broke out how much revenue was from the Yellow Pages category.
Could you please list that again?
Thanks.
Michael Arends - CFO
This quarter it was just under 20% -- 19% -- which is --
James Dobson - Analyst
Okay, thank you.
Michael Arends - CFO
I think last quarter it was 20%.
Operator
(Operator instructions).
Your next question comes from the line of Neil Chatterjee with Craig-Hallum.
Neil Chatterjee - Analyst
Hi, guys.
I have a few questions, I'm kind of covering here for Ryan Bergan and I apologize if you've already covered a couple of these.
In regards to reputation management, if you could maybe speak a little bit about the progress you're making there and any new partners you might be seeing there.
Russell Horowitz - Chairman, CEO
Sure.
When you look at our presence management, product offerings, including reputation management, we've done some limited announcements of partners.
We have adoption beyond what we've communicated to date and we do envision being able to share some of those details with you.
But as it relates to adoption and utilization by small businesses, we're seeing a lot of validation in terms of the value of the product.
And we view it as a core offering and value-add to delivering pay-per-call to end small business customers.
This will be an area that we'll share more detail in the coming months, but so far, so good.
Neil Chatterjee - Analyst
Okay, okay.
Then just one other question -- so I guess as far as call advertising partners, anything developing there similar to the Skype relationship?
I'm not sure if the Canada Yellow Pages would fall into that.
Russell Horowitz - Chairman, CEO
Yes, look, all day, every day -- big and small relationships on the demand and supply side.
It's what pretty much everybody at this place is focused on.
So clearly to the extent that there's a threshold that merits an announcement, we'll share it publicly.
Outside of that, it'll show up in the numbers.
Neil Chatterjee - Analyst
Okay.
Then just one last quick question on the AT&T Interactive, are you still on target for the accretive in Q1?
Michael Arends - CFO
We are, yes.
Neil Chatterjee - Analyst
Okay.
Okay, that's it.
Thanks.
Operator
There are no further questions at this time.
I'd like to turn the call back to management.
Russell Horowitz - Chairman, CEO
We appreciate everyone's participation and we look forward to updating you on our next call as well.
Thank you.
Operator
Thank you, ladies and gentlemen.
This does conclude today's conference call.
You may now disconnect.