Marchex Inc (MCHX) 2011 Q3 法說會逐字稿

Good afternoon.

My name is Allie, 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 your host, Mr.

Ethan Caldwell, General Counsel and Chief Administrative Officer.

Sir, you may begin your conference.

Thank you.

Good afternoon, everyone, and welcome to Marchex's business update and third quarter 2011 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 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 of our most recent periodic report and registration statement filed with the Securities and Exchange Commission.

All of the information provided on this conference call is as of today's date, and we undertake no duty to update the information provided herein.

During the course of this conference call, we will also reference certain non-GAAP measures of financial performance and liquidity, including OIBA, adjusted OIBA, adjusted EBITDA, and adjusted non-GAAP EPS.

A reconciliation of these non-GAAP financial measures to 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 briefly discuss our progress, Mike will review our financial results, and then we'll open it up for Q&A.

As you all know, Marchex is committed to leadership in digital call advertising.

Specifically, we're focused on solving the needs of advertisers that want live connection, new customers, and more sales through the phone.

We know there's tremendous demand for this advertiser outcome.

We recently commissioned Forrester Research, who confirmed our thesis in a July 2011 study, revealing that connecting with customers over the phone is one of the highest-value marketing outcomes for many businesses.

Specifically, Forrester's findings indicated that first, very strong demand exists for phone calls.

49% of marketers view calls as the most desirable result of their digital advertising efforts, and regardless of the channel, marketers believe that advertising campaigns are more valuable when they result in phone calls.

Second, the call opportunity is large.

Findings indicate that call-focused digital advertising can reach $6 billion or more annually by 2014.

Third, mobile and emerging media are drivers.

The adoption and increased usage of mobile devices, as well as other call media sources that drive personal connection, offer marketers the ability to connect with more consumers any time, anywhere, and closer to the point of the purchase through phone calls.

This fundamentally drives new customers and sales.

And fourth, education and technology are the current obstacles to growth.

40% of marketers who aren't driving digital phone calls today are simply unaware of the technology.

44% incorrectly believe that they would have to pay for all impressions or clicks, even for those that did not result in a phone call.

Additionally, 89% of advertising agencies say they would more aggressively recommend call-based advertising campaigns if the technology for it were easier to implement.

We know the market opportunity is substantial and that we must continue educating customers about the opportunity that exists today in digital call advertising.

That's why driving results for advertisers is at the center of everything we do.

Since we launched our pay-per-call product in July of 2009, every quarter has provided evidence that validates our earlier decision to focus on the digital call advertising opportunity.

We made the early bet that the emergence of mobile and other phone media sources, combined with call analytics and technology, would transform how advertisers bought and measured phone calls as a lead source.

As a result, today Marchex is well positioned to help define this rapidly evolving industry as it gains momentum.

To highlight some of the near-term initiatives we're executing against, first, we want to make it easier for advertisers and publishers to work with us.

We're driving technical innovations and building digital call advertising products that make it simple and lucrative for both advertisers and call media publishers to work with Marchex.

This is not as straightforward as it sounds.

The dynamics of generating high-quality leads over the phone at scale and providing details regarding the advertiser and customer interactions are very different from online performance media and, in particular, search.

Our objective is to integrate telephony, ad serving, and call analytics simply and seamlessly for our customers.

Our investments here center on, one, call targeting, where we're investing in various ways to target the caller's location and device.

We're also investing in number inventory management, voice interoperability, and dynamic number replacement.

Second, call filtering, which is how we deliver quality calls to advertisers.

For example, we've automated several key filtering features, including fraud and spam detection, call duration monitoring, repeat call screens, interactive voice response, and call availability rule sets.

Third, call tracking and analytics, which is our advertiser and publisher optimization investment.

This includes items such as caller data, convergence analysis, real-time call scoring, and customer conversion data.

These and other capabilities allow us to unlock and capture the value of the phone call and to deliver transformational performance for our advertisers and publishers.

Next, we want to increase the scale of our digital call marketplace through strategic call media publisher relationships.

We've built relatively significant call reach over the last three years by focusing our efforts on creating transformative consumer improvements and getting as deep in the call stack as possible.

What we mean by this is, rather than just focus on trying to generate phone calls through website traffic, our main initiative is to develop relationships with well-known, large-scale partners where phone calls naturally occur, such as with mobile carriers, multiple system operators, and other call media sources.

With mobile carriers, our relationships are centered on enhancing their customers' experience while also materially reducing their costs and delivering consumer services such as voice search.

At the same time, we also drive them meaningful incremental revenue.

These partnerships typically require a substantial level of commitment from our partner and a deep technical integration with Marchex.

There are several benefits we see in being integrated within the network architecture of these partner types.

One, there's an inherent level of defensibility; two, there is more direct control of the advertiser experience, which allows us to make sure the right advertisement is offered at the right time to the right consumer; and three, there is more influence with that partner, given the level of integration, including our expansion opportunities.

Examples of relationships like this include TracFone and Sprint, where we have automated much of the voice-rich experience, and Skype, where we have created an entirely new advertising program, deeply integrating into their VoIP architecture.

Our focus is to continue extending our supply side leadership, which currently consists of more than 100 call media sources, and also grow our reach.

In the third quarter, we entered into a new relationship with CityGrid Media, broadening Marchex's digital call marketplace to hundreds of local Web and mobile properties, including Citysearch, Urbanspoon, Insider Pages, and other leading properties.

As we move forward, we'll add new mobile partnerships and grow existing relationships throughout the Marchex digital call marketplace.

Additionally, we want to expand our base of national and local business advertisers to scale both advertiser coverage and budgets.

We're building one of the world's largest networks of advertisers buying phone calls.

During the third quarter, we added both large national and small business advertisers.

We're investing in growing our direct customer relationships, adding reseller partners who work with local businesses, and further extending our agency presence to support future growth.

Lastly, we'll expand internationally.

While it's very early, we have begun to support delivering digital call advertising in Europe, specifically in the UK, focused on growing advertiser relationships and adding call media sources in that market.

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

Thanks, Russ.

During the third quarter, continued execution across all of our call-driven products and customer initiatives helped drive meaningful year-over-year growth and cash flow.

Total revenue for the third quarter was $39.9 million.

During the quarter, we continued to add new advertisers of all types and new partners to the digital call marketplace.

As a result, our call-driven revenues grew more than 50% on a year-over-year basis pro forma for the Jingle acquisition.

Our non-call-driven revenues experienced seasonal decreases in the third quarter consistent with historical seasonal patterns.

Excluding stock-based compensation, acquisition costs, and amortization of intangible assets, total operating costs were $34.4 million for the third quarter of 2011.

Sales and marketing costs, excluding stock-based compensation, were $4.1 million.

During the quarter, sales and marketing expense levels were in line with our expectations.

In the near term, we expect our marketing expense to decrease modestly from the third quarter, as certain expenses related to the third-party marketing study and other brand marketing initiatives will not flow through to the fourth quarter.

Longer term, consistent with what we've messaged in prior quarters, we expect to increase sales and marketing expense in support of the continued growth of our sales and customer support teams and the evolution of our products.

Adjusted operating income before amortization for the third quarter was $5.4 million.

Adjusted EBITDA was $6.4 million.

GAAP net income applicable to common stockholders was $1.2 million for the third quarter of 2011, or $0.03 per diluted share.

This compares to GAAP net loss applicable to common stockholders of $547,000 for the same period of 2010, 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 $0.09 per share.

During the third quarter, we generated $4.9 million in operating cash flow and had $35 million cash on hand as of September 30, 2011.

Additionally, we sold a small number of non-strategic domains that yielded $2.5 million in incremental cash flow.

As highlighted previously, we expect non-strategic domain sales to be uneven quarter to quarter, but we do continue to see strong demand.

During the quarter, we acquired 15,000 of our common shares for a total price of $135,000, bringing our total shares acquired under our repurchase program to 10.4 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 our outlook for 2011 and the fourth quarter.

First, looking at our revenue guidance for the remainder of 2011, for the year we anticipate revenue to range between $148 million to $149 million, and for the fourth quarter of 2011, we anticipate revenue of more than $40 million.

This guidance implies that in the fourth quarter, we will deliver our tenth consecutive quarter of sequential growth.

In the short term, our growth level will mainly be influenced by the timing of new customer launches on both the demand and the supply side, as well as the growth of existing customers.

Next, looking at adjusted OIBA and EBITDA margins.

For 2011 we expect more than $19 million in adjusted operating income before amortization and more than $23 million in adjusted EBITDA.

This implies fourth quarter adjusted operating income before amortization of more than $5.4 million and EBITDA of more than $6.4 million.

We continue to invest in product engineering and sales, and these areas will be an important focus, both in the current quarter and into next year.

As we discussed on the call last quarter, we look forward to sustained growth going forward, but we do not expect our growth to be linear.

At times, that may also cause our levels of profitability to fluctuate as we invest ahead of our growth.

At the same time, we are carefully managing our investment in the digital call advertising opportunity such that as we grow, a portion of the incremental contribution will be allocated to support our growth initiatives, including investments in our products, our people, and our customers.

The rest will flow through to contribute to expanding profit margins.

As previously communicated, we believe Marchex can deliver strong annual growth rates and revenue, with EBITDA margins scaling beyond 20% over the long term.

And with that, I'll hand the call back to Russ.

Thanks, Mike.

While we've made significant progress, it bears reiterating that we are in the very early stages of the digital call advertising opportunity.

We are still investing significantly in our business while working to educate the market, which continues to be one of our most important initiatives.

We believe the opportunity is very significant for Marchex and that we have an opportunity to develop one of the great transformative digital businesses.

I want to again thank our employees for their continued dedication and hard work, and we look forward to updating you all on our progress throughout the year.

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

Are you with us, operator?

Gene Munster.

Congratulations.

And Russ, can you tell me a little bit about the long-term growth rate?

Last quarter you mentioned you thought the business was a 20% long-term grower.

Do you still feel comfortable with that with this economy?

And then I've got a couple of follow-up questions.

Gene, this is Mike.

So just to follow up, clearly, we have seen significant year-over-year organic growth rates in our call-driven revenue sources, and when you look out in the future, we think there's a lot of good reasons that those growth rates can continue, both on a sequential and a year-over-year basis.

So looking forward to that as we progress.

And then second, you mentioned a call targeting product in your prepared remarks.

Can you give an example of how that would work?

Yes, for call targeting -- I'm not sure if this specifically is answering your question -- but we've got a whole lot of different variables that we can target by whether it's geography in terms of radius targeting; obviously, time of day; gender; and a variety of other components such as the actual specific device.

So those would be examples, at least.

Okay.

And my final question is in terms of your larger call customers, is there any way to get a feel of how much of their budgets they are currently committing to your product, your call product, and how much potential is there for them to increase spending?

In other words, is your growth coming from increased penetration with existing customers or new customers?

We feel we have a very small percentage of the potential budgets of the large advertisers that we work with.

So in terms of upside, we think over time, if we can continue to execute and deliver the kinds of performance levels we see now, we have a chance to grow the budget with those existing advertisers very meaningfully.

Okay, thank you.

(Operator Instructions.) Sameet Sinha.

You indicated that in your fourth quarter guidance, obviously, it's heavily dependent on some of your partner launches.

Can you talk about those launches?

What are you expecting, and what are the timelines, so that at least we have a sense of what we can potentially look forward to.

And specifically, if you can talk about YPG transition, Skype as well as pay-per-call for AT&T.

And the second question is, did you, in your own linearity in the quarter, did you at any point see any softness or advertisers reporting ads?

And my third question is just to understand the focus of this buyback.

That's it.

Thank you.

So I'm not sure we'll answer these in order, necessarily.

There's a lot of folks talking about a kind of macro theme of softness.

We understand that.

That's the reality of the environment we're in.

But performance-based call advertising, we think we're on the right side of a major secular trend that's very early.

And so we feel very good about our position and, as we mentioned, making a decision a number of years ago to really push our chips in around this opportunity.

In terms of the timing of launches with mobile carriers and other partners, et cetera, some of these things, it's the reason we're messaging our confidence in the growth of the business and continued sequential growth is we like the visibility around the traction we're getting, both with advertisers and with the supply side relationship.

But with a lot of these, it makes sense to be appropriately conservative on when they might hit and how much growth they might deliver on a quarter-to-quarter basis.

And so that really sets the foundation for how we're approaching and communicating that.

Mike, if you want to hit on the YPG or other questions, that sounds great.

Will do.

Thanks for the questions, Sameet.

I think one of your questions was just what sort of trends we were seeing here in the third quarter.

And one of the ones that we did see was some weakness from the non-call-driven revenues and the budgets of advertisers there.

And on the call-driven revenues, we actually saw a very strong quarter-over-quarter sequential growth as well as year-over-year growth.

But there was a step back sequentially in some of the non-call-driven revenue sources.

And if you just look out over the next six months, there's some uncertainty in advertiser budgets in the non-call-driven areas, and that's part of the appropriate conservative guidance that we've put out there as we look ahead.

I think your last question was the purpose of the buyback.

And we continue to have a mix of desire for meaningful cash balances for financial flexibility, as well as, I think that just where our stock is at today, that we're a very good investment choice.

Now, that is tempered by probably more of a leaning right now towards the desire to have financial flexibility and more cash in our coffers.

And part of that is there are some payments as we look into the full year of 2012 where we would like to have the flexibility of whether we pay cash or stock from some of those deferred acquisition payments, and that's probably where the leaning is a little stronger today.

Thank you very much.

Ross Sandler.

Two quick questions.

Russ, you guys see ROI metrics across both search advertisers and call advertisers.

Can you talk about the difference that you're seeing in ROI between these two today?

And then the second question is, just this past week Google launched a 1-800 call tracking service.

It looks like they're doing some of the analytics that VoiceStar was originally doing around duration, geography, maybe transcription.

Do you see these products as competitive, or does Google's evangelizing of the space actually help you guys?

And when do you think we'll reach that tipping point of advertiser awareness around pay-per-call?

Thanks.

Sure.

Thanks for both questions.

On the performance of search advertisers versus call advertisers, typically we see conversion rates on call advertisers at more than 10X search advertisers.

And when you look at it, kind of call it search as a source of calls and effective comparable costs, we are the most cost-effective, highest-quality source of calls for any call-focused advertiser.

So on a comparative basis, we quote about one out of four phone calls actually converts into a transaction.

And on average, again, we see about 10X of the conversion rate in call sources versus search sources.

In terms of some of the announcements that Google has made recently around their initiatives with call advertising, there are a variety of differences.

We put a heavy emphasis on pre-qualifying calls and filtering out calls that we really don't view as leading to new customers and sales.

But the most important component, which you hit on, is our biggest obstacles to accelerating growth are market education and continuing to evolve our products.

And so Google, announcing that this is relevant to them and showing some of the initiatives that they have, first off, there's nothing there we haven't expected.

It's very consistent with how we've seen this space evolving.

But we do think that it can accelerate or steepen the education curve.

And anything that steepens the education curve, given, I'd say, how deep and significant our pipeline is on both the advertiser and supply side, would be very good for us, and we think that it could definitely help accelerate our growth opportunity.

And I would even highlight within that, with mobile carriers.

Thank you.

Ryan Bergan.

You talked about, for the first time specifically, the UK within Europe as being a geography that you've expanded into.

Can you talk about when you expect to enter into other geographies within Europe and the timeframe to announce those?

We have said that we are focused on European expansion.

We are operating in the UK now.

Our intention is to expand to other markets.

But right now it would be premature to be specific on those.

But it's obviously a very good question and one we do look forward to updating you on.

And then I had a question about your relationships with the mobile carriers.

Can you comment on what you're doing to further relationships with the existing carriers you work with and what you're doing to attract new carriers?

And if any of these relationships are, or what percent are exclusive relationships you have with them?

A lot of them are exclusive around the services that we provide.

And when you look at us delivering both automated voice search functionality and pay-per-call advertisements into their call-centric inventory, we are able to do a couple of things for them that are very unique and lead to deep integrations and, in many cases, exclusivity, which is to lower their costs in terms of what it takes to deliver against voice search and business listing lookups and bring them incremental new revenue opportunities.

So for them, it's a double win.

And it also increases their relevance with their consumers.

And clearly, they're not interested in seeing that being an integration point with their consumers to just anyone else, so for us to be able to deliver these solutions and private label them for them is a big deal.

And we get a lot of traction.

So you're saying that lots of them are exclusive relationships.

I guess that implies that there are some that are non-exclusive.

What are the other alternatives for the carriers if they're not working with Marchex?

There are two things.

Right now, we do think we have a unique position, given our product and value proposition and the ability to deliver it at the scale these guys need.

So I am not specifically aware of what other solutions there are in the marketplace, or even credible operators that could deliver it.

So we've got a window here where, for us, it really is about market education and execution.

So long as we can continue to educate these guys on what's out there and successfully execute, we think we have a lot of greenfield.

My last one is, you've talked about for a few quarters now, about increasing investment around sales and product.

Do you have a sales headcount now, and what it is now and what you think it can be by the end of, say, 2012?

Sure.

This is Mike.

Thanks for the question.

We have added, in the last six months or so, over 40 net personnel.

We're over 375 total folks to date, and a significant portion of the folks in the sales, business development team, in the marketing team, we are close to over 70 people in that aggregate group today, including account management.

And just in terms of where we think we're going, we still think there are 16 net additions, and we'll probably get there before the end of 2012, incremental to our current employee headcount.

Thank you.

James Dobson.

First, could you give us the contribution from Jingle in the quarter, and also the contribution from the publishing revenue?

Sure.

James, this is Mike.

Thanks for the question.

In terms of Jingle, it is just over $5.8 million.

Jingle has been integrated as part of our sales and product teams already, so part of the digital call marketplace.

And that is net of any intercompany eliminations number.

The other question was our publishing, our proprietary websites, and the revenues from that were $5 million for the third quarter.

Great.

And then getting back to the UK expansion, obviously, you have the partnership with Skype, which is fairly big in Europe.

Is there any other large partners you have on either side of both the publishing and advertising right now?

We do have other relationships, but it would be premature to provide the specifics.

Okay.

Thank you.

(Operator Instructions.) And sir, at this time, you have no further questions.

I would now like to turn it back over to Mr.

Horowitz.

Thank you very much, and thank you, everyone, for participating in today's call, and we look forward to updating you on our progress in the coming months.

Thanks again.

This does conclude today's conference call.

You may now disconnect.