Marchex Inc (MCHX) 2013 Q1 法說會逐字稿

Good afternoon, my name is Chanel and I will be your conference operator today.

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

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

After the speaker's remarks there will be a question-and-answer session.

(Operator Instructions).

I will now turn the conference over to Ethan Caldwell, General Counsel, Chief Administrative Officer.

Thank you.

Good afternoon, everyone, and welcome to Marchex's business update and first-quarter 2013 conference call.

Joining us today are Russell Horowitz, Chairman and Chief Executive Officer; Peter Christothoulou, President; John Keister, Executive Vice Chairman; and Michael Arends, Chief Financial Officer.

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.

In addition, there are certain risks and uncertainties relating to our previously announced proposed spin-off transaction which contemplates a separation of our mobile and call advertising business and our domain and advertising marketplace business, including but not limited to the impact and possible disruption to our operations, the timing and certainty of completing the transaction, the high cost in connection with the spin-off which we will not be able to recoup if the spin-off is not consummated, the expectation that the spin-off will be tax-free, revenue and growth expectations for the two independent companies following the spin-off, unanticipated developments that may delay or negatively impact the spin-off, and the ability of each business to operate as an independent entity upon completion of the spin-off.

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 reports 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 [including] OIBA, adjusted OIBA, adjusted EBITDA, revenue with domain sales, adjusted OIBA and EBITDA with domain sales 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 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 our also contained in today's earnings release.

At this time I would like to turn the call over to Russell Horowitz.

Thank you, Ethan.

Thank you, everyone, for joining us for today's call.

We started off the year with good momentum.

There are several trends driving growth in Marchex, some of which helped us in the first quarter.

The first trend is higher mobile adoption resulting in rising national and local advertising budgets dedicated to mobile channels.

Several points here.

First, more large national and small local businesses are embracing mobile and call advertising for the first time.

In the first quarter we added more than 40 national and reseller customers across our call products, including brands such as Pella, an energy efficient window and door manufacturer; Charter Communications; TBC Corp., one of the nation's leading automotive services companies; and [Ziplocal].

Separately, we meaningfully grew existing relationships including adding thousands of local businesses into our call marketplace to resellers.

Next, the local advertising market is increasing in importance in mobile performance advertising as many smaller or regional local businesses are interested in generating leads for mobile consumers.

We see this in our expanding reseller channel where our partners are looking to offer call based leads that deliver new customers to their local businesses.

Additionally, a new opportunity is quickly emerging.

Many national businesses with a local presence, such as auto manufacturers with regional dealerships or insurance companies with local agents, are coming (technical difficulty) to these in the digital marketing landscape.

Historically these brands have run under national and local marketing campaigns through separate initiatives and that has created widespread inefficiencies.

Given the fragmentation in mobile one of the biggest problems we are seeing is competition at the local level among those who work for the same brand.

National businesses are now intent on changing this.

Ad spend is growing rapidly and there is greater demand for higher return on investment.

National brands spent more than $45 billion last year on local media advertising according to BIA/Kelsey.

These advertisers want to drive maximum brand consistency and in turn greater customer conversions at the local level.

Our expertise across both the national and local advertising channels uniquely positions us to optimize campaigns for these brands as they shift budgets to mobile customer acquisition.

Marchex can leverage our technology to efficiently drive calls to an advertiser's national call center and to separately deliver targeted calls to their local agents or dealers.

During the quarter we expanded our relationship with an existing Fortune 500 customer to deliver highly qualified calls to many of their local agents while continuing to deliver mobile callers to their national call center.

We expect this trend to continue where we deepen relationships with our existing national customers to also support their local needs.

The second trend is increased demand for performance-based models that deliver high return on mobile ad spend.

Businesses that have been experimenting with mobile advertising are gaining more experience and a deeper understanding of this diverse and fragmented marketing channel.

While many of them started in mobile by focusing on awareness campaigns or mobile display as a means to understand the medium, they now recognize the importance of driving performance.

Marchex has had success focusing on mobile advertising because we provide a performance-based advertising model and pay for call and rich underlying call analytics technology that bring transparency and measurability to this emerging market.

For example, in the first quarter we were able to increase our average conversion rate for national advertisers to 29%.

This means that on average nearly one in every three calls we sent to our national customers resulted in a sale.

For local advertisers more than 65% of the sample calls we delivered resulted in product or service discussions.

And the third trend is the need for analytics to transparently measure and optimize advertising results.

As advertisers scale their spending and performance-based mobile advertising they increasingly want underlying analytics that provide insight into returns on investment.

We've invested significantly in the call analytics technology to facilitate this including developing solutions that map consumer actions within the call and ultimately highlight conversion and related data.

We are adding new features that analyze numerous factors critical to driving quality calls including new spam filtering technology and other elements that analyze call center and customer conversations and new customer identification filters.

As our experience and knowledge build through our Call Analytics technology we are accelerating growth and increasing defensibility.

In the first quarter we filed an additional five Call Analytics and related performance advertising patents adding to Marchex's expanding patent portfolio.

Now moving on to a brief update on the Archeo spin-off.

We are on track to complete the spin-off this summer.

During the first quarter early investments in hiring more people and implementing new processes led to increased domain sales.

As we build the team and launch new products we believe we will further increase domain sales and unlock the value in Archeo while driving growth over time.

With that I will hand the call to Mike.

Thanks, Russ.

Total revenue for the first quarter was $36.2 million with call driven and other related revenues representing $31.1 million.

Call driven revenue growth accelerated to 17% year over year and 9% sequentially.

We continue to make progress growing budgets from existing advertisers as well as adding new advertisers.

Our investments in products, technology and people were the principal drivers in the first quarter and in the near term we expect to continue investing in our products and technology.

Over time we believe we can capture additional efficiencies and increase margins in these products as we gain additional scale.

For the first quarter, including domain sales, Archeo revenue was $6.5 million.

Excluding domain sales revenue from Archeo was $5.1 million.

Overall we saw some decreases in advertising spending in these products due to our historical decisions to concentrate our investments in our higher growth mobile and call advertising products.

Excluding stock-based compensation, separation costs and amortization of intangible assets, total operating costs were $34 million for the first quarter of 2013.

Sales and marketing costs, excluding stock-based compensation, were $2.8 million.

During the quarter we hired additional sales and marketing employees as we invested in the opportunities we see to unlock performance-based call advertising and to support Archeo.

In the near-term we expect our marketing expense may modestly increase from current levels in support of continued growth of our sales and customer support teams and the evolution of our products.

Product development costs were $6.5 million as we were able to hire some additional product and engineering talent during the quarter to continue to build out our market leading call analytics platform and our call marketplace.

Adjusted operating income before amortization for the first quarter was $2.2 million.

Adjusted EBITDA was $3.1 million.

GAAP net income applicable to common stockholders was $85,000 for the first quarter of 2013 or $0.00 per diluted share.

This compares to a GAAP net loss applicable to common stockholders of $788,000 for the same period of 2012 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 $0.04 per share.

During the first quarter we generated $2.1 million in operating cash flow and had more than $17 million in cash on hand as of March 31, 2013.

Additionally, during the quarter we sold 50 domains that yielded approximately $1.4 million in incremental cash flow.

Based on continuing demand trends in 2013 and the increased investments we have been making in Archeo, we expect sales from nonstrategic domains will increase going forward.

We also acquired 31,000 of our common shares for a total price of $119,000 bringing our total shares acquired under our repurchase program to $11.3 million or 30% of our common shares outstanding.

Now turning to our initial outlook for 2013 and the second quarter.

First, looking at our revenue guidance for 2013, while budgets can change and we can be exposed to period-to-period variability, for the year we currently anticipate revenue will be in a range of $146 million to $150 million.

Additionally, we expect call driven revenue to be in a range of $127 million to $130 million, representing 14% to 17% growth from the 2012 levels.

Our growing footprint of advertisers and publishers along with our increasing traction with existing advertisers are the principal drivers of the increase in guidance for the year.

For the second quarter we anticipate revenue will be between $36.5 million and $37.5 million.

We anticipate call driven revenue will be more than $32 million.

For Archeo we believe the renewed focus and dedicated resources on these products and assets will allow it to unlock significant value going forward.

Next, looking at adjusted OIBA and EBITDA margins for the year.

For 2013 we expect $10.5 million to $11.5 million in adjusted operating income before amortization and $14.5 million to $15.5 million in adjusted EBITDA.

For the second quarter we anticipate a range of $1.5 million to $2.5 million in adjusted operating income before amortization and a range of $2.5 million to $3.5 million in adjusted EBITDA.

In the first quarter we were able to hire additional product and engineering talent to help fulfill our plans for the year.

However, we still have a meaningful number of positions to fill and expect that investment to flow through to the current quarter and the rest of the year.

We continue to invest in (technical difficulty) products and technology as we look to capitalize on the opportunities we see that can drive higher revenue growth and build defensible leadership in mobile and calls.

We also expect that investment to drive higher growth in 2013 is reflected in our guidance today.

As we grow we anticipate adjusted OIBA and EBITDA will increase as we move through the balance of the year.

And with that I will hand the call back to Russ.

Thanks, Mike.

From our technology to our products to our people, Marchex is focused on delivering on the opportunity in mobile performance and call advertising.

We believe in tangible data-driven results that generate new customers for our advertisers and higher yield for publishers.

As more advertisers continue to adopt our products it's great to see validation that supports our early commitment to mobile performance and call advertising and also to see our progress translating into higher growth.

I want to thank our employees for their hard work and dedication and we look forward to updating you again soon.

And with that I will hand the call back to the operator for Q&A.

(Operator Instructions).

Andre Sequin, RBC Capital Markets.

When you take a look at the near-term growth catalysts in your call business what are you looking towards there?

Is it more existing clients or winning new clients?

And then I guess in connection with that the announcement around Ziplocal, do see that as more of a near-term driver or intermediates?

And then separately, we talked last quarter about pricing trends in different verticals in the call business.

Are there any particular trends you are seeing there in the course of this quarter?

Sure, thanks for the questions, Andre.

As it relates to growth catalysts going forward, when we look at existing relationships and new ones we do see a real balance.

One of the themes you heard us talk about in this call so far is those advertisers that have come into the mobile channels and kind of worked their way up the learning curve are understanding performance more.

And as they do we see dollars shifting into mobile and specifically focused on performance.

And so we see catalysts to grow existing relationships based on that trend.

In parallel with that, those folks who are now call it second wave adopters who are initially coming into mobile seem to have tighter cycles in those learnings and we're able to get them to appreciate performance I would say at a faster rate than perhaps even some of our early adopters.

So I think it is balanced, but I do think we have plenty of opportunity to grow existing relationships as well as continue to bring in more customers and broaden those folks for whom we are a good fit.

The other thing that we started to talk about last quarter and we are bringing more emphasis to now is the opportunity with this kind of national local -- local problem where we look at these national companies that have local agent or dealer networks and kind of the problems that exist as mobile continues to grow and the increased fragmentation that comes with it translates to the national brand and local agents or dealers competing for placements on a very small screen.

And it leads to brand confusion and economic inefficiencies.

And so, kind of almost in real time we have seen this massive market become a place where brand confusion and economic inefficiency has created a big problem that is only getting bigger.

And so, somewhat serendipitously we have historically supported these national customers and these local customers, but there is this very organic convergence of needs here that we seem particularly well-suited to solve.

And so, we think that is one of the key catalysts for us going forward as well is growth of our national ad relationships driving into being part of their local solution and that being a catalyst for new relationships as well.

In terms of pricing trends, consistent with last quarter, there are certain categories that as we see adoption we do see some pricing pressure move prices up.

But nothing new per se versus the trends we saw last quarter.

Okay, great, thank you.

We think that will continue going forward.

Okay, thank you.

Dan Salmon, BMO Capital Markets.

Two questions.

First, yesterday you had a quick update in a press release of a new products solution.

And one of the things you mentioned was a pay for performance model and I know that has been part of the platform.

But just wondering if there were some new options for pricing for clients that we could maybe flesh out a little?

And then second, just maybe an update on the supply side of the call marketplace and anything that has been positive, negative or otherwise there lately?

Good questions and thanks, Dan.

As it relates to our pricing model, one of the things that we have recognized over the last year or more is that the growth of mobile has translated to a lot of confusion for folks.

And so, we have been very focused on communicating what we think is a very comprehensive value proposition in terms of what Marchex can deliver and trying to make the model through which they buy it as simple as possible in terms of pay for performance and pay for call.

And so, that is the model that we are using where we deliver a lot of value, solving a lot of problems under a performance-based model with pay for call.

And right now we think the conversion rates in driving to 29% for national guys and validating that about two-thirds of the calls we drive to local businesses are generating product and service conversations is a real validation.

Our goal is to continue to try and take the friction out of the process and make it easy for folks to adopt this.

And so, we are going to maintain that model of really emphasizing pay for performance with pay for call.

And so, that is where we are and how we envision things moving forward from here.

On the supply side we have grown -- I don't think we have come out with anything specific from an announcement perspective, but we have grown our supply-side relationships.

We have more than 100 sources we are working with actively, we've integrated with more than 300 to figure out which 100 drive both quality and quantity.

And we are growing existing supply-side relationships and we are also adding new ones.

And I would look at this as a place that you will see some disclosable activity as we move forward in the next period.

Great, thank you.

Carter Malloy, Stephens & Co.

Congratulations on the quarter.

So, one is on the Local Leads platform improvement for national advertisers.

Can you just explain a little more on the potential of that product and is that factored in your guidance in contributing to this year's guidance at all?

Sure.

When you look at this national local opportunity, we don't want to get ahead of ourselves, but at a market level you have got $40-billion-plus that national companies spend each year targeting local customers.

And as I noted, the problem is big and getting bigger based on the complexities of mobile.

And it's kind of happening very dynamically.

And a lot of these brands are realizing kind of the rate at which economic inefficiency is getting worse and the importance of having a cohesive approach to managing their brand both at the national level and understanding really what kind of logical rules to drive when a call ought to be driven to the national call center versus to a local agent or dealer based on who it -- consumer intent and which of those entities is best suited to close that transaction.

And so for us, we do see this as one of the real catalysts in our business over the next couple of years.

We do see it as a real-time one.

It has been a source of investment and we have been messaging that investment as part of our directional guidance as well as financial guidance.

But I would say that we are not trying to be -- we are not trying to over think ourselves in timing it and we do think that there is a catalyst there that may not be fully reflected.

And when we get more visibility on its impact is when I think we would kind of factor that more meaningfully into our guidance and how we set expectations.

Okay.

And then also, given a few reports lately showing some comparable domain sales in the thousands on average and I think you guys had some at a much higher average of $27 or something like that.

Can you help us understand just the stand-alone value of Archeo?

I know it's a difficult topic to navigate from a disclosure standpoint.

So maybe even just a minimum -- if someone came along and said, hey, I'll pay you $50 million or $75 million for that, would that be worth the consideration or is it in your mind worth much more than that?

Very good questions.

I will do the best I can to be as transparent as I can given our process.

Historically we have said we believe that there are nine figures of asset value there.

And the obstacle to getting that realized was focus and investment.

And so, this process has been about getting the folks in place who have the expertise and can bring the focus in in turn to make the investment on unlocking and demonstrably showing what these asset values are so that we can unlock those asset values and in turn create a growth opportunity with Archeo.

The data that we shared in our release this week I think is very affirmational.

We talked about the fact that we think we've got some of the most viable premium digital real estate in the world.

And we have world-class people who we are very thankful have committed to Archeo and have helped us build a process and an organization and create the intellectual property to really start to institutionalize what it means to validate our beliefs and hopefully translate that into a kind of broader appreciation for what we have got.

In the context of what would it take for us to part with those, I am going to leave that one alone, but reiterate that the data we shared this week were metrics we thought were very meaningful in establishing who Archeo is, our premium position in the market and the opportunity we have got forward to both unlock liquidity and create a recurring premium business in this industry.

And so, we think we're just getting started.

A lot of the people we have hired literally have started within the last weeks and months and a lot of the tools that we have been building are just coming into their hands and use.

So we think it only gets better from here and will only be easier for people to appreciate the values that we have come to know and love.

Okay, thanks so much.

(Operator Instructions).

We have no further questions at this time.

Do you have any closing comments?

Appreciate everybody's participation in our call today and we will look forward to updating you on our business progress very soon.

Thank you.

Thank you, everyone, for joining today's conference call.

You may now disconnect.