Marchex Inc (MCHX) 2013 Q2 法說會逐字稿

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  • Operator

  • Good afternoon, my name is Faren, I'll 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)

  • Mr. Ethan Caldwell, General Counsel and Chief Administrative Officer, you may begin your conference.

  • Ethan Caldwell - Chief Administrative Officer, General Counsel

  • Thank you.

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

  • Joining us today are Russell Horowitz, Chairman and Chief Executive Officer; Peter Christothoulou, President; 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 the separation of our mobile and call advertising business, and our domain advertising marketplace business, including but not limited to the impact and possible disruption to operations, the timing and certainty of completing the transaction, the high cost in connection with the spin-off, which we would 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 these businesses 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 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.

  • 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 are also 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 thank you everyone for joining today's call.

  • I'd like to begin today by highlighting the trends which drove our strong second quarter performance.

  • First, mobile is proving to be the force we imagined it would be when we began incubating our call advertising business 4 years ago.

  • We saw enormous opportunity as mobile adoption was taking off to help businesses connect with consumers over the phone.

  • Millions of businesses, whether it's a nationally branded hotel, car rental, insurance, or cable company, or a locally focused dentist, lawyer, or auto repair shop, need advertising that gets customers to call.

  • These companies rely heavily on over-the-phone conversations to convert sales, and the growth of consumer mobile adoption is providing a new, high-volume channel.

  • There is significant demand for these call-based outcomes.

  • In fact, BIA/Kelsey estimates US national and local businesses spend more than $65 billion annually on media that ultimately drives calls as a consumer action.

  • Marchex is uniquely positioned to support these businesses, and significantly grow their sales.

  • We offer these advertisers a performance-based model, where they only pay for high-quality consumer calls, receive full transparency into their ad campaign performance, and give deep, unique insights that allow them to clearly understand what they're getting for what they're spending.

  • Our market position is the result of the investments we have made over the last 4 years in our products, our customers, and our people, and our second quarter results are just a reflection of our continued focus.

  • Specifically, our products and technology investments are core to powering this performance, and performance remains the cornerstone of our business.

  • In the second quarter, we continued to drive differential customer conversion rates for our clients, which ultimately drove growth and momentum.

  • We also added more advertisers, and existing advertisers spent more with us.

  • More national and local businesses are coming forward and embracing mobile as a performance advertising medium, and calls as they way to drive results.

  • In the second quarter, we added more than 20 national and reseller customers across all our call advertising products, including national brands such as GEICO, and local brand and resellers, such as DIRECTV local dealers, and Pella Windows, and other channel partners who collectively added more than 1,000 local advertisers.

  • This included growing our relationship with Entravision, a diversified Spanish language (inaudible), which announced it was expanding its Marchex caller product into 15 new markets.

  • We also saw this throughout our reseller channel, as our partners view Marchex as the leading solution for delivering call-based leads that drive new customers for local businesses.

  • Finally, with the increased investment levels, we accelerated our product momentum.

  • In the first half of the year, our product and engineering team accelerated their development with more than 80 unique product and technology releases.

  • These included both minor updates, such as creating systems that drive further internal efficiency, as well as major efforts, such as launching a new advertising product for national businesses with local interest, an optimization enhancement to our mobile and call advertising analytics technology

  • We also continued our efforts to protect our mobile and call advertising intellectual property through additional patent filings to add to our patent portfolio.

  • Our customers will continue to benefit from our products progress in the back half of 2013, including from the launch of deeper analytics to further drive our unique understanding of call conversion.

  • Now moving on to an update on the Archeo spin-off.

  • In our earnings release today, we announced the sale of certain pay-per-click publisher relationships as part of our effort to increasingly focus Archeo's business on its premium domain marketplace.

  • Mike will go over additional details in a moment.

  • I'd like to highlight that we're narrowing Archeo's focus on the buying and selling of domains along with the select develop of proprietary websites.

  • This move to sell certain pay-per-click relationships furthers that goal.

  • As a result of the sale and the need to refile our Form 10, we expect that the spin-off will occur not earlier than the fourth quarter.

  • In the meantime, we'll continue to evaluate the strategic pieces within Archeo, and monitor its progress based on Archeo's updated profile.

  • As previously communicated, we believe there is an opportunity to create a leader in the domain marketplace, and for us to unlock the value of our more than 200,000 domains.

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

  • Michael Arends - CFO

  • Thanks, Russ.

  • Total revenue for the second quarter was $39 million with call-driven and other related revenues representing $33.9 million.

  • Call-driven revenue growth accelerated to 23% year-over-year, and 9% sequentially.

  • During the quarter, we added new advertisers, and continue to make progress driving customer performance and unique insights, resulting in increased budget allocations.

  • We are seeing early returns from our investment in our call products, including our investment in our new national local product, and our technology and people, which is coming in the form of accelerated revenue growth.

  • As a result, we remain heavily invested in each of these areas.

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

  • But for now, we believe our opportunity is significant, and we will continue to invest in our leadership position.

  • For the second quarter, including domain sales, Archeo revenue was $6.5 million, consistent with the first quarter.

  • Excluding domain sales, revenue from Archeo was $5.1 million.

  • Excluding stock-based compensation, separation costs, and amortization of intangible assets, total operating costs were $36.8 million for the second quarter of 2013.

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

  • 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 $6.6 million.

  • In the near term, we plan to hire additional product and engineering talent to continue to build out our market-leading call analytics platform, and our call marketplace.

  • Adjusting operating income before amortization for the second quarter was $2.2 million.

  • Adjusted EBITDA was $3.2 million.

  • GAAP net loss applicable to common stockholders was $354,000 for the second quarter of 2013, or $0.01 per diluted share.

  • This compares to a GAAP net income applicable to common stockholders of $330,000 for the same period of 2012, or $0.01 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 second quarter, we generated $1 million in operating cash flow, and had more than $18 million in cash-on-hand as of June 30, 2013.

  • Additionally, during the quarter, we sold 70 domains that yielded approximately $1.3 million in incremental cash flow.

  • Based on continuing demand in 2013, and the investments we've been making in Archeo, we expect sales from non-strategic domains will grow going forward.

  • Now turning to our outlook for 2013, and the third quarter.

  • Looking first at our revenue guidance for 2013.

  • While budgets can change and we can be exposed to period-to-period variability, for the year we are increasing our expectations for our call-driven revenue to a range of $132 million to $134 million, representing 18% to 20% growth, up from our prior range of 14% to 17% growth from 2012 levels.

  • Our increasing progress with existing advertisers, traction with new products like our national local product, along with our growing footprint of advertisers and publishers, are the principal drivers of our increase in revenue guidance for the year.

  • In July, we sold some of our pay-per-click third-party distribution relationships that were part of the Archeo business for proceeds of up to $2.6 million in order to provide greater focus and opportunity around creating a premium domain marketplace.

  • Those relationships contributed $1.4 million in revenue, and approximately $100,000 in adjusted EBITDA in the second quarter, and were on pace to contribute approximately $3 million in revenue, and $200,000 in adjusted EBITDA for the remainder of the year.

  • We estimate the full-year impact for 2013 to be approximately $6 million in revenue, and $300,000 in EBITDA.

  • Going forward, we anticipate this sale will be presented in our financial results as discontinued operations.

  • We are very focused on realizing the value from the Archeo assets, and will assess the best opportunity to achieve that over the next several months, while the process for Archeo's revised profile, and strategic pieces are reviewed.

  • As a result of the sale of these relationships, and the accelerating growth in our call-driven revenue, we are currently updating our total revenue guidance range to $145 million to $148 million.

  • On an adjusted comparative basis, including $6 million in revenue from discontinued operations, this equates to a guidance range of $151 million to $154 million.

  • For the third quarter, we anticipate call-driven revenue of $34 million to $35 million, and total revenue of $37 million to $38.5 million.

  • On an adjusted comparative basis, including $1.5 million in revenue from discontinued operations, this equates to a guidance range of $38.5 million to $40 million.

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

  • For 2013, we expect $9 million to $10 million in adjusted operating income before amortization, and $13 million to $14 million in adjusted EBITDA.

  • On an adjusted comparative basis, including $300,000 in adjusted OIBA from discontinued operations, this equates to a guidance range of $9.3 million to $10.3 million in adjusted OIBA, and $13.3 million to $14.3 million in adjusted EBITDA, respectively.

  • Also today, for the first time, we're including annual guidance for Marchex call-driven profitability measures.

  • We separately provided in our financial tables attached to today's press release, a profile of our call-driven adjusted EBITDA with all call-driven expenses, and Marchex's overhead allocated to it, and Archeo contribution, excluding certain indirect overhead.

  • On this basis, our results for the first 6 months of 2013 totaled just over $4 million of call-driven adjusted EBITDA, and we are forecasting Marchex's call-driven adjusted EBITDA for the full year 2013 will increase to more than $9 million.

  • This approach reflects fully burdened call-driven revenue under a standalone model.

  • For the third 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.

  • On an adjusted comparative basis, including $100,000 in adjusted OIBA from discontinued OPs, this equates to a guidance range of $1.6 million to $2.6 million in adjusted OIBA, and $2.6 million to $3.6 million in adjusted EBITDA, respectively.

  • During the second quarter, we continued to make progress in hiring additional product and engineering talent, an important part of our hiring plans for the year.

  • As our call products meet with success, including the progress we are making with our national local product, and our belief in the potential market opportunity, we are continuing to invest in order to capitalize on momentum.

  • Key items factored into our outlook for the second half of 2013 include -- one, we are continuing to hire in anticipation of new customer launches during the year; and two, and again relating to our early success with our national local product, we are making certain infrastructure and scalability investments that will enable us to continue to grow this product.

  • As we grow, we anticipate our call-driven adjusted OIBA and EBITDA margins, and absolute dollars, will increase as we capture additional scale over time.

  • With that, I will hand the call back to Russ.

  • Russell Horowitz - Chairman, CEO

  • Thanks, Mike.

  • We continue to see validation that supports our commitment to mobile performance and call advertising, and see our progress translating into higher growth and leadership in this market.

  • Our ecosystem of advertisers and mobile publishers is growing, and our investment in technology to deliver unique insights and analytics in mobile advertising is driving that momentum.

  • We look forward to updating you through the year.

  • I want to thank our employees for their hard work and dedication, and I'd also like to thank our customers, and we look forward to updating you again soon.

  • With that, I'll hand it to the Operator for q and a.

  • Operator

  • (Operator Instructions).

  • Your first question comes from Andre Sequin with RBC Capital Markets.

  • Andre Sequin - Analyst

  • Thank you.

  • Great quarter, guys.

  • We obviously saw some nice revenue acceleration, and it's something we've talked about in the past, where would you say the growth, or maybe more importantly, where did the acceleration come from?

  • You noted both price increases and customer wins.

  • Is there one you would point to more there?

  • And then more of a small housekeeping question, we saw the 8-K that came out with the small adjustment to the YP contract.

  • Could you give us a little color on the change, and maybe what the impact from that might be?

  • Russell Horowitz - Chairman, CEO

  • Sure.

  • Thanks for the questions, Andre.

  • On the first front, when you look at kind of the acceleration of growth, and our outlook going forward, the virtuous cycle in our business is that when we prove out our performance with existing customers, we see budget increases.

  • And increased budgets from existing customers was the biggest contributor to accelerating growth.

  • In parallel with that, winning new customers is key, because as we onboard them and prove it out, they then become customers who have budgets that can move up based on our out-performance relative to their alternative channel.

  • So those are really the contributors.

  • On an in-quarter basis, increased budgets from existing customers, but we got a nice pipeline of new customers that we think can fit that profile as we go into Q3 and Q4, and help drive this accelerating growth.

  • So, we feel good about that trend, and I hope that answers the question.

  • On the YP front and the 8-K that we filed, we had some fees that we reduced with YP, and there were some fees that we increased with YP.

  • We extended our relationship around our providing pay-per-call to YP into mid-2015, but the net impact was greater alignment for each of us to get the outcomes that we want in the relationship.

  • Andre Sequin - Analyst

  • Okay, great.

  • Maybe I can follow up on that first question, and also, again, since we saw such a nice acceleration here, it might be a little early, but when you look forward and say, maybe 2014 and beyond, how do you think at a high level, what do you think the long-term growth rate for the call business can be?

  • Do you have sort of any internal targets in mind, or have you looked forward to think about that?

  • Russell Horowitz - Chairman, CEO

  • We're not prepared to give specific numbers, but we know mobile is a high-growth market.

  • We think that performance-based models is inevitably where the dollars move in that the early adopter model in mobile like desktop before it was display, and as people kind of got their training wheels off, the dollars really started to move into performance.

  • So, as it relates to what represents our opportunity, clearly we saw acceleration into the 20s this quarter on an annual basis.

  • We'd like to see our growth rates be reflective of what people kind of categorize as growth companies.

  • The market supports it and we think we've got the products and customers to deliver it.

  • That's kind of the long-term focus in terms of what we're trying to drive, and the profile we're trying to achieve.

  • Andre Sequin - Analyst

  • Okay, great.

  • Thanks, guys.

  • Russell Horowitz - Chairman, CEO

  • Thank you.

  • Operator

  • Your next question comes from Matt Lebo with Piper Jaffray.

  • Matt Lebo - Analyst

  • Good afternoon.

  • I just had one quick one.

  • When I look at the domain sales that you had over the quarter, the average amount is roughly $18,500 per sale.

  • Do you think that kind of reflects the portfolio that you still have, and -- the values of it?

  • Russell Horowitz - Chairman, CEO

  • The averages can be very -- can vary fairly significantly depending on a small number of transactions in any given quarter.

  • What I will say is that, as we've invested in Archeo, and adding people and systems that allow us to launch a marketplace and scale this business, the yields that we're seeing reinforce our belief that we have a lot of asset value to unlock here.

  • Matt Lebo - Analyst

  • Great.

  • Thank you.

  • Russell Horowitz - Chairman, CEO

  • Thank you.

  • Operator

  • (Operator Instructions).

  • Your next question comes from Lauren Slabaugh with Stevens Incorporated.

  • Lauren Slabaugh - Analyst

  • Congrats on a great quarter.

  • Russell Horowitz - Chairman, CEO

  • Thank you.

  • Lauren Slabaugh - Analyst

  • Could you talk about the increased share of business you are seeing?

  • What are you doing sales wise, and how does that apply nationally versus locally, and then where do you see that going in terms of investment in sales and sales strategy?

  • Russell Horowitz - Chairman, CEO

  • Our focus with our direct sales force is to go after the large national customers, and that's where we both go out and win them and support them on a direct basis, and where we have the scale and efficiency to really make that work.

  • As it relates to the local businesses, we've worked with partners, both -- when you look at kind of your horizontal players, and then we also look at vertical specific resellers to go out and kind of win the thousands or tens of thousands of customers, and potentially hundreds of thousands of customers, that value call-based leads.

  • The interesting place where we see one of our biggest opportunities now is with these direct national relationship that have a local presence, local agents, local dealers, and local affiliates that sell their products, like insurance agents for insurance companies, that with mobile, are needing to rationalize how they manage their brand, and where they drive leads to the national call centers, and where they drive leads to the local agent, and we feel that we're very uniquely positioned with our products and relationships to see a real growth catalyst come from this channel opportunity.

  • And this is really where the meat of the $65 billion market is that Kelsey estimates when you look at the media dollars spent on calls.

  • So, we think it's a sweet spot for us.

  • We think we've got a highly defensible position, and it's kind of a convergence of our direct sales force, and our local expertise.

  • Lauren Slabaugh - Analyst

  • Great, and then following up on that, understanding that you are making some meaningful investments now, how do you think about the margin in the pay-per-call business, understanding it's being speced a little bit right now, where does that eventually go?

  • Michael Arends - CFO

  • So, this is Mike.

  • Thanks for the question.

  • When we think about the profile on the digital call marketplace, and we think about dollars coming in from advertisers, from a direct contribution perspective, there's $0.30 to $0.50 that drops to the bottom line equation for every dollar that's coming in on average.

  • And then there are some costs as part of that that are incremental in terms of the product developments, and some of the other more discretionary costs that we get to make investment allocation decisions on.

  • But overall the ultimate profile of that opportunity is still over a 20% plus margin contribution business.

  • Lauren Slabaugh - Analyst

  • That is helpful.

  • Thanks a lot.

  • Russell Horowitz - Chairman, CEO

  • Thank you.

  • Operator

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

  • Ygal Arounian - Analyst

  • Hi, guys.

  • This is Ygal calling in for Dan.

  • Just have a quick question on the Archeo pay-per-click sale.

  • You did give a guidance on what you're expecting it to be for the rest of the year.

  • We're just trying to clarify if that's assuming you're selling off all of the pay-per-click assets by the end of this year, or if there will be more after this year.

  • Basically, how close you guys are to being a pure play domain business?

  • Russell Horowitz - Chairman, CEO

  • Thank you for the question.

  • This is not all of the pay-per-click business.

  • It's a decent chunk of it, and it allows us to really narrow our investment and focus on domains.

  • But, again, the forecast here was specific to the third-party publishers we sold, and at this point, kind of the minority of the pay-per-click business remains as part of Archeo at this point.

  • And as we mentioned, moving forward our real focus is on the domain marketplace, and development of the verticals, and we'll continue to review the other strategic pieces that make sense for Archeo in the intermediate to long term with an emphasis on unlocking the asset value.

  • Ygal Arounian - Analyst

  • Okay, great.

  • Thank you.

  • Russell Horowitz - Chairman, CEO

  • Thank you.

  • Operator

  • Your next question is a follow-up question from Andre Sequin with RBC Capital Markets.

  • Andre Sequin - Analyst

  • Great.

  • Thanks for taking the follow up.

  • I guess in actually following on the last question there, what more do you feel like you still need to prep for the Archeo spin out?

  • Is there a lot of hiring that needs to be done or internal reorganization, or basically at this point, a matter of paperwork?

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

  • Are there any particular trends there you're seeing in the course of this quarter?

  • Russell Horowitz - Chairman, CEO

  • Well, to hit on the trends first, pricing-wise, similar to last quarter and kind all up, pricing was in the same range as it was in Q1.

  • On a go-forward basis intermediate to longer-term, we think as we're able to display the value, there's opportunities to see prices on a pay-per-call basis increase.

  • Right now, our focus is on market penetration, and really covering the breadth of the opportunity.

  • But those are the trends we see, and we think that work.

  • They're very favorable.

  • Andre Sequin - Analyst

  • Sorry, I was trying to get into sort of different verticals, if there's any in particular there, where you saw a meaningful trend in any one of them?

  • Russell Horowitz - Chairman, CEO

  • Nothing specific I can highlight for you today.

  • Andre Sequin - Analyst

  • Okay.

  • Russell Horowitz - Chairman, CEO

  • And then on the Archeo side, we need to refile to reflect the pro forma profile of Archeo in terms of the Form 10.

  • We're continuing to build against the domain opportunity.

  • We've made progress in terms of hiring and building up the senior team, and just feeling like we're in a good place to be able to illustrate and unlock these asset values.

  • Those are really the key components to drive in the coming months.

  • Andre Sequin - Analyst

  • Okay, great.

  • Thank you.

  • Russell Horowitz - Chairman, CEO

  • Thank you.

  • Operator

  • At this time, there are no further questions.

  • Presenters, do you have any closing remarks?

  • Russell Horowitz - Chairman, CEO

  • We appreciate everyone's involvement in the call and the great questions, and we look forward to updating you on our progress soon.

  • Thanks again.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.