Marchex Inc (MCHX) 2013 Q3 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Marchex third quarter conference call.

(Operator Instructions)

I would now like to turn the call over to Ethan Caldwell, Chief Administrative Officer, General Counsel.

Sir, you may begin your conference.

Thank you.

Good afternoon, everyone, and welcome to Marchex's business update and third 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.

We may not actually achieve the plan's 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.

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

We had a productive third quarter with $35.7 million in call-driven revenue.

Existing clients are shifting more of their advertising budgets to us and we're also winning new clients who are eager to see their ad dollars measured against real consumer outcomes.

This is exciting to see.

Several years ago we believed that phone calls would be a transformative advertising outcome as consumers rapidly shifted to mobile.

With a mobile phone in everyone's hand we saw that businesses, particularly those who are service based or required some form of personal connection would have a new way to connect to consumers to drive sales.

Now that mobile adoption is pervasive phone calls are rapidly emerging as one of the most valued actions in the purchasing path for both consumers and businesses.

A recent study found that 61% of mobile searchers viewed the ability to call businesses from a search result as a critical step in the purchasing process.

In fact, nearly half of consumers searching on mobile say that if a business does not have a phone number associated with their search results they will be more likely to explore other providers.

On the other end of this purchasing pipeline advertisers want ads that get consumers to call them, and they also want to understand what happens on these phone calls at a granular level.

Marchex is very well positioned to meet this growing demand.

As you've heard us say before, we believe mobile advertising will follow the trajectory of online desktop advertising, that is desktop advertising started as largely a display medium and as businesses became more familiar with that format and the technology became available to measure performance in a click world advertisers moved a disproportionate share of their spending to a performance model, which was [pay per click].

At the heart of the success of pay per click was web analytics, which drove measurement and transparency.

The same thing is unfolding right now in mobile.

Advertisers first started testing mobile through display networks, now we're seeing increasing evidence that brands are looking for performance based mobile advertising models, which is why we've invested heavily in both pay for call and call analytics technology, but there's one very significant distinction and comparison between clicks and calls and it's this.

Calls are much more complex and the problems that need solving are totally different.

For example, how do you know when a sale occurred during a conversation or which publisher impression among the many different on traffic sources and hundreds of millions impressions drove the call that led to that result?

Bringing together the infrastructure, technology and people that are able to solve problems like these are complex and the necessary investment is significant.

We have spent more than $100 million on our infrastructure, product innovations and our people with a heavy emphasis on intellectual property development, which is reflected in our more than 27 patents issued or pending.

Our continuing investment in these areas is both adding to our opportunity and increasing our business' defensibility.

At the heart of our business is our call analytics platform, which allows us to route the right caller to the right place at the right time.

Our data provides deep insights that solve significant advertiser pain points, such as how and when to block unwanted calls before they happen and how to identify what makes the quality call.

The intelligence we drive from our analytics platform gives advertisers a full view into how their ad campaigns are performing and empowers them to optimize their spending.

Our technology also enables us to provide strategic insights to the marketing and call center organizations and allows them to make efficiency improvements that increase both conversions and customer satisfaction across all of their inbound call volumes.

With that backdrop, I'll now move to selected highlights during the quarter.

First and foremost, we are a customer centric Company.

Everything we do centers on providing our customers the highest value at the lowest cost and greatest scale.

We also believe that the vast majority of all media for national brands and local service based businesses will ultimately be bought and sold on a performance basis.

Businesses will place the most value on cost per conversion models.

We believe that innovative technologies, coupled with service from people with unique expertise are necessary to best support these businesses.

This approach influences everything in our business, from what our teams build to how they operate.

It has created a vibrant ecosystem where existing clients increase their commitments to Marchex and new clients continue to come onboard, as well.

In the third quarter we continued to deliver on key performance metrics for our advertisers and in certain instances with our national pay for call advertisers delivered conversion rates of more than one in four phone calls.

We also continue to add new customers with our call advertising products, including national brands, such as Bank of America, Waste Management, and Sprint.

We've seen a growing trend of existing customers using multiple Marchex products.

In fact, our value proposition and product structure are naturally suited to drive this.

Next up are our products.

We had a productive third quarter, delivering on several key call analytics innovations.

As I mentioned earlier, our proprietary call analytics technology is the foundation of our business.

Advances to our call analytics suite drives value for our entire Company, and insights from our pay for call product are pushed into our call analytics platform.

In the third quarter we launched two new patent pending technologies -- Call DNA and Dynamic Tracking, which are designed to significantly lower customer acquisition costs for advertisers.

These advancements provide visibility into which keywords or impressions lead to high quality customer conversations, real-time automated insights into what is actually occurring in the conversation, and ultimately which conversations resulted in conversions, all dynamically and all at scale.

Marchex is taking the lead in understanding what quality calls look like, particularly in the mobile environment, including the sources and tactics needed to produce those calls.

Forming strategic technology partnerships is also critical to driving innovation and performance.

We have announced product integrations with several major digital campaign management providers to help their clients measure the conversions that result from mobile and online campaigns, including with Google's DoubleClick and Marin software.

And, finally, our people, this year we made significant advances and have expanded our employee base by more than 10%, mostly in our product and engineering team, which brings our headcount to more than 400 people.

We also recently brought Clark Kokich onboard as our Chief Strategy Officer.

Clark has more than 14 years of experience in digital advertising and most recently served as Chairman of Razorfish, which is one of the largest digital marketing agencies in the world, where he also held the roles of CEO and President.

Razorfish was also the largest operating Division within aQuantive, an advertising technology and services giant, and Clark helped grow the company from pre-IPO status in 1999 to more than $600 million in annualized sales prior to its acquisition.

Clark has a fantastic track record in driving advertising performance for some of the world's largest companies, and he's already working with our sales and client development teams.

We'll continue to add people we believe can drive innovation and client performance.

We're excited about the progress we're making across our business, and with that I'll hand it to Mike.

Thank you, Russ.

Call-driven and other related revenues were $35.7 million, while total revenue for the third quarter was $39.7 million, excluding domain sales and revenue from discontinued operations related to the sale of certain Archeo assets during the quarter.

Call-driven revenue growth increased to 22% year-over-year and 5% sequentially.

We continue to see increased budget allocations from existing advertisers based on the outperformance of our call advertising products, and we also added new advertisers.

Given our traction with our call advertising products we continue to invest in product development and in building our team.

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

For the third quarter, including domain sales, Archeo revenue was $5.9 million, excluding revenue related to discontinued operations.

Excluding domain sales revenue from Archeo was $4 million.

With the launch of the domain marketplace during the quarter we are taking steps forward with implementing our strategy to extract additional value from the Archeo assets.

Total operating costs were $37.2 million for the third quarter of 2013.

This total reflects continuing operating costs and excludes stock based compensation, separation costs, amortization of intangible assets and domain sale costs.

Sales and marketing costs, excluding stock based compensation, were $2.6 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.

Without domain name sales adjusted operating income before amortization from continuing operations for the third quarter was $2.5 million.

Adjusted EBITDA was $3.4 million, excluding these items.

GAAP net income from continuing operations was $598,000 for the third quarter of 2013 or $0.02 per diluted share.

This compares to a GAAP net loss from continuing operations of $490,000 for the same period of 2012 or $0.02 per diluted share.

Excluding domain name sales adjusted non-GAAP income per share from continuing operations, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.04 per share.

During the third quarter we generated $4.3 million in operating cash flow and had more than $25 million in cash on hand as of September 30th, 2013.

Domains sold during the quarter yielded approximately $1.9 million in incremental cash flow.

I wanted to add a brief comment on revenue recognition this quarter.

The evolving business progress with the Archeo domain marketplace requires GAAP revenue to include domain sales from the date of the launch.

Prospectively, we expect domain sales to be counted for wholly in GAAP revenue, though we intend to separately identify it to provide for the ability to track revenue from continuing operations, excluding sales of domains.

Now turning to our outlook for 2013 and the fourth quarter.

Before we begin, I'd like to note that my commentary on guidance measures will exclude discontinued operations and contribution from domain name sales.

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 more than $134 million.

We continue to make progress across our call-driven products and see traction with existing advertisers as well as in adding new advertisers.

As a reminder, in the third quarter 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.

Last quarter we estimated the full year impact for 2013 to be approximately $6 million in revenue and near $300,000 in EBITDA, with those amounts largely flowing through our P&L in the second half of this year.

This sale is presented in our financial results as discontinued operations.

We are very focused on realizing the value from the Archeo assets.

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, excluding domain sales, to more than $148.5 million.

For the fourth quarter we anticipate call-driven revenue of more than $33.5 million and total revenue, excluding domain sales, of more than $36.5 million.

As a reminder, while we anticipate that we will see growth in demand for our call-driven products as we move forward, in terms of seasonality it is worth noting that many of our advertisers are service based businesses that typically scale back their marketing efforts in the fourth quarter.

Call volume similarly drops off in the latter part of the fourth quarter.

We began to see this over the last few years as the scale of our call advertising products continued to grow.

We remain very bullish about our mobile and call advertising products and the traction we are making with both new and existing customer bases.

However, as the call business makes up the vast majority of our business today, in the future we may be subject to seasonality of ad budgets in this channel.

Next, looking at adjusted OIBA and EBITDA margins for the year, for 2013 we are reiterating our guidance of $9 million to $10 million in adjusted operating income before amortization and $13 million to $14 million in adjusted EBITDA, excluding domain sales.

For call-driven adjusted EBITDA for the full year 2013 we are forecasting more than $9 million.

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

For the fourth quarter we anticipate a range of $2.1 million to $3.1 million in adjusted operating income before amortization, and a range of $3.1 million to $4.1 million in adjusted EBITDA.

We are highly focused on hiring additional product and engineering talents, as well as salespeople and client managers.

We are continuing these efforts as we look to capitalize on our product and customer momentum going into 2014.

Our dialogue with advertisers affirms our belief in the potential market opportunity and our call advertising products are meeting with success.

As a result, we are continuing to invest in order to capitalize on this momentum and to build our leadership position in this emerging market.

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

Thanks, Mike.

From customer validation to product momentum the pieces are coming together.

We're working hard to establish leadership in mobile and call advertising, which is a very important and dynamic emerging market.

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

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

(Operator Instructions)

And your first question comes from the line of Andre Sequin from RBC Capital Markets.

Great, thanks for taking my question, and nice quarter.

As we're getting into the budgeting season for advertisers, looking ahead to 2014, can you talk a little about what you're seeing there?

Are you seeing signs they are going to continue to shift more budget in your direction?

And then, secondly, now that the decision to keep Archeo internal has been made and Archeo Domains has been launched, where are you prioritizing your investment with Marchex, as a whole?

You already mentioned some more spend in marketing, are there other areas you'd call out?

Thanks.

Sure.

Thanks for the questions, Andre.

Yes, on the first front we are in kind of the season where with our larger national clients we're looking at 2014 initial budget commitments.

And the trend has been positive, and we feel very good about the direction those are going.

So, yes, we are optimistic that we'll see increased budget commitments from our bigger customers going into 2014.

In terms of what's happening on the Archeo side, with the launch of the domain marketplace we're seeing some good initial success and an opportunity to build on that momentum.

So in the context of where kind of our investment lies we know that Archeo can spin-off a lot of discretionary cash flow that can build our balance sheet and also create latitude for investment elsewhere.

And so with Marchex the theme is consistent, first and foremost, it's about continuing to differentiate the technology platform, and so that's -- we're going to continue to invest in this product and engineering.

It's a logical kind of point of extension of that thesis, the sales and marketing.

We know our technology and products are delivering differential performance for our customers, and we know the key is to continue to win more of them so we can keep the virtual cycle going and extend our momentum.

And so product and engineering, sales and marketing will continue to be the investment themes.

Okay, great.

Thank you.

And your next question comes from the line of Gene Munster from Piper Jaffray.

Hey, good afternoon, and congratulations.

Just kind of follow-up on the theme about next year and just some of the budgets.

As far as getting new customers onboard, I know you've got a laundry list of Fortune 500 customers, but anything on the updates in terms of the pace of those new customers and I guess your confidence that the light is essentially going on, continue to go on with some new customers and should we think about that as one of the drivers in 2014?

Thanks for the questions, Gene.

Yes, you should think about that as the driver in 2014.

As we kind of layer the business we anticipate existing budget, kind of growth in budget commitments from existing customers, kind of at this point in 2013 we have won more customers than we did last year this time, and so we feel good about that being a catalyst.

We think given the emergence in understanding of the market opportunity our ability to win more customers in 2014 is greater than it was kind of same time in 2013.

So kind of all three buckets are working in our favor, and I guess to backdrop that this market is still early, it's really big, but we continue to see validation that we've got the right solution for it.

Okay, that's helpful.

And then the follow-up question in terms of, obviously, you in some ways work with Google and in other ways you compete with them on the call business.

They've talked a lot more about calls and kind of validating what you're doing on calls.

Anything just how we should think about other players I guess, whether it's Google or other players, if it's a foregone conclusion that calls are real, what gives us confidence that Marchex is going to be fully or be one of the key participants in this over the long term?

Well, first and foremost, we do think this is a big market, and what Google has communicated has been a big validator for the industry and for customers, and that's really helped us.

Again, as you know, we've invested over $100 million so far in our intellectual property, and we've put together a world-class team of people who understand kind of the unique problems and how to solve them, and that's being validated every day at increasing scale.

When you extend kind of that opportunity into Google, you know, they're clearly a meaningful part of the media ecosystem given their consumer reach, but we feel we sit in a unique place and advertisers increasingly reach out to us and want to extend our analytics capabilities into Google and want to be able to leverage our pay for call performance model.

We think it's very complementary.

We think it's consistent.

We're kind of coexisting with Google in many respects, but we're highly confident that what we're building on the technology side is both unique in its ability to deliver value and highly defensible as it relates to solving the problems and pain points that advertisers focused on calls need, recognizing that there's hundreds of sources they need to go out and find perspective customers in, and Google is an important one, but again our solution is agnostic and helps them solve that problem and address those pain points in a much broader fashion.

We feel good about that.

All right.

Thank you.

Your next question comes from the line of Lauren Slabaugh from Stephens.

Hi, guys, congrats on a good quarter.

Thank you.

Sure.

So thinking about opportunity in terms of national clients or local or looking into -- getting more into the agencies, what's at this point where you sit, what's the biggest driver for 2014 in terms of your revenue growth?

Good question.

We view it as a 50-50 kind of deal, 50% balanced to national brands and agencies and 50% focused on local advertisers, with an emphasis on the vertical players.

Okay, and that's sort of verticals, you announced some other financial services customers.

I know you guys have done a good bit in insurance.

Which verticals is this really catching on right now?

If you were going to lead with our strongest ones, home services, you know, folks like ADT and home security, financial services you hit on with folks like Allstate, travel is strong and growing, and Intercontinental Hotels is an example there.

And then local continues to be kind of a strong vertical where we support over 100,000 small businesses buying pay for call through our reseller partners.

And then auto would really be the fifth, where we're extremely deep, both with kind of analytics and pay for call customers.

Those five are big.

We think there's others behind it that could be big drivers, as well.

Okay, got it.

Thanks a lot.

Thank you.

Your next question comes from the line of Mark Zgutowicz from Northland Capital.

Hi, guys.

Just a question on some of the initiatives that Clark may be already putting in place that might be sort of incremental revenue drivers in 2014, was wondering if you could maybe talk about anything that might be taking shape there already and when that might be sort of an incremental driver to revenues in 2014?

Look, Clark, as we mentioned, is really already embedded with the sales and client development teams with a real emphasis on the agencies and that agency penetration.

That scenario we feel underexposed and where there's a lot of opportunity, and where he obviously has unique expertise and relationships, so we think he'll be an accelerant of our penetrating agencies and that can be an accelerant to growth for us.

It'll be an impact for 2014, and we think it can be an even bigger driver extending out into 2015.

Okay, super.

And then on seasonality in Q4, I was just curious if there's anything that you're seeing that's similar or dissimilar to what you saw last year at this time, is it kind of a similar sort of view into the quarter or is there anything you might want to share there?

Thanks for the question, Mark.

Yes, from a seasonality perspective there's two parts to it.

One is in particular with some of the service based businesses, they do tail-off their budget in the latter part of the fourth quarter.

And then the second from a volume perspective, especially at the tail end of the fourth quarter, the call volume does go down, and we've seen that as the call side of our equation in our business has increased over the last couple of years we've seen those trends play out over those periods of time and we're expecting similar, and we've built that into our forecast from a seasonality perspective.

And then as you look back into 2014, especially in the first half of the year, there's some good things that occur, both from a supply perspective, as well as from an advertiser perspective in terms of service based businesses.

And just to augment that, there's nothing so far this year that stands out relative to our expectations of how seasonality plays out in this business.

Okay, great, thanks very much.

Thank you.

(Operator Instructions)

And there are no further questions at this time.

We want to thank everybody for participating in the call.

We're glad to give you today's update, and we look forward to giving you our progress reports as we go forward in the coming months.

Thank you.

And, ladies and gentlemen, this does conclude today's conference call.

You may now disconnect.