Marchex Inc (MCHX) 2014 Q4 法說會逐字稿

Good afternoon.

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

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

(Operator Instructions)

Thank you.

Mr. Ethan Caldwell, General Counsel, you may begin your conference.

Thank you.

Good afternoon, everyone, and welcome to Marchex's business update and fourth quarter 2014 conference call.

Joining us today are Russell Horowitz, Peter Christothoulou, Clark Kokich, and Michael Arends.

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 they 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 release.

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

Thank you, Ethan.

It's been my privilege to have led the founding of Marchex and to serve as its CEO and Chairman for more than a decade, growing the Company from an initial idea to where we are today.

As highlighted in our news today, it's now my desire to redefine my role for the next phase of the Marchex's journey.

In consultation with my executive team and Board of Directors, I've indicated a desire to evolve my role and to be an executive member of our Board of Directors in a manner that frees me up to focus on the longer-term Marchex opportunities and that also fosters growth in our overall executive leadership.

As part of this initiative to expand the leadership team at Marchex, I'm very please that Clark, a long time industry veteran, and Pete, will step into these leadership roles.

I'll continue to support Pete, Clark, and our team's overall ongoing needs as we continue to focus on what we believe is a transformative and significant growth opportunity.

With this, I'll now hand today's call to Pete.

Thanks, Russ.

Let me start off by saying I'm incredibly excited about my evolved role as CEO.

I couldn't be more energized about our opportunity.

I'm really looking forward to continuing to work with the entire Marchex's team to build a market-leading Company.

Now, I'd like to take a moment to talk about how we got to where we are today.

We started developing our analytics platform in 2009 to connect businesses with a new and growing segment of customers, mobile customers.

We believed mobile would transform how consumers and brands interacted even though the world looked very different at the time.

BlackBerry was the dominant operating system then with more than twice the combined market share of Android and iOS, and mobile made up just 1% of global internet traffic.

Few brands considered, much less invested, in mobile advertising campaigns.

Mobile was a new complex channel and advertisers can track activity let alone conversions the same way they could with clicks on the desktop.

Businesses were effectively spending blindly.

Early on, we saw the makings of a giant mobile advertising measurement problem and an opportunity to build technology to solve it.

As mobile adoption grew, the measurement problem worsened.

Advertisers were defaulting to using desktop strategies to acquire and track mobile customers.

The digital marketing loop that works so seamlessly on desktop was simply not capable of measuring the full mobile picture.

That's because mobile consumers behaved differently.

With immediate access to business information on their phones, consumers often call a business directly or just walk into a store.

These are incredibly valuable offline consumer actions, and advertisers spend billions of dollars on campaigns to generate these outcomes, given they represent prime opportunities to engage with customers and drive sales.

As our technology advanced, we developed tools to analyze complex conversational patterns and service that data for clients to optimize against.

This in turn, led to increased performance and unique customer intelligence.

The clients wanted these real-time insights integrated into their reporting dashboards and media buying platforms.

What they are ultimately looking for was a mobile solution that allowed them to operate just as seamlessly and effectively as they were accustomed to on the desktop.

And so our mission became clear; bring visibility to mobile behaviors.

We created a breakthrough analytics platform to help businesses securely and reliably understand perspective customer calls in real time.

Our call analytics platform provides advertisers highest level of visibility, data intelligence, and insights.

This technology is the backbone of our Company and is applied to everything we do.

For example, we developed our call marketplace of an application on top of this platform to drive incremental qualified mobile leads to businesses.

By developing technology that tracks the consumer journey from online to offline, we have substantially grown our client relationships over the last several years and now work with some of the nation's leading businesses such as ADT, Bridgestone, Bank of America, State Farm, T-Mobile, Time Warner, and many others.

Over the years, we've connected our clients to consumers more than1 billion times, including more than 300 million times last year alone.

But what gives us our edge is the ability to provide customers with increased visibility into every conversation surfaced directly into the reporting dashboards and marketing platform environments.

We include nearly 100 unique data points ranging from caller location, to demographic profile, to conversion characteristics and we do this all in real time.

But we are still in the very beginning.

Every ad agency and marketing executive I have spoken to over the last six months expects mobile and analytics technologies to transform marketing and how they operate over the next five years.

Our early focus and leadership in call analytics puts us ahead of this market trend and gives us a unique opportunity.

Just this month, we launched Marchex call analytics research, the newest application of our analytics platform.

The initial version of this product allows search marketers to see, for the very first time, all calls from mobile search campaigns at the keyword level and understand which calls converted to a sale in real time.

This data surfaced through deep integrations into the marketing dashboards search marketers use every day.

It automatically synchronizes when campaign structures change with just one click.

This visibility is powerful and empowering.

Allconnect, one of our first beta customers, cite 50% improvement in ROI and a 43 reduction in cost per acquisition in its early implementation.

There has been a significant change since we set out on this path a few years ago, and there's going to be more.

We now live in a world completely saturated with mobile experiences.

Advertising strategies are becoming more sophisticated and the winning brands are real and personable, whether through live conversation, interaction with the store, or direct connection social media -- info media.

In a world where attention has become one of our scarcest resources, brands need the right products to create emotional engagement with customers.

They also unfold visibility into their mobile ad spend and 100% of their data accessible in realtime within their existing marketing dashboards with just one click.

The opportunity ahead of us is large and to capture it, we must continue to focus ourselves and be fast to deliver products that offer differential real-time insights.

Here are two things you can expect from us this year.

One, further analytics innovation.

We will evolve existing intelligence features and develop new channel specific applications that bring real-time visibility to enterprise clients.

We will integrate our products directly into our customers' workflow to make sure the data is actionable and their day is efficient.

And two, an unwavering organizational commitment to customer success.

While we utilize technology to transform client performance, we are ultimately in the trust business.

Everything we do and every person in the Company can make a positive impact for our clients.

The decisions we make reflect this approach, and we are actively hiring across organization to support this commitment.

I'm incredibly excited to work with the entire Marchex team as we move forward.

I'm very grateful to our customers and our partners for their continued support, to our people, who raise the bar every day with their creativity and ability to innovate in ways that deliver and create extraordinary customer results.

We look forward to updating you throughout the year.

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

Thanks, Pete.

For the fourth quarter, Call-Driven revenues were $30.3 million while total revenue was $33.3 million.

The fourth quarter was characterized by two primary factors.

One, seasonal fluctuations in budget and call volumes, and two, continued progress in building a healthy sales pipeline to support future growth, something I will comment more on in a moment.

For the fourth quarter, including domain sales, Archeo revenue was $3 million.

Domain sales were $1.7 million during the quarter.

Total operating costs were $29.8 million for the fourth quarter of 2014.

This modal reflects continuing operating costs and excludes stock-based compensation.

Sales and marketing costs, excluding stock-based compensation, were $2.9 million.

Over the coming periods, we expect our marketing expense may modestly increase from current levels in support of continued growth of our sales and customer support teams.

Moving to adjusted operating income before amortization and EBITDA from continuing operations, Call-Driven adjusted OIBA and EBITDA were $2.5 million and $3.4 million respectively.

Including domain name sales, total adjusted OIBA from continuing operations for the fourth quarter was $3.5 million, and adjusted EBITDA was $4.4 million.

GAAP net income from continuing operations was $571,000 for the fourth quarter of 2014 or $0.01 per diluted share.

This compares to a GAAP net income from continuing operations of $597,000 for the same period of 2013 or $0.02 per diluted share.

Including 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 $0.05 per share and $0.07 per share for the same period in 2013.

During the fourth quarter, we generated $4.3 million in operating cash flow and had $80 million in cash on hand as of December 31, 2014.

In addition, during the quarter, Marchex purchased 670,000 or 2% of its outstanding class B common stock for a total price of $2.5 million under its new share repurchase program established in November, 2014.

Now turning to our initial outlook for the first quarter of 2015.

I'd like to first start out by mentioning we are making solid progress in our business across a number of fronts including: developing new products, expanding customer relationships, and developing partnerships.

Consistent with prior quarters, given the relative contribution of our call-driven products, we believe focusing on Call-Driven revenues and profitability measures is the most appropriate way to communicate our business progress and guidance going forward.

Looking first at our Call-Driven revenue guidance for the first quarter.

For the first quarter, we are forecasting $32 million or more for Call-Driven revenue.

While advertiser budgets can change, and we can experience period-to-period variability based on a variety of factors, we continue to make progress in our business.

In 2014, we had a record number of million dollar customers.

In 2015, we believe we will continue to expand the number of million dollar customers and the number of customers overall, which work with us on multiple products.

We are broadening the footprint of advertisers we work with, and as we onboard new customers, we're building a pipeline for future growth.

Next, looking at Call-Driven adjusted OIBA and EBITDA margins.

For the first quarter, we are projecting $1.5 million or more in Call-Driven adjusted OIBA and $2.5 million or more in Call-Driven adjusted EBITDA.

These amounts exclude any contribution from the Archeo assets and domain sales.

Consistent with prior years, it is worth noting that there are adjustments including compensation, personnel related items, and certain professional fees that flow through disproportionately in the first half of the year versus the second half.

We are highly focused on capitalizing on our early mover advantage in mobile advertising technology, and we are continuing to invest to support our growth opportunity.

While we believe there are significant margin leverage in our business over the long term, we are focused on becoming leaders in this emerging market and supporting the momentum in our business in the near term.

We are excited by the progress we're making in our business and look forward to updating you throughout the year.

I'd like to thank you for joining us today, and we look forward to reporting on our progress as we move forward.

I will hand the call back to the operator to take questions.

(Operator Instructions)

Darren Aftahi with Northland.

So first, congratulations to Pete, but just a few if I may.

I think in the prior calls you kind of called out the telecom verticals specifically, cable, MSOs, and some wireless carriers.

Are you continuing to see strength in that vertical?

And any kind of incremental progress you have made there in the last three months?

Secondly, in the past you kind of talked about some international opportunities there is existing installed base.

Can you speak to that a little bit?

And then I think, Mike, your last comments were about some incremental costs flowing through in the first half of the year versus second.

It looks like your EBITDA margins on the call-driven business were pretty strong in the fourth quarter versus your implied guidance in 1Q.

Can you speak to the delta there?

Thanks.

Sure, Darren.

This is Pete.

Thanks for the question.

Your first on telecom and cable and satellite.

Yes, we are focused there; we are seeing strength there.

We've been delivering very good results for our clients.

I think last quarter we specifically mentioned T-Mobile, for example, as a new 2014 client.

We are seeing scale in the category this year as we expand with multiple products, including Call Analytics For Search, which we just launched.

On your next question, international, we think this is a global opportunity; we're focused on executing against it.

Fortunately, we have a number of large enterprise clients who are multi-nationals, and we are in conversations with them, and agencies about what our international expansion plans are to support their needs.

And this is Mike.

Thanks for the questions, Darren.

The question on the first quarter and just the first-half cost structure, there's a couple of examples I'll throw out.

An example would be the year-end audit, or the professional fees related to that.

We also have compensation items, like we fund our healthcare programs upfront in the month of January, so those are a couple of examples of costs that flow through disproportionately in the first half of the year relative to the second half.

Great, thank you.

John Campbell with Stephens, Incorporated.

Hey, guys, good afternoon.

Just on the service costs, that came -- that obviously came in a good bit sequentially just as a percent of rev.

What are you guys thinking for the balance of 2015?

Where is a good range to be thinking about for the year?

So when we think about the contribution, it goes back to how we think about the customer programs and the Marchex call marketplace, primarily, and again, when you think about $1 coming in between $0.50 and $0.70 of those dollars goes out in the form of the revenue share or the payment to the call source itself.

And then, we have between $0.10 and $0.20 on the dollar that goes out for some of the variable cost, the telephony, variable components, the sales and marketing initiatives that are specifically related to that particular customer initiative.

And so we have a $0.20 to $0.30 contribution profile.

So, as we move the revenue streams, that's our primary focal point of how we think about contribution.

And, the remainder of that contribution is then discretionarily devoted to things like the product innovation, the research and the development initiatives of the Company.

But, for the most part, the fixed-cost structure of the G&A is fairly stable, even at higher revenue levels, significantly higher revenue levels than we are today.

Got it.

Okay.

I think that makes sense.

And then, share repo for the remaining part of the year, I think you guys talked about that a little bit.

But you finished the year with ample cash, I think $80 million or so in cash.

How much do you have remaining in the allotment and how aggressive do you guys think you'll be if the stock remains at current levels?

We do have a share repurchase program in effect and those parameters are preset as part of that program.

We do have 2.3 million shares remaining under the allotment.

We did acquire approximately 700,000 in the period in the fourth quarter.

Okay, got it.

And then, just last question for me.

Just going back to the customer mix, you mentioned Bank of America.

That's a new name that I haven't heard yet.

How old is that relationship?

Is that a relatively new relationship?

And then, on State Farm, and thinking about the insurance vertical, kind of similar to the last question you guys just got, is that dynamic in that vertical changing much?

Is Allstate a read through to what we might be able to -- or what you guys might be seeing in the insurance vertical?

Is there spin being pulled out there or is that more just company specific?

This is Pete.

Thanks for the question.

First off, our products deliver exceptionally well in the financial services category.

Bank of America is a new client that we launched in 2014, so this will be their second year with us.

As it relates to the State Farm Insurance question and Allstate, no, we do not see any trends similar to that, and we expect to grow that vertical this year.

Okay, great.

Thanks, guys.

Ross Sandler with Deutsche Bank.

Great, hey, guys.

Just two questions, I think pretty high-level stuff here.

Pete, I know the team has been together for a very long time and is in pretty solid shape, but any strategic change in approach that you plan to take versus what we have done over the last couple of years?

Or any new thinking around overall strategy in go-to-market?

And then, Russ, it looks like you've got about 5 million shares still left and 70% voting rights.

With you stepping aside, any change in thinking around your super voting shares, now that you are going to be a little less involved in the day to day?

That's it.

I'll go first.

Thanks, Ross.

On the team, on the strategy and go-to-market, first, as you know, we think there's a huge opportunity in mobile measurement.

Businesses are struggling right now with real-time visibility and having technologies to figure out how to drive performance.

Our strategy is not changing.

We're solving that problem and developing products to support their needs.

So as it relates to the team, we're really looking to add talent to the team that helps us kind of go-to-market and embed more deeply.

Obviously, Clark's evolved role into Chairman shows our approach to going after best-in-the-world talent at every level of the organization.

That's going to continue.

Last quarter, we announced other people who have joined the Company, in client engagement and business development, who have 15, 20 years of real experience, and I think you'll continue to see that from us.

Ross, it's Russ.

As you know, I've been the CEO and Chairman since our inception, more than a decade ago, and when I started this conversation with the Board and the executive team, I was just really thinking about we're in a very tangible window of opportunity, it's really big, and how do we collectively position everybody in the best place to make this happen and move forward.

And I personally saw it as an opportunity to take my time to go deeper in the areas I am most passionate about, really focusing on strategy and conceptualizing and pursuing strategic relationships as well as other big impactful opportunities.

And so this is where I see the opportunity for me to really focus more deeply, on a prospective basis, to positively impact the Company in the immediate and the longer term.

The other part of the agenda was to use my role evolution as a catalyst to evolve our Board and bring in new impactful Board members and to evolve and grow the executive and senior management teams to help ensure we have the people and resources that we need to harvest this opportunity.

So, I'm obviously pleased to continue to be the largest shareholder, and I'm going to continue to play an important role in doing whatever the Company needs to make sure that I and we make a lot of money.

Gene Munster with Piper Jaffray.

Good afternoon.

I'll send my congratulations, Russ and Pete, in both your new roles.

And I apologize if I missed this earlier, but did you give growth rates, ex-Allstate, in the quarter?

And then, separately, any updates in terms of Yellow Pages?

Thanks.

Thanks for the question, Gene.

This is Mike.

So the -- at the $32 million mark for the first quarter, that would be a growth rate of over 13% on that pro forma basis, as you proposed.

And then, for the fourth quarter, on an adjusted basis as well, it would be about 7% growth.

Okay.

And then, I guess just for general numbers to think about 2015, I don't know if we can go out that far, but growth, ex-Allstate?

Gene, I'm not sure that we are following the question.

I guess maybe just organic growth?

Oh, okay.

Understood.

For now, what we've done is we've put out a framework for the first quarter, and when we think about for the year, we've got a number of initiatives that are going on right now.

One of them is some of the new product introductions that we worked on with a lot with the innovation in the fourth quarter.

They have come to market here in the first quarter.

An example would be MCA for Search.

We've had a lot discussions with customers at this point in time.

There's a lot of receptiveness with some of these discussions.

Now, we need to go forward and bring those to market, and actually loop those into a financial translation, but that would be an example of an item that is impactful for how we go forward.

Then we've got things that are key partnerships that we have made a lot of progress on here, recently, and we are close in a number of areas.

There's different parameters in terms of how those partnerships may play out.

In addition, we've got a key customer that we've got a very good relationship with.

We've got a long-standing relationship with them that is significant, and we've got a contract that comes up for extension, here, at the end of June, and both parties are very focused on extending the terms of those relationships, and we are working through those parameters.

All of those things are things that we look forward to updating in the near term, and that will help inform further updates in terms of 2015.

Okay, great, thank you.

Rohit Kulkarni from RBC Capital Markets.

Great, thank you.

Big-picture question, please.

As in, given that you have been somewhat pioneering this call with mobile advertising for quite some time now, do you see any signals from advertisers that makes you feel that the Allstate loss is behind you and you have somewhat reached a tipping point, or even a proof of concept here [point] for considerably new forms of advertising?

And, are the incremental dollars that need to flow through these systems and you are getting what [considerate] that you are due?

This is Pete.

Thank you.

I think your question is really around trends in the business and the market, and what we are seeing is that as clients are -- as businesses really see how mobiles transform consumer behaviors, where consumers are now utilizing mobile and creating many offline actions, whether it's clicking a call, or walking into a store, we are seeing a need for technologies like ours to help give them visibility and transparency into their campaign data, in fact being pulled into conversations.

So, as we have gone through our budgeting process this year, and discussions with clients, we feel really good about our relationships and their allocations to us and think we are at the start of a very early trend of mobile performance and measurement.

Okay.

And a quick question on the ad agencies.

Any updates on how your conversations with them are focusing?

Any early signs of any announcements that you would be making?

Sure, we continue to make very good progress with many of the agencies.

We have several clients already from agencies and made significant traction last year.

We continue to expect to do that this year.

Outside of that, there are no specific announcements.

And last question from my side.

On the call analytics and measurement product, is that a separate product that you would be selling?

Or is that going to be bundled into your core mobile advertising product?

Good question.

Call analytics has always been the backbone for everything we do.

Every product or feature we have sits on top of our call analytics platform, which I highlighted, it's connected 300 million consumers last year.

As we announced earlier this year, we did launch an application on top of call analytics, Marchex Call Analytics For Search.

You will continue to see further product introductions on top of the call analytics platform, which we will sell independently, yes.

Okay.

And one last question.

Any additional color on the comment you made about there are several customers with $1 million run rate?

Any additional color you could give to quantify to help us understand that better?

So, Rohit, this is Mike.

Thanks for the question.

It is a double-digit customer number today, and we look to meaningfully increase that over the course of this upcoming year.

Part of that just goes back to some of the product innovation getting traction with the new products as well as focusing on the success for the customers.

Okay, thanks, Mike.

Thanks, Pete.

Thank you.

(Operator Instructions)

There are no further questions at this time.

I will turn the call back over to the presenter.

Thank you, everybody.

We appreciate your continued support in us and look forward to updating you throughout the year.