Marchex Inc (MCHX) 2016 Q4 法說會逐字稿

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

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

I now turn the call over to Ethan Caldwell, General Counsel.

Thank you.

Good afternoon, everyone, and welcome to the Marchex's business update and fourth-quarter 2016 conference call.

Joining us today are Michael Arends and Gary Nafus.

Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements, including with respect to our financial and operational performance, and actual results may differ materially from those contemplated by these forward-looking statements.

Risks and uncertainties that could cause these results to differ materially are set forth in today's earnings press release, and in our most recent annual or quarterly report filed with the Securities and Exchange Commission.

Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements for subsequent events.

During this call we will present both GAAP and non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release.

The earnings press release is available on the Investor Relations section of our website, at Marchex.com.

At this time, I would like to turn the call over to our Chief Financial Officer, Michael Arends.

Thank you, Ethan.

Good afternoon, and thank you, everyone, for joining us today.

I would like to start by updating you on what the office of the CEO has been focused on.

Over the last few months, we have been listening to our customers, and evaluating key product areas to uncover where we can best grow existing relationships and win new ones.

We successfully extended our relationship with YP through 2018.

In addition, we continue to win the relationship with Fortune 1000 companies, largely based on the unique measurement capabilities and insights our analytics platform can provide.

Equally as important, as part of our strategic review, we've been scrutinizing which of our offerings are not meeting our internal expectations.

As we work to scale our new analytics customer relationships and their financial contribution, we still remain subject to budget fluctuations from some of our largest Call Marketplace customers.

The Marketplace is a media product where we have historically been vulnerable to changing media tactics, given the nature of the product, and this is carried over into our initial outlook for the first quarter of 2017.

The Call Marketplace has also been impacted by the decline in the financial contribution from our YP relationship over the last year.

In addition, the revised economic terms in the expansion of the YP relationship -- the extension of the YP relationship, along with its related impact on the Call Marketplace, are factored into our initial guidance.

Despite these short-term Call Marketplace impacts, we remain highly focused on returning Marchex to being cash flow positive, and delivering long-term profitability.

We are going through a strategic business review with each of our product areas, to determine which areas have the best opportunity for growth and value creation, in order to optimize for financial progress.

Going forward, one area we are very excited about is analytics.

We believe our Call Analytics platform is a market leader based on the depth of the product platform, and the insights we can deliver to customers.

This is an area where we have customer attraction, given our growing product portfolio.

We think our analytics product area is a unique strategic asset, with favorable operating characteristics and we are very focused on executing on our growth opportunities in this area.

As we progress through this review, we expect that our overall corporate strategy may evolve, and that we can unlock value in our assets.

In the meantime, as part of our focus on greater spending efficiency, we are starting to scale back on investments with longer payout horizons, such as certain international initiatives, and also reducing cost scenarios that are not mission-critical our current priorities and growth.

Through a combination of these efforts, we anticipate our cost reduction initiatives will reduce operating costs by more than $10 million in annualized savings, the impact of which we expect to ramp throughout the course of the year.

As a result, we anticipate Marchex to be at or near breakeven for adjusted EBITDA at some point in the second half of this year.

At that time, we also expect more updates on our search for a new CEO.

While we continue to get more cost efficient, we also remain focused on building products that deliver premium value for our customers.

This month, we launched our Omnichannel Analytics Cloud, which is the latest example of how we are transitioning from the investment to the execution phase for several critical product development cycles, and where we see opportunities to reinvigorate growth.

Our significant investments in building technologies to help marketers measure mobile and offline convergence, has given Marchex what we believe, is the most complete view of what happens from a call generated, from the range of marketing channels most used by Fortune 1000 companies to acquire customers.

We see the value of our Omnichannel Analytics products bring to our customers, and our focus now is on winning new ones, having new revenue, and deepening existing relationship.

We know that if we do this we will make financial progress and start to get our value recognized.

With that, I would like to hand the call to Gary to cover some insights on our customers.

Thanks, Mike.

Despite a challenging 2016 that included ramping our sales force, we made progress building Marchex's footprint of new customers in strategic product areas.

In 2016, we added 30 new enterprise clients.

In addition, we extended our relationships with certain strategic clients like YP, where we now have the deal through 2018.

With the ramped sales force, we expect add new analytics customer relationships and new revenue.

One of our most exciting developments has been our recent integration with Facebook.

Facebook partnered with Marchex for two reasons.

First, because it recognizes that marketing measurement on social media has to evolve.

And second, Facebook wanted to offer the most reliable and advanced call analytics intelligence to enterprise brands that spend billions of dollars marketing on its global platform.

While the Facebook influence is immense, ad exposure on social media can be difficult to tie back to phone calls made to businesses.

Our partnership eliminates that blind spot, by giving marketers a deeper understanding of what happens on a phone call that stems from a Facebook ad.

Instantly measuring cross channel impact is what today's marketers need to convert prospects into customers.

Evolving our product platform differentiates Marchex in the marketplace, and opens up opportunities to cross sell to clients.

In December, we launched Display and Video Analytics, to tap into the more than $11 billion that brands are expected to spend on video advertising in the US, this year alone.

With our product, enterprise marketers can now measure the impact of display and video advertising campaigns on inbound phone calls to a call center or a store.

Marchex Display and Video Analytics also allows marketers to measure video advertising units, in both premium and programmatic video publishers.

Marketers can understand the impact of mobile display, in app, and video ad units on offline customer acquisition.

In fact, our data shows that consumers exposed to both video and display ad units are two times more likely to purchase a product offline than consumers who are exposed to just video or just display.

Both of these launches built out the portfolio of media insight for Marchex to launch our Omnichannel Analytics Cloud.

This integrated technology platform now enables marketers to quickly optimize their marketing spend across all media channels, based on which channel drove off-line interactions by a consumer.

Marchex is one the first to create a one-stop shop to connect consumer conversions driven from all media channels, including search, display, video, and social, to calls made to a business.

Enterprise marketers can now get more efficient media spend and lower their customer acquisition costs.

Many of our relationships with customers start small, but they come with substantial potential for growth over time.

Bridgestone, for instance, was once a small co-analytics pilot, and is now a strategic multi-million dollar client.

We currently have active pilots with multiple Fortune 500 brands, and combined with our current pipeline, we believe will put us on a path returning to growth.

With that let me turn the call back to Mike, to cover the financials.

Thanks, Gary.

For the fourth quarter, call-driven revenues were $28.4 million.

We know some of you track our growth without YP, so to help models with this framework in mind, call-driven revenues in the fourth quarter, excluding YP, were $22.4 million, compared to $25.3 million in the year-ago period.

On a year-over-year basis, the fourth-quarter call-driven revenues without YP were primarily influenced by a decrease in budgets from certain customers who were the subject of acquisitions, and from the previously mentioned trends with a limited number of Call Marketplace customers.

Additionally, while we believe that new customer relationships and an expanded sales pipeline can have a meaningful impact on our long-term growth, they are not yet at a scale that is impacting our financial profile in the near term.

Looking further down the P&L for the fourth quarter, excluding stock-based compensation, total operating costs for the fourth quarter were $31.2 million.

Service costs were $15.9 million, down from $19.5 million in the fourth quarter of 2015.

Sales and marketing was $5.2 million, which was up year-over-year, as we continue to invest in our sales and marketing organization.

Product development was $6.4 million, down modestly year-over-year.

Moving to adjusted operating income before amortization and EBITDA for the fourth quarter, call-driven adjusted OIBA and EBITDA were losses of $2.9 million and $2.1 million, respectively.

GAAP net loss from continuing operations was $5.7 million for the fourth quarter 2016, or $0.14 per diluted share.

This compares to GAAP net income from continuing operations of $1.2 million, or $0.03 for per diluted share for the same period of 2015.

Adjusted non-GAAP loss per share was $0.04 per share, compared to income of $0.03 per share for the same period in 2015.

We ended the fourth quarter with more than $103 million in cash on hand.

Now, turning to our outlook for the first quarter.

First, let's discuss revenue.

For the first quarter, we expect call-driven revenue of $22.5 million or more.

Our guidance takes into account a couple factors.

One, lower Call Marketplace budgets from a large financial services customer.

While that customer remains as a large, and ongoing multi-million dollar relationship, budget reductions caused by a shift in media tactics has impacted the outlook in the first quarter for our Call Marketplace product.

Two, we are seeing the flow through impact for the new economics of the long-term extension of the YP relationship, and also from the customers we have that were acquired last year, which we discussed on the second-quarter conference call.

Our guidance also takes into account that many of the new relationships we entered into last year are in the early-ramp phases, and are not meaningfully contributing to the overall financial progress of the business.

Over time, as we win more new customers and increasingly penetrate our existing customer relationships, we believe we can create a path to long-term growth.

Next, looking at call-driven adjusted OIBA and EBITDA.

For the first quarter, we are forecasting call-driven adjusted OIBA at a range of a loss of $4 million, to loss of $4.5 million.

For call driven adjusted EBITDA, we are forecasting a range of loss of $3 million, to loss of $3.5 million for the first quarter.

These numbers for the first quarter include estimated reorganizational costs of approximately $800,000 to $1.5 million.

Over the last month, we have taken steps to align our investments and cost structure with our current revenue levels, to ensure that we can make progress toward our goal of positive cash generation, and so that our future growth drives greater efficiency and operating leverage.

As we've previously noted, we anticipate some of our savings initiatives to benefit us more in the second quarter, and we expect in the latter half of 2017 to be at or near breakeven for adjusted EBITDA.

Customer attraction from sales and marketing initiatives and growth of our enterprise customer base will also open up opportunity to see additional flow through to cash contribution and financial operating leverage.

As one of the early movers in the mobile advertising analytics market, Marchex has built a unique analytics platform and product suite that delivers critical insights for marketers who depend on us to operate efficiently and grow their businesses.

The market leadership of our analytics products is reinforced by the meeting market-leading Fortune 1000 customers that have chosen to use our products in strategic ways.

We are now optimizing our business in crucial ways, while pursuing a strategy that we expect will lead to both financial progress and value recognition.

I would like to thank all of our employees for their hard work, and on continuing to focus on our customer needs and on providing the products and service that drives their success.

With that, I would like to hand the call back to the operator to take questions.

(Operator Instructions)

Brett Huff, Stephens.

Good afternoon, guys and thanks for taking our questions.

A couple of them.

Number one, in terms of the $10 million annualized savings that is really helpful.

I just want to see that the math that I was roughly thinking about makes sense to you.

If you take your negative $7 million or so of EBITDA in 2016, and assume you get something like half of the $10 million that you alluded to of ramp, that would get you, probably, minus $2 million, depending on how quickly that happens for 2017 for EBITDA.

Is that the right magnitude to think about how quickly you can get traction from those savings?

Brett, this is Mike.

Thanks for the question.

I think the context of the $10 million in the annualized savings is more directed at a comparison to the actual costs in 2016, versus the profitability and measure, which obviously includes the full outlook of the revenue streams as well.

What we do think, is that we can relatively quickly see meaningful impact of those annualized savings, and we see the majority of that benefiting us, already, beginning in the second quarter.

Okay, that's helpful.

And then, in terms of the Facebook deal, thanks for putting out the detail you did a couple of days ago, it was really helpful.

Obviously, people are excited about that.

Can you give us a sense of, qualitatively, where are we in the process of figuring out how to turn that into revenue?

I think it is a referral relationship, but has a back-end integration.

Can you just flush that out a little bit for us so we understand what exactly the technical relationship is?

And how, going forward, the referrals and things like that might work?

Thanks for the question, Brett, this is Gary.

We're super excited about the Facebook relationship.

It is -- the partnership is a very critical element for us to have an Omnichannel capability.

Relative to the specifics about how the relationship works, Marchex will be the selling engine for that offering.

Facebook -- we do have a good partnership with Facebook, and we are hopeful for referrals, but it is certainly not a situation where they are reselling our capabilities.

But we are, relative to how that will contribute to the revenue line, probably a good example is to look at our search capability that we brought out, and within about 12 months we saw good revenue contribution for that product line.

So it took 12 months in past similar things, so maybe we can think, at least on that level of time magnitude.

Okay, that helps.

And then, any change in -- or in the discussions you're having with your customers, in the shifting budget priorities on media spend, can you give us any update on the tenor of those discussions?

I mean any new rationale, or different rationale for maybe spending less on call-driven add stuff versus other particular channels or media?

Any update on why the shift?

If it might come back?

When it may come back, et cetera?

Sure.

With regard to the large financial institution that we do business with, and one is one of our largest customers, that shift was very predicated on them investing in one of their product lines versus another.

And so in 2016 we were very involved in a product line of ours in driving phone leads to them.

They have deemphasized that as part of their 2017 plan.

And so, that is the biggest impact.

We don't have any other indications around areas where it's going to have further impact.

Okay, so it was -- it was a tactical decision on their part that just happened to flow through to you all?

Yes.

Okay.

And then in terms of some of the new products that might be coming out, still yet to come.

I know the Omnichannel is a big one.

I know you're also focused on getting to revenue faster on the ones you think are going to be bigger hits.

Any update, or previews, on the tenor of some of those releases?

Or can you give us an update on any that you have articulated already?

Or things that you can tell us a little bit more about as we look through the rest of the year?

You bet.

We do have a great product pipeline right now, and we are really excited.

We released, in December, a Display and Video Analytics capability, and then very recently added on the Facebook.

We do expect more releases coming throughout this year, and so we are really excited about the product pipeline that is coming down the pike.

And we believe that we are able to see that flow through to new customers and new revenue.

You know, just as soon as humanly possible.

Okay, that's what I needed.

If I have more I will jump back in the queue.

Thanks for your time.

Thank you.

Darren Aftahi, ROTH.

Hey guys.

Thanks for taking my questions.

Just a few, if I may.

First, on your guidance commentary about break-even, potential positive EBITDA in the second half of the year, does that comment -- I know you're not giving FY17 sales guidance, but does that contemplate growth sequentially, as the year progresses?

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

Hi, Darren.

This is Mike.

What we've given on the view on today for the first quarter, is the revenue as well as the profitability side of the picture.

We've also given some the lead-in indicators of where we think the profitability will move or migrate towards over the course of the coming quarters for 2017.

There's a variety of outcomes on the revenue side of the equation.

We're focused very much on the strategic business review of all of the different products, as well as business areas, and aligning our investments in those areas for things that we think will definitely provide a return on investment and bring us back to a return to the long-term growth, as well as profitability that we desire.

Analytics are our key component as part of that.

We see that with our investments, with some of the things that customers are giving us feedback for, as well as how we're winning new customers and adding to our pipeline in that area, relative to some of the other areas.

So, we hope to be able to give more progress updates as we go through the course of the year there.

And then, following up on Facebook, what do you need to prove to move from a Marchex selling initiative to more of a Facebook referral model, from Facebook?

Facebook has been shifting to an agnostic view and allowed measurement tools to come in and measure their ads.

And so, that is the biggest shift that is going on.

I would say it will probably likely remain a Marchex sold product for the life of the product, as they haven't gotten into reselling of attribution solutions, thus far.

Got it.

And then third, can you give us any update of the WPP relationship that you announced last year?

And then lastly, I know there is some commentary, either in the call or in the release about the CEO search.

What variables have to be in place for you to move forward?

Is it get the business in line and then look for the CEO?

Or is it, say a mutually exclusive track, in terms of how your thinking about that?

Thank you.

Yes, Darren I will take, this is Gary, I will take the WPP.

We still have a great partnership with WPP, and we do go to market together.

And, when they have clients that are in call-based industries where they do acquisition over the phone, we work with them heavily.

And so, it's still a great partnership and we work very closely together.

Darren, this is Mike, I will take it second part of the question about the CEO search.

And part of it comes and dovetails from the strategic review that were doing with the different products in the business areas.

Out of that comes alignment of investment to be able to meet some of our objectives about returning to long-term growth and profitability.

In the meantime, as we're working towards those initiatives, and refining exactly what the best path is for that search for the CEO, we have a team that is operating today that has a lot of history with our customers, our technology, our products, and our people, and we feel are capable of driving the business forward in the meantime.

Great, thank you.

There are no further questions at this time.

I turn the call back over to the Management Team.

We'll thank everyone for their time and joining us today.

And we look forward to giving you an update as we progress through the year.

This concludes today's conference call.

You may now disconnect.