Marchex Inc (MCHX) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Marchex First Quarter 2020 Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Trevor Caldwell, Senior Vice President of Strategic Initiatives and Investor Relations. Thank you, sir. Please go ahead.

Thank you, Natalia. Good afternoon, everyone, and welcome to Marchex' Business Update and First Quarter 2020 Conference Call. Joining us today are Michael Arends and Russell Horowitz.

Before we begin, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements, including references 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 and quarterly report filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we take 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 this time, I'd like to turn the call over to Mike Arends, our Co-CEO and Chief Financial Officer.

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

As we all try to navigate our way through this pandemic, our focus at Marchex has been to prioritize the health and well-being of our employees, and to do everything in our power to support our customers.

In early March, as the situation began to unfold, we mobilized in just a matter of days to move our entire company to a remote working environment. We then began to create processes to best manage our business remotely, while guiding our customers through this rapidly shifting landscape. I am proud of our team's ability to adapt, which has helped us stay connected and supportive of each other and our customers during this challenging time.

Like millions of other businesses, we have been impacted by the economic shutdown but we remain very optimistic. Every day, we are inspired by how our team is adapting to this new and emerging world order. We are especially motivated by how our customers continue to turn to us for solutions and the ways we are finding to support them.

For our customers, the pandemic remains a significant challenge as state governments across the country continued to extend stay-at-home orders. Revenues were measurably impacted as closures hit almost every business vertical, from auto dealerships and auto service locations, to dental offices, hotels and many others. All of these verticals were growth opportunities for Marchex. Based on the conversations we are having with customers and prospects, we do see the potential for these opportunities as these industries resume operations in the future.

The trend toward AI-augmented sales acceleration solutions is very important to many of our customers. However, in today's climate and on a near-term basis, lots of businesses are just trying to make it through this crisis with their resources stretched thin. Many of our customers have reached out to us to help them understand what's happening in real-time at the franchise or store location level. They've come to us for insights that can help them better understand how to manage their businesses, deploy our conversational analytics and speech technology for COVID reaction signals and gain the insights needed to respond appropriately.

Nowhere is this more evident than in the auto vertical. We've made progress in several OEM relationships in helping them navigate an unprecedented sales slowdown. In fact, they are asking us to accelerate different aspects of our product road map and fast track certain products that drive critical insights and customer engagement. They want products that will streamline a complex vendor system in the sales engagement channel to enable a more robust and responsive relationship between the OEM and the dealer. We believe this will have a positive impact for Marchex in the intermediate and longer term.

Also, at a time when many of our Sales Edge Rescue rollouts were delayed and some pilots were deferred or extended, no one has canceled their pilot plans. Many customers are eager to test and deploy the solution when the ground solidifies. This highlights the importance of our solutions to the short- and long-term health of our customers.

We recently received third-party recognition and validation regarding our market innovation and leadership. Opus Research, an independent research group focused on the evolving nature of customer and prospect engagement, named Marchex as the Leader in Conversational Intelligence last month. The award recognizes companies based on their ability to turn raw data into actionable business insights. And it's another proof point that the investments and focus we've poured into artificial intelligence can open the door to a larger and, we believe, more valuable opportunity.

Through our proprietary speech technology and our investments in data science and artificial intelligence, we are now able to solve an increasing number of mission-critical problems for our customers. From the hundreds of millions of conversations we process every year, we were expanding the insights and sales engagement solutions we are offering, and this will continue.

This demand trend is real. These conversations between consumers and businesses are occurring across voice and text communication channels every day. Importantly, Marchex is positioned with unique solutions to help businesses engage with consumers in highly personalized and efficient ways, ways that help create better customer experience -- experiences and increased sales.

Now I'd like to hand the call to Russ.

Russ is unable to join us for the moment. So I'll continue to engage...

I'm actually -- yes, technical difficulty. I'm here.

Thanks, everyone. After 3 decades of running various public companies, our leadership team has experience navigating economic crisis and difficult market conditions. COVID-19 has its own unique characteristics, but Marchex has weathered challenging times before and I'm confident we will do so again. The pandemic makes us more aware of the reliance our customers have on us, and accordingly, we are staying focused on continuing to innovate in ways that support them.

We are also accelerating our infrastructure initiatives and revisiting our product pipeline to adapt to the real-time needs of our customers. To that end, we recently hired a new Chief Product and Strategy Officer, Ryan Polley. Ryan has a deep background in developing and implementing product strategies at emerging technology companies.

He has a history of leadership in product, strategy and partnership roles with innovative companies that provide data analytics and advertising products into the enterprise customer channel. We are very pleased to have Ryan on board and to have him leading the efforts with growing our AI capabilities and helping steer us through this important time with our customers.

We are also continuing to pursue a strategic review. We are currently evaluating many scenarios, including looking at our cost structure to help ensure long-term flexibility. And given the persistence of the COVID-19 crisis, we also plan to explore other initiatives that could possibly help Marchex accelerate our leadership and capture opportunities arising from these market conditions.

We see significant opportunity in our business and remain committed to taking a disciplined approach as we look to enhance our operating profile and capitalize on the areas where we are building momentum, all while remaining focused on returning Marchex to growth as we get to the other side of the current challenges.

And with that, I'll hand the call back to Mike.

Thanks, Russ. For the first quarter, revenues were $24.8 million. The quarter was characterized largely by the events of the pandemic. In January and early February, we were pacing slightly at significantly higher volume levels than at present. Then in March, as the country went into a rolling quarantine, many of our customers saw substantial and progressive decreases in call volumes and sales throughout the month.

Call volumes in our analytics and solutions products started declining meaningfully in March, and by the end of March were down in some areas nearly 30%. In certain verticals, we saw volume decreases even greater than this as we exited the quarter. These declines continued into April. As car dealerships, dental offices, hotels and small businesses closed or shut down operations, sales calls transitioned to canceled appointments. We've seen this trend largely persist these past weeks as much of the country remains in lockdown.

However, recently we have started to see some progress in certain verticals coming off of the lows in April. However, we are still down meaningfully, broadly speaking, on a year-over-year basis as the majority of locations for many of our customers remain disrupted or closed.

This affected our financial results in several ways, including we recorded a preliminary estimated impairment charge to our goodwill and intangible assets totaling $20.1 million as a result of the pandemic's indirect varying impacts. Secondly, we saw lower volumes resulting in decreased revenue and operating contribution.

Third, included in revenue results is an adjustment or reserve reducing revenue by $900,000 for call analytics services delivered, but where revenue was not recognized because criteria for recognition were not met. For instance, uncertainty of a customer's ability to contract with and pay for services delivered, given their deteriorating operational and financial condition.

We further recorded an incremental bad debt reserve in the amount of $300,000. In total, including the $900,000 revenue reserve, this impacted our bottom line by $1.2 million.

We have also provided payment timing and other short-term relief, and in certain cases, waived minimum package commitments. These factors, combined with customer cancellations caused by shutdowns, will continue to impact us for at least the near term. These latter items will have some level of permanent impact, although we don't currently believe the magnitude of these shutdowns detracts materially from our long-term opportunity, but it is still another disappointing factor resulting from the pandemic. Because many of our customers are struggling, we are doing what we can to support them through this period and to help them successfully navigate to the other side.

Now let's look at the product areas more closely. Core analytics and solutions revenue was $11.8 million for the quarter. This represents the net amount of revenue after the reserves. We've attempted to take a conservative approach in recognizing the impact this will have on our business as our customers navigate this situation and some work to stay solvent.

With that said, we continue to make meaningful progress with our analytics products and solutions and believe that will benefit Marchex in the intermediate term. In fact, while the Sales Rescue existing pipeline has been delayed and various highlights have been deferred or extended, we're continuing to see active interest in deploying prospectively.

We continue to believe auto will remain a relatively strong category for Marchex in the intermediate term as we continue to see meaningful engagement from our OEM partners, both in terms of the insights they've asked us to deliver in the near term to help them make critical business decisions, and also in bringing AI-infused sales engagement solutions to their franchises in the future. These solutions can help meaningfully by giving them a better view of their performance at the dealer level all the way down to performance by individual sales representatives.

We are also continuing to have productive conversations with many health care and home service companies as they are still very motivated to bring AI-fueled sales engagement solutions to their sales forces. Technical priorities at many of our customers are currently stretched thin. So we don't expect this trend to benefit the current quarter, but we are very engaged in positioning ourselves for growth as these opportunities emerge.

Now looking at the marketplace. First quarter revenue was similar on a year-over-year basis, offset by the expected decline from the legacy Local Leads platform. Categories like financial services held up well on a relative basis during the March time frame, while some advertising categories faced pressure, such as the health care and hospitality verticals.

During the quarter, we also saw our marketplace initiatives with our Thryv relationship, maintain similar levels on a year-over-year basis, offset by the decline in the legacy Local Leads product and some general call decreases in call -- some general decreases in call volumes. We continue to anticipate Local Leads will transition in the near future, consistent with prior commentary. However, we expect some modest contribution may extend through the first parts of the year.

In looking at the P&L for the first quarter and excluding stock-based compensation, a preliminary estimate of impairment, amortization of intangible assets and acquisition-related costs, total operating costs for the first quarter were $28.2 million compared to $25.7 million in the first quarter of 2019.

Service costs were $14.5 million, up from $14.2 million in the first quarter of 2019 and down from the fourth quarter level of $15.6 million. Service costs as a percentage of revenue increased on a year-over-year basis, largely due to the mix shift in revenues, which were in part caused by reserve amounts.

In the intermediate term, as we moved through the uncertain business climate caused by the COVID-19 crisis and launch our new analytics products and sales engagement solutions and they begin to contribute, we believe growth in our analytics stream can positively impact service costs as a percentage of revenue. We also believe there are several investment efforts with respect to our analytics infrastructure that will provide long-term margin benefit in 2021 and beyond.

Sales and marketing costs were $4.7 million. This amount was up compared to the first quarter of 2019 on a percentage basis, reflecting our increased investment in our sales and marketing initiatives and the Sonar acquisition. Product development costs were $6 million and were up as a percentage of revenue compared to the fourth quarter, reflective of our increased investment in our infrastructure initiatives as well as the Sonar acquisition and our private company auto services investment.

As a reminder, our core platform work was in full swing in 2019, carrying through the first quarter of 2020 and which we expect will be largely completed later this year. As noted in the fourth quarter commentary, 2020 includes an additional estimated $2 million of investment to address various infrastructure initiatives, including consolidating infrastructure and data centers that we do not expect to recur in 2021.

Approximately $200,000 was incurred relating to this during the first quarter. The technology infrastructure and efficiency investments should enhance our operating profile in the intermediate term and is work we are attempting to accelerate in the current environment to the extent possible.

Moving to profitability measures. Adjusted operating loss before amortization for the first quarter was $3.4 million. Adjusted EBITDA was a loss of $2.9 million.

Net loss applicable to common stockholders was $24.9 million for the first quarter of 2020 or $0.53 per diluted share, which includes the effect of an estimated pretax $20.1 million impairment charge based on the preliminary results of the company's goodwill and intangible asset impairment tests. This compares to a net loss of $1.3 million or $0.03 per diluted share for the first quarter of 2019.

Adjusted non-GAAP loss per share was $0.06 per share for the quarter compared to adjusted non-GAAP income of $0.01 per share for the first quarter of 2019. And additionally we ended the first quarter with approximately $40 million in cash on hand.

Now turning to our outlook. Due to the highly fluid situation and the wide range of potential outcomes for the current quarter, at this point, we are not releasing revenue, adjusted operating income before amortization or adjusted EBITDA guidance. Many of the key verticals we serve, auto, health care, hospitality and others, are broadly impacted in the present environment as many locations remain closed through April and early May and potentially longer. The pressure that is placing on many of our customers is creating an impact on the planned ramps of almost all of our scheduled Sales Edge Rescue deployments, many of which were slated to start in March and in the second quarter.

While it's too early to forecast growth later in the year, we do believe there is opportunity for Marchex to deliver incremental products and value for our customers, many of which are eager to have these solutions in market as soon as possible. We know that some verticals may take longer to recover, and that may have a resulting impact on some of our customers and our future results.

While we work through these circumstances, the current environment requires that we evaluate our expense structure vigorously in order to preserve liquidity and flexibility. We are looking closely at our fixed and variable cost structure as part of this ongoing initiative. In many cases, we've already taken actions, including delaying hiring, and we're examining other operating efficiencies where possible.

It is also important to note we are pursuing these initiatives while also being thoughtful about continuing to support our customers and maintaining investment in our areas of differentiation, such as our AI and data science teams. The trend toward AI-powered sales acceleration solutions is a multiyear strategy and a key driver of our long-term opportunity.

To all of our employees, Russ and I are most thankful for your hard work and dedication to keeping our customers' needs front and center, all while dealing with the disruptions to your daily lives. Because of your efforts, we are both optimistic about our future and focused on getting through this and emerging stronger.

Our admiration also extends to all those who are struggling themselves but still manage to find ways to help others. Our thoughts are with the first responders whose selflessness is inspiring us all, and with the many families that have been affected by this crisis.

We look forward to our future in solving problems for each other and our customers in meaningful ways. And with that, operator, we'd like to hand the call back to you.

(Operator Instructions) Your first question is from the line of Darren Aftahi with ROTH Capital Partners.

This is Dillon on for Darren. First one, related to some of your OEM auto customers that you spoke to strategically looking for some sort of new product or like plug into the suite, are those products you've been working on developing already? Or is this sort of like a step 1 in the process for you on some of those?

Dillon, this is Russ. Very good question. As we hit on, we think auto is one of our more prominent growth opportunities. And when we look at our product priorities, it effectively dovetails into kind of 2 primary focus. One, is we've got our existing relationships where we've got products launched and kind of on a ramp, obviously impacted in the moment but where we look at the longer-term opportunity. And what we've seen is them requesting for us to accelerate some of our product initiatives to address specific sales enablement scenarios, both from the OEM and the dealer level.

And so these were planned initiatives but given the feedback and what we think may be a catalyst for these opportunities, there's been a reprioritization effort to potentially deliver some of these solutions sooner. And we think in that process, it could also potentially accelerate winning some new customers across the auto vertical as well.

Got it. And then sort of across the verticals that you saw, are you able to quantify or at least speak to sort of how things were in April and May relative to that last week in March?

And then do you have any insight into what verticals you see getting back up and moving for customers faster than others, whether that's based on business specifics or sort of geographically?

Dillon, this is Mike. Thank you for the question. So if you look at the trend as we progressed through the course of March, we started at the beginning of March and we saw some single-digit percentage call volume declines. By the end of March as we exited, on the main platform for the analytics and solutions, we saw a near 30% overall call volume declines. And as I mentioned in the remarks, that continued into April, where we saw progressively into the 30s and near 40% overall call volume decline.

In certain verticals and some of the ones that I mentioned earlier, including the hospitality in particular, they were substantially more affected on a percentage basis and even there is a 40% decline levels on a year-over-year basis. As we've looked in the last week to 2 weeks, there has been some progression. It has come off the lows that we were in at partway through April, and there has been some progress in certain verticals.

And an example of that would be, there has been some more activity from consumers engaging with businesses in the auto services sector. And that's been very recent. It hasn't been a substantial amount but has improved from those lows that we saw in April.

In terms of just what visibility we have on a go-forward basis, I think the really hard part for us to focus on and think about is what exactly the impact of the COVID-19 is going to have on different verticals. There are so many different outcomes. There are so many different variations. What our focus is going to be is on helping those customers that we serve today, focusing on making sure that we can create flexibility for our company to deal with more than one type of outcome depending on how the situation unfolds, and remaining committed and believing in our long-term opportunity, which we think is intact and will emerge, and putting ourselves in that position.

And then last one for me. On some of the delays in Sales Edge Rescue, what sort of criteria need to be met on either the customer side as to how those get restarted or back on track? Or is that just a derivative of how long and, I guess, deep the pandemic last?

A lot of it is a derivative. When you look at deploying and operationalizing these products, it requires operational continuity at store franchise level. And so as there's greater visibility on reopening and bringing these stores online again, that helps unlock the timing of how we can roll out and operationalize the various relationships and programs.

So they are tied together. As Mike mentioned, the last few weeks have been at least ticking in the right direction as it relates to some of these trends. And so a little premature to get more specific than that, but as Mike mentioned, all the clients are intact. We're engaged with all of them. And now we're just kind of scheduling implementations as we have the opportunity to.

(Operator Instructions) Your next question is from the line of Michael Latimore with Northland Capital Management.

This is [Anchal Sahu] on for Mike Latimore. Could you just comment on Sonar revenue contribution to Q1? And is Sonar growing 20% as you had forecasted previously?

So this is Mike, and thanks for the question. Sonar, when we had forecasted originally, when we shared some of the feedback and the commentary on what we thought it would contribute in near the end of 2019, it was not going to contribute anything material from the perspective of 2020 revenue stream. So it was certainly something that we focused on and believed that text communication and messaging is a way that consumers are going to continue to increase in terms of their appetite for working and engaging with businesses.

And one of the things that we had slated was an integration that by the end of 2020, the technology would be integrated from a texting perspective into our core analytics platform. Those pieces of the puzzle are still intact.

In terms of the revenue contribution, it was a fairly nominal amount as we had forecast back at the end of 2019. It was a few hundred thousand dollars. In terms of it growing, I don't think unfortunately if you just look at the impact of COVID-19, there is anything that is growing. On the contrary, as we've seen some of the volume declines across the board with our main platform and the call volumes, we've seen that consistent also with some of the texting. And specific to some of the customers, they may even be more effective in some verticals than others.

Okay. And as various industries with a home dollar such as HVAC have been impacted by COVID-19, what you have seen in that vertical to date? And are things starting to improve some with the various states reopening?

I think one of the areas that we've seen some significant weakness in originally in March and then in April was the home services category. We mentioned our dental network relationships in the health care industry that we work with, that we've seen effectively shut down in some cases because they've been required to provide some of the PPE to some of the other health care facilities. Those are a couple of areas of the hospitality sector has been significantly impacted. Auto service centers, auto manufacturers and their dealership networks are other ones that we've seen significantly affected. Even in the real estate vertical, we've seen impacts there.

As I mentioned before, there was an auto services stream of companies that we saw some folks from the consumer side engaging in more robustly here in the last 1.5 weeks. And that trend specifically so far over the last few days has continued to improve. We've seen some things in the home services vertical where if you look at the last few days and on a week-over-week basis, there's some improvement there. Do we know exactly if it's attributable to some of the reopenings? We don't have that correlation or that data set, but we could correlate it from a guess perspective and go from there.

Again, one of the comments we mentioned before was just setting ourselves up for flexibility with whatever some of the different sets of outcomes, which is a very wide range depending on how COVID-19 impacts in the very near term as well as for the intermediate term, so that we have the opportunity to take advantage of our long-term opportunity. And that is something that we remain focused on.

Okay. That's helpful. And the last one, are there any key technology updates you need to have this year for your bigger customers?

Yes. Good question. One of the things that I think we feel good about is that coming into 2020, our belief was that it was really about execution more than anything. And that based on our product development efforts as well as recent acquisitions like Sonar, we had all the key ingredients that we needed to deliver difference-making products that really could extend analytics into the sales enablement solutions.

And so with where we are now, we always look at strategic scenarios, but to a large degree, we've got what we need. It's just about execution now, given the visibility we have on opportunities with a whole bunch of customers where we think there's meaningful headroom over time.

And as we implement those, we know that we'll gain learnings, and that will build momentum on adding new customers as well. So right now, it's about execution, utilizing our existing product momentum and just delivering on those product opportunities.

There are no further questions.

Thank you, everyone, for taking the time today. I just want to reiterate to everyone who's listening to stay safe and healthy. And we look forward to, in the coming periods, hopefully, being in a situation where we can give updates where everything is in a better place. We look forward to that. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.