Marchex Inc (MCHX) 2022 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for joining today's Marchex Fourth Quarter Earnings Conference Call. My name is [Tia], and I will be your moderator for today's call. (Operator Instructions) I would now like to pass the conference over to your host, Trevor Caldwell, Senior Vice President, Strategic Initiatives and Investor Relations.

Thank you, Tia. Thanks for your help. Good afternoon, everyone. We welcome to Marchex Business Update and Fourth Quarter 2022 Conference Call. Joining us today are Edward Miller, our CEO; Michael Arends, our Vice Chairman.

Before we get started, I would 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 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 this time, I would like to turn the call over to Edwin.

Thank you, Trevor. Good afternoon, everyone. Thank you for joining us today. This is my first earnings call as CEO, as a new CEO for Marchex. I do have a long history of leading and scaling technology companies, and I'm excited to join Marchex because of its world-class solutions and exceptionally talent team. I'm eager to build on the work been done prior. While I see myself providing the most value is through my operational experience of turning strategies tangent results. I want to lead us in this space and do everything to help us get there. In the months since I joined Marchex, I've been orienting myself in the business, meeting many of our talented people, as you know, Marchex has been at the forefront of an exciting opportunity in the conversational intelligence market. From my vantage point, our shot is clear.

Marchex sits at the confluence of conversational data and artificial intelligence at the very moment that our largest commercial customers need to streamline and transform complex and outdated technology ecosystems. We are helping these companies adapt to a data science and AI-driven future. The future of cells will require understanding of your customers or prospects and their needs at the moment the business interacts with them. Sales and training processes will have to be augmented, if not reimagined. The fact is real and has the potential to transform the financial characteristics of Marchex. Not only that, conversational intelligence has empowered to transform the way businesses function. It will change the way businesses sell and deliver customer service experience. From an operations standpoint, I see this as a tectonic shift, and we're committed to being at the forefront of this endeavor. So far, I've observed how Marchex has built foundational relationships with leaders across many large commercial verticals, including several Fortune 500 customers. These relationships have grown over the last several years and just as importantly, has significant potential to grow even more in the future. In fact, we recently signed our longest multiyear agreement with a Fortune 500 customer, which in and of itself represents an extraordinary commitment to Marchex.

On our end, this is a pivotal opportunity to transform the bottom line of the enterprise auto manufacturer. A company which needs help transforming how they sell with exactly the kinds of problems our AI-based solutions software. We believe that this customer will sell more by working with Marchex a lot more in the future. Our expansion potential here goes hand-in-hand with Marchex's new auto dealer strategy to secure more dealers getting onto our platform. The company added more than 300 dealers in just the last 12 months through product and channel partner adoption and that is the tip of the iceberg. We believe the auto vertical, which is our largest vertical, can hit accelerating double-digit growth as we exit the year.

At a high level, here's what you can expect of us this year. In 2023, we're going to focus on accelerating the business through continued innovation with award-winning products. While expanding relationships with many of our industry-leading Fortune 500 customers, we also plan to unlock new channel opportunities through partnerships and deepen existing relationships, and we look forward to going fast. I believe Marchex has the potential to build a $100 million business on an annual revenue basis. The market is right and most importantly, our existing customer base of the Fortune 500 customers and want to do significantly more with us. There's a lot of opportunity in our existing customer base, and we expect to expand the customers we work with. Plus Marchex has a large and valuable conversation data sets that will help us leap for auger innovation in data science and AI. I look forward to connecting with all of you and updating you further in the coming periods.

I'll now hand it over to Mike Arends.

Thank you, Edwin. We are very glad to welcome you and to have you on board, and we'll talk more in a little bit about that. But first, the financial results for the fourth quarter of 2022. The results were mixed. Revenue was $12.3 million versus $12.8 million for the same quarter last year. We saw continued pressure on conversation volumes due to the macroeconomic environment impacting certain customer types, along with the typical seasonal flow of coal volumes impacting the sequential and annual comparisons. For instance, there was pressure with portions of our smaller customers as well as with our small business listing and solution providers that mostly sell marketing services to local businesses as they faced greater customer churn compared to 2021. That trend manifested over the later part of 2022 and is one that we're watching closely as the new year begins. At the same time, we continue to sign new customers across several verticals and signed our longest multiyear term commitment from a Fortune 500 customer in our history. Looking ahead, we see several expansion opportunities in certain verticals for 2023 and beyond.

I'll dive into this more in a moment when I discuss our initial guidance for 2023. But first, turning to the P&L for the fourth quarter. Excluding stock-based compensation, amortization of intangible assets and acquisition or disposition-related costs, total operating costs for the fourth quarter were $14.6 million compared to $13.1 million in the fourth quarter of 2021. Service costs were $5.6 million for the fourth quarter. Service costs increased on a year-over-year and sequential basis in part due to increased data and labor costs associated with customer migrations on to new product platforms and increased staging investment in our AI technology initiatives as we prepare for new product launches scheduled for the first half of 2023. Several of these investments are of a fixed nature. And therefore, over time, we believe we will see a positive impact on service costs as a percentage of revenue as we sell through our new conversational intelligence products and advance our new channel initiatives.

Sales and marketing costs were approximately $3.1 million. This was largely in line with comparative periods. Product development costs were $3.8 million and were up as a percentage of revenue compared with the fourth quarter of 2021, as we've continued to invest in our future product pipeline that is staging for several customer pilots beginning in the first part of 2023 and in enhancing our AI-driven conversational intelligence capabilities.

Moving to profitability measures. Adjusted operating loss before amortization for the fourth quarter was $2.3 million. Corresponding adjusted EBITDA was a loss of $1.7 million, reflective of the increased staging investments. GAAP net loss was $3.6 million for the fourth quarter of 2022 or $0.08 per diluted share. This compares to a loss of $2 million or $0.04 per diluted share for the fourth quarter of 2021. Adjusted non-GAAP loss was $0.05 per share for the quarter compared to a loss of $0.01 per share for the fourth quarter of 2021. Additionally, we ended the fourth quarter with $20.5 million in cash on hand. And during the quarter, we are pleased we were able to further reduce our total share equivalents going forward by 1.34 million shares through the settlement of a 2023 contractual commitment for $1.5 million in cash and a prospective liability of $335,000.

Now turning to our outlook. Certain customer segments continued to face pressure at the start of the year, and therefore, for the first quarter of 2023, we believe revenue should be similar to the fourth quarter of 2022 with the potential for a modest increase. We also believe with several new and ramping customer relationships, we should see sequential revenue growth from Q1 over the course of 2023. And additionally, once we take into account certain restructuring expenses, we believe we will be near a similar range on an adjusted EBITDA basis for the first quarter of 2023 compared to the fourth quarter of 2022. This contemplates the exclusion of a few restructuring expenditures for operating activity modifications, which we anticipate will be largely weighted to the first half of the year and should enable greater leverage and consequently, significant improvement and profitability measures over the course of 2023 and potentially reaching at or near breakeven on an adjusted EBITDA basis in the back half of the year.

This year, we expect to make further progress with several large customer expansion opportunities as highlighted by our recent announcement regarding a long-term Fortune 500 customer commitment and traction with our outer dealer sales channel. We believe this large enterprise relationship has significant opportunity to grow over time, and we expect to make additional inroads with our order dealer sales channel this year. This traction, we believe, will lead to accelerating double-digit growth on an annualized run rate year-over-year basis by the end of the year in our auto vertical. These are just 2 examples of our pipeline of opportunity within our existing base of customers, and we see several other opportunities. We are winning mind share in verticals like auto, auto services and other industries as the leaders within these verticals look to do more with Marchex and expand our product footprint within their retail basis. We also have the opportunity to drive a more meaningful growth profile over time and deliver significant operating leverage in the business. Our current financial profile achieves enhanced profitability and can support incremental investment as it approaches $60 million in annualized revenue run rate. Some of our new products carry incremental gross margins in excess of 80%. As we execute on our sales and technology infrastructure initiatives, we believe the business will make additional progress towards an enhanced revenue and profit margin profile this year and beyond.

Now with that said, I'd like to share some broader commentary on our business. First off, I wanted to express that I'm excited to welcome Edwin to the team. We believe he has the right combination of technology, operational and customer experience as well as the strategic talent to take us to the next level. Marchex has a tremendous opportunity, and we believe now is the time for the company to align to capture the unique opportunities in the conversational intelligence market. While we are in an uncertain economic climate, we continue to believe Marchex is well positioned to emerge as a leader in conversational intelligence. Our products help businesses solve critical sales and customer experience challenges. Our innovation engine is leveraging data science to help large businesses understand how to better sell more and more effectively through their retail networks. And meanwhile, we are investing significantly to move our infrastructure and customers to a common platform that will serve as the basis of our future innovation and enable the company to move faster. This investment gives Marchex the flexibility to add new products and features that we believe will enable us to accelerate growth and potentially add significant operating leverage over time.

And once again, I want to thank all of our employees for their dedication and continued efforts. And with that, operator, we will hand the call back to you.

We will now begin the Q&A session. (Operator Instructions) The first question comes from the line of Michael Latimore with Northland Capital Markets.

And congrats on the new position Edwin.

Thank you.

In terms of the auto vertical, can you remind me roughly what percent of revenue auto is today?

So Mike, this is Mike. The automotive vertical is our largest vertical today, and it represents near 25% of our total revenues as we operate. We did speak in some of the prepared commentary of note that the auto vertical is one of the areas we actually see some of the opportunity for meaningful growth. And we do think by the end of this year, it has the opportunity for double-digit and accelerated growth profile on a year-over-year basis.

And then in terms of the areas of weakness you called out smaller customers or those in the marketing. Can you just elaborate a little bit more on the verticals there? What you're seeing there?

The primary areas that we see is the small business and the listing solution providers that work with local businesses, those resellers or listing providers to local businesses on a year-over-year basis, had more decline, more churn than in any of the other areas we had on a year-over-year basis. So sequentially, we also had seasonality impact the business as we normally do. service-based conversations decline generally in the fourth quarter around the holiday time frame. So that was another reason for some of the sequential decrease from the Q3 to the Q4 time.

And then you talked a little bit about seeing maybe sequential growth throughout the year. Is that largely tied to -- this new customer adds? Or are you expecting some macro improvement?

So there's multiple parts to it. The first part, I think I'll answer, and I'll just be very direct with the macro environment. We're not actually anticipating in some of our comments and remarks with the go forward any updates or improvements in service from a macroeconomic environment. We do think that could be a lift or an opportunity if that does play out. One of the things we have is we've been staging and putting different things together from our infrastructure investments, getting some of our existing customers where we think we've got some very robust conversations to expand the relationship on to our platforms that allow for access to our new features as well as the new products that are coming to market. And we have several new products that are slated in particular, in the first half of the year, we have pilots that are scheduled. And those pilots are initiation opportunities for go-forward growth opportunity where we can monetize those new products if we're able to onboard and execute towards getting those customers to sign up. We have a deep investment with some of the OEM relationships in the auto vertical. There's not just expansion of existing relationships. There's also new relationships we have. We spoke in our prepared commentary about channel relationships in the auto dealer sales initiative.

And auto dealers, as an example, to go back just a couple of years ago, we saw that as an opportunity to take some of our product opportunities and go directly to the dealer versus just the OEM. And we started staging that a number of years ago. And this past year, we put a lot of effort into a direct sales initiative as well as channel partnership opportunities. And to that end, we were successfully able during 2022 to be able to deploy over 300 individual dealer relationship engagements through both the direct sales and efforts as well as the channel partnering opportunities. It is those areas that we actually think will be able to continue furthering our growth opportunity in 2023, and we see it as a big area of investment, not just for this current year, but for how that stages on a go-forward basis. The other thing that Edwin will note, I think, is one of the prepared remarks he spoke about was an opportunity where he sees growth for the business.

And I think, Edwin, it would be helpful for you to give some of the added context about why you feel over the next number of years, there's actually some of the robust growth opportunity.

Yes, happy to. So although it's only been here less than 30 days, what I've learned so far, the opportunity business is extremely real. I spent close to 75 days ahead of joining, learning about the business and getting excited about the talent and the customers. This is the future, all the businesses that I'm seeing need help in sales and marketing. AI is the future, the amount of conversation intelligence we have as data sets is really strong. So the ability to -- for us to go and continue to engender trust and grow existing relationships and sign new ones based on the size of the companies we've already signed, it's absolutely astonishing opportunity for right in front of us.

And then just on the AI topic. Generative AI has gotten a lot of attention lately, probably rightly so, but do you see a way to build on that or leverage that in your business over the next year or so?

Absolutely. So I come out of a technology background, I've been at it for a little over 30 years, and the ability to build math and modalities around what we currently do and help clients, our customers monetize their relationships as a real path forward. And I probably had, I don't know, 45-plus conversations with individuals I've met the entire product management team, impressive group of people, real skills in and around AI, math and machine learning. So I'm very excited about that future.

The next question comes from the line of [Dillon Darren Aftahi] with ROTH MKM.

It's Dillon for Darren. First, if you look at sort of the volumes though down overall on a year-over-year basis, but then you're talking about some of the margin verticals being up. Can you sort of talk to the split between those? Like, I mean, I'm assuming that's as a percentage of total volume and not revenue, but I guess like how big of an impact are the smaller verticals having as a drag on the ones where you're seeing growth?

Hi, Dillon, this is Mike. Thanks for the question. A couple of notations and some of this may be recorded from our prepared comments. But if you look at the conversation volumes, there's the smaller customers and then the small business listing, the providers that work in large part with some of the local accounts. Those providers all around, they had a meaningful decrease on a sequential basis, which are affected seasonality, but also on a year-over-year basis. And in some cases, especially with the small business listing solution providers to local businesses, they were down well over 20% when we look at those comparative periods. In addition to that, we have the seasonality and the opportunity with seasonality in the fourth quarter with service-based businesses is muted around the holiday season in particular, when consumers engaging with service-based businesses isn't as robust as at other times of the year. And so that, historically, on a Q3 to Q4 basis is seen in that 10% to 15% aggregate range.

Now what we saw contrasting that was not only some of our volumes in a couple of the verticals like automotive and home services staying relatively stable even though there was the seasonality levels, but furthering and part of the reason for our outlook on a sequential revenue growth basis right now is our long-term pipeline expanded. And we had more discussions about staging for some of our new product pilots. We have more incubation of those test pilots stage for the first part of the year than we did in the middle part of 2022. So those trends from a volume perspective, we'll see how it plays out, but we are forecasting right now a sequential movement in the revenue upwards as we progress through 2023.

And then with the research and development, you sort of spoke to some of those starting to pay dividends in terms of product launches in the first half of this year with AI, do you think that there's more investment that you need to make to get you back to growth? Or is it some of the -- or the bulk of it already done?

So in our remarks, we've indicated some of the thoughts about the fourth quarter and what we think in the first quarter. Those investments are continuing. We're working diligently. We move some customers over onto our primary platforms that allows for the upside of them getting access and then ultimately, us being able to monetize when they engage with our new features as well as the new products. In some of our remarks, the large customers, in some cases, have migrated already here as we sit here in the first quarter. And so they are in a position to be able to pilot and take charge of getting access to those features, and we'll see how that goes from an execution standpoint. But again, it's part of the reason why we think the revenue opportunity has room for sequential growth. We also think onboarding some of the existing auto dealer relationships at the dealer level onto our platform with over 300 here in this past 12-month period, and that opportunity gives access to new product features as well and potential upsells to that existing client base that we already have in the auto dealer body.

So in terms of investment, what I would say is we're staged and stable for the time being. We actually have some things from an operating perspective that are fixed in nature. So with the sell-through, we actually see some pretty significant operating leverage and gross margin leverage as we progress with revenue progress over the course of '23 and more importantly, that stages beyond 2023 as well.

And one more, if I may. When you talk about adjusted EBITDA, a potential return to breakeven or maybe better in the second half of the year, is that a reported quarter? Or is that just sort of a monthly number that you're getting back to?

We haven't given any more specific specificity other than we're looking to be at or near breakeven in the later part of the year. That's the forecast and the guidance. We obviously think with increased revenue and monetization, adoption of some of our new products, as we mentioned, some of the new products have literally 80% plus gross margin characteristics. It doesn't take that much from a revenue side to be able to get to that breakeven over leverage. And as we near $60 million in annualized revenue run rate, that should put us in that position to be able to achieve those breakeven levels. And we do see moving towards that as we progress in the latter half of the year.

Yes, I can add one thing to that. And part of what I've learned here early on is there's a real opportunity to scale the existing relationships and new clients with our go-to-market motion. So I'm incredibly encouraged of what I've learned early on. So I think the second half of the year should be a very good time for us.

There are no additional questions at this time. I will now hand it back to the management team for closing remarks.

I wanted to thank you again, everyone joining us today. We really appreciate the time. I wanted again to welcome Edwin and we'll be providing further updates as we progress throughout the course of the year, and we look forward to that. Thank you.

That concludes today's conference call. Thank you. You may now disconnect your line.