Marchex, Inc.
Q2 2007 Earnings Call Transcript
Published:
- Operator:
- Good afternoon, ladies and gentlemen and welcome to the Marchex Incorporated sponsored second quarter earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Mr. Ethan Caldwell, General Counsel and Chief Administrative Officer of Marchex Incorporated. Sir, the floor is yours.
- Ethan A. Caldwell:
- Thank you. Good afternoon, everyone and welcome to Marchex's business update and second quarter 2007 conference call. Joining us today are Russell Horowitz, Chairman and Chief Executive Officer; John Keister, President and Chief Operating Officer; Michael Arends, Chief Financial Officer; Peter Christothoulou, Chief Strategy Officer; and Cameron Ferroni, Marchex's Chief Technology Officer. During the course of this conference call, we will make forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts, including on this call regarding our strategy, future operations, future financial position, future revenues, 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 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 here-in. During the course of this conference call, we will also reference certain non-GAAP measures of financial performance and liquidity, including OIBDA, adjusted OIBDA, adjusted EBITDA, and adjusted non-GAAP EPS. A reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is contained in today’s earnings press 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 to investors will be referenced during this conference call and are also contained in today’s earnings press release. At this time, I would like to turn the call over to Russell Horowitz, our Chairman and Chief Executive Officer.
- Russell C. Horowitz:
- Thank you, Ethan and thank you everyone for joining us. On today’s call, we have a lot to cover and we’ll focus on four topics. First, a business and strategic update, beginning with a summary of Marchex's evolved mission, the opportunity in the local market, and the details surrounding our commitment to the online local marketplace. Second, a review of the series of announcements we made today, which highlight our significant progress in both the local advertising and the local consumer channels. Third, a summary of important metrics in our business and lastly, Mike Arends will provide a summary of our second quarter results and updated forward outlook, which reflects our commitment to being a leader in the local marketplace. First, let’s look at what Marchex's evolved mission is and the details surrounding our commitment to the online local marketplace. So the first question is why does the local marketplace matter so much and why does Marchex think leadership in this market is so valuable? The answer is in the industry reports that all point to accelerating growth in local. Today, there are more than 50 million businesses in the United States spending more than $100 billion annually in offline, locally targeted marketing. Piper Jaffray estimates that over the next 10 years, local online advertising spending will grow from $5 billion to $25 billion. For their part, Borrell Associates estimates annual growth rates over the next four years as high as 43% for local paid search and 12% for the entire local Internet ad market. These metrics in online local advertising growth are very powerful and point to the fact that local paid search will drive the paid search and overall online advertising space for years to come. Furthermore, we have great internal momentum around local products, local services, and local traffic. For example, we launched 100,000 websites in the second quarter with targeted local content. These sites are seeing very good traction. We will also relaunch openlist.com in September, which will add to the scale of our network. On the advertiser side, we are adding more new local advertisers to our system every month than we have at any point in our history. We have great progress with our local advertiser platform in terms of features and functionality. Local is clearly an area of strength for us and a place where we are seeing the most growth. In light of this growth in opportunity, in Marchex's specific areas of strength in our locally focused content network and local advertising platform, we believe it is the right time for us to make a stronger commitment to the local business. There have been and will continue to be a large amount of investment from many companies around the local opportunity. If we are to maintain and build on our position in local, we need to increase our investment in great local products, hire the best people, extend and defend our intellectual property, and expand our local traffic base. Therefore, we are transitioning our business to capitalize on this opportunity as well as the momentum we are seeing in our business and committing even more to the local marketplace. As part of this transition, we are realigning around our highest growth and highest opportunity business areas on a go-forward basis. We think the reasons and opportunities that are prompting our decisions are very exciting. In total, we are going to continue investing in the local opportunity, which means an incremental investment of $13 million this year. This will help Marchex capitalize on the momentum we are seeing in our local business and our operational initiatives. We believe this investment will support Marchex's position as a local leader while also reducing risks and dependencies. In Marchex's history, we have never been in the position to have such clarity on our strategy for leadership and growth. Local is a tremendous space to be in and we have critical mass on both the consumer and the advertiser side. We believe the time is now to make the investment and commitment to local and transition our business to optimize against a significant shift in online advertising spending. As with most transitions, this transition comes with some re-prioritization and reallocation of resources. In certain cases, to do this right may mean de-emphasizing certain revenue streams that are now less strategic. We are prepared to work through this transition and any challenges because we are big believers in the local online opportunity over the next three to five years. The primary message I want to deliver is that we are committed to delivering the best solutions anywhere for local advertisers and consumers and believe by doing this, we will create the most value for our shareholders. With that, as we go through this call, we will point out the places where we will focus in the future, where we will invest, and the places where we are in transition. Now, how did Marchex get to this point of committing to local? Well, it’s been a multi-year process. Marchex has been building and investing in a local advertising platform and locally focused website network for more than three years, anticipating the industry would cross an inflection point in the local side of the online advertising industry. In 2004, we began advertiser fulfillment for BellSouth, which led us today to having relationships with AT&T, Yellowpages.com, and other large local advertiser aggregators. In 2005, we invested in a large portfolio of websites and local websites, which we are now turning into a locally focused network. In 2006, we acquired openlist.com, which has allowed us to deliver high utility local content to our network of websites. 2007 has been a very busy year on the local side for us. We launched more than 100,000 websites with OpenList content, creating the largest network of local sites in the United States. We also announced today that we are acquiring VoiceStar to offer our large aggregators a truly comprehensive and unique platform, a pay-per-phone call and call tracking solution combined with our existing search marketing offering, therefore allowing us to fulfill on both calls and clicks for local advertisers. So over the last three plus years, Marchex has achieved strength in local through building initial critical mass on first the local advertiser side and second, the local website network side. On the local advertiser side, Marchex now has more than 30,000 advertisers exclusive of VoiceStar’s call-related advertisers, who are using Marchex's advertising technology and services platform to create, manage, fulfill, and report against search marketing campaigns. Additionally, VoiceStar now allows Marchex to offer call-based marketing as part of our local advertising platform. As a result of the momentum we are seeing in new advertiser sign-ups, we currently expect our local advertiser number to more than double by the end of 2009. On the local website side, we have tens of millions of monthly visitors using Marchex's website network which in turn provides more than 1 billion pages of local content to help local consumers make better purchasing decisions. We believe that these investments in operational focuses have allowed us to build a leadership position at a time when the local online advertising market is approaching an inflection point. In order to build on this leadership position, we will need to invest in the products, systems and people to support both advertiser acquisition acceleration and content network growth. We expect the benefits of these investments will accrue over time, not overnight. Moving on to the second topic, I will highlight the series of announcements we have made today and their impact to Marchex. Although it is not our normal course of business to have so many strategic announcements at one time, and we know it is a lot to digest, we had a number of operational and strategic opportunities converge, many of which directly related to Marchex's opportunity for leadership in the local marketplace and supported us making the commitments to wit that we are communicating today. The first announcement is that we have strengthened our executive team with the addition of Bill Day, who will serve as Marchex's Chief Media Officer and oversee Marchex's media strategy, including the online content, consumer experience, and related advertising opportunities. Bill is a world-class operator and pioneer in providing vertically focused original content destinations. He also has extensive experience growing media properties at scale, given his experience at About.com, where he co-founded the company and served as President and then CEO. Bill grew About.com to a top 20 online global media network that covered more than 700 topics and 50,000 subjects. About.com was and still is today used by tens of millions of monthly users to find highly targeted useful information. His experience at About.com and at other Internet advertising companies fits very well with our focus on developing unique, highly useful local content destinations. Today, Marchex has local searchable content on more than 1000,000 websites that in the second quarter generated more than 40 million quarterly revenue-generating local look-ups and referrals. We have become one of the largest local publishers in the entire industry. We are committed to making ourselves a world-class provider of high quality content for locally focused online users. We knew that in order to build a major consumer facing network, we needed to bring in someone with deep consumer experience who had run a first-tier online media company at scale. We are very excited and fortunate to have Bill join us and we believe that Bill will bring the leadership to enable Marchex's building our network into a major brand and grow the network to a leadership position in the local category. Second, we are enhancing our advertising services offering through our acquisition of VoiceStar, the leader in providing call-based advertising services to local advertisers, such as pay-per-phone call, call tracking, and form-to-phone. With the addition of VoiceStar, which comes with a call-related patent, Marchex will have the most comprehensive platform for local advertisers and aggregators in the industry. We can now offer advertisers and aggregator partners an integrated text and call-based advertising platform with comprehensive distribution for their advertisements in search engines, vertical websites, and on our own local websites. We plan to make significant investments in pay-per-phone call going forward to support VoiceStar’s expansion as part of Marchex. Third, regarding our local consumer network, we have reached an agreement with Yahoo! to expand our existing website monetization relationship through June 2009. There were other potential providers who were highly interested in working with Marchex and whom we also considered during our process. However, based on a number of factors, including our need for product flexibility, economics, reporting, and other terms, we believe Yahoo! represented the best strategic fit and we look forward to working closely with Yahoo! on this and other strategic opportunities. Marchex has focused on complementing the Yahoo! relationship with our own advertising initiatives so we may be in a position to be the primary driver of revenue on our websites by the end of 2009. Marchex anticipates this growth will be driven by accelerated advertiser growth and product innovation, including the rollout of new relevant proprietary ad formats, such as pay-per-phone call ads. By being a leader in terms of the number of local advertisers using our products, and being a leader in owning high quality local traffic, it is logical that we should increasingly be putting our own local advertisers on to our own local pages. While in the short-term this will lead to a net monetization reduction, in the intermediate and long term we expect to see higher growth in monetization rates and we will have more control over our own future results. From a financial perspective, under the new deal with Yahoo! potential revenue benefits from increased economics may occur in 2008. For 2007, however, we currently anticipate Yahoo! quality pricing initiatives will have a modestly negative impact. Through our announcements today, we believe Marchex is uniquely positioned to our large and growing network of local advertisers and traffic to continue emerging as one of the leaders in the online local marketplace. While our decisions mean increased investment in our local products and services and certain short-term financial implications, we believe the decisions we have made to prioritize leadership and the creation of highly valuable intellectual property and technology is the right one in optimizing Marchex's value creation opportunity over the next two to three years. On the backside of today’s announcement, there is clear evidence that Marchex is building leadership in the local category in four key areas. First, our local search and call advertising platform; second, our local content and consumer focus; third, our unique base of advertisers and aggregators; and fourth, our local metrics. First, looking at our complete and proprietary local advertising platform, with VoiceStar, Marchex now has the most sophisticated online advertising services platform, supporting both local search and now call-based advertising at scale. This platform helps local advertisers create, manage, deliver and optimize pay-per-click search marketing campaigns and also provision, connect and report against online and offline pay-per-phone call marketing campaigns. It also offers us the opportunity to provide local aggregators a more complete solution that should lead to an increase in the number of aggregators using Marchex's products. Two, we have added great leadership in Bill Day to build and execute on our strategy to grow our local network and consumer facing initiatives. Three, unique advertising and aggregator base -- we now have more than 30,000 advertisers in our ad system, excluding VoiceStar. The VoiceStar acquisition will enable Marchex to offer one of the most comprehensive local platforms in the industry and also adds more than 100 local aggregator partners who leverage our advertising services platform to sell online search and call-based advertising services on a private label basis, including AT&T, Yellowpages.com, Comcast, The Cobalt Group, and Yellow Book U.S.A. Fourth, our local metrics are impressive. We have developed one of the most comprehensive local information networks and have more than 200,000 websites. Our websites reach millions of users and delivered more than 40 million look-ups and referrals in the second quarter, which are defined as revenue-generating business searches on primary proprietary sites like Yellow.com and OpenList.com, and referral clicks on advertisement listings on our proprietary websites like bostonmortgage.com. We believe these metrics will significantly expand over the next 24 months based on increased traffic and usage levels at our websites, including the upcoming relaunch of OpenList.com in September. I will now hand the call to John Keister, who will give a little more color on some specific metrics and announcements from the second quarter.
- John Keister:
- Thanks, Russ. First I will highlight the traffic side of our business for our consumer network. Regarding usage, in the month of June, our websites were accessed by 31 million unique visitors, which represents 11% growth over the preceding year. Against that backdrop, let me highlight some specifics on our consumer network strategy. I will start with our OpenList rollout. Following the OpenList content integration on more than 100,000 locally focused websites at the end of June, we now have consumer facing properties that support our mission of providing consumers with online resources that intuitively help them make better, more informed decisions around locally focused purchases. We are now seeing very positive average daily traffic increases versus the pre-launch period. As we collect data in the coming months and quarters, and also relaunch OpenList.com, we will update you on the progress of our websites. I also want to add that with our June launch of the 100,000 OpenList powered sites, we have updated our goals around website marketing so as to allow us to assess the impact of OpenList integrated websites and create a thoughtful branding plan to promote OpenList, both as an engine that powers our network as well as a destination for consumers at OpenList.com. While these updated goals have led to decreased marketing in the interim, we believe that now is the time to plan and invest against this opportunity with OpenList powered sites as our primary go forward marketing focus. This is a very healthy shift for Marchex, as we will learn from the marketing we have done to date to build a long-term marketing strategy for OpenList powered sites that have increased utility and should drive higher consumer interaction over time. We have received very positive feedback from consumers as well as the industry on these OpenList powered websites and --
- Operator:
- Thank you for your patience, ladies and gentlemen. Your conference call will resume momentarily. Again, we thank you for your patience and please continue to hold.
- John Keister:
- Okay, welcome back, folks. Sorry, we had a telecommunications issue there. I’m going to start back at the beginning of this particular topic. I want to add that with our June launch of the 100,000 OpenList powered sites, we have updated our goals around website marketing so as to allow us to assess the impact of OpenList integrated websites and create a thoughtful branding plan to promote OpenList, both as an engine that powers our network as well as a destination for consumers at OpenList.com. While these updated goals have led to decreased marketing in the interim, we believe that now is the time to plan and invest against this opportunity with OpenList powered websites as our primary go forward marketing focus. This is a very healthy shift for Marchex, as we will learn from the marketing we have done to date to build a long-term marketing strategy for OpenList powered sites that have increased utility and should drive higher consumer interaction over time. We have received very positive feedback from consumers as well as the industry on these OpenList powered websites and they will only get better and offer more consumer utility and features over time. This is another example of where we are investing in an area of strength. No one else in the industry has a large network of local websites with targeted content. We will build on this area of opportunity and strength. Second, our Spanish language websites acquisition -- in May, we acquired more than 100 tier one Spanish language websites and announced a business development relationship with Fox to co-develop these sites into robust destinations. With the Spanish equivalent of sports.com, soccer.com, kitchen.com, health.com, movies.com, photos.com and many others, we believe Marchex has one of the highest quality collections of websites in the Spanish language market and will be in a strong position to capture advertising dollars as advertisers increasingly focus on this local and global demographic. Next I will address some of the highlights and initiatives in advertising services and the opportunity with VoiceStar. The advertising services business is at an exciting point with the addition of VoiceStar, as we believe the pay-per-phone call and call tracking is and will increasingly be important for national advertisers, local advertisers, and local aggregators. We believe that online call-based marketing will be one of the fastest growing segments of local advertising online. While it is still early in its evolution, it is seeing rapid growth and robust demand from publishers and advertisers alike. In fact, in a recent survey, the Kelsey Group forecast the pay-per-phone call market to grow up to $4 billion by 2009. Additionally, the Kelsey Group points out that 71% of local advertisers would rather pay for calls versus clicks. Furthermore, pay-per-call advertisements can range from $2 to $100 per call versus the search marketing equivalent of $0.10 to $10 per click, and call-based ads generate conversions of up to 40% versus the 1% to 5% range for most search marketing or pay-per-click models. Being a lead in the local marketplace requires the ability to support highly scalable click and call-based advertising solutions and Marchex now has both, in addition to our own network of high-quality traffic to fulfill advertisers click and call-based campaigns. One of our primary initiatives going forward will be to optimize our cross-selling strategies so we can offer call-based advertising to advertisers and aggregators who buy search advertising from us today and vice-versa. VoiceStar brings us a very strong roster of local aggregators that dramatically expands our footprint. As with our focus on the local search marketing platform, VoiceStar is focused on a private label approach for aggregators. Since VoiceStar has a private label approach, it is very synergistic with how we do business today. We do not compete directly with local aggregators like yellow page publishers, newspapers and cable companies. We simply provide these aggregators with the products and services to enhance and maximize their business relationships with the local merchant. Today, VoiceStar primarily sells its services to local advertisers through private label agreements with local publishers, such as The Cobalt Group and Yellow Book, who leverage their own sales force to sell these services. Therefore, with VoiceStar, we have added a significant and strong roster of aggregators to our partner list, which expands our local growth opportunity while also mitigating risks. It puts us in a position to build a stronger relationship with large aggregators so they can get more key services from a single source; pay-per-phone call, call tracking, pay-per-click fulfillment, and targeted local distribution on our network of websites. At a high level, that is truly our big opportunity. Over the next three to five years, we will focus on bringing together hundreds of thousands of local advertisers with quality distribution and our own targeted local websites. Adding call advertising, call tracking, and more targeted search listings to our local websites is something we will focus on internally in coming months, as we believe it will unlock a lot of value in these websites as they grow in usage. Additionally, VoiceStar has developed a plan for a pay-per-phone call marketplace, such that call-based advertisements can be served on any participating publisher site, including Marchex's own local websites. Over time, we will build third-party distribution for this marketplace as well. So how will VoiceStar allow us to extend call-based marketing programs to local and national advertisers? To explain a little bit how the VoiceStar technology platform works at a high level, the technology platform generates custom, trackable phone numbers for advertisers. This can and does work today for both online and offline call-based marketing programs. For example, whenever an advertiser’s phone number is dialed by a consumer who sees a relevant advertisement, whether online at a specific website or offline in the Yellow Pages book or a newspaper, the calls are routed through VoiceStar’s servers to the advertiser. The call is then tracked and billed and the advertisers only pay for calls received. In order to succeed in serving the local advertising channel, we believe that supporting call-based services, such as pay-per-phone call, click to call, form to phone, and call tracking is a prerequisite and provides the ability to assist those advertisers that already have a web presence, as well as those advertisers who don’t have a web presence. We believe these classes of advertisers will be the biggest drivers of online growth in the local marketplace going forward. Now let’s turn to monetization trends. For the second quarter, revenue from our proprietary traffic was up 22% on a year-over-year basis. This has helped us to continue to make progress with our direct advertiser base as they continue to be exposed to more and more quality traffic from our own network of websites. For the sixth consecutive quarter, rates from direct advertisers on our owned and operated sites has increased. Overall, we saw increasing sequential revenue per click rates from our direct advertisers bidding on our own network of more than 20%. This rising rate is driven by two factors -- increased advertisers bidding in our network and rising allocations from existing advertisers in our system. National and local advertisers continue to allocate budgets to our network as they get exposed to the quality of traffic associated with our proprietary websites. Furthermore, as this number continues to scale, we will likely see increasing pricing leverage across our network of proprietary and partner traffic sources. Based on these investment decisions today, we believe we can set ourselves up for higher revenue growth rates in 2008, 2009 and beyond. We are planting seeds for this growth today and some of the following local metrics bear that our. Our advertiser growth rate has doubled in the last six to 12 months to more than 3,500 new advertisers per quarter, and we expect this number to continue to grow. Today we have more than 30,000 advertisers in our system and with additional investment in our local businesses and the addition of VoiceStar, we expect to see our local advertiser number more than double by the end of 2009. Additionally, we have tens of millions of unique users each month using our locally focused network of websites and those websites are generating more than 40 million revenue generating look-ups and referrals in our network as of the second quarter. All of these data points demonstrate that we do have the building blocks for growth and leadership in local. We look forward to providing more metrics around our local growth in the coming quarters. At this time, I would like to hand the call over to Mike Arends to discuss our financial results in more detail.
- Michael A. Arends:
- Thank you, John. I wanted to quickly use this opportunity to provide a summary of the items that impacted our second quarter revenue and adjusted operating income before amortization to help connect the dots between what was expected versus what was delivered. In the second quarter, revenue was $34.7 million, which represented a 9% year-over-year growth. The second quarter was impacted by data center outages, which resulted in a $500,000 revenue adjusted operating income before amortization and adjusted EBITDA decrease to proprietary traffic sources. These outages were not anticipated and Marchex views them as non-recurring. Adjusted operating income before amortization was also impacted by the increase of approximately $300,000 based on the amortization costs associated with the Spanish language website acquisitions and adjusted operating income before amortization and adjusted EBITDA were impacted by $600,000, based on our decision to accelerate our investment and our advertising services platform for local advertisers in order to support our largest aggregator partners. We believe that $600,000 incremental investment will help accelerate the rate at which we are adding advertisers as well as adding competitive product features and further scalability to our local advertising platform. Therefore, adjusted operating income before amortization for the second quarter was $6.4 million. Adjusted earnings before interest, income taxes, depreciation, amortization, stock-based compensation expense, facility relocation, and gains or losses on sales and disposals of intangible assets, or adjusted EBITDA for the first quarter was $8.6 million. Now, moving to the specifics -- as noted, second quarter revenue was $34.7 million. Revenue from proprietary traffic sources, or local consumer network, was $13.5 million, which represent a 22% growth from the prior year period. The principal drivers for that growth were the increase in traffic, selected marketing of certain of our sites, and the rate we received from our direct advertisers. On a sequential basis, we were principally impacted by certain seasonal trends in traffic similar to last year, in addition to small adverse impact from the overall monetization we received from Yahoo!, primarily stemming from quality base pricing. As we move throughout the year, we will update you on the impact of our enhanced content integrations and website launches. Revenue from our partner network, or local advertising services group, was $21.2 million, which was 11% higher on a sequential basis. The quarter was primarily influenced by several decisions we made over the last several quarters. Primarily
- Russell C. Horowitz:
- Thank you, Mike. I want to share with you how we are thinking about Marchex as we go forward over the coming quarters and years. In 2007, Marchex will be completing its fourth full year of operations. As I mentioned earlier, we have taken consistent steps in building a foundation from which we can now commit to leadership in the local marketplace. In 2004, we created the outsource-able version of our search marketing platform for BellSouth, now part of AT&T. In 2005, we made the strategic decision to add a significant local consumer traffic base to our business as part of our proprietary website network strategy. In 2006, we acquired OpenList, giving us the publishing platform to transform our websites into a strong, high utility consumer network. Now, in 2007, with the momentum we are seeing in local advertiser adoption, as well as the product momentum Marchex is seeing in the implementation of the early phases of our local traffic strategy, we believe Marchex is in as strong a position as ever to capitalize on the growth of Internet advertising and we will do so by remaining committed to leadership in the local marketplace. VoiceStar is an important part of this plan, as is the continued investment in our local advertising services platform and our locally focused network of websites. By hiring Bill Day, we have added a fantastic leader that has built a top 20 media company and understands our space as well as anyone. In Marchex's first four years, we have positioned ourselves among the leaders in the highest growth area of online advertiser going forward over the next three to five years, the local market place. We are motivated and energized to make the most of this window of opportunity and we believe by making these investments now, by 2008 and 2009 we can deliver a much bigger company with superior financial results as well. One of the things we know is that in the technology industry, there are three primary drivers of value creation. The first is leadership, the second is intellectual property, and the third is financial results. Marchex is in a unique window. The local marketplace has just crossed a tipping point and we are looking at a $100 billion market that will see a major transition to online over the next three to five years. Some leading online companies have called Marchex an accelerant in the adoption of online by local advertisers. Our advertiser solutions help take the friction out of local advertisers buying online and our goal is to make it as easy for them to buy online as it is to buy offline marketing products. Marchex is an early leader in the local marketplace and we think the most important thing we can do is embrace this opportunity, invest against it in a manner that will drive leadership and the creation of valuable intellectual property and technology, and then scale it. Billions of dollars of value will be created and shifted in the next few years based on the growth of the local marketplace and we believe optimizing our business to maximize leadership, intellectual property and overall growth is how we will create the most value over that timeframe. At this time, Operator, we would like to give the call back to you to take questions from the audience.
- Operator:
- (Operator Instructions) We’ll take the first question from Christa Quarles. Madam, your line is live.
- Christa Quarles:
- Three questions, I guess the first one is really centered on Yahoo!. I think you guys were anticipating some of these quality base pricing impacts into Q2. I was just wondering what changed relative to what you had begun the quarter seeing and what had ended the quarter seeing. And in particular, what has Yahoo! said to you that makes you confident in further initiatives that you chose to sign with those guys for another two years? It sounds like you will be getting a price or a split increase in next year. I was just wondering if you could comment just generally on Yahoo!, and then I have two follow-up questions.
- Russell C. Horowitz:
- Sure. In the last quarterly call, we received some questions about what we are seeing with Panama and Yahoo!’s monetization and we said that we were in close communications with them on their product roadmap and also expectations for monetization. And we were neutral and we took a wait-and-see attitude. We clearly have been communicating and collaborating closely with them and we have a lot of belief in the direction that they are going and we think our views of where the opportunities are are fairly closely aligned. So in terms of our guidance today, we think the way that they are building their products in the short-term could have a modest negative impact, and that’s a conservative approach to what we’re seeing and in our communications with them. But we think the ingredients are in place for them to see increased monetization over time and clearly that is something we look to benefit from. And in the context of a new deal, yes, we did get increased economics going forward and we hope the combination of all the variables that impact monetization come together to create a very favorable environment for us when we look at 2008 and beyond. Obviously the product flexibility is the key component for us as well when we look at our vision for product evolution and being able to deliver high utility for consumers through our websites.
- Christa Quarles:
- And then it only looks like you generated about 5% of your direct traffic yourself and 95% through Yahoo!. Is there an expectation that should meaningfully shift in the coming quarters?
- Russell C. Horowitz:
- If you look at what we monetize for Yahoo!, not all of that is directly attributable to our website, so those percentages understate how much of our own monetization is being provided today.
- Christa Quarles:
- Okay, and then my other two questions, one is just as you look at the stock trading after hours in sort of the 11 range, have you ever tried to think about in the current pricing environment what just the asset value of your URLs may be, just to give investors a sense of the bottom range there? And then a question for Mike; I think you indicated many times that the long-term OIBDA margin of 30% or more, I think the guidance this year is like 18%, so I’m just wondering if you could update us as to when long-term will manifest. Thanks.
- Russell C. Horowitz:
- Sure. On the first, clearly we can’t give specific numbers and when we think about just the asset values but we think we have very tangible asset values and at times, we are approached about certain assets which have done nothing but confirm that there is a very tangible value to the assets we have, including our websites. So we feel very good about the foundation value we have and we think our opportunity clearly is to invest in leadership and growth. Ultimately, those are the companies that have the most interesting opportunities and give value in the most favorable ways. When we think about how we drive the greatest value creation over time, that’s the way we are going to do it. When we look at where we are, we’ve been a buyer of our stock. We noted in today’s press release that we anticipated amending our buy-back plan, so we’ll let our actions speak more so than our words. But we think our assets have a very tangible value and at the same time, we think the thing that is going to drive real value recognition going forward is going to be leadership and growth.
- Michael A. Arends:
- I think the other part of the question was about the OIBDA margin and yes, in the short-term we are taking an OIBDA margin impact and a lot of that drives to the investment decisions we are making around the local framework. What we think that is going to translate into in 2008 and 2009 is actually an accelerating model where we can move revenue growth at a faster rate than we are growing today, and from that perspective in terms of moving the margin the impact to a lower framework than we’ve been at in the past, we actually think that’s the right decision from an investment perspective to make. So yes, from a long-term perspective, I do think the profile in the local marketplace in order to drive some of those revenue growth rates faster is going to be lower than it has been in the past.
- Russell C. Horowitz:
- Christa, just to be specific on the answer on asset value, we do believe our asset values are higher than our stock price, which is one of the reasons we are looking to buy back more shares. It’s that tangible.
- Christa Quarles:
- Thanks.
- Operator:
- Thank you very much. We’ll take the next question from Marianne Wolk. Your line is live.
- Marianne Wolk:
- Thank you very much. I’m just wondering if you could help us quantify the Yahoo! smart pricing impact. I know you mentioned it was a factor this quarter. If there were any way to quantify it, and was it much worse than you anticipated it to be?
- Russell C. Horowitz:
- I’ll answer the question prospectively, which is we said a modest negative impact and we specifically quantified that. Us increasing more of our own inventories combined with a modest impact from a quality base pricing initiatives in the short term would have a total $4 million impact over the last six months of the year. You can assume that we think it is about equally split between those two, and so you are looking at really in the context of annual revenue, driven by our proprietary websites, it is a few percent.
- Marianne Wolk:
- Great. Thanks very much.
- Operator:
- Thank you very much. We’ll take the next question from Maurice McKenzie. Your line is live.
- Maurice McKenzie:
- Thank you. Just a few questions on your proprietary network, the first is what percentage of your proprietary traffic was paid versus organic? I also want to get a sense of how many of those pages have been indexed by major search engines. Finally, where they have been indexed, what sort of search ranking improvement are you seeing now with the new implementation of OpenList?
- Russell C. Horowitz:
- First off, as we’ve said in the past, the majority of our network is organic. Obviously our investment is around driving organic growth. We have also said that we think good products are going to drive organic growth, that they will be marketed, which can drive revenue, but the key is to have products where you think you can acquire users, and today’s marketed user is tomorrow’s organic user. We think we have a healthy balance and going forward, we continue to think that our catalysts are to drive organic growth and that is how we drive the highest equity value over time as well. When you look at search engine penetration, we don’t have stats to share with you today but in our recent press release around our OpenList powered website launch, we had a listing of a bunch of examples of sites that we were launching and I encourage people to go do searches on the common generic terms, like bay area hotels, and see where these things show up in the search engines, or Chicago doctors. And you’ll see a lot of these things on the first pages of search results. So in the grand scheme of our expectations or hopes for what would happen post launch, while it is premature to share specific data, we intend on sharing specific data on the impact of these website launches going forward and we can directionally tell you that it is delivering on the higher end of our expectations for what we would be looking at six weeks after launch.
- Maurice McKenzie:
- Russ, just to follow up on that, you had previously discussed licensing or allowing third party vendors to benefit from OpenList. Can you just update us on how that is going, if you’ve had any discussions and whether or not that can be meaningful in the future?
- Russell C. Horowitz:
- Sure. When we look at the opportunity, as we noted in the presentation today, our focus is on being a world-class provider of high utility content, the natural consumption point --our owned and operated website. But we know that there are lots of other people focused on this market who need enriched content too. Phase one for us is use this as a strategic differentiator and phase two is to look at selective partners that we think it is worthwhile to extend what we think is one of our most valuable assets. We have done it on a selective basis to date. Right now we are prioritizing distribution of this content through our own site. We do anticipate that we will extend this selectively on a go-forward basis, although we have not committed to when that will happen.
- Maurice McKenzie:
- Thank you.
- Operator:
- Thank you very much. We’ll take the next question from William Morrison. Your line is live.
- William S. Morrison:
- Thanks. A couple of questions; one, I was wondering if you could help us with the third quarter revenue guidance, understand maybe just what we should expect on the growth rate side for the proprietary traffic versus the marketing services revenue? It looks like the core marketing services revenue grew year over year this quarter but based on your guidance, it looks like one of the two are going to decline year over year. I was just wondering if you could give us some help there, and then I’ve got a follow-up.
- Michael A. Arends:
- I’ll address that very quickly. I think our expectations for the third quarter specifically are for a decrease in the revenue coming from the proprietary traffic sources, and we do expect it will be several million dollars, and I think what you may see from the advertising services side is actually some modest up-tick.
- William S. Morrison:
- And that’s year over year, Mike, or is that sequentially?
- Michael A. Arends:
- Sequentially.
- Russell C. Horowitz:
- And that ties in to the updated goals we’ve established for marketing and what we’ve messaged today on reduced revenue associated with these updated marketing goals on a go-forward basis.
- William S. Morrison:
- On that point, could you clarify the one thing in the release and then in your comments on the call I didn’t really understand -- the $4 million decrease in revenue associated with website marketing. What does that mean? Does that mean revenue associated with marketing dollars you spend to drive traffic to the proprietary sites, or is that marketing services revenue?
- Russell C. Horowitz:
- That is marketing to proprietary websites. Once we launched our enhanced product, we had an updated set of goals in terms of the data we were looking to collect, how we were trying to drive people to websites to expose them to it, and at the same time drive them to hopefully write reviews, interact with it, and at the same time create repeat users. Based on the updated goals, it means we will be spending less and some of the dollars we spent previously drove revenue and operating income, so that is why we messaged that we expect it to ramp up over time but we are going to let the data on all of these new websites drive the decisions of how we do it and we are in the early phases of aggregating that data, and that’s why in the meantime sales and marketing will dip and we do believe it will ramp back up over time and we’ll let the data drive how that money gets spent and how quickly we ramp it back up.
- William S. Morrison:
- And one last question; Mike, it sounded like in your response to a previous question that you indicated you would expect these investments to drive an acceleration in revenue growth next year, and possibly even in ’09. I’m wondering if you could maybe quantify the magnitude of that acceleration that you expect, because you are investing a lot and it would be helpful I think to investors to understand just how much growth we can expect to these investments to drive over the next couple of years. Thanks.
- Michael A. Arends:
- We haven’t given specific guidance for 2008 at this point in time but clearly with the magnitude and the nature of the investments in our platform, and some of the strategic implications of entwining pay-per-phone call into our network and the investment we are making with VoiceStar, we do think that from VoiceStar’s perspective, they can more than double their revenue in 2008 and we’ve given some impact and color in some of the releases that we’ve put out there specifically to them. I think from our perspective, obviously we believe that some of these local investments are going to be able to translate into a significant percentage growth rates as we go into 2008 and 2009. At this point in time, what we can give you is we’ve got more than 30,000 advertisers on our advertising services platform and we do believe that over the next period of time into 2008 and 2009, we are going to be positioned where we can double those numbers of advertisers on our system. In the future when we go out and give 2008 guidance, we can give you more specifics and color of what we are anticipating for the revenue range at that time.
- Russell C. Horowitz:
- We do plan on giving more specifics around 2008 in the coming month. We do think advertiser growth is a good indication for what we are thinking about in terms of our overall business growth over the next couple of years, and clearly today we’ve made a pretty important and bold decision on putting a stake in the ground on who we are and how we are going to drive the greatest value and what the price tag to do that is. And getting a return on that investment means higher growth than we’ve been seeing. We see that beginning in ’08 and we see that accelerating as we go later in ’08 and ’09, and we will share specifics with you soon.
- William S. Morrison:
- Thanks.
- Operator:
- Thank you very much. We’ll take the next question from Matt Donati. Your line is live.
- Matt Donati:
- Thanks, guys. My first question has to do with the spend on website marketing. We were under the impression, I think most folks were under the impression that the vast, vast majority of revenue in the proprietary network came from organic traffic, direct type-in traffic. Now, $4 million and that coming in the back half of the year, that sounds like a pretty, like 16% off the top of my head, of second half last year revenue in that segment. That’s a pretty significant piece. I was wondering if you could talk a little bit about that, kind of when that started ramping up and why that was such a high percentage of revenue.
- Michael A. Arends:
- Clearly we have online marketing initiatives. They have driven traffic, they have resulted in revenue generating events. We have had those set-ups in the past. I think what we’ve done currently is refocused our team to re-guide them in terms of some of the strategic initiatives on the OpenList sites, and they are diverging from their focus on some of the old sites or the predecessor sites and focusing almost entirely and exclusively on some of the new sites. And with that, there comes a transition. In terms of what we are expecting, I think there will be fluctuation in the online marketing traffic and spend, as well as some of the revenue that comes from that. I think some more of that will likely be in this quarter, relative to Q3 over Q4, simply because as we get to Q4 and we’ve got some of our initiatives working again, we will see more ramp in that spend, as well as more ramp in terms of the expected revenue contribution that comes from that spend. And ultimately, from a strategic perspective, as we have more traffic to our sites from marketing initiatives, we anticipate that there will be more users coming back and repeating those visits through other means, including repeat visits through direct type-in as well as some of the algorithmic searches when they see some of the results that are coming up in the algorithmic.
- Russell C. Horowitz:
- But again, to be clear, because this is the question we’ve had today, the vast majority of our traffic was organic, it is organic and going forward, our catalyst to grow organic is where we are focusing our efforts and our dollars.
- Operator:
- Thank you very much. (Operator Instructions) We’ll take the next question from Clay Moran. Sir, your line is live.
- Clay Moran:
- Thanks. Russ, can you explain the investment in accelerated build-out of the advertising services platform? What is it that you are investing in? Why is that not -- is that in servers? What is that exactly that needs that money going into the platform and how does it improve things? Thanks.
- John Keister:
- I’ll take that question. Really what we are looking at is an investment in our local advertising platform, as well as some things on the advertising services side that support the national advertisers, but primarily obviously today we are talking about the opportunity in local over the next three to five years. As background, in May, one of our largest partners, yellowpages.com announced that they are doubling the number of sales offices that they have by the end of 2007. And this comes from the success that AT&T and yellowpages.com have had in selling local search packages. Clearly this is something that we need to support -- we need to support their growth, we need to support the opportunity on a national basis with other aggregators as we add them to the system, and we believe that the macro trends here in this category are significant and we are in a place where, if we do invest against them, we can stay in a leadership position as the local advertisers come online and those numbers accelerate. Today, we are seeing from a lot of start-ups and smaller companies an effort to do parts of what we do but no one has really been able to pull together the pieces on the pay-per-call side plus what we are doing on the search side and off a great end-to-end solution for aggregators and local advertisers. This is a place where we are going to invest, is in our platform. We are going to invest in the IP and we are going to invest in great leaders so that we can make sure to stay in the leadership position as we move ahead.
- Clay Moran:
- So does that entail adding people? When you say IP, is that product development? Where exactly does the money go?
- Russell C. Horowitz:
- It’s both. We are adding developers to specifically work on the products, add features in terms of the distribution options available to our aggregator partners, the features around the reporting systems, the scalability like servers, et cetera. And it also means hiring trainers and other personnel who can go out to our aggregators and train their salespeople to effectively sell these products into their local merchant base. And as we’ve seen that happen, we’ve seen very tangible returns in terms of increased close rates, and that’s one of the reasons why we’ve had a real acceleration in the advertiser adoption rates. So it’s product development, it’s sales and support, it’s infrastructure, it’s integration into new distribution sources -- it’s all of those things. It will also be a combined investment with what we talked about with VoiceStar, so that we can sell a combined product suite and they could integrate with the combined reporting suite as well.
- Clay Moran:
- Is there a capital investment that goes along with these operating expenses?
- Michael A. Arends:
- There is a capital investment, Clay. There’s going to be some increased data center build outs. That’s part of the infrastructure. There’s some up-front installation components to that. There’s some minimum commitments on leasing bandwidth on communications lines -- all of those sorts of things. There’s an operational personnel build-out framework in order to support and maintain all of those related things as well.
- Clay Moran:
- Any guidance on CapEx for the rest of the year?
- Michael A. Arends:
- CapEx, I think we’ve been looking at historically about $1 million a quarter. I think what you will see from a CapEx standpoint is likely that is expected to double to about $2 million a quarter.
- Clay Moran:
- Okay. Thank you.
- Operator:
- Thank you. Ladies and gentlemen, the last question we have today is coming from [Istafa Cedyk]. Your line is live, sir.
- Istafa Cedyk:
- I have a few questions. The first one is a fairly simple one. I just want to understand -- can you help us quantify, however you can do so, the actual revenue benefit from the new Yahoo! deal in 2008 and onwards, all else being equal?
- Russell C. Horowitz:
- To answer that, it’s premature to quantify that. We’ve got a fair bit of the year ahead of us. We’re optimistic that beyond some of the short term modest negative impacts we can see a positive monetization trend separate from effectively what our economics are. But again, whatever extra percentage we have is one variable that dictates what we end up getting paid, and so when we get to ’08 guidance, our plan will be to share some more details with you. But between now and then, we’ll have a chance to look at more details and give you as accurate an assessment as possible. We expect more. We’ll do our best to quantify that soon.
- Istafa Cedyk:
- Okay, and then following up on a question another gentlemen asked about, the $4 million decrease from the reduction of website marketing, are you factoring in any improvement in revenue, any bump from the OpenList rollout on the 100,000 sites? I would imagine that as you scale back the website marketing to experiment with the impact and collect data on the OpenList results --
- Russell C. Horowitz:
- We have a variety of things changing and we know people have a lot to digest today but we are seeing and messaged that we are seeing very good growth on those website launches, but at the same time this is one of the opportunities for us to monetize more of our own inventory and we also messaged that that will impact monetization because to us, the most important thing we could do right now is really deliver relevance, whether it is editorial content or paid content. So our focus with a lot of these sites is get the best ads on there, whether they happen to pay us the best rates or not. And we have built all that into the combined guidance we have given today because we think creating the best consumer experience is going to be how we drive the highest organic growth rates over time, and we believe we will be able to really drive up rates we get on these relevant ads, given the accelerated ramp at which we are adding advertisers onto our system. We think we have an opportunity to be a meta integration point for local advertisers on a go-forward basis and our website network is a natural distribution point for that. So there’s a lot of opportunities beyond the ones we are specifically communicating today. We are trying to be appropriately conservative and giving a lot of messaging to you, including how we are looking to monetize a lot of these local sites with our own ads. So it is a blended impact between the reduced website marketing, given the updated goals, and the increased monetization of some of these sites with the advertisements we view as most relevant, regardless of what the rates are.
- Istafa Cedyk:
- Just to try to get a little more color, or at least help me understand this a little bit better, on the previous pilots that you’ve run on OpenList rollout, you talked about revenue bumps somewhere between 10% to 70% in the months subsequent to rollout relative to prior to OpenList rollout. So when I look at 100,000 sites, about half the portfolio on the direct navigation side being rolled out, if you take even say a modest 10% bump on the revenue, that suggest something in the order of $2 million to $5 million positive impact on revenue, divided by two for half a year, should get you something in the order of $2.5 million in revenue bump, which would presumably offset the $4 million decrease from the anticipated reduction in website marketing. I’m just trying to understand -- are you guys being conservative in your forecast as to the OpenList impact? What kind of revenue bump are you factoring in from the OpenList rollout?
- Russell C. Horowitz:
- We built some anticipated impact into our prior guidance. What we are seeing is positive. We aren’t quantifying it yet. We think it is reasonable for people to think about increased contributions, particularly late this year and going into 2008.
- Istafa Cedyk:
- All right. Thank you.
- Russell C. Horowitz:
- We appreciate everybody making the time to digest all of the different announcements we’ve made today and in really understanding our focus and commitment around leadership in the local marketplace. On top of today’s announcements, we are very excited and we think clearly the next few months are going to be very important in sharing additional information, whether it is on the strategic front or metric front or in a variety of other areas, to help you get some color on why we are so excited and how we think this opportunity is going to translate to value creation. We’ll be in touch with you soon. Thank you.
- Operator:
- Thank you very much, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your lines and have a wonderful day.
Other Marchex, Inc. earnings call transcripts:
- Q3 (2024) MCHX earnings call transcript
- Q1 (2024) MCHX earnings call transcript
- Q4 (2023) MCHX earnings call transcript
- Q3 (2023) MCHX earnings call transcript
- Q2 (2023) MCHX earnings call transcript
- Q1 (2023) MCHX earnings call transcript
- Q4 (2022) MCHX earnings call transcript
- Q3 (2022) MCHX earnings call transcript
- Q2 (2022) MCHX earnings call transcript
- Q1 (2022) MCHX earnings call transcript