Marchex, Inc.
Q4 2012 Earnings Call Transcript

Published: 28 Feb 2013

[Operator:]

Good afternoon, my name is Jamaria, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Marchex Fourth Quarter Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the conference over to Mr. Ethan Caldwell, General Counsel and Chief Administrative Officer. Sir, the floor is yours.

[Ethan A. Caldwell:]

Thank you. Good afternoon, everyone, and welcome to Marchex's Business Update and Fourth Quarter 2012 Conference Call. Joining us today are Russell Horowitz, Chairman and Chief Executive Officer; Peter Christothoulou, President; John Keister, Executive Vice Chairman; and Michael Arends, Chief Financial 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 fact included on this call regarding our strategy, future operations, future financial position, future revenues and other financial guidance, acquisitions, projected costs, prospects, plans and objectives of management are forward-looking statements. In addition, there are other -- there are certain risks and uncertainties relating to our previously announced proposed spinoff transaction, which contemplates a separation of our mobile and call advertising business and our domain and advertising marketplace business including, but not limited to, the impact and possible disruption to operations, the timing uncertainty of completing the transaction, the high cost in connection with the spinoff, which we will not be able to recoup if the spinoff is not consummated, the expectation that the spinoff will be tax-free, revenue and growth expectations for the 2 independent companies following the spinoff, unanticipated developments that may delay or negatively impact the spinoff and the ability of each business to operate as an independent entity upon completion of the spinoff. 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 herein. During the course of this conference call, we will also reference certain non-GAAP measures of financial performance and liquidity, including OIBA, adjusted OIBA, adjusted EBITDA, revenue with the main sales, adjusted OIBA and EBITDA with domain sales 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 release, which is available on the Investor Relations section of our website, and the definitions of these measures, as used by us, and the reasons why we believe these measures provide useful information are also contained in today's earnings release. At this time, I would like to turn the call over to Russell Horowitz.

[Russell C. Horowitz:]

Thank you, Ethan. We feel good about our progress in the fourth quarter, especially as it relates to building momentum for 2013 and beyond. Some selected highlights from the fourth quarter and 2012 include

[Michael A. Arends:]

Thanks, Russ. Total revenue for the fourth quarter was $34 million, with call-driven and other related revenues representing $28.5 million. As we highlighted during the third quarter conference call, we estimate call-driven revenue was impacted during the fourth quarter by approximately $500,000 due to damage caused by Hurricane Sandy and the resulting reduced call volumes and telecommunication systems disruptions. Excluding the Hurricane Sandy impact, we continue to make progress, adding new advertisers and publishers and believe we have set a strong foundation for our call business in 2013. For the fourth quarter, revenue from Archeo was $5.5 million, which was largely consistent with the prior quarter. During the fourth quarter, we saw some stabilization of revenue due to our increased focus on these products and customers and a seasonal lift in budgets. Excluding stock-based compensation, acquisition and separation costs and amortization of intangible assets, total operating costs were $31.4 million for the fourth quarter of 2012. Sales and marketing costs, excluding stock-based compensation, were $2.7 million. During the quarter, we hired additional sales and marketing employees as we invested in the opportunities we see to unlock performance-based call advertising and to support Archeo. In the near term, we expect our marketing expense may modestly increase from current levels in support of continued growth of our sales and customer support teams and the evolution of our products. Product development costs were $5.8 million as we were able to hire additional product and engineering talent, which is very important to our execution and growth. With mobile and call performance advertising becoming an increasingly important consideration for advertisers, we continue to focus on building our market-leading call analytics platform and our call marketplace. Adjusted operating income before amortization for the fourth quarter was $2.6 million. Adjusted EBITDA was $3.5 million. GAAP net loss applicable to common stockholders was $34.7 million for the fourth quarter of 2012 or $1.02 per diluted share. This compares to GAAP net income applicable to common stockholders of $920,000 for the same period of 2011 or $0.03 per diluted share. Adjusted non-GAAP income per share, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.05 per share. During the fourth quarter, we generated $4.3 million in operating cash flow and had more than $15.9 million in cash on hand as of December 31, 2012. Additionally, during the quarter, we sold a small number of domains that yielded approximately $900,000 in incremental cash flow. Based on continuing strong demand in 2013 and the increased investments we have been making in Archeo, we expect sales from nonstrategic domains will be increasing over the course of 2013. We also acquired 22,000 of our common shares for a total price of $87,000, bringing our total shares acquired under our repurchase program to 11.3 million or 30% of our common shares outstanding. Now turning to our initial outlook for 2013 and the first quarter. First, looking at our revenue guidance for 2013. For the year, we currently anticipate revenue will be in a range of $144 million to $148 million. Additionally, we expect call-driven revenue to be in a range of $125 million to $128 million, representing 13% to 15% growth from 2012 levels. Budgets can change and we can be exposed to period-to-period variability. However, we do believe we have taken an appropriate and measured approach in our initial 2013 guidance relative to the opportunities we are seeing. For the first quarter, we anticipate revenue will be more than $35 million. We anticipate call-driven revenue will be more than $30 million. For Archeo, we believe the combination of the spinoff, the resulting renewed focus and providing of dedicated resources to support the opportunities with these products and assets can allow it to unlock significant value. Next looking at adjusted OIBA and EBITDA margins for the year. We believe 2013 is an important year for Marchex in building the foundation for long-term growth. As a result, we are increasing our investment levels, particularly in the first half of the year with the intent of driving higher revenue growth as we move through 2013 and beyond. For 2013, we expect more than $10 million in adjusted operating income before amortization and more than $14 million in adjusted EBITDA. For the first quarter, we anticipate more than $1.1 million in adjusted operating income before amortization and more than $2 million in adjusted EBITDA. Key items factored into the first half of 2013 include

[Russell C. Horowitz:]

Thanks, Mike. Today, we're seeing increased adoption of mobile performance advertising focused on calls and it's translating into higher growth. As the market continues to develop and mobile performance advertising grows, our products are well-positioned to meet advertisers' and publishers' needs. As a result, we're excited about 2013 and our opportunities this year. I want to thank our employees for their continued hard work and dedication, and we look forward to updating you again soon. And with that, I'd like to hand the call back to the operator for Q&A.

[Operator:]

[Operator Instructions] Your first question will come from Andre Sequin with RBC Capital Markets.

[Andre Sequin:]

First, if I could, a couple on the Archeo side of the business and then I'd like to follow up on the call-based side, if I could. In terms of the value of the domain portfolio, how do you think the introduction of the new gTLDs, which will be happening here in the next 2 months, will impact the value of the domains you hold? And then coming at it from a slightly different angle, does the shift to a more mobile world and a broader use of smartphones have any impact on the value?

[Russell C. Horowitz:]

Sure. Thanks, Andre, those are excellent questions. We've done exhaustive due diligence as part of our process with Archeo. And in looking back at the new TLDs and potential impact, I think I'd liken it to the fact that, in the past, when new TLDs have been introduced, whether they're .biz or .info, they really haven't impacted the value of generic commercial .com domains. When we look at the new TLD introduction, it's possible they'll grow the market to some degree. But the feedback we've received from folks who have both made investments in that market and other folks in the domain space, as well as based on our own experience and the fact we continue to see very high demand in terms of the Archeo assets, it kind of tells us that commercially relevant .com domains continue to have substantial value, and we don't believe the new TLDs are a significant factor that impacts that value. In terms of taking kind of the question further into mobile and its importance, what we're seeing is that publishers with multichannel strategies really require a key domain to be part of that strategy. And so even with mobile and the evolution, it doesn't seem to be impacting, again, the value of commercial generic .com domains. The .com generic domains are really key elements of any large brand and for any new business coming online. And we think it's important as they look at kind of multichannel opportunities that include mobile that, that continues to be a key part of it. Nothing's happened that changes our view.

[Andre Sequin:]

Okay, great. And then, if I could move on to the call side of the business. When you're thinking about the next year or 2, where do you see the biggest drivers of the growth? Is that coming from existing advertisers increasing their budget, new advertisers, rate increases or somewhere else? Or what's kind of the mix between those?

[Russell C. Horowitz:]

I think you just answered your question, but I'll reiterate it, which is we see opportunities with existing advertisers to continue to apply our technology and expertise to a complex and diverse marketplace and allow them to kind of gain insights and increase volumes of customer acquisitions and more cost-effective CPAs. But even within existing customers, I think the greatest vain of opportunity is national customers whom we've worked with to drive calls to their call center but now strategically working with them to acquire and channel local calls to their local agents and dealers. We think that's a very strategic and very significant opportunity that's really starting to emerge for us. And it really highlights the convergence of our product's technology and expertise, when you look at our history in supporting both national and local customers and now how that converges to support national customers that also have local presence when you look at their agents and dealers. So the sweet spot for us is folks that have that profile, and we have a number of them who are meaningful, existing customers and new customers that fit that profile.

[Andre Sequin:]

Okay. And then one more follow-on on that one then and then I promise I'll let someone else on. Could you talk about the trends you're seeing in ad rates? What factors into the prices? Are you seeing any particular strength in any particular verticals?

[Russell C. Horowitz:]

Yes, we think, pricing-wise, that is a catalyst as well for us. As we continue to develop our analytics technology and that informs optimization, we are able to find more volume at cost-effective CPAs for our advertisers. When you think about which verticals we really see opportunities or where you see pricing moving up when you're dealing with conversion rates of 25% plus, we're working across the core verticals of financial services, travel, kind of your broader kind of key home services markets when you look at the local opportunity but within travel, specifically hotels, et cetera. And then on the professional services side, that's another where we see opportunities for both increased price, but in a way that continues to drive cost-effective CPAs for those advertisers.

[Operator:]

Your next question will come from Gene Munster with Piper Jaffrey.

[Charles Eugene Munster:]

Russ, could you talk a little bit about just the overall growth of the call business? How should we think about that longer term? I don't know if this is the right form or if before the actual spinout becomes a reality there will be another call, but maybe just in terms -- I always think about that business growing for the next year. And separately, if you could talk a little bit about the visibility in that business as a whole? Is this something that you feel you have greater visibility or less? Just how we should think about that as we start planning for the spinoff?

[Russell C. Horowitz:]

Sure. Thank you. In terms of growth rates, our initial guidance on the call-driven part of Marchex, which is on a pro forma basis, will be Marchex once Archeo is spun off. Our initial guidance is -- today for 2013 implies growth in the teams, which is up from 2012's growth rates. And we've also talked about what we feel are pretty tangible opportunities that can drive those growth rates higher. So when we think about this year and next year, we clearly believe the opportunity can drive growth rates at or higher than these levels and that's why we're making the investment. And really, what we're excited about is looking at the catalyst that can drive those growth rates higher. And so a lot of the -- a lot of that opportunity just ties down to the shift to mobile where it's really our sweet spot, given that calls are a natural outcome from mobile devices. The other thing that we really feel is the catalyst is we're getting past this kind of Phase 1 adoption in mobile of people buying display and now where people are becoming sophisticated and really looking for performance. The way in which that's translating into visibility is that with a lot of our core customers, we are now driving a very strategic level of customer acquisitions for them in mobile with a performance model centered on pay per call. So while budgets can vary from period-to-period, we do see ourselves as gaining truly a kind of institutionalized mind share and relevance and driving strategic levels of customer acquisition for our core customers, which we think does give us pretty good visibility as it relates to existing levels and potential opportunity within those customer relationships.

[Charles Eugene Munster:]

You feel that, I guess, the remaining Marchex, the call business, has generally similar type of visibility as the entire company? Or is this a business, the call business, inherently slightly greater visibility or less visibility? Any directional context?

[Russell C. Horowitz:]

In terms of what we have today? Yes, I do believe it has more visibility. Our tenure with our customers, if you look at who our core customers are, these are folks that, with every passing month, we've worked with for a long time, in certain cases a number of years. Others are more recent, but we've been able to really build deep levels of trust and create institutionalized relationships that give us significant insights into their strategic direction, and we're building collective roadmaps with those companies that I do believe give us higher levels of visibility going forward than we've had in the past.

[Operator:]

Your next question will come from Dan Salmon with BMO Capital Markets.

[Unknown Analyst:]

This is Ygal Arounian [ph] calling in for Dan. I just have one question on the Marchex side and then one on the Archeo side. For the call-based business, I was wondering if you could give us a little insight into the relative traction between your work with agencies and resellers and what -- if you're seeing any particular trends in between the 2. And for Archeo, I know you guys said you would give more information in the coming months but I was wondering if there's any more color you could add at this time, specifically if you've made any key hires. And if not, if you -- when you think -- when do you expect that you would make some hires?

[Russell C. Horowitz:]

Sure. Thank you. In terms of on the -- with Marchex and kind of how our success with sales is going both on kind of the national side and on the reseller side and with agencies, on the national side, we work direct with those customers and we also work with customers through agencies in certain cases. We're getting traction with both, but I would say that's weighted towards direct. And as it relates to resellers, a lot of the early adopters were what we call horizontal resellers that kind of cover the whole Yellow Pages taxonomy. But what we're seeing now, in addition to growth in that opportunity, is a lot of vertical resellers that are really adopting mobile and call advertising when you get into categories like autos and real estate, professional services, et cetera. And so those are the catalysts when you look at kind of the vertical resellers on the one side and kind of the direct relationships with some core agency relationships built in. And it's split about 50-50 between those 2. On the Archeo side, we do have -- we have made some specific progress as it relates to the management team. There are a few pieces of the puzzle coming together that we think will put us in a position to share some more specifics. But as it relates to the people, the products and what we would consider as the key milestones, we're on track. We feel good about where we are relative to the schedule. And as I mentioned in the body of the call, we do expect to provide some specific updates here in the next couple of months as we get closer to effecting the spinoff.

[Operator:]

[Operator Instructions] And at this time, there are no further questions. I would now like to turn the call back over to Russell Horowitz for any closing remarks.

[Russell C. Horowitz:]

We appreciate your involvement in the call, and I've enjoyed updating you on our progress and look forward to updating you in the coming months. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.