Marchex, Inc.
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

Good afternoon. My name is Rachel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Marchex Third Quarter Conference Call. [Operator Instructions] I would now like to turn the call over to Ethan Caldwell, Chief Administrative Officer and General Counsel. Sir, you may begin your conference.

[Ethan A. Caldwell:]

Thank you. Good afternoon, everyone, and welcome to Marchex's business update and third quarter 2013 conference call. Joining us today are Russell Horowitz, Chairman, Chief Executive Officer; Peter Christothoulou, President; 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 the 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. 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. 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, and thank you, everyone, for joining today's conference call. We had a productive third quarter with $35.7 million in Call-Driven revenue. Existing clients are shifting more of their advertising budgets to us and we're also winning new clients who are eager to see their ad dollars measured against real consumer outcomes. This is exciting to see. Several years ago, we believed that phone calls would be a transformative advertising outcome as consumers rapidly shifted to mobile. With a mobile phone in everyone's hand, we saw that businesses, particularly those who were service-based or require some form of personal connection, would have a new way to connect to consumers to drive sales. Now that mobile adoption is pervasive, phone calls are rapidly emerging as one of the most valued actions in the purchasing path for both consumers and businesses. A recent study found that 61% of mobile searchers view the ability to call businesses from a search result as a critical step in the purchasing process. In fact, nearly half of consumers searching on mobile say that if a business does not have a phone number associated with their search results, they will be more likely to explore other providers. On the other end of this purchasing pipeline, advertisers want ads that get consumers to call them. And they also want to understand what happens on these phone calls at a granular level. Marchex is very well positioned to meet this growing demand. As you've heard us say before, we believe mobile advertising will follow the trajectory of online desktop advertising. That is, desktop advertising started as largely a display medium and, as businesses became more familiar with that format and the technology became available to measure performance in a click world, advertisers moved a disproportionate share of their spending to a performance model, which was pay-per-click. At the heart of the success of pay-per-click was Web Analytics, which drove measurement and transparency. The same thing is unfolding right now in mobile. Advertisers first started testing mobile through display networks. Now we're seeing increasing evidence that brands are looking for performance-based mobile advertising models, which is why we've invested heavily in both pay-per-call and call analytics technology. But there's one very significant distinction in the comparison between clicks and calls and it's this

[Michael A. Arends:]

Thank you, Russ. Call-Driven and other related revenues were $35.7 million, while total revenue for the third quarter was $39.7 million, excluding domain sales and revenue from discontinued operations related to the sale of certain Archeo assets during the quarter. Call-Driven revenue growth increased to 22% year-over-year and 5% sequentially. We continue to see increased budget allocations from existing advertisers based on the outperformance of our call advertising products and we also added new advertisers. Given our traction with our call advertising products, we continued to invest in product development and in building our team. Over time, we believe we can capture additional efficiencies and increase margins in these products as we gain additional scale. For the third quarter, including domain sales, Archeo revenue was $5.9 million, excluding revenue related to discontinued operations. Excluding domain sales, revenue from Archeo was $4 million. With the launch of the Domain Marketplace during the quarter, we are taking steps forward with implementing our strategy to extract additional value from the Archeo assets. Total operating costs were $37.2 million for the third quarter of 2013. This total reflects continuing operating costs and excludes stock-based compensation, separation costs, amortization of intangible assets and domain sale costs. Sales and marketing costs, excluding stock-based compensation, were $2.6 million. 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. Without domain name sales, adjusted operating income before amortization from continuing operations for the third quarter was $2.5 million. Adjusted EBITDA was $3.4 million, excluding these items. GAAP net income from continuing operations was $598,000 for the third quarter of 2013 or $0.02 per diluted share. This compares to a GAAP net loss from continuing operations of $490,000 for the same period of 2012 or $0.02 per diluted share. Excluding domain name sales, adjusted non-GAAP income per share from continuing operations, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.04 per share. During the third quarter, we generated $4.3 million in operating cash flow, and had more than $25 million in cash on hand as of September 30, 2013. Domains sold during the quarter yielded approximately $1.9 million in incremental cash flow. I wanted to add a brief comment on revenue recognition this quarter. The evolving business progress with the Archeo Domains Marketplace requires GAAP revenue to include domain sales from the date of the launch. Prospectively, we expect domain sales to be accounted for wholly in GAAP revenue, though we intend to separately identify it to provide for the ability to track revenue from continuing operations, excluding sales of domains. Now turning to our outlook for 2013 and the fourth quarter. Before we begin, I'd like to note that my commentary on guidance measures will exclude discontinued operations and contribution from domain name sales. Looking first at our revenue guidance for 2013. While budgets can change and we can be exposed to period-to-period variability, for the year, we are increasing our expectations for our Call-Driven revenue to more than $134 million. We continue to make progress across our Call-Driven products and see traction with existing advertisers, as well as in adding new advertisers. As a reminder, in the third quarter, we sold some of our pay-per-click third-party distribution relationships that were part of the Archeo business for proceeds of up to $2.6 million in order to provide greater focus and opportunity around creating a premium domain marketplace. Last quarter, we estimated the full year impact for 2013 to be approximately $6 million in revenue and near $300,000 in EBITDA, with those amounts largely flowing through our P&L in the second half of this year. This sale is presented in our financial results as discontinued operations. We are very focused on realizing the value from the Archeo assets. As a result of the sale of these relationships and the accelerating growth in our Call-Driven revenue, we are currently updating our total revenue guidance, excluding domain sales, to more than $148.5 million. For the fourth quarter, we anticipate Call-Driven revenue of more than $33.5 million and total revenue, excluding domain sales, of more than $36.5 million. As a reminder, while we anticipate that we will see growth in demand for our Call-Driven products as we move forward, in terms of seasonality, it is worth noting that many of our advertisers are service-based businesses that typically scale back their marketing efforts in the fourth quarter. Call volume similarly drops off in the latter part of the fourth quarter. We began to see this over the last few years as the scale of our call advertising products continue to grow. We remain very bullish about our mobile and call advertising products and the traction we are making with both new and existing customer bases. However, as the call business makes up the vast majority of our business today, in the future, we may be subject to seasonality of ad budgets in this channel. Next, looking at adjusted OIBA and EBITDA margins for the year. For 2013, we are reiterating our guidance of $9 million to $10 million in adjusted operating income before amortization and $13 million to $14 million in adjusted EBITDA, excluding domain sales. For Call-Driven adjusted EBITDA for the full year 2013, we are forecasting more than $9 million. This approach reflects fully burdened Call-Driven results under a standalone model. For the fourth quarter, we anticipate a range of $2.1 million to $3.1 million in adjusted operating income before amortization, and a range of $3.1 million to $4.1 million in adjusted EBITDA. We are highly focused on hiring additional product and engineering talent, as well as salespeople and client managers. We are continuing these efforts as we look to capitalize on our product and customer momentum going into 2014. Our dialogue with advertisers affirms our belief in the potential market opportunity, and our call advertising products are meeting with success. As a result, we are continuing to invest in order to capitalize on this momentum and to build our leadership position in this emerging market. And with that, I'd like to hand the call back to Russ.

[Russell C. Horowitz:]

Thanks, Mike. From customer validation to product momentum, the pieces are coming together. We're working hard to establish leadership in mobile and call advertising, which is a very important dynamic emerging market. I want to thank our employees for their hard work and dedication, and we look forward to updating you again soon. With that, I'll hand the call back to the operator for Q&A.

[Operator:]

[Operator Instructions] And your first question comes from the line of Andre Sequin from RBC Capital Market.

[Andre Sequin:]

As we're getting into the budgeting season for advertisers, looking ahead to 2014, can you talk a little bit about what you're seeing there? Are you seeing signs they're going to continue to shift more budget in your directions? And then secondly, now that the decision to keep Archeo internal has been made and Archeo Domains has been launched, where are you prioritizing your investment with Marchex as a whole? You already mentioned some more spend in marketing. Are there other areas you'd call out?

[Michael A. Arends:]

Sure. Thanks for the questions, Andre. Yes, on the first front, we are in kind of the season where, with our larger national clients, we're looking at 2014 initial budget commitments. And the trend has been positive and we feel very good about the direction those are going. So, yes, we are optimistic that we'll see increased budget commitments from our bigger customers going into 2014. In terms of what's happening on the Archeo side, with the launch of the Domain Marketplace, we're seeing some good initial success and an opportunity to build on that momentum. So in the context of where kind of our investment lies, we know Archeo can spend an awful lot of discretionary cash flow that can build our balance sheet and also create latitude for investment elsewhere. And so, with Marchex, the theme is consistent. First and foremost, it's about continuing to differentiate the technology platform. And so that's where going to continue invest, is product and engineering. The logical kind of point of extension of that thesis is to sales and marketing. We know our technology and products are delivering differential performance for our customers, and we know the key is to continue to win more of them so we can keep the virtuous cycle going and extend our momentum. And so product and engineering, sales and marketing will continue to be the investment themes.

[Operator:]

And your next question comes from the line of Gene Munster from Piper Jaffray.

[Charles Eugene Munster:]

Just kind of a follow-up on the theme about next year and just some of the budgets. As far as getting new customers on board, I know you've got a laundry list of Fortune 500 customers. But anything on the updates in terms of the pace of those new customers and that gives you confidence that the light is essentially going to go on, continue to go on with some new customers? Should we think about that as one of the drivers in 2014?

[Russell C. Horowitz:]

Thanks for the question, Gene. Yes, you should think about that as a driver in 2014. Yes, as we kind of layer the business, we anticipate existing budget -- kind of growth in budget commitments from existing customers. Kind of at this point in 2013, we have 1 more customer than we did last year at this time, and so we feel good about that being a catalyst. We think given the emergence and understanding of the market opportunity, our ability to win more customers in 2014 is greater than it was kind of same time in 2013. So kind of all 3 buckets are working in our favor. And against the backdrop that this market is still early, it's really big but we continue to see validation that we've got the right solution for it.

[Charles Eugene Munster:]

Okay. That's helpful. And then a follow-up question in terms of, obviously, you, in some ways, work with Google, in other ways you compete with them on the call business. They talked a lot more about calls and kind of validating what you're doing on calls. Anything just how we should think about other players, I guess, whether it's Google or other players? If it's a foregone conclusion that calls are real, what gives us confidence that Marchex is going to be fully or be one of the key participants in this over the long term?

[Russell C. Horowitz:]

Well, first and foremost, we do think this is a big market. And what Google's communicated has been a big validator for the industry and for customers, and that's really helped us. Again, as you know, we've invested over $100 million so far in our intellectual property. And we put together a world-class team of people who understand kind of the unique problems and how to solve them, and that's being validated every day at an increasing scale. When you extend kind of that opportunity into Google, they're clearly a meaningful part of the media ecosystem, given their consumer reach. But we feel we sit in a unique place, and advertisers increasingly reach out to us and want to extend our analytics capabilities into Google, and want to be able to leverage our pay-per-call performance model. We think it's very complementarity. We think it's consistent. We're kind of coexisting with Google in many respects. But we're highly confident that what we're building on the technology side is both unique in its ability to deliver value and highly defensible, as it relates to solving the problems and pain points that advertisers focused on calls need, recognizing that there's hundreds of sources they need to go out and find perspective customers in and Google is an important one. But again, our solution is agnostic and helps them solve their problems and address those pain points in a much broader fashion. We feel good about that.

[Operator:]

Your next question comes from the line of Lauren Slabaugh from Stephens Inc.

[Lauren Slabaugh:]

So thinking about opportunity in terms of national clients or local or looking -- getting more into agencies, what, at this point where you sit, what's the biggest driver for 2014 in terms of your revenue growth?

[Russell C. Horowitz:]

Good question. We view it as a 50

[Lauren Slabaugh:]

Okay, and that's sort of looking into verticals, you announced something that other financial services customers, you've done a bid in insurance. What -- which verticals is this really catching on right now?

[Russell C. Horowitz:]

If you are going to lead with our strongest ones, home services, folks like ADT in home security; financial services, you hit on with folks like Allstate; travel is strong and growing and we have InterContinental Hotels as an example there. And then local continues to be kind of a strong vertical where we support over 100,000 small businesses buying pay-per-call through our reseller partners; and then auto would really be the fifth where we're extremely deep, both with kind of analytics and pay-per-call customers. Those 5 are big. We think there's others behind it. That could be big drivers as well.

[Operator:]

Your next question comes from the line of Mark Zgutowicz from Northland Capital.

[Mark J. Zgutowicz:]

Just a question on some of the initiatives that Clark may be already putting in place that might be sort of incremental revenue drivers in '14. Was wondered if you could maybe talk about anything that might be taking shape there already and when that might be sort of an incremental driver to revenues in '14?

[Russell C. Horowitz:]

Look, Clark, as we mentioned, is already embedded with the sales and client-development teams, with a real emphasis on the agencies and agency penetration. That's an area we feel underexposed and where there's a lot of opportunity and where he, obviously, has unique expertise and relationships. So we think he'll be an accelerant of our penetrating agencies and that can be in accelerant of growth for us. It will be an impact for '14 and we think it can be an even bigger driver extending out to 2015.

[Mark J. Zgutowicz:]

Okay. Super. And then on seasonality in Q4, I was just curious if there's anything that you're seeing that's similar or dissimilar to what you saw last year at this time. Is it kind of a similar sort of view into the quarter? Or is there anything you might want to share there?

[Michael A. Arends:]

Thanks for the question, Mark. Yes, from a seasonality perspective, there's 2 parts to it

[Russell C. Horowitz:]

And just to augment that, there's nothing so far this year that stands out on -- relative to our expectations of how seasonality plays out in this business.

[Operator:]

[Operator Instructions] And there are no further questions at this time.

[Russell C. Horowitz:]

We'd like to thank everybody for participating in the call. We're glad to give you today's update, and we look forward to giving you our progress reports as we go forward in the coming months. Thank you.

[Operator:]

And ladies and gentlemen, this does conclude today's conference call. You may now disconnect.