Marchex, Inc.
Q4 2013 Earnings Call Transcript

Published:

  • Operator:
    Good afternoon. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Marchex Fourth Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions) I would now like to turn the conference over to Ethan Caldwell, General Counsel. Sir, you may begin your conference.
  • Ethan Caldwell:
    Thank you. Good afternoon, everyone, and welcome to Marchex's business update and Fourth Quarter 2013 conference call. Joining us today are Russell Horowitz, Chairman and 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 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 centers as are described in the risk factor section of our most recent periodic report and registration statement filed with the Securities and Exchange Commission. All of the information provided on this 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. Definitions of these measures as used by and the reasons why we believe these measures provide useful information are also contained in today's earnings release. At this time, I'd like to turn the call over to Russell Horowitz.
  • Russell Horowitz:
    Thank you, Ethan. Thank you, everyone, for joining today's conference call. Marchex had a strong fourth quarter and delivered our third consecutive quarter of more than 20% year-over-year revenue growth. Over the past several months, we've seen greater advertiser demand for our call-driven products and services. This demand has made it increasingly clear that advertisers going after mobile consumer need something from us that they're not getting anywhere else. What they need boils down to one word
  • Mike Arends:
    Thanks, Russ. For the fourth quarter, call-driven and other related revenues were $34.5 million. Total revenue was $38.1 million, excluding domain sales. Year-over-year quarterly call-driven revenue growth was 21%. The outperformance of our call advertising products, combined with a number of new advertisers added over the course of 2013 led to our continued strong growth. Given our traction with our mobile call advertising products, we continue to invest in product development and in building our teams. Over time, we believe we can capture additional efficiencies and increase margins in these products, as we gain additional scale. For the fourth quarter, including domain sales, Archeo revenue was $5.3 million. Domain sales were $1.6 million during the quarter. Total operating costs were $35.4 million for the fourth 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 $2.7 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. Excluding domain name sales, adjusted operating income before amortization from continuing operations for the fourth quarter was $2.7 million. Adjusted EBITDA was $3.7 million excluding these items. GAAP net income from continuing operations was $597,000 for the fourth quarter of 2013 or $0.02 per diluted share. This compares to a GAAP net loss from continuing operations of $33.5 million for the same period of 2012 or $1 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 fourth quarter, we generated $6.1 million in operating cash flow and had more than $30 million in cash on hand as of December 31, 2013. Now, turning to our initial outlook for 2014 and the first quarter. Before we begin, I'd like to note our business is being driven by our call-driven products and our investments are centered on maximizing market adoption. Given the relative contribution of our call-driven products and magnitude of our opportunity, we believe focusing on call-driven revenues and profitability measures is the most appropriate way to communicate our business progress and guidance going forward. Given this and the variability inherent in Archeo and domain sales, we are not providing financial guidance on any Archeo operating results today. Archeo operating results would be incremental and additive to our call-driven revenue, profitability, and other measures provided in our guidance. Looking first at our call-driven revenue guidance for 2014, for the year, we expect call-driven revenue to grow to $162 million or more, which represents more than 20% growth over 2013. Additionally, for the first quarter of 2014, we anticipate call-driven revenue of $40 million or more, which represents approximately 30% growth over the first quarter of 2013. We are focused on maximizing client adoption and product innovation. In many cases, we are still seeding the market in some of the most valuable verticals such as insurance, home services, professional services, travel, and many others to help accelerate adoption of performance-based call advertising. Our progress in bringing in new advertisers throughout 2013, as well as the continued outperformance of our call advertising products, relative to other options for advertisers, helped us make significant progress during the 2014 advertiser budget planning season. While advertiser budgets can change and we can experience period-to-period variability based on a variety of factors, we are excited about the ongoing progress we are making in our business. Next, looking at call-driven adjusted OIBA and EBITDA margins
  • Russell Horowitz:
    Thanks, Mike. We believe that calls are the currency of mobile advertising. The advertising technology companies that will win in mobile will understand calls better than anyone else. Given our investments over the last several years and the significant progress we made in 2013 and so far in 2014, we believe Marchex is uniquely positioned for leadership in this emerging market. I want to thank our employees for their hard work and dedication. 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 our first question comes from the line of Mark Zgutowicz from Northland Capital Markets.
  • Mark Zgutowicz:
    Good evening, guys. Nice results. I'm curious โ€“ you've got, obviously, a pretty big sequential uptick in Q1. Just curious if you could maybe talk about what's driving that? Maybe quantifying how much Call DNA and Dynamic Tracking is contributing to the pipeline. Broadly speaking, as you now, I guess are seeing some pretty good national business across some key clients, what's your visibility today across your call-driven revenue relative to a year ago? How do you see that visibility trending over the next year? Thanks.
  • Russell Horowitz:
    Good questions. When we look at how we really see growth driven, there's three layers to it. One is, those advertisers and clients with whom we built a certain level of strategic trust and scale and how those grow and the incremental budget we get from them is, call it, layer one. The second are customers we won over the previous year where we've been able to perform and show the differential value that we can drive for them and reaching that point of institutional adoption, which translates, again, to increased commitments as well. The third is, new customers who we bring onboard who, as we perform, can increase and allocate us more budget as we work through the year. We look out what's happening in Q1, as we come through the late part of any given year, like we did in 2013, we reach a place that we work with our key strategic partners on their planning for the perspective budget cycles. As part of that and as a byproduct of the performance and importance we've gained with our clients, we just saw significant increase in their contributions in terms of budgets to Marchex. Across all three buckets right now, we see very favorable trends which is leading to accelerating growth and we think carry through. To hit on your second question, the combination or the byproduct of that process also is to increase our visibility into the business performance in our outlook. Our business is, call it, 50% driven through resellers to small business and 50% growing with direct national customers. We have a lot of visibility as it relates to supporting small businesses to resellers. As we work through those cycles with those national advertisers, we've seen visibility increase and think that trend continues as we go forward.
  • Mark Zgutowicz:
    Great. That's very helpful. Appreciate that. Mike, on the expense side, you touch on a little bit, but in terms of investment, is that mostly front-end loaded or is there some linearity there in the R&D and sales and marketing side of things?
  • Mike Arends:
    Let's start with the sales and marketing. We do think there's going to be a little bit of uptick in the sales of marketing from a modest perspective over the course of the year, but a lot of this has to do with โ€“ it looks like the adoption is accelerating. It looks like our growth rates are accelerating. From that standpoint, we're trying to invest along with that to make sure that we can take advantage of the opportunity because it's still in the very early stages of the opportunity. That goes hand-in-hand with the product development side of this stage of the equation as well. We're definitely out there looking to continue to further all of those product innovation initiatives.
  • Mark Zgutowicz:
    Okay. And then on the R&D side?
  • Mike Arends:
    On the engineering components, think about those from our product enhancements as well as some of the innovations that we have. We think those are also going to be scaled over the course of the year. Whether they're linear or not, I think that's a large part of just we onboard folks and the timing of when we can bring folks on to the team. There may be steps that may be linear, but over the course of the year, I think there's definitely a buildup in that absolute dollar equation. A lot of this is still absolutely focused on driving the acceleration of the revenue opportunity that we see in front of us right now.
  • Mark Zgutowicz:
    Okay. Super. Thanks, guys. Appreciate it.
  • Operator:
    And our next question is from the line of Andre Sequin of RBC Capital Markets.
  • Andre Sequin:
    Thanks for taking my question. To follow a little on the previous question, we've talked a lot over the last few months about how, in the most recent budgeting cycle, you were finally invited to the table for the first time with several customers. Maybe you can comment on any takeaways from that? Secondly, you've been pretty actively launching new, call it, analytic product. How should we be thinking about how and also when those new products will be impacting your results? Thanks.
  • Russell Horowitz:
    Thanks, Andre. Good questions. I'll hit on the second one first, as it relates to new products. For us, I call it the theme as an opportunity to really deepen the value that we can deliver and differentiate, really our value proposition. For advertisers who are looking at mobile and understanding at this point, it's a must-have as it relates to customer acquisition strategies. We look at Call DNA and Dynamic Tracking and Clean Call. These are important products that enhance and create a deeper wider moat around the lead and advantage we've created so far and really reinforce our ability to drive performance in mobile for these very large-scale sophisticated clients. As we launch these products and as we talk about this functionality, think about it through that lens knowing that this is what helps us become institutionalized with these customers, which translates there to bigger commitments kind of on a perspective basis. When we look at our process of going through the budget cycles, we're just at a place where mobile's crossing the tipping point. Most folks talk about it as being one-third or more of their traffic. You obviously have a whole new world or ecosystem when you think about mobile and increased fragmentation. For advertisers, it's very complex. The technology's needed to effectively and strategically approach it through customer acquisition is something new to them. This year, the depth of conversations we had as part of that budgeting cycle really translated, as I've characterized it, as a must-have. The simple scale of consumers in this channel and our ability to go access perspective customers in the markets they serve looking for what they offer is unique. The combination of those factors is what's really served as catalyst for the increased commitments.
  • Andre Sequin:
    Okay. Great. Thanks. Nice quarter, guys.
  • Russel Horowitz:
    Thanks.
  • Operator:
    And your next question comes from Jean Munster [ph] with Piper Jaffray. Iโ€™m sorry that question was withdrawn. Your next question comes from the line of John Campbell with Stephens Inc.
  • John Campbell:
    Congrats on the great quarter and impressive guide. Can you guys just give us a quick update on agency front? Mainly just how much of that, if any, is factored into the 2014 guidance? In general, are you guys allocating a lot of capital and headcount towards further building that out in 2014?
  • Russell Horowitz:
    We think about our strategy with large national enterprises, those direct relationships and places where we support them through their agencies, right now, we think deeper penetration to agencies is a catalyst. While we factored some contribution from that, real strategic penetration is a source of upside from where we sit today. Some months back, we added Clark Kokich onboard as our Chief Strategy Officer. He, obviously, is one of the most experienced and respected people in that field. Him coming onboard has really been a catalyst for us to deepen those conversations and hopefully unlock some of the opportunity that exists there. Today, again, we've got deep relationships with a lot of the key world class digital agencies, but we think plenty of upside as we continue to penetrate those relationships.
  • John Campbell:
    Okay. Great. First, how have call volumes turned over the last several quarters as you think about a same-client or a same-store basis? Second, how are the conversion rates looking at those same customers, same calls? How have the conversion rates trended over time?
  • Mike Arends:
    This is Mike. Thanks for the question. It's a very good one. On the first one, it's very much a volume-based equation. As the revenues have moved ahead, it's not pricing that's changed, it's very much volume and increases from that perspective. In large part, that's directly in correlation to conversion rates. Even with higher spends, the return on investment on the conversion rates that are playing through there are translating consistency and healthy return on investment rates relative to other media spend areas. Our technology is driving the insights in terms of providing greater performance than some of those other media spend areas. Those insights are what are translating into the advertisers building trust with us and expanding their budgets.
  • John Campbell:
    Okay. Great. Thanks for taking our questions, guys.
  • Operator:
    We have no further questions in queue at this time. I would like to turn the call back over to our presenters.
  • Russell Horowitz:
    We appreciate your participation on the call. We look forward to updating you as we make progress through the year. Thanks, again.
  • Operator:
    Thank you. This does conclude today's conference call. You may now disconnect.