Marchex, Inc.
Q3 2014 Earnings Call Transcript

Published: 6 Nov 2014

[Operator:]

Good afternoon, my name is John and I'll be your conference operator today. At this time, I would like to welcome everyone to the Marchex third quarter conference call. [Operator Instructions] Ethan Caldwell, General Counsel, you may begin your conference.

[Ethan A. Caldwell:]

Thank you. Good afternoon, everyone, and welcome to Marchex's business update and third quarter 2014 conference call. Joining us today are

[Russell C. Horowitz:]

Thank you, Ethan, and thank you for joining today's conference call. The third quarter was challenging for us, as we were faced with the impact of parting with a meaningful customer. While painful in the short term, we are applying what we've learned to move the business forward. But I do want to highlight that beyond this short-term challenge, we are confident about our opportunity and are going to continue investing in it. We believe that calls are the currency of mobile advertising performance, much like clicks were on desktop. Over the last several years, we have focused on a mobile-centric advertising opportunity centered on providing the highest performance for businesses who want to drive and measure sales in mobile advertising channels at scale. Importantly, we have focused on providing a framework that accomplishes these tasks in real-time, with the greatest transparency, efficiency and deepest consumer insights possible. We have invested tens of millions of dollars against this opportunity and created the leading mobile and caller advertising measurement technology platform. Today we have growing scale, including more than 300 million calls connected annually through our platform, thousands of happy customers, a growing pipeline of new customer opportunities, significant product innovation and momentum, with nearly half of our people dedicated to product development engineering and support with expertise in this market, robust intellectual property, which is reflected in our products and growing patent portfolio, and the roadmap to further capitalize on the emerging mobile and call advertising opportunity. We're in a very different position today than when we first started investing in this opportunity. We are a focused company with unique technologies and expertise, leading in mobile and call advertising. every day, we see and hear clear validation of our model and opportunity from enterprise brands who are seeking the highest mobile advertising performance. Our opportunity is as meaningful as it's ever been. We have centered our business on one core belief, that advertisers want the same level of measurement and transparency in mobile as they have in the desktop world. They want to know specifically how their mobile-focused advertising dollars can deliver the best advertising outcomes. This mission drives our investment in the technology behind our market-leading Call Analytics platform. Our ability to track consumer to business phone calls from an ad and uncover real-time insights at scale continues to provide tremendous value for our customers. As a result, some of our clients are realizing greater than 8x return on an advertising spend when working with Marchex. We continue to innovate with unique solutions that bring transparency to mobile advertising, products that are defining the market for Call Analytics today. For example, we recently launched a new technology, Real-Time Call DNA, which marks a major advancement in advertisers' ability to visually map, analyze and measure what happens inside a consumer-to-business phone conversation, without recording any of the actual dialogue. This solves a major blind spot for advertisers in industries such as insurance and financial services, which can be legally restricted from recording phone calls. These industries have struggled for years to better understand large volumes of inbound consumer calls coming from click-to-call ads. Its the first product to give these advertisers deep insights into the value of consumer calls. With Real-Time Call DNA, we can understand at scale how often consumers are put on hold, for how long, and how often this leads consumers to hang up and abandon the call. That's just one example of how advertisers can use our call intelligence to evolve their advertising campaign strategies. By creating products that open the door to new insights, we give advertisers a meaningful opportunity to increase their return on investment in mobile. Real-Time Call DNA and the other products in our pipeline over the coming months are designed to do exactly that, create mobile performance-based advertising solutions for enterprise clients and broaden the market opportunity for our products. The impact of last quarter has further mobilized us as a company. We're highly focused on the initiatives that will drive differentiated client success, long-term growth and profitability. We are growing with existing customers and signing new customers, and our collective knowledge and expertise are deeper than ever. With that, I'll hand the call to Mike to cover the financials.

[Michael A. Arends:]

Thanks, Russ. For the third quarter, Call-Driven and other related revenues were $46.4 million, while total revenue was $49.2 million, including $1.6 million in domain sales. Before going further into the details, I'd like to highlight 2 factors at play in the third quarter

[Russell C. Horowitz:]

Thanks, Mike. I'd like to take a moment to thank our employees, who are the engine of our business. Their ability to recognize problems and unlock opportunities to make our customers more successful is the driving force behind Marchex. With the current product and customer progress we're making, we are creating a path to long-term growth. We look forward to updating you in the coming months. And with that, operator, I'd like to hand the call back to you for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Rohit Kulkarni from RBC Capital Markets.

[Rohit Kulkarni:]

Russ, I guess 3 quick questions. I guess, Russ, first one, can you characterize what are the lessons you have learned from the Allstate process over the last 3, 6, 9 months? And what changes do you think you are implementing or need to implement either in the sales go-to-market strategy, particularly for national accounts as you ramp them up over the next 12, 18 months, or educating your advertising customer about your performance module? And secondly, do have any updates to share around -- [indiscernible] efforts with agencies?

[Russell C. Horowitz:]

Sure. I'll do the best I can. Yes, in terms of lessons learned, I think just a general theme is, it's just you always want to stay really close to your customers and continue to focus on making sure that you're all very aligned. And I think, as a company, we have a good understanding of that, and we've always had a very customer-centric culture. And so I have a lot of confidence in our ability to just continue to create deeper relationships with the customers that we've got and the customers that we've got very good prospects to bring onboard. And so that's just one of the core ones. It's just continuing to be as customer-centric as possible. When you look at, if I recall the next question properly, the thing we really see an opportunity with and where we really put our, I'd say, our kind of best foot forward, is with our analytics platform and our ability to gain strategic insights, it's just a core part of what we want to do with our customers. And then augmenting that with the marketplace, with these emerging sources in the mobile landscape that are hard to measure, hard to buy, is just a very good natural complement. And so our strategy continues to really be centered on embedding analytics as a means to deliver great customer experiences and unique insights that, in many respects, they've never had before, combined with the ability to bring them new customers in these emerging channels where we've got unique insights and expertise and understanding to help drive new sales and do so in a very cost-effective manner. And so right now we have a lot of clarity on that market opportunity, and given the nature of our sales pipeline, feel real good about the direction and momentum of that business. And so part of that, getting into the next aspect, is on the agency side, and we continue to make progress with working with the agencies and winning clients through the agencies. And we've been talking about this as one of the bigger opportunities we see going forward, and nothing today has changed our view that this is a real catalyst for Marchex, given the nature of our technology and our ability to integrate and bring insights into ad campaigns, where they're effective in driving calls and understanding the outcomes of those calls, is something we see as the real opportunity, both in the short and intermediate term. But the ability to kind of approach this at scale and in real-time is creating what we think is a unique window of opportunity for us. And so those are the real points of emphasis.

[Operator:]

Your next question comes from the line of Ross Sandler from Deutsche Bank.

[Deepak Mathivanan:]

This is Deepak on behalf of Ross. Just 2 quick questions. First, last quarter, you guys provided some update on new verticals you guys are penetrating and highlighted a few customer adds. Can you give some update on that and how it was during the third quarter? Whether there's any meaningful update you saw or number of customers that you have added? And then secondly, since the Allstate development, have you had conversations with your other meaningful partners? Or is there any meaningful changes to the dialogues over there? Or how should we think about that going into the next year?

[Russell C. Horowitz:]

Sure. On the Allstate front, just to kind of hit that first. We communicated when we made that -- when we gave that update a month or so ago, that we felt that there were unique circumstances that made that a customer-specific situation. And our dialogue since has really reinforced that because we feel positive with our customer relationships in that there's a lot of product momentum, both with our new -- kind of our existing products, recent releases like Real-Time Call DNA, and other products coming through the pipeline that we're eager to get into our customers' hands and share with you all soon. And so, that's kind of the quick update on that front. On the verticals, a lot of the core verticals that continue to drive the business are auto, home services, cable and satellite, travel, real estate, financial services. These all continue to be very ripe for our opportunity centered on mobile and calls. Some of the kind of new customers are customers that are ramping up, folks like Time Warner Cable, Dish Networks, Bridgestone, T-Mobile, we mentioned last time. State Farm continues to be significant in terms of an opportunity. Other new names, Vonage, Darden in the restaurant space is a new opportunity. Apollo Group in the EDU space, Carnival in travel. So we see a lot of activity.

[Operator:]

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

[Charles Eugene Munster:]

Russ, can you talk a little bit about the previous question, too, as far as what your existing customers are thinking about the call business? Any sort of growth rates on those existing customers and any customers that are a larger piece of revenue that might be, maybe 5% or greater of the call revenue? So I apologize for the long list of questions there.

[Russell C. Horowitz:]

Sure. I appreciate the questions. I'll answer some and I think I'll have Mike step in as well. As a general theme, x Allstate, we've seen sequential growth the last few quarters. The dialogue with our existing customers now is really starting to center on kind of '15 initial planning, and those conversations are going well. And as I mentioned earlier on the call, the sales pipeline looks very promising. So while not being specific directionally, we think outside of Q4 being typically seasonally slower for call-based services versus e-commerce, we think the momentum -- the sequential momentum of the business and the opportunities with existing customers and prospects looks promising.

[Michael A. Arends:]

And this is Mike. Just to add on, we have one customer that is greater than 10%, which is the White View relationship, where we work with tens of thousands of their small business customers on our platform within our call marketplace, providing pay-for-call leads. In addition to that, when you think about the rest of the business, we don't have any other customers over that threshold. What we do have is some of the national advertisers, in particular, have some decent growth prospects as we look ahead. And when we think about the opportunity, there's definitely many of those customers that can move from the hundreds of thousands to potentially millions of dollars in the future. And Russ listed a few of them already.

[Operator:]

Your next question comes from the line of Darren Aftahi from Northland Securities.

[Darren Aftahi:]

Just a few -- just a follow-up on those questions. Some of the newer customers you mentioned, in the third quarter, are you winning those via direct sales or agency? And then I've got a couple of follow-ups.

[Russell C. Horowitz:]

Sure. It's been both. We've seen good progress both through the agency relationships and on a direct basis.

[Darren Aftahi:]

And then, you guys have, typically, in the past, guided your Call-Driven business as sort of a number or better than that, and for the fourth quarter you kind of gave a range. Can you talk to kind of the rationale there? And then also, it looks like you if back out kind of the termination of the Allstate contract, revenue guidance seemed like it was about $1 million lower than what the pro forma was prior to that, kind of talk to that. And then maybe last one, you've kind of guided the midpoint of 4Q to I think 16% Call-Driven year-over-year growth on the x Allstate business. Can you kind of give us maybe some general idea of what your thoughts are, broadly speaking, for 2015 Call-Driven growth?

[Michael A. Arends:]

I'll start with the second one there, and you may have to -- this is Mike, you may have to go back and refresh on the first part of the question. But the second one was, when you think about the forecast and what we're doing, we're actually -- the only adjustments that we're doing from the recent forecast we put out there, the Allstate, there's a little bit in the third quarter and a little bit at the beginning of the fourth quarter that the effect from the early transition that Allstate had that was in those prior forecasts. So the adjustments are about $2.5 million to $3 million for that. And again a portion of it, $2 million or so, was in the third quarter and a portion of it was in the fourth quarter. And in terms of just some of the overriding forecasts, again, we're putting out a range at this point in time. We've only got approximately 2 months left in the year, so we've got closer parameters in terms of what our expectations are, relative to when you were -- in the early part of the year. So that's more -- some of the precision or the range of periods. At the same time, we continue to work very hard in, as Russ talked about, with some of the customers. We've got some very good discussion and some feedback coming from some of the new product introductions. So we'll see how we do this quarter. We do think the opportunity remains in front of us, and that's why we continue to devote the resources and the efforts towards the innovation and our customer feedback, especially with some of the existing ones that we're working with today, and some of the new ones that Russ mentioned give us pause for optimism as we look ahead in 2015.

[Operator:]

[Operator Instructions] Your next question comes from the line of John Campbell of Stephens Inc.

[Hayden Blair:]

This is Hayden Blair sitting in for John Campbell. So how should we be thinking about margin trends as some of these newer, larger clientele -- I know you've mentioned T-Mobile, Dish, Verizon, ramp spend?

[Michael A. Arends:]

So thanks for the question, this is Mike again. If you think about the margin, the profile with the call marketplace is the same as what we've talked about historically, where you think about between $0.50 and $0.70 on the dollar generally, and going out to the partner where that consumer is making that phone call from, and then connecting through to the advertiser. In addition to that, there's other communication telephony, some of the direct analytics cost that range between $0.05 and $0.10 on the dollar. And then we have some of the variable selling components, again $0.05 to $0.10 on the dollar. So generally, we're looking at contribution with the marketplace, which is the primary component where we see some of the opportunity moving forward, at about $0.20 to $0.30 on the dollar.

[Hayden Blair:]

I guess, as a quick follow up to that. Has your headcount been affected post-Allstate? And if it has, will you be keeping some of them in anticipation of these other contracts ramping? Or will you need to rehire once some of these other guys reach a certain level?

[Michael A. Arends:]

So when we look at -- we have approximately 400 people today, and about half of those people are devoted to the product development in the innovation front of our business. And we think about the opportunity some of the customer feedback we're getting from the other customers and just the receptiveness to the product advancements. We remain committed to that investment. And the team and the people that we have, and the company, and hopefully, as we make progress with some of the other customers and the products, we'll be in a position to actually -- to add to that base and the team members that we have today.

[Hayden Blair:]

Got it, got it. And then, one last quick one. Clearly, the growth in the Allstate contract, over such a short period of time, was impressive. But given how all this has played out, have you guys reconsidered how you ramp customers in your pilot program? Is there some sort of optimal time frame for ramping spend?

[Russell C. Horowitz:]

We -- look, it's always good to be self-reflective and to look at it -- and just look at what you're doing and what makes sense and where there's opportunities to evolve. And this has been a natural time to do that. So first and foremost, where we come out is focusing on client performance and then really making sure that there's a lot of alignment around the products we're delivering and the model through which we're delivering them. And so we kind of start with that. And at a broader level, continue to focus on winning lots of customers and hoping we can grow them in ways that are healthy for both them and us, and do so in as diversified a way as possible. So that really is the focus as we think about both where we are today and how we prioritize what success looks like for the balance of the year and 2015.

[Operator:]

At this time, we have no further audio questions. I turn the call back over to the presenters.

[Russell C. Horowitz:]

We appreciate everyone's participation, and we look forward to updating you again very soon. Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.