Marchex Q3 2023 Earnings Call Transcript

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November 8, 2023

There are 5 speakers on the call.

Operator

Afternoon, and thank you for joining the Marchex Third Quarter 2023 Earnings Call. My name is Kate, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with a question and answer session at the end. I would now like to turn the call over to your host, Trevor Caldwell, Senior Vice President of Strategic Initiatives and Investor Relations. You may proceed.

Speaker 1

Thank you, Kate. Good afternoon, everyone. Welcome to Marchex's business update and Q3 2023 conference call. Joining us today are Edward Miller, our CEO Holly Aglio, our Chief Financial Officer and Michael Renz, our Vice Chairman. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward looking statements, including references to our financial and operational performance, And actual results may differ materially from those contemplated by these forward looking statements.

Speaker 1

Risks and uncertainties that could cause these results to differ materially set forth in today's earnings press release and in our most recent annual and quarterly report filed with the SEC. Any forward looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements for subsequent events. During this call, we will present both GAAP and non GAAP financial measures. Reconciliation of GAAP to non GAAP measures is included in today's earnings press release. The earnings press release is available in the Investor Relations section of our website.

Speaker 1

At this time, I want to turn the call over to Edwin.

Speaker 2

Thank you, Trevor, and good afternoon, everyone. I'd like to thank you all for joining Today for our quarterly earnings conference call. I'm pleased to share our progress with you during this period of transformation. I've been on the job for 275 days and we are well on our way to positioning Marchex for long term success. We're building a culture that's highly committed and fosters innovation and collaboration.

Speaker 2

We continue to advance our technology in order to deliver new and powerful value creation for our customers and prospects. And we are building out a world class team to tackle the robust market opportunities in front of us. We are moving fast as a company. Furthermore, I'm pleased to share that our progress has enabled us to achieve profitability sooner than expected. We are seizing on this momentum and the big opportunity in front of us and that is to increase our leadership in the conversational intelligence market.

Speaker 2

Today, I'd like to highlight 3 key initiatives that we believe will thrust us toward being a 9 figure business in the space. These initiatives revolve around creating a world class team, Streamlining and enhancing our technology and the formation of excellence in our go to market motion by vertical market. Let's look at our first initiative, which is building a world class team with a world class culture. When I arrived, we had a high quality teams in our vertical markets with many years of experience. We organized towards shared services to empower our vertical market talent.

Speaker 2

This has worked well with client engagement. Further, given how quickly the AI landscape has evolved, we have been adding to our talent pool in order to build towards the future And support our growth opportunities. We're investing in additional leadership and building out our data sciences and AI team To leverage our vertical market understanding and depth, we know we need to move fast to advance our products and offerings And that is our people who make the difference. Thus, we are prioritizing and investing in our talent to ensure we Capitalize on a significant market opportunity and can harvest the revenue opportunities that will drive growth over time. Our second initiative focuses on continuing to optimize our technology stack to create a unified data pipeline And move up the technology stack.

Speaker 2

Marchex possesses a wealth of conversational data across multiple channels In vertical markets. This asset is a powerful differentiator and it holds incredible value for businesses Ranging from Fortune 500 Companies to individual service providers, our future is to continue toward 1 data pipe, One step, One Marchex culture, advanced AI math models tailored To our vertical market clients, advanced data analytics and creating more AI signals that will allow our clients to derive an end In view of a lead to a client as well as improving the overall client experience, We are in the flow of over a 1000000000 minutes of conversational data And the potential for mission critical insights for businesses is boundless. Moving to one data pipeline and one technology stack Continues to be a significant focus for the business and we believe it is one that will accelerate our product pipeline and speed innovation In the new world of generative AI. Given the increased efficiency, we also see these moves as leading to the potential for significant Margin Improvement in the Business Over Time. Our 3rd initiative focuses on strengthening our vertical go to market approach.

Speaker 2

We need to leverage all that we've accomplished in the past in building strong relationships with some of the largest Companies in the world. This will help us create new relationships in the coming quarters within our selected vertical markets as well as accelerate sales growth Through our go to market motions and product marketing strategy. All of this should be done in PandaWhip and on the back of Are moving to a clean one stack of software, which enables us to innovate with new automation tools for increasingly efficient onboarding of clients. These efforts will enable our clients to deliver great customer experiences, while allowing us to expand our API capabilities, Which we are continually working to improve as part of our integration initiatives.

Speaker 3

Every day

Speaker 2

I'm in this role, I'm reminded of one thing. We are at a pivotal moment in hemisphere. The rapid evolution of AI is changing the game. It is poised to usher in significant change at every level of human interaction, We're ready. Marchex lives in vertical markets with unique and rich data versus A thin horizontal approach to the market.

Speaker 2

We strongly believe that the vertical position is the best place to be within the AI market. Creating a single efficient data pipeline will arm us with the power to unleash deeper and more meaningful insights at a scale we've never seen before. Our customers will up level their abilities to understand and engage their customers in ways they too have never seen before. On that note, I want to share that we recently launched new AI features to our expanding conversational intelligence software suite. AI call summary and AI sentiment suite are the first of our expanding generative AI driven capabilities.

Speaker 2

There will be more to come. AI call summaries leverage the power of generative AI To transform the way businesses capture and utilize critical insights from customer interactions. This technology gives concise Natural language descriptions of what occurred on a call between a consumer and a business. Decimate suite Combined structured and unstructured data to provide a holistic view of customer emotions during conversations. The possibilities in helping businesses to understand and meet the emotions of the customers they engage a business Will help sales close rates and we believe will drastically improve the customer experience.

Speaker 2

These can be powerful insights for businesses to understand and engage consumers. Our commitment to AI is a driving force And can unlock the potential for our business on a vast scale. It can help our customers foster better relationships with their consumers And drive meaningful revenue growth. That's why right now we are laser focused on the 1 data pipeline and 1 stack initiatives. In fact, we expect this effort to accelerate our ability to deliver new features and products to our customers And enable Marchex to cross up in ways that in the past were not possible.

Speaker 2

We believe this to be an Essential step towards accelerating growth and building a 9 figure revenue business in the future. Conversational intelligence is a multi $1,000,000,000 market. Marchex has a significant advantage in several verticals As we have industry leading customers with multi year contracts who are asking us for more, the initiatives I've outlined will to grow at rates that meet this demand over time and deliver a compelling margin profile to the business. I'm excited about where we are and also where we're headed. We have a clear vision and we are moving quickly and thoughtfully in all areas of our business.

Speaker 2

While some of these efforts will take time, I am mindful that we still expect to deliver a compelling financial profile as we build, While keeping an open mind to all potential strategic initiatives that can help us unlock the value of Marchex. I look forward to updating you on our progress next quarter. With that, I am so excited to welcome the newest member of our team, Polly Aglio, she will walk you through our financials.

Speaker 4

Thank you, Edwin. I am thrilled to have joined Marchex at this time. For the Q3, revenue was $12,800,000 versus $12,500,000 in the 2nd quarter $13,200,000 for the same quarter last year. From a revenue perspective, on a year over year basis, we saw expansion in some key verticals With our small business listing and solution providers that mostly sell marketing services to local businesses. In the auto vertical, we continue to see expansion of our dealer channel and of our OEM relationship As a key driver of growth, our ability to win new relationships and extend others into multiyear terms has contributed to Marchex's expanding footprint in the vertical.

Speaker 4

In addition, We see significant potential to expand some of our products into verticals that have similar characteristics and where we already have relationships with many of the vertical market leaders. For example, in the home services vertical, we see expansion of key relationships being helpful to our overall profile. Turning to the P and L for the Q3. Excluding stock based compensation, amortization of intangible assets and acquisition and disposition related costs, Total operating costs for the Q3 were $13,200,000 compared to $13,600,000 for the Q3 of 2022. During the quarter, we incurred certain costs associated with reorganizing and modifying operating activities totaling approximately $300,000 Service costs were $5,100,000 for the 3rd quarter, which decreased as a percentage of revenue from the Q2 of 2023.

Speaker 4

Over time, we expect our service costs as a percentage of revenue May decrease as a result of our current technology infrastructure initiatives. That should enable an overall improvement with our service cost margin as we sell through our new conversational intelligence products and advance our vertical market initiatives. Sales and marketing costs were approximately $2,200,000 for the Q3. This was down from the prior comparative period in large part as a result of the reorganizing initiative. Product development costs were $4,000,000 for the 3rd quarter as we continue to invest in our products and in building AI to expand our conversational intelligence capabilities.

Speaker 4

Moving to profitability measures. Adjusted operating loss before amortization for the Q3 was $400,000 Corresponding adjusted EBITDA was a gain of approximately $370,000 These amounts include approximately $300,000 for certain costs associated with reorganizing and modifying operating activities. Excluding those amounts, adjusted EBITDA would have been approximately $670,000 GAAP net loss was $1,500,000 for the 3rd quarter or $0.04 per diluted share. This compares to a loss of $1,600,000 or $0.04 per diluted share for the Q3 of 2022. Adjusted non GAAP loss was $0.01 per share for the Q3 compared to a loss of $0.01 per share for the Q3 of 2022.

Speaker 4

Additionally, we ended the Q3 with approximately $13,700,000 And cash on hand. Now turning to our outlook. We believe revenue in the Q4 of 2023 Should be at or near 3rd quarter level. While the 4th quarter has historical seasonal downward volume trends And there are some headwinds in certain verticals previously mentioned. We believe those factors should be offset by the growth driven by new customer adoption and the onboarding of previously won relationships over the course of the year.

Speaker 4

In addition, we continue to believe that our traction Within the automotive vertical can lead to double digit growth on an annualized run rate year over year basis by the end of 2023 within that vertical. With that progress in mind, we believe that we will continue to be above Breakeven on an adjusted EBITDA basis in the 4th quarter. As we look to 2024, based on current progress with current And new customers, we anticipate revenue growth on a year over year basis with sequential progress throughout the year. Furthermore, Our current initiative to move to 1 DataPipe and other cost savings initiatives in tandem with expected future revenue growth initiatives Should enable greater operating leverage in the business and consequently, we could see improvement in profitability measures in the future. For 2024, we anticipate adjusted EBITDA to be above breakeven throughout the year.

Speaker 4

I'd like to pass the call back to Edwin for closing remarks.

Speaker 2

Thank you, Holly. Since I joined Marchex, we've accomplished a lot over a short period of time. We've achieved profitability earlier than planned And put in place a series of initiatives that will enhance the profitability profile of the business well into the future. In addition, we're supplementing the team with world class talent that will be the driving force for growth As we launch our go to market initiatives in the coming quarters, I've been a part of a lot of technology companies And I'm excited about what I see here at Marchex. We have an incredible group of world class customers who are asking us to do more.

Speaker 2

We have a world class team that we are continuing to build out. Just as importantly, we have an underlying data asset that makes The company truly unique with lots of value to unlock in many ways to do so. AI is here. Its possibilities continue transforming the conversational intelligence market represent a significant and growing opportunity as AI continues to evolve. In the meantime, we have a clear view of what unlocks the potential of Marchex.

Speaker 2

Further, we have a path for growing a sustainable An increasingly profitable business. We will continue investing in industry leading AI capabilities. I want to thank the team for their hard work. I look forward to accomplishing great things together. Thank you for your time today.

Speaker 2

With that said, operator, let's move to

Operator

questions. Thank you. We will now begin the question and answer session. The first question will be from the line of Mike Latimore with Northland Securities, your line is now open.

Speaker 1

Hi, this is Logan on for Mike. Could you guys talk about how call volumes

Speaker 3

Hey, Logan. This is Mike here. So just for reference, call volumes from a seasonal perspective are consistent with what we've seen in prior years. Usually The downward trend is primarily in the November, December timeframe around the holiday starting more heavily in the Holiday timeframe. There is a seasonal adjustment that does start in the latter part of September, but the heavier part Of the downward trend in the 4th quarter is generally around that holiday timeframe.

Speaker 3

So we've seen consistency In general across that, but we also have a number of new customers and relationship items that are Spending as well as some of the new onboardings and those are helping us offset some of the total revenue sequential movement where we think we're still going to be At or very near the levels that we were in the Q3.

Speaker 2

Perfect. Thank you. And then One more question. Can you talk about the electric vehicle category and how important that is as a growth driver going forward?

Speaker 3

So this is Logan, this is Mike again. Automotive, it's trending well for us. It's a key part of The overall framework of where we think we're going to be headed on a go forward basis and just echoing some of Edwin's And Holly's comments there, there's a lot of new product activity that we have, especially related to some of the generative AI Activity and how that can play out and benefit our customers, but particularly in auto with the EV movement. EV, it's simply an incredibly, intricate and diverse arena that the auto dealers as well as the OEMs are working through. It's giving momentum in the parts for us because it's driving industry needed change To be able to deal with the critical challenges of an electric vehicle world.

Speaker 3

And if you think about intricacies and differences, It's demanding data intelligence, it's demanding sentiment, it's demanding signals and insights and importantly identification of trends And movements quickly and in real time, we are in a position with a powerful solution where we can help With that across all types of conversations, whether it be voice, text, chat, prospectively as well as other forms of conversations and With prospects and customers and it's not just the automotive arena that we're seeing some of this application in. We've got some very deep and strong relationships with OEMs in the auto vertical. We've expanded some of those relationships, landing multiyear We've onboarded some new ones, but we have some other very relevant relationships in other verticals And the applicability of the product, 2 other verticals, Edwin spoke about this in some of the prepared commentary. We think there's some replication here that we can do in the coming periods with home services, with auto services And healthcare to name a few because those are a few that we already have some very entrenched and strong relationships with large conglomerates That are relatable to some of the work that we've been doing in the auto sector.

Speaker 2

Yes. No, this is Edwin. I'll add to that. I'll add to that. Good question and it's a very relevant and germane question on timing.

Speaker 2

The what we're seeing and we've got Team out in the Autoland this week and the conversations around EV are Hot. Everybody is trying to get there. And if you just think about the 2 things we just launched with AI features around AI call summaries and AI sentiment, Think about you walk into a dealership and the salespeople are used to selling gas or diesel And now they got to answer questions and understand how to sell EV. The question set is different. And so understanding the summary of a call and the sentiment of a call And getting ahead of that and being able to foster intelligent conversations at the dealership level And for our large OEMs is powerful.

Speaker 2

But again, I'll echo what Mike said. It's not just in The automotive vertical, what we found since I've joined, I've been on 275 days counting weekends because I end up working on weekends too, but Is that the need of technology and what we provide From numbers to text to chatbots to the ability not even to have a number and ingest data, it's required across any B2C Complex ecosystem, and it creates very rich deep vertical market data, which allows us to build new math models faster than other companies And allows us to help, I think get ahead of what is going to be needed based on understanding those conversations. So we can also become A predictive analytics platform versus prescriptive. I think most of the company companies out there live in a prescriptive world. Hey, here's what happened yesterday.

Speaker 2

Oh, thanks. Yes, I got run over by a car. Where we want to live is in a world where we tell you the car is coming. So I hope that helps, but we're excited about the EV, but We're also excited about all the verticals and the commonality of the needs against the verticals we serve. Yes.

Speaker 2

Thank you. That was very helpful. Congrats on the quarter guys.

Operator

Thank you. At this time, there are no further questions registered in the queue. So I will turn the call back over to the management team for final closing remarks.

Speaker 2

Okay. Well, I would like to thank everyone who joined. We thank you for your time, interest in our business And we look forward to updating you in the future and we're here to grow the business. So thank you so much for your time. Appreciate it.

Operator

That concludes today's conference call. Thank you all for your participation and you may now disconnect your lines.

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Earnings Conference Call
Marchex Q3 2023
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