MCHX - NASDAQ

Good afternoon. Thank you for attending today’s Marchex Q1 2023 Earnings Call. My name is Cole, and I will be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I’d now like to pass the conference over to our host, Trevor Caldwell, Senior Vice President of Investor Relations and Strategic Initiatives. Please proceed.

Thanks, Cole. Good afternoon, everyone, and welcome to Marchex’s business update and first quarter 2023 conference call. Joining us today are Edwin Miller, our CEO; and Michael Arends, 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. Risks and uncertainties that could cause these results to differ materially are 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. A reconciliation of GAAP to non-GAAP measures is included in today’s earnings press release. The earnings press release is available on the Investor Relations section of our website. At this time, I’d like to turn the call over to Edwin.

Thank you, Trevor. Good afternoon, everyone, and thank you for joining us today. I’d like to start by giving you an update on my experience over the last couple of months. When I joined Marchex in February, my first priority was getting to know the team and meeting as many customers as possible across the country. From that mission, I learned two important things. First, Marchex has world-class talent with deep industry expertise. Second, our customers love and trust Marchex to meet the urgent challenges facing their businesses. Time and again, I heard how much they lean on us to navigate big and increasingly complicated problems. I’ve been in the technology world for most of my career, so seeing these two proof points firsthand makes me certain that we are an important and valuable market. Marchex is at an interesting inflection point. Right now, several industries which are core to our business are struggling with significant industry shifts along with innovation disruptors that are redesigning their purchase funnels. And the auto vertical for instance, the entire industry is transforming because of the rise of electrical vehicles. New and more nimble competitors have put tremendous pressure on the legacy leaders to evolve. In auto, it’s Tesla, a home services, it’s new CRM systems and massive consolidation, driving disruption, and that’s just the starting point. Other dominant players and multi-billion dollar verticals are experiencing similar disruptions due to the changing consumer expectations and the arrival of AI. Here’s where it gets exciting. Every one of these companies needs conversational intelligence to unlock the insight needed to inform what is required to successfully transform their businesses. This is what will open the door to their future growth. Right now, we have a real opportunity to build out a significantly larger business. The intelligence we will provide in time will help scale each of our customers’ businesses from closing the loop between marketing dollars to salesperson conversations, to developing real-time customer sentiment, analytics across retail networks and communication channels. Marchex understands how to help large enterprise customers saw complex business ecosystems and sells and service in order to grow. That is our bread and butter and is deeply needed in today’s rapidly evolving technology landscape. Our customers having trusted us with their futures and we are growing existing relationships with some of the biggest brands and multi-billion dollar verticals. Additionally, we’re winning new relationships with OEMs and brands that represent significant new opportunities for our business. In the last few months alone, we have seen numerous multi-year extensions with existing large customers in addition to winning new relationships. Our expanding product suite is essential to this progress. We recently announced the release of Spotlight for the auto vertical, which will be vital to increasing revenue for our customers. Spotlight is the next step in innovation for enterprises with distributed retail footprints. It will help them easily identify, sell business to consumer conversations, and instruct them specifically on how to course correct intelligence on how retail locations can solve complex business problems and the sales and marketing funnel and corporate requirements are now achievable with our products. The future will be built on that intelligence to help businesses increase sales and marketing outcomes. We recently signed a multi-year extension with a major automotive brand customer as well as a multi-year engagement with a new brand. Furthermore, our newest products Spotlight now includes access to eight automotive brands and more than 8,500 dealers representing more than 50% of the franchise dealerships in the United States. Our automotive vertical is setting up well for accelerating growth. We are excited by this progress and in the coming months, we’ll be focused on optimizing specific areas of our business to accelerate our growth in auto and other verticals, as well as extend leadership into our core verticals. We will also be moving aggressively to evaluate every cost in the company so we can deliver a path to increase efficiency, growth, and profitability as soon as possible. In order to achieve those goals, we are also augmenting our executive team to help accelerate our business. We recently hired new CRO, Chief Revenue Officer, Troy Hartless, who has world-class experience in aligning revenue organizations to win. I’m excited about what Troy can contribute and expect to share more on this in the coming period. Looking forward we’re committed to accelerating growth and key verticals and building a much bigger business in the conversational intelligence market. Our customers are signing up for record commitments and we have a lot of potential to unlock. Thank you for joining the call today, and I look forward to updating you on our progress in the quarters ahead. With that, I’ll turn it over to Mike.

Thank you, Edwin. For the first quarter, revenue was $12.2 million versus $13.2 million for the same quarter last year. The quarter was characterized by continued pressure on conversation volumes due to the macroeconomic environment impacting certain customer types. There was continued pressure with our small business listing and solution providers that mostly sell marketing services to local businesses as they faced greater customer churn compared to 2022. This trend manifested over the latter part of 2022 and has continued into 2023. On the new business front, and as Edwin noted, we recently won a new multi-year automotive brand relationship that we expect will onboard in the summer timeframe and we also extended another automotive brand relationship in a competitive process into a multi-year framework. We also won a multi-year extension with one of our small business services customers. And as we look forward into this year, we see several customer expansion opportunities and believe we will continue to build momentum as the year unfolds. We expect this will set us up well for future years. Now, I’ll dive into this in more detail in a moment when I discuss further guidance for 2023. Turning to the P&L for the first quarter. Excluding stock-based compensation, amortization of intangible assets and acquisition or disposition related costs, total operating costs for the first quarter were $15.4 million compared to $13.5 million for the first quarter of 2022. And during the quarter, we incurred certain costs associated with reorganizing and modifying operating activities totaling approximately $800,000. These were primarily in sales and marketing related to personnel, facility and systems expenditures. We expect to incur additional restructuring expenses in the second quarter. Service costs were $5.4 million for the first quarter, which decreased from the fourth quarter of 2022. Service costs increased year-over-year in part due to increased data and labor costs associated with customer migrations onto new product platforms and increased staging investments in our AI technology initiatives as we prepare for new product launches scheduled this year. Several of these investments are of a fixed nature, and therefore, over time, we believe we will see a positive impact on service costs as a percentage of revenue, as we sell through our new conversational intelligence products and advance our new channel initiatives. Sales and marketing costs were approximately $3.7 million for the first quarter, and excluding certain reorganizing costs totaled $3.2 million, and this was largely in line with the comparative periods. Product development costs were $4.1 million for the first quarter and we’re up as a percentage of revenue compared with the first quarter of 2022 as we have continued to invest in our future product pipeline and to support customer pilots that are in process of being initiated as well as others that are staging. Similar to the fourth quarter of 2022, we have continued investing to leverage our unique dataset to build out our AI driven conversational intelligence capabilities. Now moving to profitability measures. Adjusted operating loss before amortization for the first quarter was $3.2 million. Corresponding adjusted EBITDA was a loss of $2.8 million, reflective of the increased staging investments. These amounts include approximately $800,000 for certain costs associated with reorganizing and modifying operating activities. Excluding those amounts, adjusted EBITDA was a loss of $2 million. GAAP net loss was $4.5 million for the first quarter or $0.11 per diluted share. This compares to a loss of $1.6 million or $0.04 per diluted share for the first quarter of 2022. Adjusted non-GAAP loss was $0.08 per share for the first quarter compared to a loss of $0.01 for the first quarter of 2022. Additionally, we ended the first quarter with approximately $16 million in cash on hand. Now turning to our outlook. Consistent with the fourth quarter of 2022, certain customer segments continued to face conversation volume pressure in the first quarter of 2023, and that continues today. This to a degree offset our progress with new customer relationships and especially in the near-term. Therefore, we believe revenue in the second quarter should modestly increase relative to the first quarter of 2023. However, looking at the recent customer wins and ramping of existing customer relationships planned for the year, we anticipate that growth should continue throughout the remainder of 2023 and consistent with our commentary a few months ago, we continued to believe that our traction within the automotive vertical can lead to accelerating double-digit growth on an annualized run rate year-over-year basis by the end of 2023 within that vertical. Additionally, with these factors in mind, we believe our results should meaningfully improve on an adjusted EBITDA basis for the second quarter of 2023 compared to the first quarter, and we believe that we should continue making progress on profitability measures in the second half of the year. Furthermore, with our business progress to start the year, we believe that our ability to achieve at or near breakeven on an adjusted EBITDA basis should likely be achieved earlier than previously anticipated in the second half of the year. As we move beyond these factors, we believe that our growth should enable greater leverage, and consequently, we should see significant improvement in profitability measures in the future. We expect to make further progress with several large customer expansion opportunities throughout the year, as highlighted by our recent announcement regarding winning a new automotive brand customer relationship while also extending a separate existing brand partnership. We believe these relationships should contribute to growth this year with the potential to grow further over time. These relationships should also support inroads with our auto dealer sales channel over time, and these are just two examples of our pipeline of opportunity within our existing base of customers, and we see several other opportunities. We expect more progress throughout the year. Now while we are in an uncertain economic climate, we continue to believe Marchex based on the current momentum in verticals like auto is well positioned to emerge as a leader in conversational intelligence. We are in a unique position where many of our largest customers are asking for more of our products and signing long-term commitments to gain access to our conversational intelligence software and our pipeline of new products. We’re continuing to invest in our innovation engine at a critical time when many industries need to understand how to leverage data science and AI to deliver a better customer experience and to sell more. We are moving quickly to leverage our new cloud-based platform of services that we believe should drive growth for our company and potentially add significant operating leverage over time. I, again, want to thank all of our employees for their dedication and their continued efforts. With that, operator, we will hand the call back to you.

Thank you. We will now begin the Q&A session. [Operator Instructions] Our first question is from Darren Aftahi with ROTH MKM. Your line is now open.

Hey guys. Thanks for taking my questions. First I guess, Edwin, good to meet you. I guess, with a few months under your belt is your – under CEO, maybe can you just kind of highlight some of the biggest opportunities you see from Marchex and maybe some of the more near-term challenges?

Sure. I mean, I’ve probably met 20 clients now or so, and I’m booked to travel almost every week through the end of July with other clients. I think the biggest opportunity in this market we believe is the fact that you got to close the loop of invested dollars and what that drives in terms of sales and mark up through marketing. It’s not going to slow down. The pace is very high. And the second thing, I would say, it’s very exciting – is the – even as I jump between vertical markets here, the business problems are the same and the innovation needs for them are the same.

Great. Another one, if I may. I know Q1 a little bit challenging economically you guys talked about conversation volumes being down. I’m kind of curious quarter-to-date through April, how conversation trends have kind of better, worse, neutral?

Hi, Darren, this is Mike. Thanks for the question. I think in our commentary, our prepared remarks, we mentioned briefly that in especially with some of our small customers or the small service business listing customers that focus on solutions for local businesses. They’ve seen churn and on a year-over-year basis relative to what they were in 2022, they saw some declines especially in the fourth quarter of 2022 relative to comparable year-over-year periods. And the first quarter of 2023 and in the prepared remarks we mentioned, we’ve seen some of that continuing on. Now compensating and offsetting that, I think we mentioned some of the extensions of the relationships we highlighted one of the major relationships with a major OEM in the automotive area in the fourth quarter that we signed extended for the longest term that we’ve had in our history. We were in a fortunate position in the first quarter, again, with a major brand OEM customer where we were able to extend another one. And very importantly, we signed a new brand, a new OEM relationship that we haven’t worked with in the past and we look into the summer months of 2023 and look into the path of bringing those on board and starting to ramp, so that it’ll provide the benefit in the second half of the year. With those relationships, we now hold access with all of our auto OEM customers to touchpoints where we could reach over 8,500 auto dealerships. And we are still in the nascent stages of touching them, but we’ve made some great strides in the last nine to 12 months in terms of outreaching and onboarding direct dealer engagement relationships with our direct to dealer automotive products. Those trends are also moving in a positive direction. And what I’ll reiterate with that is, we do see progression on both the profitability side, we see progression also on the revenue side, but those trends in the automotive in particular, we think by the end of 2023, we may be at a point where we can see double-digit year-over-year revenue growth at the end of the year of 2023. And clearly, that helps set the stage for the future. And Darren, I’ll reiterate, this is all in recognition and cognition of it is a challenging economic environment out there for all companies, including us. But we’re giving those insights with visibility as we see it through 2023. So that should give some level of comfort as we do see those minimum commitment levels from certain customers.

That’s helpful. Mike, if I could dovetail back to some comments you made about growth throughout 2023 I just wanted to kind of clarify. Are you still expecting the same sort of cadence of a softer 4Q relative to historical trends? And then as it pertains to growth throughout 2023, is – I guess, what’s over-indexing? Is this some of these newer deals you’ve won, like, this auto OEM or is it renewals that are driving that? And I guess in terms of your commentary, like, how much line of sight do you have in that actual growth?

And this is where obviously economic environment and the impact there can help float moving things ahead if the economy improves further. But with what we see today and what commitments we have from the customers today, there’s three primary points that we see a framework for our opportunity on a go forward basis. We have the seasonal element where we do benefit generally in the summertime period relative to the fourth quarter. So yes, seasonally, that fourth quarter could be down. But offsetting that, and part of the reason why we think there can be this progress not just in the second quarter, but as we progress into the back half of the year and see growth in the back half of the year relative to the first half is because we’ve got existing customer relationships that are leaning in and need solutions to help deal with their customer experiences from an AI perspective, from an analysis perspective to help them with how to better themselves and also how to sell more. Those are the overriding thesis, and that’s not just across the automotive vertical, it’s across services, it’s across home services, it’s in healthcare, it’s in some of the other areas that we work in today. In addition to that, we’re seeing this trend where we are with a pipeline able to consummate and have been consummating some new relationships, some of them fairly significant, and some of those are in process of either onboarding or we expect to see them on board in the next number of months or the coming periods of time. And then the third, which is a very interesting area for us that we haven’t done a lot with except for the last couple of years is on the direct dealer basis or an individual retail location or dealer location, we’ve been able to sell products into that market and we’re selling more today than we have in the past. And we think that cohort and that progress there is something that can also help move us and make us progress. And so when you bring all of those things together with the minimum commitment levels especially that some of the multi-year long-term contracts have, we do see a stage where things are going to progress here and we’re hopeful that we can see some acceleration to be determined.

Yes. No, I would just add to that, Darren, there’s a fourth component that we’re working on where we really haven’t done channel distribution in the past or partnerships. And we’ve got some good conversations I believe that will help us possibly get to market, not just with our direct sales force, but through partners, large partners and smaller partners.

That’s helpful. Thank you.

Thank you, Darren. Our next question is from Vivek Palani with JMN Investments Research. Your line is now open.

Hi, I’m Vivek on behalf of Mike Latimore of Northland Capital. So my first question is, there are lots of news about generative AI, so is it prompting any trials and RFPs?

Yes. Hey, thank you for the question. I – we are actively number one, I’m excited about what’s happening around AI and space. It’s going to allow us to bring better solutions to our clients and they look for us to do that, so that’s exciting. I think the – at the end of the day, it’s a very positive thing for us. We are engaged in looking at OpenAI, ChatGPT you pick it with licenses. So we’re on top of that and excited about what can do for our client.

So as it brought any RFPs?

Pardon me.

No. Is it prompting any RFPs like request for proposals?

We are – look, what we are doing right now is I think people are trying to understand and play with it. We got that in our lab, we’re playing with it. I haven’t seen an RFP from any client around specifically that as of yet, but embedding and leveraging the technology to create innovative solutions for our clients is where we’re focused.

Okay. So my second question is, is auto still about 25% of revenue?

Yes. This is Mike. That’s correct, yes.

Okay. And my last question is have you had any sales via the UCaaS and CRM partners?

So I think the question was have we had any sales via UCaaS partners? And this is Mike again. Edwin was just speaking when he was talking about one of the opportunities for our future. We don’t have a lot of depth today with sales resulting from channel partnerships, but it is a key area of thought and progress and likely area that will facilitate with some of our product offerings and just the way we allow our products to be accessed for the future. And there’s multiple plays in there. UCaaS is absolutely a channel that could be one of the plays within that, but I don’t want us or you to be thinking that we’re limited in terms of that being the only channel partnership. And interestingly, it has been an area that we forayed into with discussions we’ll see in 2023, whether those discussions translate into fruitful and productive actual engagements with partnerships that can onboard and generate additional customer base for us. But it’s certainly a path that we’re looking into and believe can be a meaningful opportunity in the intermediate to long-term.

Okay. Great. Thank you.

Yes. And I’ll just add [indiscernible] I really do believe that there’s a very viable path for partners a great question. We’ve got a motion going in inside the business now to ascertain and understand how to develop that. There have been to Mike’s points conversations in the past, and I’ll say that we have products one in particular that is very well suited for a larger go-to-market. And the last point on this is Troy Hartless who joined as our Chief Revenue Officer actually was Head of Sales and Product for [indiscernible] so he’s got great experience in the [indiscernible] and so we’re minding that as well.

Okay. Well, that’s it from my side. Thank you.

Thank you.

Thank you, Vivek. There are no additional questions waiting. So I’ll pass the conference over to the management team for any closing remarks.

Okay. Well, thank you, everyone for joining us. We look forward to updating you in the coming months with data. So thanks again.