Ethan Caldwell – General Counsel and Chief Administrative Officer Pete Christothoulou – Chief Executive Officer Michael Arends – Chief Financial Officer Gary Nafus – Chief Revenue Officer.

Darren Aftahi – Roth Gene Munster – Piper Jaffray Ross Sandler – Deutsche Bank James Rutherford – Stephens Incorporated.

Good day and my name is Skinner, and I’ll be your conference operator. At this time, I’d like to welcome everyone to the Marchex First 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] Thank you.

I’ll now turn the call over to Ethan Caldwell, General Counsel and Chief Administrative Officer. Please, sir, you may begin..

Good afternoon, everyone, and welcome to Marchex’s business update and first quarter 2016 conference call. Joining us today are Pete Christothoulou, Michael Arends, and Gary Nafus.

Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements, including with respect 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 the results to differ materially are set forth in today’s earnings press release and in our most recent Annual or Quarterly Report filed with the Securities and Exchange Commission.

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 marchex.com. At this time, I would like to turn the call over to Pete Christothoulou..

Thanks, Ethan, and thank you, everyone, for joining us for our first quarter conference call. I’m excited to talk about the momentum we’re seeing from several initiatives we kicked off last year. We are signing more new enterprise clients across North America, Europe, and Australia. Our innovation is accelerating.

We’re expanding our product suite in ways that are measurably improving our clients’ performance, and we are continuing to build a world-class team. Importantly, the net effect of our progress in all these areas is that we’re increasing client engagement and satisfaction.

Our company is singularly focused on providing global brands, extraordinary insights into the mobile consumer journey by uniting the physical and digital worlds. In mobile, the high value paths to purchase come through phone calls, store visits, and SMS messages.

These actions result in higher conversion rates because consumers can engage with brands on a personal level. At the same time, these interactions are difficult to measure because they occur offline and outside of today’s marketing analytics infrastructure.

Connecting every data point of this online-to-offline customer journey to facilitate and measure human connection is the next frontier in marketing analytics, and marketers are now embracing this movement.

T-Mobile, for instance, has re-architected its customer acquisition strategy to leverage its telesales organizations because they believe that creating an authentic human connection, meaning speaking to their prospects is a key to winning market share and building customer loyalty.

In a few years, we expect to have the capability to connect and measure any digital advertising format across any type of media to any offline purchase outcome, and provide the world’s largest marketers with maximum control of the levers that accelerate business growth, increase operating efficiency, and improve customer loyalty.

In the first quarter, we made progress against that vision through executing on the three strategic initiatives highlighted on our last call – enterprise client growth, expanded global strategic partnerships, and accelerated product innovation.

In terms of enterprise client growth, we had a strong new sales quarter, adding new global clients across each of our core categories in travel, auto, financial services, home services, and communications.

For example, in travel, we signed AccorHotels, a top 10 global hospitality chain that controls more than 3,700 hotels on five continents, and Seabourn Cruise Line, a top cruise brand. Seabourn is particularly exciting because it represents an expansion of our relationship with its parent company, Holland America.

In Auto, we signed Meineke, which is a leading international automotive service chain. And in financial services, we added Metromile, a new, rapidly-growing auto insurance brand. Our new client progress is due in large part to hiring new talent in our sales and marketing organizations over the last few months.

We recently announced two additional senior leaders to this group – Anna Forbes, a top-tier sales leader who comes from AppNexus, who will lead our expansion into the UK and surrounding territories, and John Carman, a sales veteran who spent more than 20 years at Kenshoo and Oracle, who will lead our enterprise sales team.

We expect our hiring progress in core category penetration to continue. Next, we’ve expanded our global strategic partnerships, and have grown our relationships with existing clients, such as State Farm and Time Warner, or we work with them alongside their agency, Omnicom.

We also expanded our relationships with other large brands, such as Verizon Wireless, through new global agency partners outside of the WPP, GroupM, or Omnicom families, including various divisions of Publicis. We continue to grow our internal team to support this important channel, and are looking forward to our progress throughout the year.

We are also expanding our reach into major marketing automation touchpoints. We recently announced the Salesforce Integration that seamlessly analyzes Marchex and Salesforce data together.

Now, marketers who utilize Salesforce can instantly see all critical call activity and data and their standard fielder ports and dashboards, providing them increased flexibility to manage their business.

Looking at accelerated product innovations, we’re excited to announce that Ziad Ismail has stepped into the newly-created role of Chief Product Officer.

Ziad and his team greatly expanded our product platform over the last several years, and in his new role, we will continue to focus on building the most powerful set of analytics tools to deeply understand the online-to-offline path to purchase.

We recently announced major enhancements to Call DNA, the first automated solution for enterprise marketers to analyze the customer experience on a phone call.

This solution gives marketers access to real-time transcription and keyword spotting, and helps them actively identify conversations that end in a sale, reference a specific product, or reveal missed sales opportunities.

This product empowers marketers to fine-tune ad campaigns towards high-converting media channels and uncover actual insights that improve operating efficiency and sales conversion rates. We believe we’ll be in a position to charge clients incrementally for these new features.

We are building out our capabilities to measure the mobile customer journey in ways enterprise marketers have never had access to before. All this ensures Marchex’s data can be surfaced in ways that are easy for the marketer or salesperson to understand while making Marchex products easier to buy and access across the marketing spectrum.

The success of Search Analytics is a proof point of this approach. One year after launch, Search Analytics is scaling with major integration partners, such as DoubleClick, and has become a multi-million dollar product line. I’m excited about the progress we’re making to start the year, and I feel great about our team.

While there’s much to do, we’re as focused as ever on becoming a leading online-to-offline analytics platform for the largest global brands. With that, I’ll hand the call to Mike..

Thanks, Pete. For the first quarter, call-driven revenues were $36 million. We know some investors track our growth without YP and Allstate, so to help their models with this framework in mind, call-driven revenue in the first quarter, excluding YP and Allstate, grew 15% compared to the same period in 2015.

In the first quarter, we saw the benefits of expanding existing enterprise client relationships in key focus verticals, like the insurance and communication verticals. Additionally, we continued to on-board new client relationships and develop new strategic integration partnerships.

On the investment side, we focused on several initiatives designed to accelerate our long-term momentum, including hiring to deepen our sales and marketing teams while continuing to focus on accelerating our product momentum. We expect we’ll make further progress on all of these initiatives in 2016.

Looking further down the P&L for the first quarter, excluding stock-based compensation, total operating costs for the first quarter were $37.7 million. Service costs were up as a percentage of revenue on a quarter-over-quarter basis largely due to a decline in YP revenue and contribution margin.

Sales and marketing was $5.1 million, which was up quarter-over-quarter as we ramped investment in our sales organization. As we’d previously communicated, this is an area where we expect to increase investment in 2016 as we expand our sales and channel footprint to accommodate new growth initiatives and support a growing product portfolio.

Product development was $6.9 million, largely flat quarter-over-quarter. Longer-term, this will continue to be an area of investment focus as we invest to support our expanding product platform initiatives.

Moving to adjusted operating income before amortization and EBITDA for the first quarter, call-driven adjusted OIBA and EBITDA were a loss of $1.7 million and $800,000 respectively. GAAP net loss from continuing operations was $3.7 million for the first quarter of 2016.

This compares to GAAP net loss from continuing operations of $330,000 for the same period of 2015. Adjusted non-GAAP loss per share, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.03 per share compared to income of $0.04 per share for the same period in 2015.

Cash flows used for operations were $2.3 million for the quarter. We ended the first quarter with more than $106 million in cash on hand. Now, turning to our outlook for the second quarter and 2016, first, let’s discuss revenue.

For 2016, we are reiterating our outlook for call-driven revenues excluding contribution from YP, which we are now calling enterprise revenue, to grow 18% or more year-over-year to $117 million or more in revenue. For the second quarter, we are forecasting $35 million or more for total call-driven revenue, including YP.

We’re making progress across a number of initiatives which we believe will drive the growth profile of the business, including onboarding new clients, signing new integration partners to expand the reach and capabilities of our analytics platform, and hiring in our sales organization. Additionally, we expect to launch new products later this year.

All of these initiatives will take time to impact the aggregate growth outlook, but we believe these initiatives will support our long-term profile. We’re excited about the progress we are making expanding our customer base, growing existing clients, and increasing our global strategic partnerships.

Next, looking at call-driven adjusted OIBA and EBITDA, for the second quarter, we’re forecasting call-driven adjusted OIBA at a range of a loss of $500,000 to a loss of $2 million. For call-driven adjusted EBITDA, we’re forecasting a range of $500,000 to a loss of $1 million.

Our guidance takes into consideration our previously announced additional investment in sales and marketing and related investment to support our growth initiatives for the year. We expect this investment to have a disproportionate impact early in the investment cycle.

As we gain customer traction from sales and marketing initiatives and grow our enterprise base, we believe we will see flow-through to contribution that results in financial leverage, over time.

We’re committed to taking advantage of our early mover position in mobile advertising analytics, and are investing in both our people and products to take advantage of our opportunity.

Over the coming years, we believe mobile advertising growth will be driven by enterprise customers, and Marchex is uniquely positioned by virtue of our customer relationships and products to take advantage of that trend. I’d like to thank all of our employees for their hard work. This is an exciting time.

Thank you for joining us today, and we look forward to reporting on our progress as we move forward. And with that, I’ll hand the call back to the operator to take questions..

[Operator Instructions] Our first question comes from Darren Aftahi from Roth..

Hey, guys, thanks for taking my questions. Just a few, if I may.

First, can you talk a little bit about traction you’re seeing with your Search Analytics products? And then, secondarily, any update on WPP, where you stand, how many customers you have live, how that changed from the fourth quarter? And then, I’ve just got a couple of financial follow-ups..

Sure, Darren, this is Pete. We mentioned this on the call around Search Analytics, specifically sourcing, very good traction from Search Analytics. There’s a couple reasons for that. One, we have our agency relationships that are helping us increase our client coverage.

Two, a lot of the technology that we’re building, for example, such as the recent announcement of Call DNA premium, which highlights incremental conversions, is integrated directly into that product.

And as we take that product to market and highlight what it can do, we’re seeing very good client adoption and are excited about what that pipeline looks like. We also highlighted that it’s now a multi-million dollar product just less than a year after launch, so we’re excited about where we are there.

The second question specifically about WPP, I guess I’d frame it as we have an overall agency strategy that we’re really excited about, and we really like the traction that we’re seeing with WPP specifically. I think there are a few elements I’d highlight regarding our agency progress. One, what we’re seeing is that our strategy’s working.

We’re gaining industry-wide traction. We talked about some examples with Omnicom, where we had increasing growth from existing clients, such as State Farm and Time Warner. We also talked about how we expanded relationships with other partners, such as various divisions of Publicis, which is newer.

And as it relates to WPP, we saw several new additions in Q1 that we didn’t reference on the call, and we’re really encouraged about what the sales pipeline looks like, given where Gary and his team have been focused in coordination with Zaxis..

Okay, and then two more, if I may. One, where do you stand in terms of the traction with the beta on display, and sort of timing for when that could actually go live as a formal product? And then, it looked like, I think, Mike, you had called out service costs ticked up from kind of the declines in the YP revenue stream.

Is that something you expect to kind of continue, going forward, not necessarily the YP declines, but more the service cost level going to be elevated? Thanks..

Sure. This is Pete again. On display analytics, what I can tell you is we’re really excited about the results we’re seeing here. We’ve been working with several beta clients, and they provided incredible feedback.

In fact, the feedback that they’ve been giving us we think makes this product even more interesting, and we’ll be releasing it more broadly in the latter half of the year..

And Darren, this is Mike.

To follow up on your question about the cost of sales, or the service costs, when you look at some of the new product features that have separate incremental pricing, as well as some of the new products, like Display, that Pete just mentioned, those generally have higher contribution profiles, so north of 50%, in some cases north of 70%, given the nature of the data and the analytics of the product.

Those type of contribution margins in the intermediate to the long-term should be able to create some financial leverage for us, so we see that in those time periods. In the near-term, with the YP revenue and where it’s at, we do think the service costs could be in the range that they were in the first quarter..

And our next question comes from Gene Munster from Piper Jaffray..

Hey, good afternoon, and congrats on moving things in the right direction, Pete and team. Could you talk, Pete, a little bit about just the sales force and some of the changes that you continue to make there, and how that can impact the model, I guess, in 2016, 2017? Then a couple follow-ups..

Sure. Thank you, Gene. I’ll take that. I may toss it to Gary, as well, and have Mike cover it up. Gary and his team are making a lot of progress, and we think there’s a big growth opportunity as it relates to new clients. Let me just remind everyone that our view on new clients is that our business is really through a category lens.

And those categories, which we referenced, were auto, financial services, communications, home services, and travel, and we think we’re less than 10% penetrated in those categories.

I think to highlight the progress specifically they made in Q1, we signed clients in each one of those verticals, and in fact several clients in each one of those verticals. Accor was an example obviously in hotels, and auto, Meineke, Maako, and FirstStop, which is an international brand.

I’ll turn it to Gary so he can talk about some of the things that he’s seeing, and then Mike can discuss how this plays into the model..

Yes. Thanks, Pete.

So, Gene, we’re seeing – we’re really excited about the talent level that we’re able to attract to the Company and bring in, and it’s helping us to see early momentum and taking advantage of all the opportunities that we have out there, not only in the agency world, but as well as the international expansion opportunities that we have..

And Gene, this is Mike. Relative to the model, we previously talked about $6 million of incremental investment in sales and related expenses over the course of 2016 relative to 2015. So, that’s still on track. On a sequential basis, the first quarter was up about $1 million over the fourth quarter of 2015.

And we’re still in build mode, and there’s also a ramp period, as noted. So, some of the returns from the sales team, we’re seeing some of the customers being acquired, but there’s more build and investment within that team.

We should see progress as the ramp plays out in the latter part of the year, as well as into 2017, and getting a return on that investment..

Okay, Mike. So, just to make it clear, there’s $5 million of the $6 million to go in 2016 in the sales force investment..

So, there was $5 million – in terms of sales and marketing, $5.1 million in the first quarter. That’s up $1.9 million on a year-over-year basis. Sequentially it was up $1 million.

So, you should see, on a ratable basis, some incremental expenses from the $5.1 million that we incurred in the first quarter, but it won’t be as pronounced as another $5 million additive to that run rate..

Got it, okay.

And Pete, can you talk a little bit about timing of any new products?.

Sure. We just released a couple in the first few months of the year, with Call DNA Premium and Salesforce. On the earlier question we referenced Display Analytics. We’re getting great feedback from our clients. That feedback’s resulted in us expanding that product, and we’re really excited to announce that later in the year.

And we think there are other channel products that will also be happening later this year that likely may include outcomes beyond phone calls..

Okay, that’s helpful.

My last question is just any thoughts on the balance sheet, any big picture categories that might be interesting in terms of M&A?.

Thanks, Gene, this is Mike. So, we have $106 million cash on hand. We continue to enjoy the benefits of having strategic flexibility because of that balance sheet. We are debt-free. It’s nice, especially in some of the conversations we have with the large global clients, to have a strong balance sheet.

In terms of taking advantage of any opportunity, it would have to be something that we would look to from a technology or a customer perspective, where we could accelerate the market opportunity that we see before us..

Okay, great. Thank you..

Thanks, Gene..

And our next question comes from Ross Sandler from Deutsche Bank..

Hey, guys. Couple questions. I guess just high level, Google has been moving further towards adding phone numbers and search results and various things, not just in the ads but in the organic pages.

So, do you see things like that, or potentially what’s happening inside of some of these messaging apps as new demand channels? And how could something like that, from a very high traffic publisher, potentially be a catalyst for growth, or do you not see it that way? Just a little color there..

Good question, Ross. Well, we do think that Google – not only Google, but other large publishers are starting to talk about and implement the ad format we’ve talked about on our last call, that we believe that would happen as the year progresses. And again, I think you will see other publishers launch these products.

The reason is, as consumers are utilizing these devices, it’s intuitive for them to interact with the business by clicking to call. And so, Google’s job, and any major publisher’s job, is to make sure they’re creating an incredible consumer experience. And phone calls are a part of that.

And we are getting questions from our clients on how do we take advantage of connecting the dots between those phone calls and sales that occur. So, when you think about online-to-offline attribution and the role that we play there, as publishers expand their inventory and outcomes, yes, we think that’s an opportunity for us..

Got it, okay. And I know that the analytics products can track a bunch of different click-to-call activities throughout the kind of purchase funnel.

But, if we look at, like, high level other display spaces, like re-targeting, which is, like, a $15 billion market and is growing very fast, faster than digital advertising as a whole, like, what’s it going to take, do you think, to transition click-to-call from being used just as analytics to being used more aggressively for customer acquisition? I know that some of your customers are using that, but some of them aren’t.

Like, what’s going to get the conversation moved from helping a brand become more efficient to let’s drive incremental business from calls?.

Yes, another great question. I think we’re really excited about that opportunity, and something that we think about a lot here.

While there are billions of calls that are driven overall, and hundreds of millions of calls that are driven to many of the largest brands, many of those calls don’t ultimately convert in a transaction, and so we think there’s an opportunity, as we’re in the call flow, to utilize our position to help our clients re-market to those users that they somehow missed, as well as re-market to existing customers.

I think the key really comes down to your data set and what kind of data set are you building.

And we’re in an interesting position with 300 million people calling businesses through our platform every year, that we have a first-party, high-quality data set that we think we can bring to market with our clients to help them drive incremental usage exactly in the scenario that you described.

So, as we make progress during the rest of the year and into next year, that would be an area that I think you’ll see some focus from us..

Great. Thanks, guys..

And our next question comes from Brett Huff from Stephens Incorporated..

Hey, guys, this is James Rutherford in for Brett. Just a couple of questions from me. One’s kind of high level, and a follow-up on a question earlier. But, Pete, in y our opening comments, you talked about expectations to be able to do analytics on, I think you said, any kind of digital format across any kind of media.

And I just was hoping you could go into more detail about what you kind of mean by that. Does that indicate intentions to go beyond call-related marketing channels, or even beyond mobile? Just trying to get a sense of kind of what the overall long-term strategy is here..

Yes, thank you. Look, our belief is that mobile has created an opportunity for brands to connect with customers on a one-to-one personal basis. Those interactions happen to be offline.

And our goal is really to connect any mobile-driven or digital ad, or impression, to any offline outcome whether that customer is making a call, walking into a store, or interacting with the brand over SMS. Doing that will allow us to give the marketer a 360-degree view into their offline initiatives.

Today they have a view into what’s happening in an online, closed system, but as soon as the customer goes offline and interacts with the brand, they don’t have that view.

So, we’ve obviously been making a lot of progress as it relates to calls as an outcome, but we think there are other offline outcomes, too, that we should be able to connect and measure and provide that marketer a 360-degree view..

Okay, that makes a ton of sense. That’s helpful. The other question I was going to ask was just around the call-driven growth, what you guys I think are calling enterprise growth now. The growth was 15%, which slowed a bit from kind of last year.

And I think the issue there is just the compares get harder this year, and I just wanted you to confirm if that’s kind of what’s driving that, if there’s anything sort of happening.

I guess kind of playing into that question, the wins you announced this quarter, how long should it take before we should see those kind of contributing to revenue? Thanks..

This is Mike. Yes, the competitors are clearly a higher profile than they were previously. In terms of the ramp, we do think, especially with the investment in the sales force, that there is going to be opportunity for acceleration, and that may come as early as the latter part of the year, or into 2017.

There is still an investment and still a building of that sales force. Some of these initiatives with the global customers are also interesting because there’s phased rollouts.

They are staged and progressed not just in a one-month launch timeframe and everything is up and running, but it can take six, nine, and in some cases with some of the international relationships, phased domestically, and then internationally over the course of 12 months. So, that’s part of the equation, too.

But, we are looking to see potential acceleration later on, especially into 2017..

Okay, thanks Mike. Thanks, guys..

At this time, there are no further questions..

Thank you, everyone, for joining us for our first quarter conference call. We appreciate it, and look forward to updating you as the year progresses..

That does conclude today’s call. You may now disconnect..