Good afternoon. My name is Jeffery, and I will your conference operator today. At this time, I'd like to welcome everyone to the Marchex Fourth Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, we will have a question-and-answer session. [Operator Instructions] Thank you.

Trevor Caldwell, VP of Investor Relations, you may begin your conference..

Good afternoon, everyone, and welcome to Marchex's business update and fourth quarter 2018 conference call. Joining us today are Michael Arends and Russell Horowitz.

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 assumption 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 our Chief Financial Officer, Mike Arends..

Thank you, Trevor. Good afternoon and thank you everyone for joining us today. We have several significant updates to share. Over the last few months, we've been focused on driving product and customer momentum.

We’ve also acquired two companies, Telmetrics and Callcap, which has given us greater scale, helped us expand our market opportunity and grow our customer base. The combination of these organic and strategic initiatives has given Marchex unique position in our industry.

Our significant progress with product innovation is accelerating our growth, driving new opportunities across our business and helping to position us as a leader in conversational analytics and sales acceleration solutions. Our customer progress reflects this.

Through Marchex's internal sales efforts, combined with the additions of Callcap and Telmetrics, we added more than 300 new customers in the fourth quarter across several of the most valuable commercial verticals, including auto.

We've also broadened our footprint into the small business ecosystem by expanding our presence across verticals, such as home services and healthcare.

Home services and healthcare are examples of valuable commercial verticals that are right for technology-based sales acceleration solutions, given the significant challenges that exist in these categories.

Within home services, for example, HVAC workers and electricians can find it very challenging at times to take inbound calls during the day when they are actually doing their work. That's where our technology comes in.

We can help them engage in customers in a timely fashion while delivering automated solutions that creates great consumer and business experiences. Because of our expertise in identifying how businesses can capture billions of dollars in lost opportunities, we've transformed the way businesses connect with their customers across both voice and text.

Many solutions we have and others we are developing, measurably help our customers create better consumer experiences and accelerate sales. Our products also solve critical, complex problems that businesses struggle with daily. We've invested heavily in our AI and data science teams to innovate on and expand the types of solutions we can provide.

What's powering this innovation is our extensive, underlying, conversational data assets, built on hundreds of millions of consumer-to-business conversations. This growing data asset is foundational in building the solutions that help customers accelerate sales. Data is also the bedrock of artificial intelligence design and machine learning.

And when it comes to conversational data, we have a lot of it. In fact, we crossed a major milestone in 2018.

With the combination of Marchex, Callcap and Telmetrics, we have more than 1 billion minutes of consumer-to-business conversational data in some of the most valuable commercial verticals such as the auto, travel and the home service industries.

Our data is built on rich, engaged interactions between businesses and their customers, and this is an essential technology prerequisite to building predictive sales acceleration solutions. To take advantage of our growing data asset, we more than doubled our data science team and added new leadership with artificial intelligence expertise last year.

These investments are helping Marchex make great strides with our opportunity. Now, let's take the issue of speech technology accuracy.

Through a series of recent updates, we've dramatically enhanced the accuracy of our speech technology platform, so that Marchex is uniquely positioned to deliver predictive sales acceleration solutions that set the standard for business and consumer conversations. This is a significant leap forward.

Our customers rely on phone calls to drive appointments and sales. They need reliable solutions to help them understand what happens precisely during every call. With our AI powered conversational analytics, businesses get powerful insights on the consumer experience and a view of what happens on every call.

They understand why a customer is calling and what the outcome is of that conversation. Ultimately, businesses that depend on high volumes of phone calls to engage customers, align with Marchex to get a competitive advantage. The auto industry is a great example of how integral phone calls are to sales acceleration and profit generation.

Last month, Marchex's data science team analyzed conversational data and found that 57% of consumers, who call a dealership, intend to buy a car. Our data analysis also found that phone calls convert at four times the rate of email.

Furthermore, salespeople, who manage inbound calls, have a statistically meaningful impact on whether a caller will come into a dealership. These are first ever data insights for some of our auto OEM customers, and they are impactful.

This is critical because appointments are the conduit to sales and it's just one instance of how our technology can surface pain points to help our customers grow their businesses.

We have more studies coming from our data science team, which is continually surfacing learnings from our leading conversational data asset to help advance analytics and sales acceleration solutions. We're excited about the progress we're making and view our market opportunity still as early.

Throughout 2019, we will continue to invest in accelerating product innovation and building our data science and AI teams.

We anticipate launching new products, solving new and emerging pain points for customers across multiple communication channels, and utilizing our enhanced -- and enhance scale to drive further efficiencies in our business over time. And with that, I'd like to hand the call over to Russ..

Thanks, Mike. Over 2018, we made significant progress evolving Marchex into an industry-leading conversational analytics company. We strategically and selectively used our balance sheet to support our current internal momentum and capture more scale and opportunity in the industry. This has had a multiplier effect.

We are creating the largest ever conversational data asset based on voice, expanding our leadership in core verticals, and broadening our market opportunities in ways that are highly strategic to our existing and new customers.

Similarly, our investments in AI and machine learning will help our customers find, engage and nurture their most valuable customers across voice and text-based communication channels. We’re building the industry's premier conversation analytics and sales acceleration solutions business while accelerating growth and opening up new opportunities.

As we move forward, we will continue to explore the various ways we can enhance our operating profile and capitalize on areas where we have increasing momentum. At the same time, we will continue to take a balanced and disciplined approach to our business and capital deployment as well. And with that, I'll hand the call back to Mike..

Thanks, Russ. For the fourth quarter, total revenues were $23.1 million. Core analytics revenue saw a strong growth on a year-over-year basis at 47%.

For the quarter, on a year-over-year basis, exclusive of the acquisitions, estimated pro forma growth remained in the double-digit teen percentages, primarily driven by continued adoption of products built on our proprietary speech technology. Revenue contributions for Callcap and Telmetrics were largely consistent with our prior guidance.

In the fourth quarter, we saw a sequential declines, given seasonally lower call volumes in late November and December, which is consistent with expectations and historical patterns.

On an annual basis, we saw an expanding pipeline of opportunity as uptake from trials and early integrations from several new customers and verticals, like auto, contributed to accelerating revenue growth.

As we work to integrate our sales and product efforts across the organization in 2019, we’re also excited about our expanding footprint of customers in valuable verticals such as home services, healthcare and with small business resellers.

We continue to see favorable results from customers utilizing solutions built off of our proprietary speech technology. As previously mentioned, we’re still early in the implementation of many of the solutions built on this technology and believe we will continue to develop new solutions off of our growing proprietary conversational data set.

This is a key investment focus for us, given the growth potential, margin profile and stickiness of these products. Marketplace revenue grew sequentially in the fourth quarter as we saw some budget increases from certain large customers.

Q1 is typically a stronger quarter for our marketplace product, and we expect these higher budget levels may remain in place or potentially increase slightly. Regarding our relationship with DexYP, we've seen growth in our analytics relationships and some increases in new marketplace initiatives.

These are offset against the ongoing decline in the legacy local lead streams, which consistent with past commentary, we anticipate to transition this year at some point as the Company focuses on its Dex products.

Regardless of the moving pieces in our relationship, we look forward to a close, long-term relationship with DexYP and continue to believe Marchex can play a valuable role in helping DexYP and other local aggregators grow their businesses over time.

In looking at the P&L for the fourth quarter, just a reminder that the 2018 fourth quarter includes a partial quarter contribution in operating expenses from both Callcap and Telmetrics. Excluding stock-based compensation, total operating costs for the fourth quarter were $22.4 million compared to $21.4 million in the fourth quarter in 2017.

Excluding amounts from acquisitions, operating costs were down slightly year-over-year. Service costs were $12.6 million, up from $11.5 million in the fourth quarter of 2017.

And note, a modest uptick occurred in service cost percentages on a year-over-year basis due to the mix shift in revenue streams and slightly higher relative service cost profiles from Callcap and Telmetrics contributions.

As we launch new data-driven products, land new customer relationships and grow our current base of customers, we continue to expect the analytics revenue streams to have favorable long-term impacts on service costs as a percentage of revenue. Sales and marketing and product development costs were $3.4 million and $4 million, respectively.

These amounts, which include incremental costs for acquisitions, were relatively flat compared to the fourth quarter of 2017. Moving to profitability measures. Adjusted operating income before amortization for the fourth quarter, was $764,000. Adjusted EBITDA was $1.2 million.

Net loss applicable to common stockholders was $637,000 for the fourth quarter of 2018, or $0.01 per diluted share, compared to a net loss of $841,000 or $0.02 per diluted share for the same period of 2017. Adjusted non-GAAP income per share was $0.02 per share, compared to adjusted non-GAAP income of $0.01 per share for the fourth quarter in 2017.

And additionally, we ended the fourth quarter with approximately $45 million in cash on hand. Now turning to our outlook for the first quarter. For the first quarter, we're forecasting revenue of more than $25 million.

For core analytics revenue, we expect $12.5 million or more, representing significant growth on a year-over-year basis and on an estimated pro forma basis. Excluding contributions from recent acquisitions, we expect growth will be in the mid to high teen percentages.

Several of the relationships we’ve secured in last year are still in integration period during the process of rolling out. And as these initiatives roll out more fully, we expect it will give us further visibility into 2019 regarding our current accelerating growth and momentum.

The solutions we’ve built off of our speech technology are resonating in key verticals, and we believe our ability to innovate based on our unique data advantage and conversational analytics is just at its beginning.

We see significant new opportunities to expand our vertical footprint and deliver new, unique, AI-driven solutions for many of our new customer relationships. We believe categories such as home services, healthcare, financial services and others represent right opportunities for our product pipeline to support further growth.

And next, looking at adjusted OIBA and EBITDA. For the first quarter, we’re forecasting adjusted OIBA of break even or better. For adjusted EBITDA in the first quarter, we are forecasting $1 million or more.

In 2019, we expect to continue investing in our speech technology, artificial intelligence, machine learning and data science initiatives, our strategic vertical initiatives including auto and expanding our conversational analytics and sales acceleration solutions into new customer communication channels across voice and text.

These areas are key pillars of our ability to solve critical problems for our customers. As we look to replicate our early traction in valuable verticals such as auto, we believe we’re in a good position to drive future growth and greater operating leverage over time. As we enter 2019, we’re energized with our direction as a company.

We are winning relationships with new, world-class brands and have reoriented our business to prioritize the voices of our customers and enhance our innovation cycles. We expect to see new products launch over the course of the year and now have a larger and growing team to take advantage of our opportunities.

There is still lots of work to do, but I would like to thank all of our employees for their commitment and their hard work. And with that, I would now like to hand the call back to the operator to take questions..

[Operator Instructions] Your first question comes from Darren Aftahi with Roth Capital Partners. Your line is open..

Just a couple if I may.

Mike, could you just clarify, when you were speaking about ex-M&A growth rates for your core Marchex business, were you referring when you were saying mid-to-high teens for the analytics business during the fourth quarter and the first quarter?.

That's correct. Yes..

Okay. Got it. Perfect.

So, the SMS and text capabilities you guys acquired, are those able to be parlayed into things like chat features, more encompassing perhaps even email?.

When we look at text as a communication channel, there are sub channels like, whether you get into messaging, chat and email, examples that you gave. We do see applicability of the analytics solution.

We’re prioritizing -- you can do anything you can, do everything -- and so we think the greatest opportunities right now are focusing on applicability with messaging, but we do expect over time we’ll extend that to chat and beyond as well..

Your business a while back, perhaps as far as the company too long, but you could demonstrate a fair amount of seasonality and it still does.

But as you have kind of transitioned the business and transformed it pretty quickly, with analytics, can you maybe indulge us based off Q1 guidance, how the cadence of revenue maybe moves from that $25 million or better? Because it seemed like it used to be sort of book ended -- pretty strong Q1 and then would be weaker as the year kind of went on.

And I'm wondering with 50% of your business coming from analytics now, is that dynamic changed?.

It does change a little bit in terms of the mix shift. So, if you think about our marketplace revenue streams, those generally are stronger in the first part of the year.

And if you think about call volume-related monitoring, analytics and some of the customer base that we have, they are actually stronger and the third quarter would be our highest seasonal quarter in just in terms of volume.

And the fourth quarter would generally be regarded more because of consumer-to-business conversations around the holiday timeframe dropping off as well as just spend patterns of service-based businesses, the fourth quarter in general would be our lowest seasonal quarter.

So, we still have those frameworks stay consistent and they’ve stayed consistent relatively consistently over the last number of years. With that mix shift, the analytics and the pronouncement of the third quarter being our highest or strongest quarter will be more reflected, the expectation would be in 2019 in any event..

And then, just last one for me, you called out SMB on sort of vertical or group. So, I'm curious, if you go back a little while you guys made a Facebook announcement, as I believe resell [ph] for the product.

How does that kind of fit in just given how pronounced Facebook and perhaps more so Instagram are in SMB business?.

So. to the extent that there are things related to conversations that are happening between consumers and businesses, as those are the opportunities with Facebook or even type of social media network.

And when you think about our opportunity around our phone calls, around text messaging, and any of the other engagements, Russ has already mentioned some of the other signals that you had asked about, Darren, chat as an example, email, but social media and engagement within messaging, conversations between consumers and our businesses are part of the platform of things that we think we can help businesses accelerate their sales efforts over.

And those are tranches that we're going to continue to pursue in the course of not just 2019, but beyond..

Your next question comes from Mike Latimore with Northland Capital. Your line is open..

Just on the seasonality, I guess, so, first quarter call volume seasonality, should we think of that as being up a little bit sequentially then relatively to fourth quarter?.

So, in general, from a seasonal perspective, the volume in terms of the units of volume would generally be higher in the first quarter than they would be in the fourth quarter, correct. Yes..

And then, in terms of the organic, the pre-Telmetrics, pre-Callcap customer base, I think, you've been working with some pretty good sized customers. Can you talk a little bit about what stage of deployment maybe those top-10 are in, are you [technical difficulty] way through just in terms of expanded deployment for that? [Ph].

Mike, sorry, I think, we missed part of the question there. If you could go restate it? I think, we lost little bit in the communication. .

Sorry. Yes. In terms of the organic business, you've been working with some pretty good sized customers through analytic business.

What stage of deployments they with that top-10 be in, are way half way through, less than half, more than half?.

Understood. Thank you for restating it. So, if you think about the top five, I would say the top five are more robust, they are more mature in terms of rollout. But, on the bottom part of the top 10, we absolutely in at least a couple of the cases, I would say, are still in the early stages. One of them in particular is an on-boarding stage.

And I think with almost all of those five and the bottom part of the top 10, we think there's more ramp to come. We should see some of that hopefully, in 2019..

And then, in terms of the acquisitions, I think part of the idea is you can bring some of your core technology to these acquired properties.

Can you talk a little bit about how long that will take? And then, will the benefit be more additional EBITDA or will it be some growth acceleration for those acquired properties?.

I think, our focus on the known is definitely on the synergy side with some of the communications and the cost of sales. We think that those opportunities will play out in 2019, as well into 2020, and those are more known where we think we're going to get some benefit on the cost of sales and the margins.

And we've mentioned some of those thoughts before. In terms of the product and aligning the product and bringing the product availability of all the different feature sets to all of our customers, that is going to take some time.

It's a little more unknown how that's going to unfold in terms of whether it impacts the revenue per se or how much it impacts just the value proposition with the customers and extending the relationship and the value being provided to those customers. We do think it will be beneficial.

And that again, we think most of that is going to come not here at the beginning of 2019, but more into the end of 2019 and 2020..

Then, I guess, just the last one, maybe hard to figure it out based on all the -- based on a two acquisitions.

But, can you talk sort of in terms of the pipeline perhaps organically, has that grown over the last quarter or two at least on the organic side of the business?.

So, definitely, we have some right opportunities and pilots that we’re feeling good about, and those would be exclusive of some of the acquisitions. And in terms of the stage of deployment and how that pipeline is looking, we feel good about it.

There's a few verticals we’re actually endeavoring into and we talked about some of them here on the call already. The health services area has not been an area where we've had a tremendous pipeline of opportunity in the past. And there's a few things that are happening right now that we look on positively.

Home services and definitely because of the acquisitions we think we're in a better place in aggregate in home services with respect to the pipeline. We’ll see how that plays out. .

This is Russ. Just to add, we think about which are the verticals that we are best suited to help solve some of these critical problems. And then what are we learning in the process of having success like we are -- we're having so far with auto, where we've got kind of the most applicability to replicate that.

And we’re seeing it with some of these additional verticals in addition to the just the broader footprint of opportunity we have, based on the combination of our organic growth in the recent acquisitions..

[Operator Instructions] There are no further questions at this time. I turn the call back to management..

We want to thank everyone for joining us today and we’ll look forward to updating all again in the future coming quarters. Thank you..

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