Good afternoon. Thank you for attending the Marchex Fourth Quarter 2023 Conference Call. My name is Victoria, and I'll be your moderator today. [Operator Instructions] I would now like to pass the conference over to your host, Trevor Caldwell, Senior Vice President, Strategic Initiatives, and Investor Relations with Marchex. Thank you.

You may proceed, Trevor..

Thank you, Victoria. Good afternoon, everyone, and welcome to Marchex' business update and fourth quarter 2023 conference call. Joining us today are Edwin Miller, our CEO; and Holly Aglio, our Chief Financial Officer.

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. 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. And at this time, I'm going to turn the call over to Edwin..

one, booking more business and increasing speed and scale of new revenue; two, positioning the business with current and future clients around prescriptive data analytics and AI capabilities; three, our successful migration to one stack by Q3 of this year as one stack is a catalyst for revenue acceleration with our vertical market growth strategy; four, continuing to deliver on operations and technology efficiencies that we anticipate could expand our gross margins and increase free cash flow.

With that, I'll hand the call to Holly to walk you through the financials..

first, continued lower volumes from our small business reseller customers; and second, a collection of certain macroeconomic factors across our verticals as consumer traffic is lower across home services and automotive to start the year. From Q1 2024 forward, we anticipate sequential revenue growth during the year.

We expect the ramping of existing customer relationships and new wins will result in 2024 revenue growing year-over-year, and we expect to exit 2024 with accelerating growth rates. We have seen positive early adoption of our recently released AI signals by customers.

As we expand our products and capabilities in this area, we expect these AI offerings to fuel our growth this year and well into the future. For adjusted EBITDA, we anticipate breakeven to positive adjusted EBITDA for the year.

For Q1, we anticipate somewhat negative adjusted EBITDA with improvement sequentially through the year, which we believe should collectively lead to neutral to positive adjusted EBITDA for the full year. We currently anticipate 2024 year-end cash balances to be at or near year-end 2023 levels.

For gross margin, we anticipate that we can increase our gross margins by 5 percentage points or more by the end of 2024 with the successful completion of the one stack initiative and acceleration of our vertical market growth strategy.

Even with the noted lower volumes in certain areas to start the year, we believe those factors should be offset by our new customer adoption and previously won relationships ramping over the course of the year.

We anticipate the early traction with our AI product pilots and new customer engagements, combined with execution on go-to-market initiatives, will lead to sequential growth throughout the year and overall revenue growth for 2024. Our existing pipeline across our core verticals looks strong.

And as we complete the necessary infrastructure to accelerate cross-selling our products, including our AI signals, we believe we will see favorable impacts from these as well.

Additionally, we expect to win more new automotive OEM customers and add meaningfully to our dealer channel as well as win more new relationships in home services and other verticals.

Furthermore, our current initiatives to move to one stack, combined with other cost savings initiatives, in tandem with anticipated future revenue growth, should enable greater overall operating leverage in the business and, consequently, improvements in profitability measures into the future. Thank you.

And with that, I'd like to pass the call back to Edwin for closing remarks..

Thank you, Holly. I'm excited about where we're heading as a company. I've spent considerable time meeting with customers in the past year. They want us to lean in and do more to help them drive sales, marketing and operational excellence.

They need to understand customers' conversations from lead to aftermarket support at a more detailed level and at a scale. Generative AI can help us rapidly advance this goal. These are large diverse businesses with complex technology ecosystems.

They need a partner who understands conversational intelligence, AI and data analytics to help them achieve operational excellence. Marchex is ideally positioned here. I believe there is a robust opportunity for our business to grow from our existing customer base and new client wins.

I also believe that we will drive the future of conversational AI and prescriptive data analytics within our vertical markets. This could open new avenues for growth as we launch new offerings throughout the year.

I want to thank the team for their hard work and we look forward to accomplishing much together on behalf of our customers and shareholders. Thank you for your time today. With that said, operator, let's move to questions..

[Operator Instructions] Our first question comes from the line of Darren Aftahi with ROTH MKM. Your line is now open..

Hi, guys. Thanks for taking my questions. First, I guess, on your commentary about revenue growth starting in 2Q and beyond. I'm curious how much of that is from existing expansion from '23 clients and/or wins versus new customers you're going to sign this year.

Like, said another way, what kind of visibility do you have on that growth beyond the Q1 dip?.

Yes. Thanks for the question and good to hear your voice. We did a lot of work in '23 in that go-to-market motion and alignment of what I would consider product marketing to product management, to dev with output into sells. So lining all that up and getting the team ready to compete on the field, we've done, which is good.

We also consolidated how we manage a pipeline and a funnel all into Salesforce.com in a very sequential manner under Troy Hartless who's our CRO, so much better understanding of our client base.

And I would add, I don't know how many customers I've met with personally, probably over 20, and as you meet them three and four times, you begin to get their roadmaps. And that just takes time to build that trust with the team. So I think we're kind of in the throes of that.

We're lining up our product development and our engineering against what our clients have said are the real pain points that we know we can deliver with our generative AI and our data analytics. And as we move to one stack, it's just going to be much simpler to sell, which is going to create velocity.

And the single API is going to, I think, open second half of the year the ability to have channel capabilities for the first time for the company. So I think it's all coming together. I don't know if that answers your question, but a lot of the lift in '23, think about it as getting the team in shape and getting ready and studying the playbook.

And now we're executing that playbook..

That's helpful.

And then I guess, how much of that growth can be achieved with your current cost structure? I guess, said another way, if you start growing more quickly, do you need to add head count? Or is existing infrastructure support a much bigger business?.

Another good question. And thanks for the thought, Paul. The cool thing that we've done in the lift in '23 moving to one stack, and we'll get there early Q3, is the touch in the business, which helps us seize our gross margins. It just gets easier to sell at speed. It gets easier to onboard at speed and scale.

It gets easier to support our clients at scale. So we will invest in this business. I think it's a growth business. I think we're in the right place at the right time. I love the market. I love the talent on the field we have. I love the customers we have, just incredible Fortune 500 companies trying to solve big problems.

Operational excellence, sales and marketing, we're right across the areas, of how to help them grow their business. So I just think it all comes together.

The investment in our business will be, as I mentioned, data science, AI, and we certainly will invest in the go-to-market as we see the verticals opening up and driving speed, but we'll be fiscally responsible and do our best to drive growth in this business and margins on this business as we grow..

Great. And then just one last one for me, more financial in nature.

On the unified stack and the benefit to gross margins, you kind of spoke to in the release and on the call, when exactly is that going to be complete? And do you need to see revenue growth in order to see gross margin benefit?.

Good question. The fact that we're bringing together what I think were really good acquisitions and technology stacks into one stack inevitably alleviate support of multiple systems.

So I like to tell the team in the very first off-site and the second off-site we had with our executive leadership team and senior leadership teams is that we've got a wagon, it's got a bunch of things to sell in that wagon and we're going to sell them every day. And I'm going to be on the frontline selling with you.

And right now, we've got some really good cool boxes and shiny boxes in the wagon of the acquisitions that were made over time, and they really were good acquisitions. Bringing all those code bases into one stack, one architecture, one API, just gives us the ability to deliver it with more ease and more scale.

So the margins will lift with that touch going down. The volume should lift because we're adding on AI models now. So we've got existing customers adopting things like Call Summary and Sentiment. And that's just an additive purchase by them. So they're already integrated into our data pipe and our stack.

So as we add on more of those models, we can add on and layer on additional revenue, which will add on margin. But of course, the more we sell with speed and scale in the go-to-market motion, the higher the margin can go as well. So I think it's a couple.

But I don't need the company to drive a bunch of new revenue in order to increase the margins that's operating the company more effectively and efficiently with one stack. But we are definitely focused on that go-to-market and the verticals. We want to replicate what we've done in automotive.

And as Holly mentioned, we've got some really strong anchors in home services, healthcare and, what we call, auto services. I've been out meeting with those clients as well. So as we penetrate all four verticals in more of an equal manner, it's just going to drive growth into the business and margin in the business..

Great. Thank you..

You're welcome..

Thank you for your question. The next question comes from the line of Mike Latimore with Northland Capital Markets. Your line is now open..

Great.

Thanks very much So I guess, Edwin, when you get back to growth later in the year, do you think the growth will come evenly from new logos being layered in versus expansions? Or is it logical that one of those two categories really is the key growth driver later in the year?.

Nice to hear your voice, Mike. Yes, it's a good question. We're focused on new logos and existing. And when you have the kind of client base we do in those four verticals, it's kind of hard to ignore them. And they're spending money. Everyone is trying to figure out what to do with AI.

And the way we're positioning it is it's AI plus prescriptive analytics. If you think about the three categories of analytics, you can be descriptive of what happened yesterday, which is important, right? We all want reports of what happened. You can get descriptive in that report and make good business decisions, I think.

But where you really want to get in the future is prescriptive, and you basically want to be able to tell them, "If you do this, this will happen." And I think that's going to resonate well with our existing clients, and it's going to resonate well with AI models with new logos.

And I'll add to that, the fact that the kind of clients we have and the experience we have in these verticals with deep data, it's 1 billion conversations that are refreshing every day, which is insanity for us, it's awesome.

Our understanding of the market and our ability to get talk through what business problems exist and what they're going to look like, it's pretty powerful. So I think it's going to be a mix of both. If you look at our pipeline, it's growing each day. We've got great sales teams aligned with the go-to-market. We've launched a couple of new AI modules.

We're going to launch more. So I think it's going to be both throughout the year..

Got it.

And on the small business segment, what percent of revenue is that now?.

It's around 15%. And we're not ignoring it. But it's not a focus of ours. The Fortune 500, I mean that's a multi-multi-multibillion dollar segment to go after. And I just don't see them taking AI and prescriptive analytics all in-house and trying to solve the problems themselves. They're going to rely on experts.

They're going to rely on AI SaaS companies to help them, which is where I'm focused the company to go. And so as long as we're delivering new value-add in the AI market and can hit all three buckets of analytics but land on prescriptive, we're going to grow that Fortune 500 footprint.

I'm just going to try to make it much easier over time for small businesses to consume with very low touch because you're talking very low numbers compared to the focus we have and the ability we have to sell, again, landing some of the logos we have in all four verticals.

Good luck to companies trying to penetrate those businesses because they're hard. It takes a long time to build trust. And we're embedded. And they're great partners. So it's just fantastic. We got some of the best logos in the world. So not ignoring that 15% at all but really focused on the Fortune 500 and the four verticals I've mentioned..

Got it.

And then just in terms of how you price for your service, any notable changes there? Do you feel like you have the pricing model down?.

Yes. I think we've got the pricing model down. It's set. If you think about the full stack of what we deliver, whether it's a texting solution or a number solution, that's kind of set in the marketplace. The question I've got in my mind is what's the model really going to be when we're delivering SaaS, Marchex as a Service, with 20 different AI models.

And we're driving prescriptive analytics. So if you think about product place, price, promotion, I think the pricing and promotion, we're going to learn a lot in '24 going into '25.

I don't know if you've met Troy Hartless, our CRO, he's got a seat at GE in products, I've worked with him a couple of times, one private, one public, and he may be the best CRO I've seen in the field. He's not your normal, what I'd call, salesperson. He is kind of a finance meets engineering mind, and he thinks of products in a very distinct way.

So I think we'll probably learn this year on pricing, on things that we're going to launch into the marketplace. And I think that's healthy.

But what we've been selling, I think we know extremely well how we add more value around that with an API and new data models and leveraging LLMs out there, I think that could shift a bit for us in a positive manner..

Great. And just last one on LLMs. There's different varieties out there. There's a wide spectrum of cost.

I guess, do you kind of leverage any particular LLMs, like open source? And how do you view the cost involved in those?.

We're looking at all the LLMs. So I'm going to stay away from being specific there, if you don't mind. It is definitely a horse race out there for who can drive the model. What we're focused on is we've got the vertical market data sets to inform those LLMs and make them intelligent.

And I think I said this on the call in the past, if you're in the automotive vertical, Bronco doesn't mean horse, it means a vehicle. But in health services, Bronco wouldn't mean anything to enable them. And that's a trite example.

But at the end of the day, when you have millions of words being used and you're informing those models, we're going to do our best to stay agnostic and leverage the best and brightest out there..

Thanks..

You're welcome. Thank you..

Thank you for your question. There are no additional questions waiting at this time. I would now like to pass the conference back to the management team for any additional remarks..

Okay. Well, thank you, everyone, for dialing in, and thank you for the questions. We look forward to working hard in the coming quarters for you all and we look forward to the next call. Thank you. Bye-bye..

That concludes today's call. Thank you for your participation, and enjoy the rest of your day..