Q4 2019 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the Marchex fourth quarter 2019 earnings Conference call. At this time, all participants arent to listen only mode. After the speakers presentation. There will be a question didn't answer session to ask a question. During this session you would need to press star one on your telephone please do.
So today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to Mr. Trevor Caldwell. Thank you. Please go ahead Sir.
Good afternoon, everyone and welcome to Marchexs business update in fourth quarter 2019 conference call.
Joining us today or Michael runs and Russell Horowitz.
Before we get started I'd 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 take 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 todays earnings press release.
Earnings press releases are available on the Investor relations sections of the website.
At this time I'd like to turn call over to our Chief Financial Officer microphones.
Thank you Trevor.
Good afternoon, and thank you everyone for joining us today.
2019 was an important here from our checks.
Made significant strides in our evolution from an insights and analytics provider.
Two and insights analytics and sales acceleration company.
Our foundation as the industry, leading call analytics solutions provider has been critical and opening the door to this bigger opportunity with cross channel consumer insights centered on sales acceleration opportunities.
As we focused on measuring the effectiveness of inbound marketing driven phone calls to businesses.
We amassed a wealth of conversational data.
We felt that if we could leverage this data and strategic ways. There would be a multibillion dollar opportunity based on moving beyond insights and into sales enablement and acceleration.
Today, our product solutions and ongoing investments in artificial intelligence are helping our customers use this data not only to understand their marketing return on investment.
But most importantly to close the loop with this data to improve their sales processes and achieve better sales outcomes.
Our future isn't helping businesses enhance the efficacy of their sales initiatives and create measurably better customer experiences that helped them grow faster.
In the fourth quarter, we acquired sonar technologies, which is an enterprise text and messaging sales engagement platform.
This extends our analytics and engagement solutions beyond calls into text and messaging.
Sonar technology enables enterprises to deliver timely and highly personalized experiences via text messaging, which is one of the most heavily used mobile consumer communication channels.
Sonar brings us a strong team with deep subject matter expertise.
So in our processes millions of messages for leading organizations and real estate consumer lending travel automotive and other industries.
We are working towards giving our enterprise customers a view of their customer conversations across calls and tax which are two most common business communication channels on mobile devices.
As part of this are evolving platform will measure how effective sales processes are in driving and converting high intent customers on their smartphones as well as provide businesses additional solutions to create better customer experiences in the communication channels. They most prefer.
We anticipate integrating the sonar platform with Marchex by the end of 2020, which will enable us to start delivering on that vision to create a unified view of these growing customer interactions in voice and text, which has noted are the most prevalent mobile business communication channels.
This is mission critical today for the first time since the launch of the smartphone mobile phone usage eclipse TV screen time in 2019.
We are convinced mobile will remain the center of consumer and business communication.
Our progress in product innovation reflects this belief and is driving new opportunities across our business and helping to position us as a leader in conversational analytics and sales acceleration solutions.
We're capitalizing on the early positive feedback from Marchex sales at suite, which is an artificial intelligence based solution that enables businesses to understand customer conversations in real time and at scale to optimize their sales processes and win more business.
Essentially we're giving businesses data driven intelligence and deep knowledge of consumer intent, which is key to delivering personalized experiences and closing more sales.
We're pleased to report that we've added four customers, including pilot conversions for sales edge rescue.
These new customers will fully onboard over the coming quarters, and we expect to add new pilots convert more of the current pipeline and add additional new customers for sales edge rescue.
Sales as rescue offers conversational AI infuse call monitoring, scoring engagement to alert businesses when potential buyers and the conversation without making an appointment or a purchase.
It identifies when high value customer conversations are miss handled and immediately delivers this intelligence to businesses. So they can reengaged with customers and rescue the sale.
Just yesterday, we announced enhancement to this product by adding closed loop conversion insights.
Now Marchex can track and analyze the effectiveness of the outbound business response, when the sales team response to a high intent alert.
This type of closed loop product suite is the first of its kind for marchex.
It allows us to not only measure in inbound call and identify missed high intent opportunities.
But it also tells us whether or not sales personnel were successful at capturing those missed opportunities and achieving the value impact.
It enables our customers to measure the effectiveness of their sales process in real time leads to better customer experiences and also enables them to close more sales.
As we integrate sonar, we will also be integrating texting engagement capabilities to further expand the applicable use cases for sales edge rescue.
I'd also like to talk further about one of the most important drivers of our future success.
Artificial intelligence.
AI has ushered in a new era of customer engagement in fact, AI and machine learning can now process data and information at rates that far outpace traditional software let alone the human brain.
Not only that AI can power better and more personalized customer experiences as because it takes more seconds to recognize patterns and produce predictive insights useful in both customer acquisition and engagement.
These capabilities enable one to one marketing that drives higher levels of customer engagement and ultimately informs more effective strategies for customer acquisition.
We are infusing our product pipeline with these expanding AI capabilities, which reinforces our commitment to being a leader in providing conversational intelligence and sales acceleration solutions for our customers across voice and text.
As well as in select verticals, such as auto and others.
With that I'll hand, the call duress. Thanks, Mike.
We are heavily focused on the impact our newest products can have with existing and new customers and are therefore investing in the talent and next generation infrastructure needed to make meaningful progress.
This is the context for our recent additions of new executive and senior leadership positions, which is a key part of our commitment to accelerate the customer adoption of our products.
We're very pleased to bring on John Rogers, our Chief revenue Officer.
John is a seasoned sales leader with a long track record of success scaling sales to use at innovative technology organization with the world's largest brands.
He has been into technology and media industry for more than 20 years and deeply understand this space.
As we continue to execute on our opportunities we will look for places, where we can augment our team with world class talent look at potential acquisitions, it financially sensible or at partnerships that are can accelerate our efforts.
Our new expanding capabilities are enabling marchex to solve large scale problems that have played businesses for years.
By empowering businesses with our unique end to end sales enablement solutions, we're positioning ourselves as the partner of choice in the conversational analytics and sales acceleration landscape.
We've made meaningful progress over the last two years in everything we're doing today from our investments in products and infrastructure to our leadership additions and strategic initiatives is designed to help us take advantage of the new and significant opportunities emerging in our business.
Theres much still to do but we are committed to helping our customers solve mission critical problems and translating that into meaningful growth for marchex.
And I'll hand, the call back to Mike.
Thank you for us.
Looking at our financial results for the fourth quarter revenues were $28.6 million.
During the quarter, we saw year over year growth for both our analytics and marketplace products for the fourth consecutive quarter.
Looking more closely at the product areas core analytics on solutions revenue was $12.7 million.
We continue to see progress on a year over year basis, particularly based on the Rollouts, we've had with customers and trials and early integrations.
Verticals like auto continued to be drivers and just as importantly, we believe there is considerable opportunity to expand our footprint of adoption in the auto vertical and others in 2020 and beyond.
Also we recently successfully converted some of our earliest pilots for sales edge rescue into annual commitments.
While the revenue from a pilot showed up in our non core revenue line in the fourth quarter. We expect at some point later in 2020 that these will start to contribute to core analytics as these customers role to full programs.
Looking at the marketplace fourth quarter revenue grew on a year over year basis, largely from budget increases from certain large customers as well as some contribution from new customers as compared to the year ago period.
During the quarter. We also saw incremental progress in our thrive relationship on a year over year basis with growth driven by increases in marketplace initiatives offsetting the decline in the legacy local leads product.
We continue to anticipate local leads will transition in the near future consistent with prior commentary.
However, we expect some modest contribution may extend through the first part of the year.
In looking at the personnel for the fourth quarter.
Excluding stock based compensation amortization of intangible assets and acquisition related costs total operating costs for the fourth quarter were $28.1 million compared to $22.4 million in the fourth quarter in 2018.
Service costs were $15.6 million up from $12.6 million in the fourth quarter of 2018.
Service cost as a percentage of revenue were flat on a year over year basis.
Compared to the third quarter of 2019 service costs increased due to an increase in the percentage of revenue tied to the marketplace product progress.
In 2020 and beyond as our new analytics products launch and they contribute to growth overtime, we believe growth and our analytics stream can positively impact service costs as a percentage of revenue.
We also believe there are several investment efforts, we plan on undertaking with respect to our analytics infrastructure that will provide long term margin benefit in 2021 and beyond.
Sales and marketing costs for $4.3 million. This amount was up slightly compared to the fourth quarter of 2018 on a percentage basis.
Product development costs were $5.3 million and were down slightly as a percentage of revenue compared to the third quarter.
In the fourth quarter and continuing throughout 2020, we will continue to invest and new products and our expanding AI and data science capabilities.
Our core platform work was in full swing in 2019 carrying through the fourth quarter and we expect will be largely completed later this year.
Through our product and infrastructure initiatives, we are broadening our market opportunities and positioning marchex for long term growth.
Moving to profitability measures adjusted operating income before amortization for the fourth quarter was $527000.
Adjusted EBITDA was $1 million.
Net loss applicable to common stockholders was $400000 for the fourth quarter of 2019, or one cents per diluted share compared to a net loss of $637000 or one cents per diluted share for the fourth quarter of 2018.
Adjusted non-GAAP income per share was one cents per share compared to adjusted non-GAAP non-GAAP income of two cents per share for the fourth quarter of 2018.
Additionally, we entered the fourth quarter with approximately $43 million, we ended the fourth quarter with approximately $43 million and cash on hand.
Now turning to our outlook for the first quarter of 2020.
We are forecasting revenue of approximately $25 million for the first quarter four core analytics and solutions. We are forecasting revenue to increase from both the fourth quarter of 2019 and the prior year comparative first quarter and be in the range of $12.8 million.
As previously mentioned the Rollouts of some sales rescue converted pilots will start to contribute as the customers fully onboard in 2020.
While it may take time to contribute meaningfully we expect our sales edge rescue and other related new products will be key drivers of potential growth in the future.
We also Ics. We also further expect that the new products and trials. We will launch this year will set the stage for potential further growth as we move through the current year and into the next.
In addition, we are in the process of ramping our relationship with a large OEM customer, which is expecting to commit additional resources to accelerate adoption of our products over the course of 2020.
Our new sales leadership is now re optimizing our team to take advantage of this added support and opportunity in further as our sales initiatives ramp and our new products begin to gain traction we anticipate that growth in our auto vertical could accelerate in the second half of the year.
For our marketplace products for the first quarter, we are forecasting relative stability or potentially a modest increase in revenue on a year over year basis, excluding the decline of the legacy local leads product.
Our product product progress enabled marchex to get a disproportionate allocation in the fourth quarter from a limited number of our marketplace customers.
And we're still in conversations with those customers regarding their annual view of their commitment, but believe we will continue to see potential opportunities for our marketplace products in 2020.
Next looking at adjusted OIBDA and EBITDA.
I wanted to highlight some of the strategic priorities that are defining our investment priorities for the year first.
We expect to invest in additional sales and marketing personnel and initiatives commencing particularly in the first part of the year as we accelerate our initiatives to capture what we're seeing as the increasing opportunity for our conversational analytics products and sales acceleration solutions.
Second we plan to invest an additional $2 million addressing various infrastructure initiatives, including consolidating infrastructure and datacenters during 2020.
Through these initiatives, we anticipate that we will recruit more than $1 million, an annualized cost savings for the company beginning in 2021 and beyond.
Third.
We made an investment in a private company that is developing an opportunity within auto services that is independent from our existing auto analytics product focus, but one we believe can benefit from our technology investment within the auto vertical overtime.
We believe this investment can help broaden our overall strategy deepen our industry coverage and offer us more ways to leverage our technology investments.
We expect to allocate $2.5 million towards this investment in 2020.
And fourth.
Regarding our guidance for profitability measures consistent with prior years. It is worth noting that there are adjustments, including compensation personnel related items and certain professional fleet fees that flow through disproportionately in the first quarter and first half of the year as compared to the second half of the year.
As a result of these initiatives for the quote for the first quarter, we're forecasting adjusted OIBDA to be a loss of $1.5 million or better and for adjusted EBITDA to be a loss of $1 million or better and near breakeven excluding charges related to our investment in our auto service opportunity.
We anticipate making profitability progress through the course of 2020 and anticipate adjusted EBITDA to be above breakeven for the year, excluding the auto service investment opportunity.
In addition, we believe these investment initiatives can help build a meaningful growth and operating profile for marchex in the future.
In 2019, we made significant progress and rolling out new large potential customer relationships, we launch new products and began laying the foundation for the new technical infrastructure that will support increased scale real time capabilities integrations and future product innovation for years to comp.
Our new technical architecture will enable marchex to innovate and integrate faster and to capitalize on the ongoing investments, we're making an AI data science and new solutions.
One example of this is our recent acquisition of sonar, which we anticipate integrating into our core offerings by the end of 2020, and we expect an incremental positive contributor to our aggregate margin profile thereafter.
Two years ago through listening to our customers, we saw a significant opportunity to utilize one of the largest conversational datasets created by being a leader in the inbound call analytics market to tackle a larger more meaningful opportunity.
And by virtue of being in the flow of hundreds of millions of sales calls we saw the opportunity to solve an increasing number of mission critical problems for our customers.
As we evolve our infrastructure to accelerate innovation and release new products. We are beginning to see this focus payoff and customers coming to marchex for the insights we can uncover through our leading conversational intelligence technology and to utilize marchex sales acceleration solutions to create better customer experiences and importantly close.
More sales.
Today, we are just starting to realize the benefits of our expanding market opportunity and we expect 2020 will represent a significant step forward.
We look forward to updating you on our progress throughout the year.
Yes, and I want to thank the Marchex team for all their hard work and we look forward to updating you on our continued progress on our next call.
And with that operator, we will hand, the call back to you.
As a reminder to ask your question you any difference now one on your telephone to withdraw your question press the pound.
Please standby will be capacity today roster.
And your first question comes from Darrin apathy with Roth capital partners.
Hey, guys and thanks for taking the questions also telephony.
Good clarity opportunities and so on the score on new sales heads rescue all comers.
How many lows will highlight and then if you get indulgence, what verticals multiples world.
So three of them, where our pilots that we're converting one of them was a direct new lead.
The verticals the primary ones, our health care and auto services.
Great.
[music].
On year guidance, and then kind of annual commentary. So I'm just kind of curious trying to understand the.
It looks like your analytics.
Guidance kind of a year over year is flattish.
But then you made some commentary about auto Oems potentially accelerating growth later in the year.
I'm just curious.
What part of gives you the confidence.
With Alkar right now in February.
Yes got a point with auto OEM that you feel like gives you strong convention that growth accelerate.
And by that kind of comments, Larry how material of acceleration could Lucy.
So darrin this is Mike there's several parts to the question in terms of how I think best to address one is we've done a lot of work on the product to be able to set the stage for new product introductions sales edge rescue as one of those.
Areas that we've introduced to the market, but there's still various features and facets that will be added over the course of 2020 and the feedback has already resonated with the customers coming back to us and.
It's positive there are new products that are coming I think thats part of the equation of why we feel some optimism looking ahead. There are new features and there is that feedback on those initiatives that are specifically sales edge rescue in terms of the auto vertical. There's a couple of things that are happening. One is the large OEM relationship that we have they have put forth and.
Issued gives to Invigorates an opportunity to go after some of their dealer network in a much more robust way and they're planning on rolling that out here in the coming periods.
So we see that potentially moving things forward. In addition, there is a variety of other relationships that we deepened and also one that our new and they'd stretch not just in the auto OEM area, but some of the auto services vertical and to that end I think one of the things that Weve then done as seen some of this feedback and knowing that the new products are are coming on.
Board, we've made a conscious decision to invest further in some of the sales and marketing initiatives and why we brought on some of the new team members and we feel good about what some of those things can garner for us as well, yes. Darren this is relative to add.
Yes, we kind of were at or just passed this inflection point as our opportunities evolved from analytics to include sales acceleration and enablement.
On getting through these initial pilots with sales rescue.
Allowed us to work through how to sell that onboarded more quickly and so between kind of our product evolution.
And the customer opportunities and visibility on kind of increased visibility we feel like.
As the year unfolds.
It's about execution and timing obviously, it's early in the year, but that's what gives us I'd say the confidence and thinking about 20 to 20 is is a good year to to execute make progress with adoption and expansion.
Great. That's helpful does just last one for me on the auto services investment.
I'm just curious in terms of capital deployment.
One.
Why you think this such as.
Good use of capital as maybe not.
Benefiting your CLO business and perhaps it does and then just strategically maybe you can expand a little bit more on on why you think disintegrated capital. Thank you.
Ill jump in and hit on a couple of theme.
Automotive is the vertical where we feel we've got some unique strength, both with our technology and our relationships and we feel we're executing well and see opportunities for acceleration.
Based on our core.
Continued execution of expansion of capabilities and and morning deeper relationships.
We saw an opportunity here to leverage the technology and relationships and confident on combination with a defined amount of capital and extend what we could be meaningful opportunities for for value creation and so.
That was the impetus for this and why we feel good about it.
Great. Thank you.
And your next question is from Mike Latimore with Northland capital.
Great. Thanks, a lot.
On the the for I guess larger customers three of which came on a pilot.
I mean, what kind of annual recurring revenue may we think about for these is it.
Thank you are 60, or 70, or just trying to get on the potential sizes there.
Thanks, Mike. This this is Mike responding here so in terms of the for the we have so far theres a few of them that I think are probably tens of thousands in terms of opportunity, but could become hundreds of thousands of.
A full rollout onboarded revenue streams on an annual basis.
And there's a couple of them that we think are already a 100000 plus in terms of the range I don't think any of them at this stage would be a million dollars plus opportunities.
But there are others that we are talking to where there could be some meaningful amounts in that range at some point in the future.
Okay.
Got it and then the large auto OEM.
Yeah.
Even working with these guys for a while I guess, what what gives you more confident they might accelerate this year versus kind of laughter.
I think more specifically some of the plans that they they put down on paper and that they have scheduled out in terms of time frames investment profiles reinvigoration of just some of the initiatives that they want to put forth and.
They are making more tangible and concrete moves in that regard and thats.
Being been re laid to us very succinctly and clearly.
You know the addressable market year end I mean, what's your general view of the growth rate of that market.
You can call analytics.
This is rough.
We call analytics, we've looked at is a it's a meaningful growth opportunity.
Obviously, our enthusiasm for four Marchex.
Has increased significantly as we've been able to kind of take that analytics opportunity and extended much more broadly into sales enablement an acceleration.
Historically kind of describe that you'll analytics applied to inbound marketing driven phone calls is a very valuable mission critical solution.
But its limitations or that you get a percentage of those media dollars.
Effectively for providing a product or service as we extend that you do kind of this broader sales enablement an acceleration market you are tapping beyond built limited kind of application of a small percentage of marketing dollars based on your value impact to the enterprise given how you can.
Recognize.
Got it through these insights whether you've missed opportunities maybe quantify the impact of what it would mean to harvest for those men provide the solutions that allow them to take action on those and then measure the actual impact and benefit by doing that we think our addressable market has been expanded from a V.
Very interesting one to a transformational one and we think the steps. We're taking now are clearly catalysts for us to to grow and accelerate and and validate that and share that progress as well and so.
Well, we're not giving specific percentages, we think it's very meaningful.
Look at the expanded footprint and kind of our access to the dollars associated with the with the problems we're solving.
Got it and then and in the press release, you talked about maintaining your profitability profile and that's still plenty I guess when you say profitability do you mean EBITDA first and second do you mean that that you would just be positive EBITDA or that you'd have the same level of EBITDA Cisco Mike.
At this stage I think excluding the auto services investment we've talked about is making progress over the course of the year from the first quarter and I think that in aggregate with that progress you should get two of the pointing in aggregate for the year, where you're above or a positive number and clearly when youre looking at the fourth quarter.
Because of the leverage in the business in the business model with some of those investments complete by the end of the fourth quarter, you're going to be in a place where you could potentially be at those levels of what the run rates were in 2019 or or above and just to add.
What we're looking at as we've made the decision to accelerate investment last year in our product and innovation. So that we'd have the solutions like sales rescue we do today, obviously more recently, we felt we'd seen what was needed to make additional incremental investment on sales leadership and organizational expansion based on where our products and our.
Opportunity were and the nice part about these is that the contribution margins associated with these products is very high so as we move forward, we'll need to make judgment calls.
Around how much of that contribution we potentially look to reinvest if we're getting validation on growth opportunity and extension as well as.
Letting it flow through.
Right and just last one on the investment in the private auto services company.
What are you getting out of that as it access to a new service that.
Equity investment you slightly what's your benefit exactly it is a majority stake equity investment a lot of the development activities will flow through on our results of operations and hopefully we get an opportunity to expand and create and an additional revenue stream as well as additional opportunity with some of the relationships in the auto services.
Area.
Okay. Thanks, Thank you.
And there are no further questions at this time.
We want to thank everyone for taking the time today and we will look forward to continuing to update you as we go and progress throughout the course of the year. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Oh.
[music].