Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Marchex first quarter 2020 earnings Conference call.
This time, all participants Arnie listen only mode.
After the speaker presentation, there will be a question and answer recession to ask a question during that time, you wouldn't be to press star one on your telephone keypad.
I would now like to hit the conference over to your Speaker today, Mr. Trevor Caldwell Senior Vice President of strategic initiative and Investor Relations. Thank you. Sir. Please go ahead.
Good afternoon, everyone welcome to Marchexs business update in first quarter 2020 conference call.
Joining us today or Michael Arends Russell Horowitz.
Before we begin I'd.
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 that's contemplated by these forward looking statements.
Risks and uncertainties that could cause these results to differ materially or set forth in today's earnings press release, and then our most recent annual and quarterly report filed with the FCC.
Any forward looking statements that we make on this call are based on assumptions as of today and we take no obligation to update you statements for subsequent events.
During this call 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 release is available on Investor Relations section of our website.
At this time I'd like to turn the goal over to Mike rents are co CEO and Chief Financial Officer.
Thank you Trevor.
Good afternoon. Thank you everyone for joining us today.
As we all try to navigate our way through this pandemic our focus at Marchex has been to prioritize the health and wellbeing of our employees and to do everything in our power to support our customers.
In early March as the situation began to unfold, we mobilized and just a matter of days to move our entire company to a remote working environment.
We then began to create processes to best manage our business remotely well guiding our customers through this rapidly shifting landscape.
I'm proud of our team's ability to adapt which has helped us stay connected and supportive of each other and our customers. During this challenging time.
Like millions of other businesses, we have been impacted by the economic shutdown, but we remain very optimistic every day were inspired by how our team is adapting to this new and emerging world order.
We are especially motivated by how our customers continued to turned to us for solutions and the ways, we're finding to support them.
For our customers, but pandemic remains a significant challenge as state governments across the country continue to extend stay at home orders.
Revenues were measurably impacted as closures hit almost every business vertical from auto dealerships and auto service locations to dental offices hotels and many others.
All of these verticals where growth opportunities for Marchex.
Based on the conversations we're having with customers and prospects, we do see the potential for these opportunities has these industries resumed operations in the future.
The trend toward AI augmented sales acceleration solutions is very important to many of our customers. However in today's climate and on a near term basis lots of businesses or just trying to make it through this crisis with the resource a stretch that.
Many of our customers have reached out to us to help them understand what's happening in real time at the franchise or store location level.
They've come to us for insights that can help them better understand how to manage their businesses deploy our conversational analytics and speech technology for cobot reaction signals and gain the insights needed to respond appropriately.
Nowhere is this more evident than in the auto vertical.
We've made progress in several OEM relationships and helping them navigate an unprecedented sales slowdown.
In fact, they are asking us to accelerate different aspects of our product roadmap.
And fast track certain products that drive critical insights and customer engagement.
They want products that will streamline a complex vendor system in the sales engagement channel to enable a more robust and responsive relationship between the OEM and the dealer.
We believe this will have a positive impact from our checks in the intermediate and longer term.
Also at a time when many of our sales edge rescue Rollouts were delayed and some pilots were deferred or extended no. One has cancelled their pilot plants.
Many customers are eager to test and deploy the solution when the ground solidifies.
This highlights the importance of our solutions to the short and long term health of our customers.
We recently received third party recognition and validation regarding our marketing innovation and leadership.
Opus Research and independent research group focused on the evolving nature of customer and prospect engagement.
Marchex as the leader in conversational intelligence last month.
The award recognizes companies based on their ability to turn raw data into actionable business insights and it's another proof point that the investments and focus we poured into artificial intelligence can open the door to a larger and we believe more valuable opportunity.
Through our proprietary speech technology and our investments in data science, an artificial intelligence. We are now able to solve an increasing number of mission critical problems for our customers.
From a hundreds of millions of conversations we process every year, we were expanding the insights and sales engagement solutions, we're offering and this will continue.
This demand trend is real these conversations between consumers and businesses are occurring across voice and text communication channels every day.
Importantly, marchexs positioned with unique solutions to help businesses engage with consumers in highly personalized and efficient ways ways that helped create better customer experience experiences and increased sales.
Now I'd like to hand, the call to Ross.
Ross is unable to join us for the moment, so all continue to engage.
I'm actually yeah technical difficulty I'm here.
Thanks, everyone.
After three decades of running various public companies our leadership team has experienced navigating economic crises difficult market conditions.
Well the 19 has its own unique characteristics, but marchex is whether challenging times before and I'm confident we will do so again.
So pandemic makes us more aware of the reliance our customers have on us and accordingly, we are staying focused on continuing to innovate in ways that support them.
We're also accelerating our infrastructure initiatives and revisiting our product pipeline to adapt to the real time needs of our customers to that end, we recently hired a new cheap product and strategy officer, Brian Poly.
Ryan has a deep background in developing and implementing product strategies at emerging technology companies.
He has a history of leadership that product strategy and partnership roles with innovative companies that provide data analytics and advertising products into the enterprise customer channel.
We're very pleased to have Ryan on board and to have them, leading the efforts with growing our AI capabilities and helping steer us through this important time with our customers.
We're also continuing to pursue a strategic review.
We're currently evaluating many scenarios, including looking at our cost structure to help ensure long term flexibility and given the persistence of the cobot 19 crisis. We also plan to explore other initiatives that could possibly help marchex accelerate our leadership and capture opportunities arising from these market conditions we.
See significant opportunity in our business and remain committed to take a disciplined approach as we look to enhance our operating profile and capitalize on the areas, where we are building momentum all while remaining focused on returning marchex to growth as we get to the other side of the current challenges and with that I'll hand, the call back to Mike.
Thanks Ross.
For the first quarter revenues were $24.8 million the quarter was characterized largely by the events as a pandemic in January in early February we were pacing a slightly at significantly higher volume levels than at present.
Then in March as the country went into a rolling corn team many of our customers saw substantial and progressive decreases in coal volumes and sales throughout the month.
Call volumes in our analytics and solutions product started declining meaningfully in March and by the end of March were down in some areas nearly 30%.
In certain verticals, we saw volume decreases even greater than this as we exited the quarter.
These declines continued into April.
As car dealerships dental offices hotels, and small businesses closed or shut down operations sales calls transitions to councils appointments.
We've seen this trend largely persist these past weeks as much of the country remains in locked out.
However, recently, we have started to see some progress in certain verticals coming off of the lows in April.
However were still down meaningfully broadly speaking on a year over year basis as the majority of locations for many of our customers remain renamed disrupted or closed.
This affected our financial results in several ways, including we recorded a preliminary estimated impairment charge to our goodwill and intangible assets totaling $20.1 million as a result of the pandemics indirect varying impacts.
Secondly, we saw lower volumes, resulting in decreased revenue and operating contribution.
Third.
Included in revenue results isn't adjustment or reserve, reducing revenue by $900000 for coal analytic services delivered.
But where revenue was not recognize because criteria for recognition were not met.
For instance, uncertainty of a customer's ability to contract with and pay for services delivered given their deteriorating operational and financial condition.
We further recorded an incremental bad debt reserve in the amount of $300000 in total, including the 900000 dollar revenue reserve this impacted our bottom line by $1.2 million.
We've also provided payment timing and other short term relief and in certain cases waived minimum package commitments. These factors combined with customer cancellations caused by shutdowns, we'll continue to impact us for at least the near term.
These latter items will have some level of permanent impact. Although we don't currently believe the magnitude of these shutdowns that tracks materially from our long term opportunity.
But it is still another disappointing factor, resulting from the pandemic.
Because many of our customers are struggling we're doing what we can to support them through this period and to help them successfully navigate to the other side.
Now, let's look at the product there is more closely.
Core analytics and solutions revenue was $11.8 million for the quarter.
This represents the net amount of revenue after the reserves.
We've attempted to take a conservative approach and recognizing the impact this will have on our business as our customers navigate the situation and some work to stay solvent.
With that said, we continue to make meaningful progress with our analytics products and solutions and believe that will benefit marchex any intermediate term.
In fact, while the sales rescue existing pipeline has been delayed and various pilates had been deferred or extended we're continuing to see active interest in deploying prospectively.
We continue to believe auto will remain a relatively strong category for marchex in the intermediate term as we continue to see meaningful engagement from our OEM partners. Both in terms of the insights they've asked us to deliver in the near term to help them make critical business decisions.
And also in bringing AI and fuse sales engagement solutions to their franchise it in the future.
These solutions can help meaningfully by giving them a better view of the performance at the dealer level, all the way down to performance by individual sales representatives.
We're also continuing to have productive conversations with many health care and home service.
Companies as they are still very motivated to bring AI fueled sales engagement solutions to their sales forces.
Technical priorities that many of our customers are currently stretched thin. So we don't expect this trend to benefit the current quarter, but we're very engaged in positioning ourselves for growth as these opportunities emerge.
Now looking at the marketplace.
First quarter revenue was similar on a year over year basis, offset by the expected decline from the legacy local leads platform.
Categories like financial services held up well on a relative basis during the March timeframe.
Well, some advertising categories face pressure, such as the healthcare and hospitality verticals.
During the quarter. We also saw a marketplace initiatives with our thrive relationship maintain similar levels on a year over year basis.
Offset by the decline in the legacy local each product and some general called decreases in call. Some general decreases in coal volumes.
We continue to anticipate local leads will transition in the near future consistent with prior commentary.
However, we expect some modest contribution makes that they may extend through the first parts of the year.
In looking at the piano for the first quarter.
In excluding stock based compensation, a preliminary estimate of impairment amortization of intangible assets and acquisition related costs total operating costs for the first quarter were $28.2 million compared to $25.7 million in the first quarter of 2019.
Service costs were $14.5 million up from $14.2 million in the first quarter of 2019 and down from the fourth quarter level of $15.6 million.
Service costs as a percentage of revenue increased on a year over year basis, largely due to the mix shift in revenues, which winter park in part caused by reserve amounts.
In the intermediate term as we move through the uncertain business climate caused by the cobot 19 crisis, and lunch or new analytics products and sales engagement solutions and they begin to contribute.
We believe growth in our analytic stream can positively impact service costs as a percentage of revenue.
We also believe there are several investment efforts with respect to our analytics infrastructure that will provide long term margin benefit in 2021 and beyond.
Sales and marketing costs were $4.7 million.
This amount was up compared to the first quarter of 2019 on a percentage basis, reflecting our increased investment in our sales and marketing initiatives and the sonar acquisition.
Product development costs were $6 million and were up as a percentage of revenue compared to the fourth quarter reflective or of our increased investment in our infrastructure initiatives as well as the sonar acquisition and our private company auto services investment.
As a reminder, our core platform work was in full swing in 2019 carrying through the first quarter of 2020, and which we expect will be largely completed later this year.
As noted in the fourth quarter commentary 2020 includes an additional estimated $2 million of investment to address various infrastructure initiatives, including consolidating infrastructure and data centers that we do not expect to recur in 2021.
Approximately $200000 was incurred relating to this during the first quarter.
The technology infrastructure and efficient and efficiency investments should enhance our operating profile in the intermediate term and his work we're attempting to accelerate in the current environment to the extent possible.
Moving to profitability measures adjusted operating loss before amortization for the first quarter was $3.4 million.
Adjusted EBITDA was a loss of $2.9 million.
Net loss applicable to common stockholders was $24.9 million for the first quarter of 2020 were 53 cents per diluted share, which includes the effect of an estimated pretax $20.1 million impairment charge based on the preliminary results of the company's goodwill and intangible asset impairment tests.
This compares to a net loss of $1.3 million worth three cents per diluted share for the first quarter of 2019.
Adjusted non-GAAP loss per share was six cents per share for the quarter compared to adjusted non-GAAP income of one cents per share for the first quarter of 2019.
And Additionally, we ended the first quarter with approximately $40 million in cash on hand.
Now turning to our outlook.
Due to the highly fluid situation and the wide range of potential outcomes for the current quarter. At this point, we're not really seen revenue adjusted operating income before amortization or adjusted EBITDA guidance.
Many of the key verticals, we serve auto healthcare hospitality and others are broadly impacted in the present environment as many locations remained close through April and early may and potentially longer.
The pressure that is placing on many of our customers is creating an impact on the plan ramps up almost all of our scheduled sales edge rescue deployments many of which were slated to start in March and in the second quarter.
Well, it's too early to forecast growth later in the year. We do believe there is opportunity for marchex to deliver incremental products and value for our customers. Many of which are eager to have these solutions in market as soon as possible.
We know that some verticals may take longer to recover and that may have a resulting impact on some of our customers and our future results. While we work through these circumstances. The current environment requires that we evaluate our expense structure vigorously in order to preserve liquidity and flexibility.
We're looking closely at our fixed and variable cost structure as part of this ongoing initiatives.
In many cases, we've already taken actions, including delaying hiring and we're examining other operating efficiencies where possible.
It is also important to note we're pursuing these initiatives, while also being thoughtful about continuing to support our customers and maintaining investment in an in our areas of differentiation such as our AI and data science teams.
The trend toward a high powered sales acceleration solutions is a multiyear strategy and a key driver of our long term opportunity.
Okay.
To all of our employees Russ and I are most thankful for your hard work and dedication to keeping our customers' needs front and center all while dealing with the disruptions to your daily lives.
Because of your efforts, we are both optimistic about our future and focused on getting through this and emerging stronger.
Our admiration also extends to all those who are struggling themselves, but still managed to find ways to help others, our thoughts or with the first responders, who selflessness is inspiring this all and with the many families that have been affected by this crisis.
We look forward to our future in solving problems for each other and our customers and meaningful ways.
With that operator.
We'd like to hand, the call back to you.
Ladies and gentlemen at this time, it's you fight Lasky cluster.
The press Star then the number one on your telephone keypad again that its star one to withdraw your question press the pound key.
We will pause for just a moment to compound to kill I'd roster.
Your first question is on the line up Darren Aftahi with Roth capital partners.
Hey, this is doing I once again, thanks for taking my questions.
First one related to some of your OEM auto customers that you spoke to strategically looking for some sort of.
New product or like plug in to the sweet.
Are those products you Dan working on developing already or is it sounded like a step one in the process for you on on some of those.
They're doing this is Russ I very good question you know as we head on we think auto is one of our more prominent growth opportunities and when we look at our product priorities.
It effectively dovetails into two kind of two primary focus one is we've got our existing relationships, where we've got products launched and and kind of on around obviously impacted in the moment, but where we look at the longer term opportunity and what we've seen is.
Ben requesting for us to accelerate some of our product initiatives to address specific sales enablement scenarios are both from the OEM in the dealer level and so these were planned initiatives, but given the feedback and what we think maybe a catalyst or are these opportunities there's been a reprioritization effort to Penn.
As we deliver somebody solutions sooner and we begun that process. It could also potentially accelerate you know winning some new customers across the auto vertical as well.
Got it. Thank you and then sort of across the verticals that.
We want to quantify or at least <unk> can you sort of how things were in April and may relative to that last week in March and then.
Like do you have any insight into what verticals you see getting back up in <unk>, the or customers faster than others, where that's based on specifics are sort of geographically.
Hi, gentlemen, this is Mike. Thank you for the question. So if you look at the trend.
As we progressed through the course of March we started at the beginning of March and we saw some single digit percentage coal volume declines by the end of March as we exited.
On the main platform for the analytics and solutions, we saw a near 30% overall call volume declines and as I mentioned in the remarks that continued into April where we saw progressively into the thirtys and near 40% overall call volume decline in certain verticals and some of the ones that I mentioned earlier.
We are including the hospitality in particular, they were substantially more affected on a percentage basis than even there is a 40% decline levels on a year over year basis.
As we've looked in the last.
We to two weeks there has been some progression it has come off the lows that we were in that part way through April.
And there has been some progress in certain verticals.
And then example of that would be there has been some more activity from consumers engaging with businesses in the auto services sector and that's been very recent it hasn't been a substantial amount, but it has improved from those lows that we saw in April in terms of just what visibility we have.
On a go forward basis, I think the really hard part for us to a focus on and think about is what exactly the impact of the Kogan 19 is gonna have on on different verticals.
There are so many different outcomes. There's so many different variations what our focus is gonna be is on helping those customers that we serve today focusing on making sure that we can create flexibility for our company to deal with.
More than one type of outcome, depending on how this situation unfolds and remaining committed and believing in our long term opportunity, which we think is intact and will emerge and putting ourselves in that position.
Thank you and then last one from me on some of the delays sales eyed eggs address skew.
What sort of.
Criteria.
On either.
The the customer side as to how those get restarted or on back on back on track or is that just a derivative how long.
Yes.
The dependent on glass.
So a lot of it as a derivative when you look at.
Deploying an operationalizing these products it requires operational continuity.
At the store franchise level and so.
As there is greater visibility on reopening and you're bringing these stores online again.
That helps unlock.
You know the timing of how we can roll out and operationalize.
The various side your relationships and and program. So they are tied together as Mike mentioned you know the last few weeks have been at least a picking the right direction as it relates to to some of these trends and so little premature to give more specific than that but as Mike mentioned Oh the clients are intact.
Oh, we're engaged with all of them and now we're just a kind of scheduling implementations as we have the opportunity to.
Great. Thank you.
Thank you.
I get to ask your question. Please press star one on your telephone keypad again that is start wine.
Your next question based on the line of Michael Latimore with Northland Capital Management.
Hi, This is uneven sohu on Pall, Mike Latimore and thanks for taking my question could you just coming from so not revenue until we can do Q1, and so not going to enable thing and you had four got Dave <unk> <unk>.
So this is Mike and thanks for the question sooner or we had forecasted originally when we shared some of the feedback in the commentary on what we thought it contributed.
Near the end of 2019, it was not going to contribute anything material from the perspective of 2020 revenue stream. So it was certainly something that we focused on and believe that techs communication and messaging is the way that consumers are going to continue to increase in terms of their appetite for working and engaging with businesses.
And one of the things that we had slated was an integration that by the end of 2020, the technology would be integrated from a texting perspective into our.
Core analytics platform those pieces of the puzzle are still intact in terms of the revenue contribution there was a fairly nominal amount as we had forecast back at the end of 2019.
As a few hundred thousand dollars in terms of a growing I don't think unfortunately, if you just look at the impact of Cowen 19, there is anything.
That is growing on the on the contrary as we've seen some of the volume declines across the board with our main platform in the call volumes. We've seen that consistent also with some of the texting and specific to some of the customers. They may be more affected in some verticals than others.
Okay, I know as media in the these without <unk> dollar I guess at lag or have be impact and like only 19 or what have you seen and that will decrease to date and I think I think to improve some the Doe radiant states that evening.
I think are one of the areas that we've seen some significant weakness in originally in March and then in April was the home services category, We mentioned, our dental network relationships in the healthcare industry that we work with that we've seen effectively shut down in some cases.
Because.
You know they had been required to provide some of the P. P E two or somebody other health care facilities. Those are a couple of years ago hospitality sector has been significantly impacted auto service centers auto manufacturers and their dealership networks or other ones that we've seen significantly affected even in a realist.
Dade vertical we've seen a impacts there.
As I mentioned before there was an auto services stream of companies that we saw some folks from the consumer side engaging in more robustly here in the last week and Uh Huh.
And that trend specifically or so far over the last few days has continued to improve we've seen some things in the home services vertical where if you look at the last few days and on a week over week basis, There's some improvement there to.
Exactly if it is attributable to somebody Reopenings, we don't have that correlation or that dataset, but we could correlate it from a guess perspective.
Okay, and that hopefully that and the last one.
And then any E D update you need to have this yet by you want because tomorrow.
Yeah.
Yes, good question.
One of the things that I think we feel good about is that.
Coming into 2020, our belief was that it was it was really about execution more than anything and that based on our our product development efforts as well as recent acquisitions like sonar. We had all the key ingredients that we needed to deliver difference making products you know that really could extend analytics into the sales enable.
Solutions, and so with where we are now or you know, we always look at strategic scenarios, but two large degree we've got what we'd need it's just about execution now you're given the visibility we have on on opportunities with a whole bunch of customers, where we think there's meaningful headroom overtime and as we implement.
Those we know that will gain learnings and that'll build momentum on adding new customers as well. So so right now it's about execution utilizing our existing product momentum.
And just delivering on those product opportunities.
Oh, yeah, Okay. Thank you.
Thank you.
There are no further questions.
Thank you everyone for taking the time today I just want to reiterate to everyone who's listening to stay safe and healthy and we'll look for two in the coming periods, hopefully I've been a situation, where we can give updates where everything is in a better place. We look forward to that thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.