Q2 2020 Marchex Inc Earnings Call
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[noise], ladies and gentlemen, thank you for standing by welcome TV Marchex second quarter 2020, <unk> earnings Conference call.
This time, all participants Arnie listen only mode. After the speakers presentation. There will be a question answer session asked a question during the session you'll need to press star one on your telephone. Please be advised that today's conference is being recorded.
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I'd now like Dan the conference over to your Speaker for today Mr. cover Capa Senior Vice President of Investor Relations and strategic initiatives. Thank you. Sir. Please go ahead.
Thank you Okay. Good afternoon, everyone. Welcome Marchexs business update second quarter 2020 conference call.
Joining us today or Michael runs and Russell forwards.
Well, we get started I'd like to take this opportunity reminds you that our remarks today will include forward looking statements, including references to our financial and operating performance and actual results may differ materially from those contemplated by these forward looking statements.
Risks and uncertainties that could cause results to differ materially are set forth in today's earnings press release, and then our most recent annual and quarterly report filed.
Any forward looking statements that we make on this call it based on assumptions as of today, we take no obligation to update you statements for subsequent events.
During the call real simple GAAP and non-GAAP financial measures reconciliation of GAAP to non-GAAP measures is included in today's earnings press release.
Earnings press release of live on the Investor Relations section of our website.
At this time I'd turn the call Mike runs our co CEO and you find out.
Sure.
Thank you Trevor.
Good afternoon, and thank you everyone for joining us today.
With the Covance 19, global pandemic still in full force throughout the second quarter and continuing today.
The environment for many of our customers remains fluid.
From March through early May many of our customers were significantly disrupted from shutdowns.
This was followed by a rebound in many categories beginning in mid May that's stabilized through the end of June.
Let's face it began to reopen covert 19 remained a threat to businesses across the verticals, we service from travel to auto to education.
However, as we focused on supporting our customers who were re emerging from shutdowns, we noticed that pent up consumer demand positively affected sales conversations in the latter half of the quarter.
Our conversational data showed patterns of economic activity picking up in critical areas, such as auto service repair shops and in the dental services industry, where appointment volumes rebounded substantially and Joe.
The other categories, such as hospitality and senior living despite still being significantly disrupted also saw additional increases in sales conversations although to a lesser extent.
Well many customers drove more business than anticipated into the ended the second quarter, we view this uptick with caution.
In fact, although June is tip Joel I'll vote July is typically a high seasonal point of the year for us with analytics volumes in recent weeks, we've seen declines in certain categories more affected by the recent surges and covert 19 cases.
Many customers overall sales conversations remained down on a year over year basis.
Furthermore, given the prevailing uncertainty for the rest of the year. Many customers are adjusting their cost structures and it will no doubt ticket extended period for them to return to normalized operations.
As we do everything we can to support our customers through this period, our company remains focused on three key initiatives.
The first is making progress with product innovation, including those initiatives that can most help our customers and prospects close more sales.
We believe there is a significant long term opportunity for conversational analytics and sales engagement solutions.
Despite the challenges in today's environment, we continue to see strong interest in deploying sales technology to help businesses understand the voice to the customer across the most important consumer business communication channels voice and text.
Some of our customers and prospects are using this window of disruption to evolve their operations and operational approach.
Auto Oems for instance are asking us to accelerate our long term product planning.
These customers are re imagining the customer selling experience and the relationships they will have with the dealerships.
And they are doing this by increasingly leveraging conversational data to help put new programs in place to grow vehicle sales.
Many are leaning on marchex to help give them a better view of sales performance at the dealer level.
And on a more granular level performance by individual sales representatives.
As part of this initiative some of our auto OEM customers are expecting to launch new product pilots this year.
We are nurturing these relationships and believe we will see our efforts bear fruit in future periods.
And we believe auto as a category will be a key driver of our growth over the long term.
Second we will continue our focus on infrastructure initiatives.
This will help us drive future innovation and support long term cost efficiencies.
We are investing significantly in growing our conversational intelligence capabilities.
To be more specific we're upgrading our capabilities to mine conversational data and moving to real time conversational intelligence. All this while supporting more efficient scaling in or cloud based infrastructure.
These investments will enable marchex to take advantage of her industry, leading conversational dataset.
In fact, Opus research, which is a technology and analysis from recently issued a report showing that conversational intelligence is key to bolstering the lifetime value of each customer.
Opus cited marchex as a leader and our innovation in this area positions us well to help our customers solvent increasing array of critical problems.
And finally, we're strategically exploring options to focus the business and conversational analytics and sales engagement solutions.
This is part of our evolution to grow and redefine our business.
Now, let me hand, the call over to Ross to talk about this in more detail.
Thanks, Mike.
In today's separate 8-K filing we described how we are pursuing strategic path to focus the company on conversational analytics and sales engagement solutions.
Over the past three years, we have taken several steps to redefine our opportunity and business model like something an increasing array of critical problems for businesses that are looking to introduce artificial intelligence solutions into their sales engagement processes.
Marchex has a wealth of data to deliver real time insights to help businesses close more of those sales prospects.
The trend toward AI assisted selling is real and Marchex is ideally positioned to be a leader in this market.
Despite the disruptive economic climate and all the current uncertainties, we do see a consistent message from our customers and our prospects. They have a strong desire for solutions that provide a unified view of conversations over the phone and via text in a way that empowers them to create better customer experiences and sales outcomes.
Third party industry research firms or see how these types of solutions can change the game of growing customer acquisition and loyalty.
In the report that Mike mentioned earlier Opus research found that call recording and chat transcripts can be aggregated into a single source of truth that imports alive or virtual sales representatives as the assist individuals to complete their desired tasks.
Report also found that companies that bill technology around purpose, driven analytics, a content and made a data to support their customers business goals have successfully established leadership in this emerging category.
Marchex being named a leader is an important forward indicator and this dynamic market.
Today, Marchex consult mission critical problems for our customers and focusing on this market is foundational for all of our investments and innovations.
In looking at our customer sales processes, there prospect conversations are occur over time, and our omni channel, including email phone conversation text interactions and social media.
Marchex offers customers a unified way for them to capture these conversations and their most critical mobile channels phone and text.
Recordings, and transcripts or a rich source of conversational intelligence and having more than 1 billion minutes of sales conversational data. There's another point of significant differentiation for marchex.
Today, the type of intelligence, we provide is largely missing and prospect and customer records.
Marchex has a significant opportunity to close the loop or product engagement as well as offer rich sales engagement solutions.
Today's strategic announcement represents an important step in our process.
We continue to evaluate many scenarios, including looking at our cost structure to help ensure long term flexibility given up on persistence of koeppen 19 at its crisis, we will continue to explore initiatives that could potentially help accelerate our market leadership and capture additional opportunities arising from these turbulent conditions.
And with that I'll hand, the call back to Mike.
Thank you for us.
For the second quarter revenues were $25.8 million similar to the first quarter. The second quarter was characterized largely by the events of the covert 19 pandemic.
New business remained largely disrupted in the quarter as many prospects are customers are putting off deployments of new sales technology no interest remains active.
And as a result, the second quarter was predominantly characterized by trends with existing customer volumes.
On that basis. It was largely a tale of two halves with significant call volume disruptions in April extending the March trend with those disruptions continuing into early may.
Followed by a rebound in the second half of the quarter.
As the country slowly began reopening in may many of our customer soft progressive increases and call volumes and sales, which studied in June appointment rates in categories like auto services dental and even autocar sales saw meaningful increases from the April period.
As car dealerships dental offices hotels, and small businesses started to reopen we witnessed sales calls progressively increasing region by region.
Well each vertical has a different dynamic and a portion of the volume recovery came as a result of consumers calling to inquire about such things as hours of operation in looking at the conversational data. It is clear that a two month hiatus and business availability for critical services led to some pent up demand.
That seem to manifest progressive late in the second half of the corridor.
Other verticals like hospitality and senior living so some color lift in June but remain significantly disrupted.
It's also worth noting however that despite the rebound sales call volumes overall for many of our customers remains down on a year over year basis, and several have had to adjust their operational and financial planning as a result.
[noise] other items of note during the quarter first.
Due to the ongoing covert thinking impact on their business and financial position.
A large auto related customer is continuing to adjust their operational framework and cost structure in efforts to remain viable.
This was a customer we reserved for in the first quarter.
Although we were fortunate to collect balances from them during the second quarter. We believe we will take a similar action for a portion of the third quarter.
Due to the changing dynamics of their business.
The Coca 19, Chrysler assessor virally curtailed the amount of investment they're going to making their operations in 2020, and 2021 and required them to significantly address their ongoing cost structure and will result in a different go to market approach for future technology deployments.
We expect this will reduce our core analytics and solutions revenue stream by approximately $3 million on an annualized basis by the end of third quarter.
Upon successful revitalization, we believe there will be perspective opportunity for us with this customer.
However, these covert related impacts of had an unfortunate near term impact.
Despite this instance, as previously stated overall, we have seen encouraging engagement from our OEM partners over the last few months and continue to believe the long term opportunity and auto is robust and it can be a driver of our growth over the long term.
Second.
Included in the second quarter and core analytics and solutions revenue results is the recognition of $800000 that was reserved for at the end of the first quarter based on covert 19 impacts.
And as noted the vast majority of this we do not expect to contribute on an ongoing basis beyond the third quarter.
Third.
As we mentioned on her last earnings call. During the second quarter, we provided a series of options to support our customers, including discounts payment timing another relief and in certain cases waived minimum package commitments.
We also had additional customers experienced bankruptcy or radically curtailed their operations.
We've had a handful of customer significantly impacted by the pandemic for home, we expect in the third or fourth quarters to provide incentives or credits that could total up to $1 million.
These incentives or credit discounts have not been reserved to date.
Many of these latter items will have some level of permanent impact. Although we do not currently believes that the magnitude of these customer initiatives are shutdowns related to that that pandemic detract materially from our long term opportunity.
Today's environment remains highly fluid and there's still a wide range of outcomes for the year, but we're committed to doing what we can to support our customers will they navigate through this period.
And now let's look at the product there is more closely.
Core analytics and solutions revenue was $12.5 million for the quarter.
Which as previously noted included the benefit of recognize revenues that were reserved at the end of the first quarter.
Excluding this benefit core analytics and solutions revenue would be approximately $11.7 million.
Despite the new covert 19 reality that is inherently driving uncertainty for all of us, including our customers. We continue to see progress with our analytics products and solutions and believe this will benefit marchex into long term.
Well the sales rescue existing pipeline remains delayed and certain pilots continued to be deferred or extended.
Various customers are beginning to take steps to bring back furloughed staff and we're continuing to see engagement with prospective deployments.
So timing is still uncertain given the broader climate.
And looking at the marketplace second quarter revenue was up slightly on a year over year basis offset by the expected decline from the legacy local leads platform.
We had a handful of marketplace customers that accelerated spending slated for the latter half of the year into the second quarter.
During the quarter, we also saw marketplace initiatives with our thrive relationship maintain similar levels on a year over year basis, including the continued decline in the legacy local leads product.
We continued to anticipate local leads will transition in the near future consistent with our prior commentary.
We expect some modest contribution may extend through the next few months.
And then looking at the PML for the second quarter.
Excluding stock based compensation amortization of intangible assets and acquisition and disposition lit related costs total operating costs for the second quarter were $28.7 million compared to $25.7 million and the second quarter in 2019.
Service costs were $15.2 million up from $13.9 million in the second quarter of 2019.
Service cost as a percentage of revenue increased on a year over year basis, largely due to the mix shift in revenues.
We continue to anticipate and believe that as we launch our new analytics products and sales engagement solutions and they begin to contribute we can see a positive impact on service costs as a percentage of revenue overtime.
During the quarter. We also made progress on our infrastructure initiatives and believe these investments will provide long term service cost margin benefits in 2021 and beyond.
Sales and marketing costs were $5.1 million.
This amount reflects an increase from the second quarter of 2019 on a percentage basis due to our increased investment in our sales and marketing initiatives and this owner acquisition.
[noise] product development costs were $5.8 million and were up as a percentage of revenue compared to the second quarter in 2019 reflective of our increased investment in our infrastructure initiatives as well as the stoner acquisition.
Moving to profitability measures.
Adjusted operating loss performed as nation for the second quarter was $3.1 million.
Adjusted EBITDA was a loss of $2.6 million.
Net loss applicable to common stockholders was $4.5 million for the second quarter of 2020 or nine cents per diluted share.
This compares to a net loss of $1.1 million or two cents per diluted share for the second quarter of 2019.
Adjusted non-GAAP loss per share was five cents per share for the quarter compared to adjusted non-GAAP income of one cents per share for the second quarter of 2019.
Additionally, we ended the second quarter with approximately $41 million in cash on hand net of current debt obligations.
Now turning to our outlook.
The current reality of our business is that the year remains highly fluid.
While we saw recovery during the latter part of the second quarter as noted for many of our customers their sales conversations volume is down on a year over year basis.
Furthermore, the current environment remains challenging from a new customer perspective as many are registered in the immediate term to start the needed work to deploy new sales technology, though there is still active interest.
This is creating an impact on the planned ramps of many of our scheduled sales edge rescue deployment as they adapt.
As a result of this uncertainty with many customers due to ongoing covert 19 impacts.
At this time for the third quarter, we're not releasing financial guidance.
They'll go is difficult to forecast when we will have greater visibility on our growth opportunities. We do believe there are and will be opportunities for marchex to deliver incremental products and value for our customers. Many of which are eager to have these solutions and market as soon as possible.
We know that some verticals can recover more quickly, but that others may take longer which could have a resulting impact on various customers and our future results.
Given the wide range of possible outcomes for the year, we're preparing for several scenarios and we'll continue to act prudently to preserve our balance sheet and financial liquidity.
Well, we're mindful not to compromise on the innovations and opportunities our innovation in AI efforts are bringing to Marchex. We believed there our actions we can take to preserve much of our balance sheet should circumstances warrant as the year plays out.
For example, there are more than $1 million, an annualized operational efficiencies that we expect to realize on a run rate basis. Once we complete our current infrastructure initiatives.
With the plan partial divestiture of the local lead assets the marketplace and other assets not related to core conversational analytics and sales engagement solutions further details of which are laid out in today separate 8-K filing we're taking steps to increase our focus on the conversational analytics and sales engagement opportune.
Good day.
The trend toward AI powered sales engagement solutions is a multiyear strategy that we believe represents a significant expansion of marchexs overall opportunity.
As we navigate to the other side of this extraordinary environment, we believe that our investments and conversational analytics and AI driven sales engagement solutions will they a saw solid foundation for our future growth.
Now looking at the second looking at the adjusted second quarter on a standalone basis, we believe that core analytics and solutions revenues are currently at an approximate 46 million dollar annualized run rate after factoring in the anticipated 3 million dollar.
Reduction from the cobot impacted auto customer as well as the other revenue reductions from impacted customers and credits.
At these revenue levels, we estimate that inclusive of all corporate overhead costs. The core analytics and solutions area has a current annualized run rate for adjusted EBITDA of approximately negative $10 million.
We believe at these current overhead and cost levels that we would achieve breakeven adjusted EBITDA at a revenue run rate nominally above $60 million, depending on discretionary investment levels.
Well, we believe our future prospects position us to achieve that goal given the pandemic and resulting uncertainties the timeliness to get to these revenue levels are currently uncertain.
Over the coming months, we expect to have more news to share regarding new products and the overall opportunities, we see the conversational analytics and sales engagement markets.
We believe giving this business increased focus and energy is the right course for Marchex and then it will enable us to capitalize on a meaningful long term opportunity to emerge as a leader.
And in the meantime.
To all of our employees.
Yes, and I are very appreciative of your hard work and dedication.
Your ability to keep our focus on solving critical customer problems is a driver of our emerging opportunities and our long term success and we look forward to our future.
And with that operator, we will hand, the call back to you.
Ladies and gentlemen, she'd like to ask a question at this time. Please press star and then another one on your telephone keep.
Once again star and the number one.
And your first question comes from the line.
<unk> with Roth capital partners.
Hey, everyone. This is Dan thanks for taking my questions have.
Here I may 1st on both the tender offer.
And they intend to divest the marketplace and other business can you talk little about your thought process behind those options in what sort of if there any other options or you are considering.
Yes, thanks doing for the questions. This was Russ.
As it relates to the tender offer.
Undressed SIFI rules, we're not able to comment beyond the specifics we included as part of that press release, so we need to refer to that for now.
And there will be more information forthcoming over the next few weeks in terms of the rationale or thinking behind.
The divestiture Hi, this is one where you we communicated for awhile and it felt strongly that you've got this emerging a significant transformational opportunity around conversational intelligence and AI driven sales engagement solutions.
You know the opportunity to create greater focus and emphasis on that is one of the elements that we felt would position us that's going forward.
We had hired a number of years ago, a investment bankers to go out and see what options might exist to divest the media in local weeds assets. Although were unsuccessful at that time, given some of the unique components here, which is you've got a concentrated business with a couple of customers that represents the majority and a and that was at a time, where there was more conscious.
Abuse and from that business then there is now in so.
As we thought about those options and wanting to Grady past, a greater clarity and also looking out some of the other uncertainties sensors.
Key contracts coming up for renewal would those with those customers, we felt that creating a path it with the greatest degree of certainty around strategic clarity on moving forward.
Equally with this.
With this focus on what we think it's the most meaningful opportunity for Marchex was the right step to taken all these components came together.
Got it thank you and and like I know you talked about a sort of a new product that you've been in the process is developing with the some of your auto Oems do you expect to launching in pilots later this year, Oh, what sort of visibility you have on time.
Frame and then.
That solution also applicable to some of your other verticals as well.
Thanks Dillon.
With regard to the auto vertical we've been fortunate in the last a 24 months or so to be able to engage in a number of new pilots new engagements with a variety of these Oems and related service providers to the auto industry and I think part of what that's helped US with is definitely create a clear more.
For clarity on the road map for a product a specialized product that's very much applicable for you on the vertical it is applicable for other verticals that have similar type of a.
Sales presence.
But those pilots to address your question directly dealing we have tabled number of them simply because of the co. The 19 impacts that we are slated to roll out even starting a near the end of the first quarter. It's been tables for the time time being in many cases some of those rollouts and I would like to say today.
Okay that we're in a position to give clarity on exactly when they're gonna be re initiated.
But unfortunately, there isn't a lot of clarity even that our customers level with exactly what their plans are they are working very very diligently on making sure that their core operations are up and running that they're going to market in ways that can engage their consumer base.
And we think we're going to be a part of that and we're definitely looking to roll other technology with them.
It's just the timing of that remains uncertain and it's unclear whether that's going to be a in the near term we still do believe though that in the long term a there's robust opportunity for this product offering within the auto vertical we think because as a matter of selling that this product as it gets rolled out.
Wont require a massive tweaking to be able to apply to at least two or three other vertical scenarios and we're looking forward to that as well, but we don't see that in the near term either.
Yes.
Got it thank you.
Regarding some of the key product road or analytics product road map and some of the investments you're making there.
Could you talk a little bit about.
Some of the attached integration he is selling our how far you along what sort of that maybe like what percentage are.
Oh, I guess ready to go to market.
Sure. Yes. This is rob so.
As we as we've emphasized.
You know what the kind of that the big problem that need solve again, where we see the significant opportunity is the ability to take a agents analytics and intelligence across all critical conversations.
Surface.
Really what a you know what the most successful path forward is for these businesses to close more sales and create better customer experiences and the consumers to define the channels that they prefer to use and the comment you use cases are particularly for the verticals that we emphasize our around calls with boys as well as.
Text and so sonar was a critical piece and accelerating our capabilities and where you know where we're well into a an integration so that the capabilities that we've historically provided on the boys side.
Our barely seamlessly being applied across voice and text, but as we finish up this year and that's going to continue to be an important theme going into 2021 now the foundational piece would be integrated with voice and text on analytics gives us the insights we need to be able to create those AI driven sales engagement solutions.
Oh it impacts.
The sales process and lead to the value impact for our customers with those tools. So it's a critical effort. It's one that we're underway now.
And we feel like between the short intermediate term Oh, we're going to see a combination of combined voice text offerings on the analytic side as well as integration of text across the sales.
Engagement side as well.
Got it. Thank you last one for me.
He sort of projecting $46 million annualized run rate analytics could you talk about maybe.
The sides of the customer base.
The number of customers and sort of how the verticals.
Now looks worse here in August versus maybe what that I guess sort of profile looks like maybe December 29 King.
Sure a dumb and this is Mike again, I think from Verticalized perspective, we've talked about as some examples in the healthcare sector. The dental services the auto OEM area Auto services.
Including we have had historically some travel and hospitality, obviously that from a perspective today would be a big change from 2019, where it's a significantly down home services is another very sizeable and meaningful category for us we work with a variety of resellers to small and.
Medium sized businesses and I would say just generically if you think about their activity in the current environment relative to where there had been in the past those are areas, where you know there significantly.
Now what I, what I would say is there are some areas for instance, the home service there are pockets within home services that have actually increased or a more significant than what they've done in the past and I would say a few of the emerging areas. We've spent more time with some of the sales efforts in the last 12 months in the auto sector the auto.
Services sector senior living is a new one for us a those would be some areas of changes or increases. However, recognizing went auto sales over the last four or five months. It's just been down in general so consumer demand has.
Reduce the overall volume in that area.
Got it thank you.
And ladies and gentlemen, just as a reminder, she'd like to ask a question. Please press star.
Our one on your telephone keypad.
And there no further audio questions at this time.
Thank you everyone for joining us today on our second quarter Conference call, we'll look forward to providing further updates as we progress during the year. Thank you.
Thank you everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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