Q3 2020 Marchex Inc Earnings Call
The Marchex third quarter Twentytwenty earnings call at this time, all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one and your telephone. Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero out.
I'd now like to hand, the conference over to your Speaker today, Mr., Trevor Caldwell Senior Vice President of Investor Relations and strategic initiatives. Thank you. Please go ahead Sir.
Thank you very much good luck.
Afternoon, everyone.
Welcome to Marchexs business update third quarter 2020 conference call.
Joining us today are Michael runs and local heroes.
We get started I would like to take this opportunity to remind you that.
Our remarks today will include forward looking statements references to our financial and operational performance.
Actual results may differ materially.
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 our most recent annual and quarterly report.
Although the FCC.
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 today's earnings press release.
Earnings Press release is available on the Investor Relations section of our web site.
At this time I'd like to turn the corner to Mike runs a co CEO and Chief Financial Officer.
Thank you Trevor.
Good afternoon, and thank you everyone for joining us today.
Just a few weeks ago, we finalized our strategic evolution, where we separated our media assets and now have clarity and more singular focus on our conversational intelligence and sales engagement opportunity.
We also completed our joint tender offer with one of our largest shareholders in which we purchased approximately 25% of our outstanding stock.
With these important and strategic advance successfully closed we believe we are well positioned to move forward and make meaningful progress.
Marchex technology solutions address unique high impact problems for our customers, we harness our rich conversational data to expand our AI capabilities to solve an increasing array of mission critical problems for our customers.
And as a part of this we provide customizable visual analytics to make it easier for marketers salespeople and call center teams to realize actionable insights across a growing amount of conversational data.
According to recent market reports the speech analytics market is expected to grow to more than $2 billion in the next two years.
Further the use of texting between consumers and businesses is exploding.
Businesses need our help more than ever to understand captured each and every customer engagement.
They are under increasing pressure to deliver compelling personalized experiences at each turn of their marketing and sales engagement process across communication channels.
Every step on that path to purchase from the customers first interaction with an advertisement through the sales conversation over text or phone has the ability to be a customized experience that delivers on customer need.
By delivering conversational intelligence into highly impactful sales engagement solutions that allow businesses to harvest the value of these customer interactions we have the potential to capitalize on this emerging multi billion dollar market.
Although cobot impacted economic conditions remain fuel fluid in the third quarter, we saw signs of recovery in our business and in certain verticals, such as with our auto home services and dental customers.
Furthermore, what many of our customers and prospects remain cautious about where and how they are spending their dollars. We are seeing increasing signs that they are more willing to start planning go forward opportunities.
Despite the current macro uncertainties, we have continued to execute on positioning marchex as a leader in conversational intelligence and sales engagement.
Our recent interactions with customers and prospects reinforce our belief that we can come out of this current cycle and accelerate as the business environment normalizes.
With that I'd like to hand, the call to Ross.
Thanks, Mike.
We are at an inflection point in our industry.
According to market research, we are now spending more time on our mobile devices than in front of our TV.
The increase in we just need to push buttons on our mobile phones to engage with the business and initiate some type of potential purchase.
Marchex is a technological leader in our space and we believe our expanding AI capabilities give us a unique opportunity to deliver for customers that need immediate insights from sales conversations combined with the ability to act on those insights to close more sales.
We deliver a full picture of customer engagement, starting with the marketing campaign that drove the customer conversation through the performance of the individual sales representative.
As well.
It's a set of problems, we can now install upwards larger than anything marchex has ever tackle it represents a significant expansion of our market opportunity to.
To capitalize on this opportunity we have created a more focused organization with rapidly expanding capabilities and a robust future product pipeline.
We believe the cobot slowdown does not detract from a long term opportunity and as Mike noted we are now completing our transition to being a business uniquely focused on the conversational analytics and sales engagement opportunity and we are increasingly being recognized and impactful ways.
For example in its April 2020 industry report Opus research evaluated 11 solution providers, who are defining the emerging conversational intelligence market.
The 11 companies included were analyzed on or factors breadth of conversational intelligence services multi channel such as voice and text messaging engagement model and speed to deploy as well its size customer base and longevity.
Marchex was the highest rated company in the report and we were judged to have the widest breadth of conversational analytics capabilities.
The Opus Research report described a number of our key differentiating attributes, which I will quickly run through.
Advanced AI models and signals built any large scale conversational dataset of more than 1 billion minutes of consumer to business conversations processed annually.
Proprietary voice transcripts and with no human accuracy more accurate, even then I've yams Watson.
Marchex stream real time, conversational data streaming and business intelligence platform.
Patented clean coal technology, which has been enhanced with new patent pending adaptive robo call blocking technology that uses AI and voice biometrics mobile.
Multichannel analytics expansion into text messaging and Opus noted that the sonar acquisition has expanded the footprint of Marchexs robot conversational dataset, extending our ability to use artificial intelligence to surface deep consumer intent.
Signals across text messaging and voice communication channels.
More than $100 million and research and development investment and more than 40 patents.
Products used by more than 1000 companies, including many of the world's largest brands.
Mission critical reliability with 100% call infrastructure availability for five years and running.
Security and privacy Marchex has maintained the highest security framework in our industry. So uniquely meet the security requirements of many fortune 500 companies and Opus recognize our distinction here as a key differentiator.
Beyond the Opus report subsequent report in September by Forrester Research found that Marchex was one of only eight companies of significance when it comes to innovative sales engagement solutions.
This is new recognition per marchexs emerging capabilities in this expansive market.
This recognition in combination with the Opus Research report showcases our emerging leadership and momentum across the space and it's worth noting that Marchex was the only company that was recognized in both of these reports spanning the conversation, though intelligence and sales engagement markets.
We have a leading conversational analytics technology and sales engagement solutions platform more than 1000 customer relationships, including World class brands, we have a diversified business without any significant customer concentrations and we are strategically well positioned in a highly dynamic and potentially transformative market that is forecast to grow maybe.
Roughly.
We think its pretty straight forward and simple it may have taken us a while to get to this point, but this is where we want to be in.
With that ill hand, the call back to Mike.
Thank you Ross.
For the third quarter revenues were $26.5 million the third quarter continued to be characterized by the events of the COVID-19 pandemic, we saw a coal volumes for some customers partially recover in the summer, which is typical of the seasonally higher summer period for verticals like home services.
Within our business volumes near the end of this past quarter typically slow into the fall and we've seen that trend continue in October.
New business remained largely the late in the quarter as many prospects and customers continue to wait on deployments of new sales technology, though interest remains active looking forward into next year.
For the third quarter cost containment remained a priority in a core topic of conversation about both existing and new customers. However, there were pockets of renewed interest in technology applications and our services from a variety of vertical categories that gave us a clearer view into several new opportunities that we believe will pay.
Layout in our favor as businesses adjust to the new normal to reach customers and prospects and they're selling processes.
[noise] looking on a vertical basis, we saw increases in appointment trends from the lows in April in categories like home services, dental and auto, which historically peak in the summer months.
In the summer verticals like travel recovered somewhat awful April volume levels, but remained down significantly on a year over year basis.
Also as we mentioned on the last earnings call. During the third quarter, we provided a series of options to support our customers, including discounts payment timing and other relief and in certain cases wave minimum package commitments.
We also had some customers close their doors or radically curtailed their operations due to the pandemic.
Many of these latter items will have some level of permanent impact although as Robert noted we do not currently believes that the magnitude of these customer initiatives or shutdowns related to the pandemic detract materially from or long term opportunity.
Now, let's look at the product areas more closely.
Core analytics and solutions revenue was $13.6 million for the quarter.
Excluding the contribution of the disrupted auto customer, which was previously referenced on the second quarter call core analytics and solutions revenue would be approximately $12.9 million.
Well, we're all continued to adjust to ongoing COVID-19, uncertainties, we continue to see progress with our analytics products and solutions and believe this will benefit marchex in the long term.
Our 2020 customer pipeline for our sales engagement products has remained impacted and certain pilot continued to be deferred or extended however, various customers took steps to bring back furloughed staff and we're continuing to see engagement with prospective deployments. So timing is still uncertain given the broad.
Other climate.
But it is worth noting that we expect of the sales rescue product opportunities could be robust as we see an unwinding of the business impact from the pandemic.
Our conversations with prospects have been encouraging in this regard.
Now looking at the marketplace and local leads platform revenues third quarter revenue was down slightly on a sequential and year over year basis, driven largely by the expected decline from the legacy local leads platform.
These will be reflected as discontinued operations for the year end period in light of the recent completion of the divestiture transaction.
In looking at the PML for the third quarter.
Excluding stock based compensation amortization of intangible assets and acquisition disposition related costs total operating costs for the third quarter were 20 and $28.1 million compared to $24.1 million in the third quarter in 2019.
Service costs were $15.3 million up from $12.9 million in the third quarter of 2019.
Service costs 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 continued to make progress on our infrastructure initiatives and believe these investments will provide long term service costs margin benefits in 2021 and beyond.
Sales and marketing costs were $4 million.
This amount was largely similar to the third quarter of 2019 and the sequential decrease was consistent with several recent recent initiatives to streamline or sales and marketing expenses.
Product development costs were $5.7 million and were up as a percentage of revenue compared to the third quarter and 2019 reflective of our increased investment in our infrastructure initiatives as well as the sonar acquisition.
Moving to profitability measures.
Adjusted operating loss before amortization for the third quarter was $1.7 million adjusted EBITDA was a loss of $1.3 million.
Net loss applicable to common stockholders was $3.7 million for the third quarter of 2020 or eight cents per diluted share.
This compares to a net loss of $1.2 million or three cents per diluted share for the third quarter of 2019.
Adjusted non-GAAP loss per share was three cents per share for the quarter compared to an adjusted non-GAAP income of one cents per share for the third quarter of 2019.
Additionally, we ended the third quarter with approximately $39 million in cash on hand net of current debt obligations.
The tender offer closing in October further reduced our cash by nearly $11 million, bringing the pro forma balance to approximately $28 million.
Now turning to our outlook.
The current environment remains highly fluid as noted there was uncertainty in the near term. However, we are seeing good engagement from a planning perspective that we believe could positively impact the intermediate term and beyond.
Now, let's first discuss the fourth quarter.
Well the third quarter, so levels of recovery in certain verticals for many of our customers sales conversation volumes are still down on a year over year basis, which is continuing to impact their planning process.
Additionally for many of our customers the fourth quarter is the seasonally lowest as coal volumes decline during the holiday period.
And as a result, we do expect core analytics and solutions revenue will be sequentially lower in the fourth quarter, reflecting this normal seasonal impact and also because we do not expect any further contribution from the disruptive auto customer consistent with our remarks last quarter.
Well, we are starting to see initial signs of thawing in our sales pipeline and we do believe several of these may restart in the near term. It is still a challenge to forecast when these growth opportunities will meaningfully impact our business.
As we look at the intermediate term and beyond we are encouraged by many of the conversations we're having with existing and potential new customers about next year.
These conversations combined with a robust plan to introduce new products and capabilities over the course of next year lead us to believe we will see progress towards our growth goals.
Assuming the current trajectory of conversations continue and there was an unwinding of the business impact from the pandemic in 2021, we believe there is a path to achieving organic double digit annual revenue growth on a run rate basis for core analytics and solutions as we move through next year.
We will also continue to act prudently to preserve our balance sheet and financial liquidity over.
Over the intermediate term as some of our new product sell through in Favourably impact. The PML. We believe we can see a path in 2021 to breakeven or better on an adjusted EBITDA basis before the end of the year.
We continue to believe in our opportunity and are actively developing new conversational intelligence and sales engagement solutions some of which we have already begun to test in the channel and.
In addition, we're continuing our infrastructure initiatives, including our investments in Marchex stream, which is our platform that analyzes consumer to business conversational data gains insights in real time extract signals of consumer intent and supports predictive analytics and the development of artificial intelligence strip.
One use case specific applications.
We believe the investment in our infrastructure initiatives will provide a solid foundation to support our future product innovation and expanding AI capabilities.
Well the environment. This year has led to unprecedented challenges for many of our customers. We believe we have made significant progress in building the foundation for future growth.
We have a liquid balance sheet, we had been large purchasers of our own shares. We believe we are well positioned with cutting edge technology and despite the setback created by the krona viruses effect.
We believe that the conversational analytics and sales engagement markets could be transformational overtime.
Additionally, while risks always must be acknowledged and the impacts and uncertainties of covert continue we think our upside is potentially meaningful.
As the key executives and shareholders of Marchex, Russ and I are committed to advancing the opportunities with all of our key constituents, including our employees and our customers and doing so in a manner that can recognize and maximize value for our shareholders as well.
Over the coming months, we expect to have more news to share regarding new products and progress with customers.
And to all of our employees Russ 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.
With that operator, we will hand, the call back to you.
At this time as a reminder to ask the question you will need to press star wanting your telephone to withdraw your question press pound key please stand by while we compile the <unk> roster.
Your first question will come from Darren Aftahi with Roth Capital Partners. Please proceed with your question.
Hey, guys. Thanks for taking my questions I hope you're well on two if I may I know you acquired a sonar.
Roughly 10 months ago I'm, just kind of curious I know there was some talk with their text analytics capability and your own call analytics, just kinda create this closed loop multi touch platform I'm, just kind of curious any sort of timeframe for maybe when that might be rolled out.
Or if it's being piloted beta had with customers is any kind of insight there.
And then.
Your commentary about kind of the inner medium outlook I'm just kind of curious.
To get back to kind of that double digit organic growth on a run rate basis.
What sort of needs to happen from a business environment. I mean are you sort of assuming cobot is completely in the rear view mirror, we kind of in its hybrid.
Sort of scenario where.
And I don't quite know what that looks like but I'm, just kind of curious any kind of context around that the would be helpful. Thanks.
Hey, Darren Thanks for a for the good words, and hoping you are healthy and well to let me. Let me address your first question and then Mike maybe you can jump in on the second on the product front I know you had the acquisition of sonar accelerated a lot of what we were working on and that was part of the key strategic thesis involved with it because our belief was given.
The acceleration of adoption of tech thing by consumers with businesses. This would become a must have component of an integrated solution and.
The good news in one of the reasons why we feel pretty positive and encouraged about where we're going to rationally as our conversations with customers have really validated their need for an integrated voice and texting solution and we've gone through a fairly accelerated product development cycle, where that's something that.
Yeah, we're going to expect him to be able to deliver into market very shortly so we.
We do have products that we are testing with with integrated voice and text and we believe that's a catalyst for us in 2021 as well as a strategic differentiator and not be texting capabilities are one of the accelerants for us and leveraging our analytics insights platform into.
Through these sales engagement applications, which we think expands our addressable market. So.
Detecting aspects our current events and we think the catalyst in 2021.
And there is this is Mike why don't I address the second part of the question about some of the intermediate thoughts about our growth rate.
And I think part of your question revolves around what the impact from go that we don't know the exact impact of colder than what the unwinding.
We'll come to bear and how that when exactly will play out we do think in 2021.
It is more likely that there is going to be some unwinding, we hope its substantial we hope it becomes completely <unk>.
Rear view mirror, but we don't think it has to be completely in the rear view mirror for us to make progress in.
In specific terms, we have been making a lot of progress on our products here in the last six to nine months, while we've been in this environment Russ just talked about some of the integration that's going on with our texting solution capabilities and how that's resonating with some of our existing customers. There are a variety of products that we have slated for the table or.
In the course of the next six nine as well as beyond that number of months the conversations that are happening with our existing customers as well as some of our prospects are suggesting theres. Some strengthen our ability to get momentum and we had some momentum going prior to the entry into the coated world we.
We do think it won't take that much or to be able to get that momentum back and that's what we're looking forward to and we're trying to do as much as we can right now to set the stage for exactly that in 2021.
Great just on the margin I guess any you know outside of your killer customer base in auto and home services and in dental and the like.
I'm, an h. back or are there are there any other verticals you would kind of call out that that maybe tax might be the turn key to to unlock more quickly in terms of penetration.
Sure, there's a variety of them, but a couple of it hit on are you I think you mentioned dental there's other applications in the health category, where it could be complementary financial services has been a big category and and we see application and insurance and financial services and then senior living is one we talked about.
You know and as a vertical where we think we can make headway as well.
Great. Thanks, Thank you.
Your next question will come from Mike Latimore with Northland Securities. Please proceed with your question.
Hi. This is until then so on all Michael that give them.
Could you tell me on how have caused volumes trended by month June to October.
Sure. This is Mike so thank you for the question the call volumes are up in April and parts of April where our lowest that we've seen in some time and had the the really radical impact from the cobot activity. We saw some uptick starting again into May and June.
July and August showed continued strength so increases there September we definitely had some of the impact of the seasonal volume start to add and show some impact during that month and we saw some of those continuations as expected in the normal seasonal course, as we move through October we.
I had a number of customers that unfortunately have been significantly impacted by the pandemic and some of them have been more permanently impacted but pandemic, but Russell mentioned some comments already during the course of the call where we do believe that those permanent impacts and coal is going away are not going to detract, especially the intermediate and the long.
Term from our opportunity we still think we can get some of the momentum that we've talked about on this call already.
Okay, and I didn't even got to myself when you $5 on bake all back and online banking.
So in the course of a March April and some of the subsequent months, we have provided and we had comments previously where we had referenced we have provided.
Adjustments for some of the customers in some cases that included pricing breaks or some modified packages or timing delays for them to be able to deal with their set of circumstances for the most part that has all been resurrected and returned back to normal conditions at this point in time and.
No knock on wood, if things do continue to unwind, who will be looking forward to that momentum build building in a healthy way as opposed to a compromised way.
Okay. Thank you.
Thank you.
Again, if you would like to ask the question simply press Star one in your telephone.
<unk>.
At this time there are no further questions in queue you do have any closing remarks at this time.
We wanted to thank everyone for joining us today, and we look forward to continuing to share progress over the course of the coming months and quarters. Thank you. Thank you everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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