Q3 2022 Marchex Inc Earnings Call
Co Ceos.
Before we get started I would like to take this opportunity to remind you that our remarks today will include forward looking statements, including references to our financial and operational performance and actual results may differ materially from those contemplated by these forward looking statements.
Risks and uncertainties that could cause these results to differ materially are set forth in todays earnings press release and in our most recent annual and quarterly reports filed with the SEC.
Any forward looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements for subsequent events.
During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The earnings press release is available for the Investor Relations section of our website.
At this time I'd like to turn the call over to Mike <unk>.
Thank you Trevor.
And good afternoon, everyone. Thank you for joining us today.
The third quarter was mixed from our checks the ongoing supply chain challenges and rising inflation continued to impact conversation volumes on a year over year basis for certain customers and business segments.
At the same time demand for our conversational intelligence software is growing among many of our largest customers as well as other large businesses with distributed retail footprint. We are seeing healthy development in our pipeline, which is a positive indicator for our overall growth as we look into next year.
There still are certain macroeconomic factors present, such as inventory shortages, which have impacted prices in certain verticals vas along with a pullback in consumer spending to a degree has had a corresponding effect on conversation volumes at the retail level.
That story is fluid on a vertical by vertical basis, but it is still a present factor, especially when looking at it on a year over year comparison basis.
At the other end of the spectrum are customers, who despite the challenging economic outlook are seeking to increase their utilization of our products and resulting spending with us.
We are engaged with some of our largest fortune 500 customers, who want to expand their relationship with us because they want to fundamentally change how they operate their businesses.
See our suite of conversational intelligence software solutions as a means to understand critical insights into the retail operations and customer interactions.
Like how do you deliver a best in class customer experience and close the loop to capture more of the opportunities and to sell more effectively.
We can solve big problems for these types of businesses and we believe this will drive our growth.
For the auto industry.
Time to change has never been more urgent the global supply chain situation has transformed how U S consumers buy vehicles and hundreds of millions of dollars in sales are being lost every year, because dealers and manufacturers have an ingrained outdated way of operating.
March six recently released an in depth data analysis of 60000 consumer to dealer conversations and from the dealers and manufacturers have significant opportunity to capitalize on these lost sales by bridging a big communication gap.
Between both dealers and consumers and between manufacturers and dealers.
We surfaced vital and detailed insights showing the dealerships and manufacturers consistently struggle and their communication over the phone answering questions about car availability and how the vehicle ordering process works, particularly as the auto industry is in the midst of one of the law.
Or just changes in its history.
This is being defined by the shift to build to order directly from manufacturer web sites and the rise of electronic vehicle sales.
In our study.
Current gaps in customer communications less the majority of potential customers frustrated and distrustful, particularly at a time when inventory is tight.
In order and financing processes are confusing.
Equally as alarming is that many of these bad experiences convince customers to defect from a particular brand.
The good news is that dealers and manufacturers are telling us they are motivated to fix these problems. So they can evolve their practices now.
Because the moment demands it and they are turning to us because we have the platform and intelligence to show them exactly how to do it.
<unk> is increasingly becoming the conversational intelligence software platform for the auto industry.
Our customer success is at the heart of what we do our commitment to that mission was recognized last month. When we won the appeal SaaS award for customer success for helping businesses recover lost opportunities.
The award came from a case study, which highlighted our national computer repair and support services company, let's say $50 in a single month by using our sales rescue feature of our conversational intelligence platform.
This success was possible through our continued investments in cloud based solutions and <unk> anywhere our integrations and applications hub that makes our suite of industry, leading conversational intelligence services available through third party communications platforms.
The world is changing and we are changing with it to serve our customers whether it's the auto industry home services or health care the need for conversational intelligence software is present and growing.
The scope of these challenges underlies our move to the cloud to reach more customers and prospects.
Our ongoing investments in innovations to solve an increasing array of customer experience pain points at the retail level, particularly for large businesses.
And with that I will hand, the call over to Russ.
Thanks, Mike.
But Mike just described about the auto industry shows how the trend toward conversational intelligence.
Very meaningful opportunity for March X.
Our product set at the juncture of reviewing critical actionable business insights to help companies transform their customer experience and to strategically plan and invest for the future growth of their businesses.
<unk> ongoing investments are driving the innovations that are enabling us to achieve a pivotal role for large fortune 500 companies with distributed retail footprints.
Conversational intelligence software it can be a defining solution to optimize costs, while creating better customer experiences and increase sales.
We are seeing our largest customers embrace our solutions in ways that can be differential from our checks and drive higher volumes as the macro environment normalizes.
While the near term economic circumstances have been somewhat cloudy, we have seen <unk> managed through these periods before and we believe that we can emerge from this even stronger and with more momentum.
That's because <unk> has the right technology solutions for businesses that need to streamline a complex ecosystem of retail operations technologies.
Our unique offerings help companies improve their customer experience. So they can continue to grow both now and well into the future.
Energized by the opportunity it presents for our business.
Meanwhile, we will continue to invest in capitalizing on this opportunity and be mindful to stay focused on our financial profile as these dynamics play out.
That I will hand, the call back to Mike.
Thank you Ross.
Revenue for the third quarter of 2022 was $13 2 million versus.
Versus $13 7 million for the same quarter last year.
As I mentioned earlier, the third quarter was mixed on the one hand conversation volumes came under pressure as macroeconomic events and persistent inflationary pressures weighed heavily on certain customer conversation volumes and led to an overall volume decrease compared to the year ago and <unk>.
Sequential periods.
For example pressure in the tail of our business and in small business listing and solution providers that mostly sell marketing services to local businesses faced pressure in conversation volumes compared to the year ago period.
While we are watching that trend closely we are seeing some traction with sales of our new products, helping the overall mix.
Looking at the intermediate and long term view, we are making progress with onboarding several new customers and also further in dialogue with several of our largest fortune 500 customers, where there are growth opportunities and potential for new multiyear commitments.
We believe that over the remainder of this year, we will continue to make progress through our momentum with several large customer expansions.
And with new sales wins in verticals, such as health care home services and auto that will set the stage for sequential progress as we go into 2023.
Our new cloud based suite of products continues to resonate with businesses and as a result.
We are adding to our long term customer and prospect pipeline and we believe it has an opportunity to drive a more meaningful growth profile over time.
On the operating cost side.
Our focus on technology infrastructure initiatives enabled us to achieve positive adjusted EBITDA, which positions us well in the future for discretionary operating operational leverage with growth acceleration.
Now, let's shift to the P&L for the third quarter.
Excluding stock based compensation amortization of intangible assets and acquisition or disposition related costs.
Total operating costs for the third quarter were $13 6 million.
Compared to $13 9 million in the third quarter of 2021.
Service costs were $4 9 million for the third quarter.
Service costs showed some leverage year over year, largely due to our progress with our technology infrastructure and cloud based initiatives.
Over time, we believe we will see a positive impact on service costs as a percentage of revenue as we continue to see successful sell through from the launch of our new conversational intelligence products and channel initiatives.
Sales and marketing costs were approximately $3 $2 million. This decreased from the year ago period due to continued optimization of sales and marketing initiatives.
Product development costs were $3 $5 million and were up as a percentage of revenue compared with the third quarter of 2021, as we've continued to invest in our future product pipeline and enhancing our AI driven conversational intelligence capabilities.
Now moving to profitability measures.
Adjusted operating loss performance <unk> for the third quarter was $430000.
Corresponding adjusted EBITDA was a positive $10 staying relatively consistent with the third quarter of 2021.
GAAP net loss was $1 6 million for the third quarter of 2022 or <unk> <unk> per diluted share.
This compares to a gain of $3 $3 million or <unk> <unk> per diluted share for the third quarter of 2021.
Adjusted non-GAAP loss was <unk> <unk> per share for the quarter, which was consistent with the third quarter of 2021.
Additionally, we ended the third quarter with a little more than $23 million in cash on hand.
Now turning to our outlook.
For the fourth quarter of 2022, similar to past years, we expect a seasonal decline in revenue compared to the third quarter. As this period typically represents lower sales volumes for many of our customers as coal volumes declined during the holidays.
In addition, as previously mentioned there are certain macroeconomic factors that are weighing down conversation volumes in parts of our business.
Despite this we anticipate that sales traction will lead to similar revenue levels in the fourth quarter as compared to the year ago period.
Additionally, we believe we will be at or near adjusted EBITDA breakeven for 2022.
This implies a loss on an adjusted EBITDA basis for the fourth quarter.
I would like to note that given the traction of our sales pipeline timing of Onboarding, new customers and technology infrastructure initiatives. We believe we will make sequential progress in both revenue and adjusted EBITDA in the first quarter of 2023.
Yeah.
With that said I'd.
I'd like to share some broader commentary on our business.
While we are in an uncertain economic climate, we believe <unk> is well positioned to emerge as a leader in conversational intelligence our products can help businesses, both grow and save costs as they look to consolidate a complex ecosystem.
Sales operations technologies.
At the same time, we are seeing strong customer engagement as businesses embrace the trend towards utilizing conversational AI to improve the customer buying experience and increase sales.
Meanwhile, our significant investment in moving our infrastructure to the cloud over the last two years will serve as the basis of our future innovation.
This also gives <unk> the flexibility to add new products and features that will enable us to take advantage of this trend and accelerate growth, which can lead to potentially significant operating leverage.
Our long term sales pipeline remains healthy.
As we move through the rest of 2022 and into 2023, we continue to have a number of opportunities with our fortune 500 customers regarding expanding our relationships meaningfully over time, including multi year relationships.
At the same time, we will be Onboarding some of our recent new customers, while also taking our new products to market and securing new customer wins.
These trends coupled with our new suite of cloud based products lead us to believe <unk> has the potential to accelerate growth with considerable potential to expand margins.
These factors are why we remain fundamentally optimistic about our future.
I want to thank all of our employees for their dedication and continued efforts.
And with that operator.
We will hand, the call back to you.
If you would like to ask a question. Please do so now by pressing star followed by the number one on your telephone keypad. If you change your mind I would like to be remained from the queue. Please press star and then K.
We ask that one potential ask your question. Please ensure that your device and Joe microphone on mute it lightly.
Our first question today comes from Darren <unk> from Roth Capital Partners. Please go ahead.
Hi, This is Dylan on for Darren Thanks for taking my questions.
If I could start you mentioned some of the puts and takes of the verticals, where you saw better traction spending relationships.
In certain verticals, where others were under pressure.
How does the revenue mix shake out between those clients.
Like the ones, you mentioned home services health care and auto versus.
The smaller customers that were still under pressure.
Thanks for the question Dylan. This is Mike. So we're looking at on a vertical basis automotive was actually relatively stable and the.
Third quarter on a sequential and a year over year basis from a volume perspective.
Home services, usually has a seasonal uptick in the third quarter. It didn't have as strong an uptick as it does.
Or as it has in the last number of years those two verticals are relatively sizable for our overall mix the pieces of the equation that saw some decrement and in particular, if you look at small business listing providers. So.
Ah Rangers in the digital as well as the advertising space that.
Work with small businesses.
A large.
Cases, they saw some more significant.
The impact on a year over year basis.
From just decreasing conversational volumes. In addition, there was some longer tail or smaller customer basis that saw they just seemed to have lower conversational volumes than they have on a year over year basis as.
As well and so there were some decrement there, but the small business listing providers, who is probably the most noteworthy one in the overall equation that we would call out as being impacted.
Got it.
Progress in both the top and the bottom line, it's because we actually feel like Theres. Some solidification of the traction coming from those existing customers with the new customers. We not only think that some of these new customers that we've won and secured the relationship with but the piloting in the onboarding process as part of that.
That we think is going to play out well for us in the first half of 2023 the.
The other piece, though that we're seeing is in the pipeline, we've actually got more opportunities there not secured theyre not signed we havent piloted them, yet, but we do have more opportunities that are building, which gives us pause for some of the interest from the customer base as we look ahead.
Feel like 2023 can actually be in tracking.
Tracking year.
For progress not just from a product perspective, and a customer perspective, but also from a financial perspective.
Thanks, and one more if I may with when you talk about some of the operating leverage.
How should we think about sort of the flexibility you mentioned in terms of what line items, you are able to you sort of.
Or back or increase say like sales and marketing if youre seeing good traction is sort of.
The breakeven or better adjusted EBITDA the goal to spend two or is it sort of where it shakes out on the top line first.
So the number one place that we see the operating leverage is with the gross margin just the cost of service the cost of sales lines, we think theres more opportunity for expansion with added revenues in economics from that standpoint, as we've talked in the past we think that at the current scale, we've got quite a.
A bit of room.
For leverage also just with keeping a few places fixed and so G&A would be an area that we think is a relatively fixed cost even with fairly robust significant scale from where we are I think sales and marketing there is more of a piece that's variable with that and if we see some traction with customer acquisition that may be an error.
That actually grows but it would be more commensurate with revenue opportunity and the revenue growth.
In that arena, so hopefully that.
That gives you some indications in the relatively near term I think our focus is on progress, especially on the top line.
And trying to make sure that we see traction there with the new customers as well as expanding some of the relationships. So revenue would be more of a focus than necessarily trying to optimize for the for the near term profitability.
Got it thank you Paula.
Our next question comes from Vivek <unk> with J M. N Research. Please go ahead vivek.
Hi, good afternoon, <unk> on for Mike Latimore with Northland Capital I have few questions with me on the bus one is what percent of sales snowing, we grew des.
Messaging.
So vivek. This is Mike I think the question you asked was about messaging our SMS text messaging. If that's the case it still remains a minority piece of the equation, but it's a growing piece, it's a single digit.
Percentage in terms of the direct traction.
But one of the things that we're doing in 2023 has this on the path it will become a more integrated components across our suite of products it's not.
Integrated across all of our products today and Thats one of the things from a strategic roadmap perspective that we want to enable on a go forward basis and so as part of that we do expect SMS and messaging to become just more of a focal point of the value proposition that all of our customers get to see.
Just the ones that are accessing or acquiring the relationships simply because of our text messaging capabilities.
My second question is bookings grew year on year in the quarter.
So when youre talking about bookings I presume that you are referring to pipeline and so from a pipeline perspective, there's two parts, there's actually secured new arrangements, so customer acquisition arrangements and those we've got some good news in the last quarter, where there is growth there is.
More activity in that arena, both in terms of number as well as dollar volume, but in terms of the pipeline and what the backlog is with growing opportunities that haven't been secured and signed I think that's where we're seeing some refreshing activity and it's across a variety of verticals. It's not just in auto it's not.
And auto services, it's coming across and home services, it's coming across.
In health care.
Okay. The last question is.
Do you see the gross margin trends and what are the main levers there.
Okay.
So on the gross margin.
We think that it can be relatively stable in the near term with consistent revenue levels. What I think we see with revenue growth is for every incremental dollar of revenue growth. We think the gross margin is going to be expensive and especially when you look at our new suite of products.
If that becomes the predominant piece of the mix of additive revenue new revenue that's added.
And then the gross margin can move more significantly we think Theres 70, plus.
Plus for each incremental dollar of revenue that comes on board that can drop to the contribution line the gross margin line.
With some of the suite of the products that could be even more than that given the cost of sale. It's a relatively nominal part of the actual service.
Component.
And thats it thanks.
We have no further questions I will now hand back to the management team for concluding remarks.
Thank you. This is Russ just to wrap up I want to thank everyone for participation on the call today and the very.
Very good question.
The main thing I think we can close on us.
We really feel like we're increasingly getting clearer and clearer line of sight on our opportunities and growth catalyst.
The environment, obviously as we've referenced has been cloudy and there's been various macro factors at play, but despite that we've been getting closer with our customers deeper in our understanding with our vertical opportunities that has helped inform a lot of our product priorities and strategic differentiators.
Let us in a place where with clear understanding and clarity around where those growth opportunities are it's really just the execution to be focused and so in the spirit of what Mike talked about as well.
With her there with expansion with existing customers, we've had new wins that validate a lot of these new products that we believe will contribute sequentially and we continue to focus on our channel expansion, which we think we.
We'll just put more momentum behind.
All of those initiatives and so.
Eager to share our progress with you and appreciate your ongoing support and involvement. Thank you very very much.
Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.
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