Q2 2023 Marchex Inc Earnings Call
My name is welcomed small checks or second cool chicken equal.
My name is Loren I know Beechwood make your call today.
There'll be an opportunity for questions at the end of the presentation.
If you would like to ask a question. Please press star one on your telephone keypad.
I will now hand, you over to host Trevor Caldwell Senior Vice President of Investor Relations and strategic initiatives to begin trigger. Please go ahead.
Thank you Lauren.
Good afternoon, everyone and welcome to <unk> business update second quarter 2023 conference call.
Joining us today are Alan Miller, our CEO and Michael Arends, Our Vice chairman.
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.
Statements in subsequent events.
During the 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.
Press release is available in the Investor Relations section of our website at.
At this time I will turn the call over to Edmund.
Thank you Trevor and thank you for everyone who is joining good after.
And then I would like to thank you all for joining us to discuss more checks and what we consider a very hot topic around AI.
Artificial intelligence, which we're in the middle of.
Before we dive into details of the quarter I will share some thoughts around my journey as CEO of March.
We believe we are in a strong market.
With strong and good tailwind.
I'm in the midst of building relationships with our clients and understanding their problems and how March X can provide solutions now and in the future.
Mark <unk> is that a unique moment.
Our early investments in artificial intelligence have positioned our business capitalized on the market strong demand for our vertical market understanding of products.
We believe we are in the right place and at the right time to.
To be a leader in the conversational intelligence market.
And that we simply need to continue our path to execute across our talent.
Process and technology and empower our clients to be smarter, each and every day.
It has been a very good amount of time is spent out in person with our clients. It's been really good.
Set of meetings, we enjoy working with some of the largest businesses in the world. The potential we have with our current clients and in our vertical markets Excite me.
I continue to focus the bulk of my efforts on our customers and reorganizing the business to take advantage of the opportunity we see in front of us with any multibillion dollar market.
Over the past six months <unk> been developing a deep understanding of the challenges.
And more importantly, the opportunities our customers possess in their industries.
It has been exciting to see how our unique understanding of the vertical markets, where we operate give us an advantage and mathematically understanding data to shape solutions around a complex set of conversations.
This is exciting to create in collaboration with our clients and I just stressed with our clients.
These are very large companies that engage with their customers across multiple communication channels.
They care deeply about each step in their processes. They are data driven.
And are aware that many have significant gaps around understanding and engaging customers across their omnichannel communications.
The error, we find ourselves in now proves that March X was ahead of the curve and using our data to develop our AI capabilities.
Our foresight and directing resources towards creating award winning AI products is a testament to the talent and innovation of our team.
In fact in the second quarter, we received the highly sought after industry honor. The 2023 artificial intelligence breakthrough award for the best AI solution for cells.
Say that again.
Through award for the best AI solution for cells.
This award recognizes excellent innovation hard work and success in a range of AI and machine learning related categories.
Including generative AI computer vision, AI ops deep learning robotics natural language processing industry specific AI applications and much more.
In the second quarter March X also received our second customer success award from a purely.
Purely SaaS awards on our customer base obsess platforms and success stories that deliver extraordinary experiences and results.
This represents further recognition that our cutting edge solutions are highly effective in delivering exceptional results for our clients.
We are creating solutions that can help realize tens of millions of incremental cells a year the fortune 100 brands.
Our customers are actively asking more from us that's a large part of why we are winning new relationships and establishing record contract extensions with certain partners.
There is another reason, we expect to lead the space.
It is directly correlated to the exceptional relationships, we have developed with several of the largest brands in the automotive.
<unk> services and home services industries among others.
These strategic partnerships have provided us with invaluable insight into customer needs and industry trends.
Our team has worked over many years to solidify our position as a trusted and often exclusive provider of conversation conversational intelligence solutions.
As the new CEO of <unk> I am grateful for the care and consideration of our teams are poured into these relationships over the years.
And what's most exciting is what many of our largest customers want us to do which is expand now and in the future to.
To accomplish that in <unk>, we will continue to organize ourselves to move most quickly and serve our customers and innovate faster as we open new market opportunities.
I will stress.
I would now met.
All of our top customers around the globe and now in second and third meetings with them and it truly is exciting.
I'd like to take a moment now to talk about how by focusing on three key areas, we intend to unlock our future opportunities.
The first.
We will be through building enhanced customer experiences for brands.
Conversational intelligence holds the potential to revolutionize the way customers interact with brands.
Leveraging our strong relationships with enterprise companies and auto auto services home services and other verticals, we can tailor conversational solutions to meet their unique needs.
We can transform the way our customers interact with their customers and prospects across the phone and in text messaging and beyond.
The second is through a data driven insights our access to billions and billions of Anonymised data points from our partners gives us a significant competitive edge.
Can extract insights from customer interactions to a degree of granularity.
But our customers have never accessed score. This again is thanks to the power of our AI platform and I'm going to add mass models.
We can identify emerging trends and customer preferences and pain points to help our clients make the best and most informed data driven decisions.
We've helped our customers achieve increased sales and improved services driving loyalty and customer satisfaction.
Now onto my third and final point.
What makes smart checks a differentiated competitor.
It is our innovation and R&D.
Staying ahead in the conversational intelligence intelligence market demands continuous innovation and investment in research and development, we've committed ourselves to expanding our team of talent engineers and data scientists, enabling us to develop cutting edge technology.
As the boundaries of conversational AI.
The work, we're doing is shaping the future of the industries we serve.
We are moving fast.
We are further aligned with further lines of people process and technology facets of the company in the past few months.
From the executive team to various other functions within the company I am proud of the team. Additionally.
Additionally, we plan to continue to drive initiatives to achieve profitability earlier than we previously anticipated and preserve the balance sheet to meet our long term needs.
In addition, these efforts are focused to enable us to move faster as a company.
AI is changing the landscape of software.
Over the next several months you will see new products and new go to market strategies unfold.
Many of our customers are looking to us to provide much needed innovation for their businesses.
There is much work to do together.
But I am excited about our future and I do look forward to updating you on our progress in the coming months with that I'll turn it over to Mike.
Thank you Evan.
Yes.
For the second quarter revenue was $12 5 million versus $13 5 million for the same quarter last year.
From a revenue perspective, the quarter was mixed.
On the one hand, we saw continued pressure on conversation volumes in certain vertical segments with growth and others.
Specifically there was continued pressure with our small business listing and solution providers that mostly sell marketing services to local businesses.
This trend manifested over the latter part of 2022 and has continued into the first half of 2023.
On the other side of the equation certain verticals like automotive and auto services saw growth on a year over year basis.
On a sequential basis, our other auto dealership facing products continued to see momentum.
This is primarily as a result of the continued expanding support from auto OEM relationships, particularly those we've recently extended into multiyear terms.
Over time as we continue to expand our OEM and brand partnerships. We believe this will provide a continued tailwind for our dealership products.
And in addition, we see significant potential to expand some of these products into verticals that have similar characteristics and where we already have relationships with many of the vertical leaders.
I'll dive into this in more detail in a moment when I discuss further guidance for 2023.
Turning to the P&L for the second quarter.
Excluding stock based compensation amortization of intangible assets and acquisition or disposition related costs.
Total operating costs for the second quarter were $14 million compared to $13 $7 million for the second quarter of 2022.
During the quarter, we incurred certain costs associated with reorganizing and modifying operating activities totaling approximately $500000.
These were spread across functional areas and related primarily to personnel facilities and system expenditures.
Service costs were $5 $5 million for the second quarter, which decreased as a percentage of revenue from the first quarter of 2023, excluding the impact of efficiency initiatives.
Service costs increased on a year over year basis in part due to increased data and labor costs associated with customer migrations onto new product platforms and increased staging investment for our AI initiatives, which we expect to remain the case through the balance of this year and into next year.
Several of these investments are of a fixed nature and therefore over time, we believe we will see a positive impact on service costs as a percentage of revenue as we sell through our new conversational intelligence products and advance our new channel initiatives.
Sales and marketing costs were approximately $2 4 million for the second quarter.
This was down from the prior comparative periods in large part as a result of the reorganizing initiatives.
Product development costs were $4 million for the second quarter as we continue to invest in our products and then building AI to expand our conversational intelligence capabilities.
Now moving to profitability measures.
Adjusted operating loss before amortization for the second quarter was $1 5 million.
Corresponding adjusted EBITDA was a loss of approximately $1 million.
These amounts include approximately $500000 for certain costs associated with reorganizing and modifying operating activities.
Excluding those amounts adjusted EBITDA was a loss of $550000.
GAAP net loss was $2 $7 million for the second quarter or <unk> <unk> per diluted share.
This compares to a loss of $1 $5 million or <unk> <unk> per diluted share for the second quarter of 2022.
Adjusted non-GAAP loss was <unk> <unk> per share for the second quarter compared to a loss of <unk> <unk> per share for the second quarter of 2022.
Additionally, we ended the second quarter with approximately $14 $1 million of cash on hand.
Now turning to our outlook.
We believe revenue in the third quarter of 2023 should increase modestly relative to the second quarter of 2023.
We continue to see some headwinds in certain verticals as previously mentioned that will carryover into the third quarter.
However, we believe those factors will be offset by the growth driven by new customer adoption and the.
Onboarding of previously won relationships, including a recent OEM auto brand wins.
By existing customers ramping.
In addition, based on that momentum we continue to believe that we should see revenue growth in our back half of the year versus the first half of 2023, and we continue to believe that our traction within the automotive vertical can lead to double digit growth on an annualized run rate year over year basis by the end of 2020.
Three within that vertical.
With our current progress we believe we will be at or near breakeven on an adjusted EBITDA basis in the third quarter, including at breakeven or above levels in September .
Furthermore, our cost saving initiatives in tandem with expected future revenue growth initiatives should enable greater leverage and consequently, we could see improvement in profitability measures in the future.
The first half of 2023 has seen significant change at the company.
Real growth initiatives are just beginning to bear fruit for us and there are significantly more to share on our product and innovation Road map.
We remain in a unique position where many of our largest customers are asking for more of our products and signing long term commitments to gain access to our conversational intelligence software and our pipeline of new products.
Well, we can identify the work needed to unlock that potential. We also recognized there remain many other significant opportunities to expand our relationships with some of the largest companies in the auto auto services home services and health care verticals among others.
We believe that several of these relationships should contribute to growth this year with significant growth potential going forward.
For example, we are encouraged to see that the progress with our auto OEM partners supports inroads and strategic advantage with our auto dealer sales channel.
We expect this will continue in the future.
And in addition has mentioned there are several new products and vertical initiatives that we expect to launch with some slated for later this year.
Now as everyone mentioned, we strongly believe that our company has significant untapped potential.
We have been realigning the business to go faster and unlock opportunities with our existing customers, while looking to open new market opportunities by penetrating verticals, where we already have a critical mass of data to innovate for them.
And at the same time, we are continuing to invest in our innovation engine at a critical time, when many industries need to understand how to leverage data science and AI to deliver better customer experiences and sell more.
As we go forward, we expect to see expanded relationships with numerous fortune 500 customers and other new and significant relationships added to our base.
I wanted to thank all of our employees again for their continued dedication and effort.
And with that operator, we will hand, the call back to you.
Yeah.
Thank you.
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As a reminder, duffy.
Tom can I just ask a question.
Our first question comes from Dillon Heslin from broker to partner Golden. Please go ahead.
Hey, Thanks for taking my question.
First one when you sort of talk about the volume trends.
I'm just wondering your other services being down year over year still.
And still some momentum sequentially in auto like if you if you compare to Q1 Q.
The general trends better in terms of the sequential basically you might have in the streets or the trough and are in are on the way up and just the general volume trends across all of the businesses.
Yeah.
Thank you Dillon for the question this is Mike.
So as we mentioned in some of the prepared remarks the small.
Small business solution providers that focus on some of their selling to local in the small and medium sized businesses. They have manifested being down in the latter part of 2022 that trend continued not just.
Here in the first quarter of the year, but also in the second quarter and we see that here as we sit in the early part of the third quarter as well what we do see though is in automotive and then auto services and then some of the other verticals that we've referenced today, where we've had not only.
<unk> relationships with some of our customer base that existed already but also some of the new wins and especially with some of the larger Oems that we have announced previously in the last six months we.
We see things burgeoning and we have on boarded.
Some cases.
Fortuitous Lee.
The ramp has already started and we saw a little bit of that during the second quarter, but that trend continues and so to answer your question in those areas, especially with the expansion of the relationships that committed relationships that have extended.
For several multiyear periods as well as some of the new prospects, we see the momentum as expected, which gives us the Pos for why we think the back half of the year again, there's going to be incrementally and higher revenue than the first half of the year and why we see the sequential growth as we sit here looking into the third.
Importantly, I think the other part of the remarks, we made which I'll reiterate we view at the end of 2023, particularly with the sponsorship opportunities with getting through the OEM relationships in the auto sector.
Some of our dealer sales direct outreach initiatives and the new products that we brought with features and benefits at the dealer level to be able to continue to see progress there and by the end of this year, we expect on a run rate basis still.
The revenue in that auto vertical to be double digit revenue growth on a year over year basis by the end of 2023, what that does in our minds, especially given the nimbleness and some of the organization modifications that have been made to align more to go after certain of these most.
Mentum producing areas, we like what that sets us up for for 2024.
Yes, Mike I'll add one thing.
Thanks for the question.
Yeah, Let me, let me add a little bit to that because on the front lines every day so.
When he says nimbleness and movement, we really have structured the business to the port.
Vertical market go to market and what I'm, finding which is really fun.
The needs of the clients across our verticals, they're not different the product offering is not different.
Feature sets not different it may be different math models with different nomenclature like in auto you say bronco it means a truck.
Of course.
And when you jumped home services.
What they say when they say pans, it's something else right.
So.
Outside of the vernacular nomenclature, our go to market with very similar even so that our current inside sales group that has been targeting that double digit growth in auto which has been great. We are now have them lit up the start new campaigns and new vertical markets with new scripts that will drive the business and our ability.
Tim.
The impact verticals, where we already have some stickiness.
Great. Thank you and actually just sort of as a follow up on what you mentioned Edmond.
So when you talk about expanding into new verticals there.
Somewhat similar.
Do you think there is a.
Large need for.
Increased R&D to sort of help with training the models on sort of the new data center, it's pretty.
Pretty similar enough, where you can get those up and running fast.
Yes, they are there.
Very similar.
The only difference that sand the math models.
We've got I don't know, how many tens of millions of conversations in certain verticals.
Understand this we're already in the vertical so it's every four verticals we mentioned.
Been with clients and offered four verticals already and.
They're massive clients.
Our ability to position what we're.
Doing an R&D across those verticals is consistent it would be.
<unk>, one data stack one pipe.
Our ability to build the math funnel to your problems is just gotten set up what we have is vertical dominance.
The horizontal and I was on a panel a couple of weeks ago, we startups, where they had a bunch of AI.
Everybody's AI now and their horizontal we actually have been in protocols for many many many many months and so the ability to walk in and understand those conversations and help them understand how to.
Create a better relationship whether it's a marketing or sales motion, we've got that data.
So for me the math models.
Got the people we are investing in that area.
And I'm not worried about that at all.
I would not want to be a horizontal.
AI planet right now I can tell you that.
Great. Thanks for taking my questions.
You bet. Thank you.
Thank you.
Our next question comes from Mike Latimore from Northland Capital markets. Mike. Please go ahead.
Great Yes. Thank you.
Sorry, Edwin conversational intelligence can mean, a lot of different things I guess, what can you give a concrete example of a use case that youre, particularly excited about maybe some of the ROI behind it that youre seeing maybe what some of your bigger customers.
Yeah.
Yes, Thanks, Mike for the question certainly I'm going to give a broad answer and then I'll go deep on the 30000 feet down to 2000.
Conversational intelligence really in Omnichannel intelligence.
It's hard to do and we have the platforms to do it.
Which is which is awesome, so our ability to collect.
Trap annualized understand and deliver data back in 20 seconds to a client about an experience of a hang up or non transfer or a bad conversation.
It's powerful.
I've not seen anything like it.
<unk>.
I've been on the journey in my career as a CEO and the this is spun so like a specific example would be.
You want you've got 500 dealerships that are using our platform. It's from the OEM tier one tier two tier three and our ability to say what happened to deliver education very quickly as the people in the field trying to drive performance at the dealership or know what happened on a call or a text.
We're there now do I think we're only there no and this is where I'm going to probably be careful but.
We are a data analytics company, we've got more data than any company I've seen in my career as a CEO .
So what we do with that data and how we form that model to drive value props for our client.
I mean, I'm literally white boarding with their clients.
I came on vacation I flew twice last week got my family located.
On a plane.
Blue and white boarded clients so the needs there.
How they expand their use of our platform and our data analytics.
It's clear to me and a clear path, we got a lot of work to do.
I believe we can do it at the right team in place.
But yes.
The amount of value and I think tens of millions of dollars a year to clients. It truly is on this call. It a math model with a signal.
Tens of millions a year that they get to say.
And I will say, yes.
It's going to help us move faster.
And our customers want to do more with us and I'm out there with them. So I actually got my first touch on the road.
Last week from clients, which is awesome.
It was completely <unk> by the way.
Nothing nothing that.
Got it.
Excellent.
And then the.
I know you've talked about the small business segment being soft or are there any other verticals that are kind of in a declining mode still and what percent of revenue.
Hi, Mike This is Mike here, so the small business listing and those solution providers make up the brunt, we do have some other smaller areas.
But in terms of those small business solution providers being down on a year over year basis that trend continues in some cases, it's more than 20%.
Down they don't make up a significant proportion, but still a meaningful proportion of the aggregate revenues each quarter. We go in the automotive progresses, the auto services progressive in the home services Progressive.
The impact hopefully becomes further muted.
Yes, I'll add to that guide.
The it's also again I'll stress that.
Having benefited from taking people that we're in just in verticals now to other vertical so they can see.
Jeff how.
The same problems exist in our software solved it.
I think our fifth is it's not just the core verticals random and include health care in there.
There are three more verticals I think we can go after with the same data pipe data stack data analytics, we have to tweak the math models.
General AI is helping with that but we also have.
Talk we got drove that data, where we can build map models going into a market.
And actually predict what it's going to look like faster than someone who is trying to sell it for the first time so.
Yes.
But I think that.
The complexity of <unk> is where we live really well.
I'm going to be hard to beat on the road.
Selling and Pwc.
So.
Yeah, no pause them probably get them right.
Yes.
I guess just one last topic, then on generative I guess.
Do you.
The idea here that you can figure data into a large language model.
And it will accelerate.
Kind of like.
Customer sentiment to the understanding of the incentive call faster, maybe just explain how degenerative AI will help here and then maybe you have a license with like an opening or how did how does that work.
So think about generative AI and everything.
Cat GPT are copilot or anybody's offering it will help you accelerate a lot of different things like that I can rattle job description now with in seconds I can feed it prompts which actually have to understand the process you can't build the prompts without the vertical data you can't build the prompts without the math models you already have.
Around the vertical data so the speed is going to be it's going to make our life everybody's life and it is transformative.
And the Internet 93, and I remember getting pulled by a very large fortune 100 did never used the internet they would stay on Adi.
Hold on.
Internet and $19 95.
So it's going to be the same but faster progression for people leveraging tools. The question is do you have the data can you build the math models do you know the clients.
We've got some of the largest clients in the world is leveraging our platform.
So we just got to keep doing what we've been doing in the past six months, we got and prior we got a lineup of our processes. We've got a lineup of talent and got a lot of our technology and we've got to leverage everything coming at us and be ahead. So we are actually hiring and the data Sciences world.
I've got a <unk>.
<unk> people on the team looking at what's next what's going to happen to us in six months with generative AI do you think <unk> is a small number it's not less is more when you're running a company with anything around technology through 50 people at 50 people in the kitchen Youll never get a dinner you throw one good shot at shelf and at dinner with some support.
Have maybe two or three you get a great dinner, so I'd like to move agile I'd like to move fast.
But I am excited about where we are.
And are you going to leverage third party LMS here or is it all internal.
Good question.
I think yes is the answer short answer we also have a lot of expertise around it so.
I think jury's out for me on <unk> Yeah.
Without some other stuff internal.
But we're certainly leveraging any.
External partner with expertise because we got the data.
And that models I've actually got we've got the client.
<unk>.
We're in a good spot.
It's a mix.
But we are automating.
A lot of different things right now that can be automated in a very simple manner with generative AI as an example, our MLP as an example.
But more to come on that.
Good question.
Great. Thank you.
Thank you.
How much do you have Nathan asked a question. So I'll now hand types with the management team for closing remarks.
Alright, well. Thank you so much for everyone attending we appreciate your time, we know everybody is busy we're excited about what we're doing we're excited about our next call. So.
Look forward to next call. Thank you so much.
This concludes today's call. Thank you joining you may now disconnect your lines.
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