Earnings Call: Q2 2021

Aug 5, 2021

Good afternoon. Thank you for attending the Marchex Second Quarter 2021 Earnings Call. All lines will be muted during I would now like to pass the conference over to your host, Trevor Caldwell, Senior Vice President of Investor Relations and Strategic Initiatives with Marchex. Thank you. You may proceed, Mr. Caldwell. Thank you, Amy. Good afternoon, everyone, the conference call. And welcome to Marchex's Business Update and Second Quarter 2021 Conference Call. Joining us today are Michael Arends and Russell Horowitz, the call. Our Co CEOs and Lila Kirschke, our CFO. Before we get started, I'd like to take this opportunity to remind you that our remarks today will call. Forward looking statements, including references to our financial and operational performance, and actual results may differ materially the call from those 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 the conference call and in our most recent annual and quarterly report filed with the SEC. Any forward looking statements that we make on this call are based on assumptions as of the call 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 on the Investor Relations section of our Web At this time, I'd like to turn the call over to Mike Renz. Thank you, Trevor, and thanks, everyone, for joining the call. The In the Q2, we saw the benefits of focusing our company on the conversational intelligence and sales engagement markets. The call. We're making progress across each of our strategic initiatives, including market expansion, product momentum, the increasing our sales pipeline and innovating in ways that solve a growing number of mission critical problems for businesses. The As consumer behavior and customer engagement evolve, we are focused on staying in the forefront to help businesses deliver the personalized selling experiences and an increasingly multi channel operation. Today, the Consumers utilize multiple communication channels during the buying process. As a consumer, it is common for each of us to move from voice the to text to e mail. This is simply the new reality of how we interact in the digital environment. This channel shift the becomes a challenge for many businesses who often lose track of the customer as they transition from a text to a phone call and back. The To the customer, the experience can become a garbled and disjointed path from beginning to end on the path to purchase. The Because today, businesses have different systems to engage them depending on which communication channel the customer first engages with. The For Marchex, this presents a major opportunity. By aggregating multiple touch points in the consumer buying journey, the the call. We put powerful conversational intelligence in the hands of businesses and help them close the loop between the marketing and sales in order to help them deliver better and more cohesive buying experiences to their customers. The We've concentrated our resources on the conversational intelligence and sales engagement markets. These are bigger, more transformative markets than the ones the quarter. We saw what we felt could be a transformative opportunity and accelerated our efforts to capitalize on our unique position. The favorable effects of that strategic decision are starting to materialize in our growth. The Coming out of the pandemic, more new customers are adopting our new products and existing customers are continuing to renew the and extend their relationship with us. Conversation volumes are up from a year ago with several key categories approaching 2019 levels. The The reopening of the economy is, of course, a factor in our growth as well. People are increasingly contacting businesses again to spend on everything from the Q2, to dental work, to address the needs they had to put off during shutdowns. And we're encouraged by what we have seen so far this year and are optimistic the Q3. Our most recently launched solutions use machine learning and AI to boost insights for businesses at a granular level the and are a factor in our increased overall momentum. This has reinforced our position as an end to end the conversational intelligence solutions provider that integrates the most critical conversational data and sales the marketing processes to convert customer leads. That means marketing driven leads are being connected with sales conversations over voice the and text to close the loop. We allow disparate processes to be streamlined for our customers and give them the capabilities the quarter to shape the sales process to close more business, which can be transformational in terms of value impact. The We see confirmation of that in our sales pipeline expansion in our new products, including our tech solutions the and our recently released auto product, Marchex Engage for Auto, which is the first vertical the specific adaptation of our broader conversational intelligence and sales engagement solution suite. Call. We will launch additional solutions and expanded product capabilities throughout 2021 2022. We're also accelerating the our cloud based infrastructure initiatives to continue moving faster as an organization to innovate and solve mission critical problems for businesses. The call. For example, Marchex recently announced its integration into VIN Solutions Connect CRM, the largest dealership customer relationship management system. This integration enables automotive dealers to deliver a better customer experience the and automatically keep their CRM up to date with conversation events and outcomes. Dealers now have a streamlined view of the omnichannel path to purchase that expands their ability to respond to inbound inquiries while delivering a better the buying experience. Marchex helps auto dealers gain unique insights into the consumer path to purchase and the tools to better engage the preferred communication channel. We're already seeing the results and impacts. When dealers better understand the customer experience, the call. They, in turn, improve sales team performance. 1 invariably affects the other. The The VIN Solutions integration is the first of many integrations that our new technology platform will leverage the as we develop new capabilities through the advancement of our channel partner strategy. Our new platform will help us not only the build our integration partnerships, but also improve our onboarding and sales process and innovate faster as we move forward. The Our advancements and innovations are getting industry wide acknowledgments. In June, Marchex won its 5th product award so far in 2021 the quarter. When AI Breakthrough Awards recognized us as the winner of the best AI solution for sales the the conference call. The conference call will be recorded for the sales engagement product suite and the 2021 Gold Stevie Award for Marchex's marketing edge solution. The consumer engagement market in its conversational intelligence IntelliView report. We will continue to expand our offerings with AI the driven products and features that build on our core value proposition, strengthening our position as a leader in helping businesses leverage conversational intelligence, the delivering the selling experience that today's consumers demand and in turn drive more sales and growth. The And with that, I will hand the call to Russ. Thanks, Mike. As we've discussed, consumers engage with businesses across multiple communication channels. With a powerful and expanding platform of value added applications across voice and text, Marchex can now unify the channel. This is the first time this holistic view has been available to many of our customers, sales and marketing teams. The presentation. Through our conversational intelligence platform, businesses can turn the strategic insights we provide into more of their most valued sales outcome. The presentation. Industry leading companies are turning to Marchex to solve mission critical problems in their sales process, and we are increasingly being recognized by industry leading research firms through our unique and emerging position in these markets. The recognition is helping us build increased momentum the call as we continue focusing on accelerating innovation and delivering measurable progress on what we believe is a transformational path. The call. Thank you, Russ. At a high level, the Q2 as a reflection that we are taking steps to recover and move past the COVID-nineteen crisis. Many of our customers continue to reopen for business the and are prioritizing the development of sales software again. As Mike mentioned, we saw conversation volumes increase over the year ago period the fiscal year 2020 with several categories approaching 2019 levels. We also saw positive developments in our sales pipeline enhanced by our new product advances. The While there continues to be a regional element to the reopening in the U. S, in terms of relative strength from a conversational volume perspective, we believe overall trends are period in the right direction. That said, we are watching recent trends closely to see if any resurgent factors Q1 2019 impact future planning initiatives. Combined with our ongoing initiatives to launch new products, economic recovery should provide a favorable tailwind from Marchex going forward. The presentation. For today's commentary, I will focus on our financial results from continuing operations. On that basis, the Revenue for the Q2 was $14,000,000 versus $12,700,000 for the same quarter last year. Conversational volumes maintained some of the momentum from March with many categories seeing double digit increases on a year over year basis. The presentation. The COVID environment continues to impact categories such as hospitality and dental compared to a normalized environment, the other categories such as auto services saw a meaningful increase relative to the year ago period. In addition, improved fiscal year. Economic environment combined with the launch of new products and continued feature enhancements is leading to an increase in new customer wins and upsells compared to the year ago period. The presentation. Now let's shift to the P and L for the Q2. Excluding stock based compensation, amortization of intangible assets and acquisition or disposition related costs, the quarter. Total operating costs from continuing operations for the Q2 was $14,800,000 compared to $17,100,000 the Q2 of 2020. Service costs were $5,500,000 for the 2nd quarter. The Service costs decrease as a percentage of revenue compared to the Q1 of 2021, largely due to a higher revenue level as well as realizing the presentation. We anticipate that we will be conducting a few key initiatives, which include cloud migration initiatives, certain platform integrations and other technology initiatives. The We anticipate as we complete these infrastructure projects and derive revenue from the launch of our new conversational intelligence products the and sales engagement solutions, we will continue to see a positive impact on service costs as a percentage of revenue over time. Sales and marketing costs were $2,500,000 This amount was down from the Q2 of 2020 due in part to continued optimization of our selling and marketing Product development costs were $4,700,000 and were down as a percentage of revenue compared with the Q2 of 2020, the quarter, reflective of efficiencies gained from technology platform progress as compared to a year ago. The presentation. Moving to profitability measures, adjusted operating loss before amortization for the 2nd quarter was $900,000 Corresponding adjusted EBITDA was a loss of $500,000 improving from the Q1's 20 20 one's adjusted EBITDA loss the of $3,000,000 GAAP net loss from continuing operations was $300,000 for the Q2 of 2021 the quarter or 0 point 0 $1 per diluted share. This compares to a net loss of $5,700,000 or 0 point 0 $9 per diluted share for the Q2 of 2020. The presentation. Adjusted non GAAP loss from continuing operations was $0.02 per share for the quarter compared to an adjusted non GAAP loss from continuing operations the $0.07 per share for the Q2 of 2020. Additionally, as we ended the second quarter with $27,800,000 in cash on hand. Now turning to our outlook. Call. We continue to be optimistic about the year and the ultimate recovery of the economy. Furthermore, we believe our internal momentum will add to our future growth prospects. The call. For the Q3 of 2021, we believe we will make continued financial progress on both revenue and profitability metrics relative to the 2nd quarter. The call. We also believe that our sales pipeline and product initiatives should enable us to grow on both a year over year and a sequential basis in the 3rd quarter. The This progress should manifest in growth on a year over year basis throughout the remainder of 2021, which can help us achieve our goal of reaching breakeven or better the call for adjusted EBITDA on a monthly run rate basis during the course of 2021. This progress will be driven by continued execution with increased sales the call, along with our cloud based infrastructure and other technology initiatives, which we expect to lead to some additional ongoing savings before the end of 2021. The presentation appropriately to ensure our existing sales and product momentum will continue into the next year. We believe Marchex call. Uniquely positioned as a trusted partner for market leading companies that need AI driven conversational intelligence and sales engagement solutions. The ecosystem of customer communications. Marchex's award winning voice and text solutions are testament to our employees and their dedication to our customers' needs. As we continue to focus on accelerating our technology and product initiatives, the call. We believe we can create and deliver long term growth profile and drive significant intermediate and long term operating leverage. The presentation. Over the coming months, we expect to have more news to share regarding new products, new relationships and our expanding AI capabilities. The To all of our employees, we thank you. The executive leadership team is very appreciative of your hard work and dedication. With that, operator, we'll hand the call back to you. Certainly. We will now begin the question and answer session. The The first question is from Austin Bedrock with Roth Thanks. Good afternoon and thanks for taking my questions. I'm on the line for Darren the call today. My first question is if you could speak more towards some of the key growth drivers the that you think will be prominent moving into the second half of the year and more specifically more on the CRM integrations. Hi, this is Mike here. So in terms of some of the growth drivers, we've the Clearly got a little bit of impact from a volume perspective from consumer activity, just regaining some of the pre COVID activities. The call. At the same time, I think a lot of the work that we've done over the course of the last year from a product perspective and bringing along the A couple of the new solutions that we mentioned today, including the auto dealer solution as well as some of our products within the texting arena the have allowed us to sign up more new customers. And this last quarter was representative of signing and onboarding the several new customers and a significant difference obviously than what it was a year ago period, but getting back to those levels the that existed in the pre COVID era. And we think with some of the product progress, there's some momentum the from a new product perspective as well as extending the relationships with some of our existing customers and potentially having some of these existing customers the Those, I think, are the keys to some of the progress that we see prospectively for the rest the fiscal 2020 1. At the same time, not just for the rest of 2021, but 2022, there are several new product and the the call. And we think the And this is Scott. I will just add on. When you take what Mike had on and synthesize it into a few key themes, the One, we feel we have a lot of headroom with our existing customer base. That new product progress that we're making the It's also really illuminating the opportunity to add new customers. So we have room to grow within existing. The new products are a catalyst the to win new customers. And then importantly to hit specifically on your question around the BIM solutions integration, one of the things we've been focused on is the We feel we have strong validation of the value impact of our products. And so one of the things we have been mindful to is what are the ways we can make it easier to adopt and operationalize those into existing operational workflows. The into existing operational workflows. CRMs are a core part of that and an integration strategy is what allows us the to do so on a kind of more frictionless basis. And so by virtue of integrating within solutions and auto, that's a catalyst for us the Which we think becomes a catalyst for growth. So those themes apply more broadly. So auto is a catalyst, texting is a catalyst, which runs the quarter. We see Catalyst in select other verticals that we look at for product expansion going forward as well. The And as Mike mentioned, obviously with COVID, there's always questions on what might happen. But directionally, we think that we've got a net Got it. And kind of to follow along on that with the CRM systems. Generally, Certain industries, certain verticals will share similar CRM systems. I'm curious if you're kind of targeting focusing on one vertical the at a time as opposed to casting a wide net and targeting multiple verticals at the same time, just pragmatically, if that makes more sense to pickup, focus on one at a time. Yes. So our approach to this has been to create capabilities in our product sets that are And then what we wanted to do is take those and apply it to a specific vertical, one where we felt we had a really strong strategic position the And some unique strategic advantages and validate that, which is what we've been doing in the auto space with VIN solutions. And there's more integrations to come that we think are accelerant. The As we do that and see the success, it's to start to expand our efforts in parallel into other core verticals where we can have vertical specific applications the and vertical specific integrations as well. So prove it out with auto and then in parallel start to build out vertical specific applications in our other core verticals the given the kind of learnings and acceleration we did by virtue of our success in auto. Does that address your question? The It does. Yes, I appreciate that. And just a last quick one for me. With the economy reopening, which Certainly seems like a tailwind for many of the verticals that you participate in. How much risk do you see with the business given the proliferation of the new delta variant. The So this is Mike. I think if you look at what's happened with any consumer activity, any resurgence the can create consumer impact where there's lessening of just the consumer activity. Whatever we may be seeing here the Q2 of fiscal 2020. We're in the very recent period of time. What we do believe is that the opportunity is there regardless. It's a question of are we going to have blips the quarter. Consumer activity continues to focus on voice. It continues to focus on texting. The That continues to be engagement from businesses needing some of the insights and information flow and sales engagement the technologies that we have. Those things are going to exist and permeate regardless of some of the COVID impacts. The Even if we see some lessening of consumer activity in the very short term because of any kind of resurgence, we think it's just a question of the intermediate and long term the playing out to the advantage of us with some of the new product introductions and adoptions by businesses of these technologies. The Thank you, Mr. Vedderick. The next question is from Mike Latimore with North Capital Markets. You may proceed. Hi, guys. This is Ankil Sohu on behalf of Mike Latimore. Thanks for taking my question. The Could you give me an update on what percentage of your revenue is usage based versus annual subscription? The Yes. I would say the The majority of our revenue is usage based at this point, but it's being driven more and more by subscription. The Do you expect that growth rate to be sustainable thereafter? The It's a very good question. I think clearly we've seen some of the impact, not just from a volume perspective of consumer the Q2 of 2019, but also from some of the new product introductions. As we've mentioned before, we have a slate of features, new products. Russ talked the extensively about some of the vertical applications and CRM integrations that we think we're going to be bringing to the table in addition to the VIN Solutions CRM the program that we've recently put out to market. As those things come to bear, the We see opportunity, and we're looking for revenue not only to grow. We think there's the possibility, especially in the intermediate term, the as we get back to normalized levels of consumer activity for potential acceleration. The Right. And what percentage of your customers are now at above pre COVID level? The This is Mike. I think when you look at the different categories, we certainly have a significant amount of resurgence back to volume levels similar 2019 in a category like auto services. Even car sales and some of the work that we do in the auto sector has the return to significant levels that were pre COVID esque. And there's a few other areas that have similarly moved forward. Home services is a key example. The But there's other categories that we mentioned are simply not at the level that they were. And hospitality, travel, the It would be one of them. I think if you look at some of the healthcare networks, even in the dental category, it's the progressed and it's significantly improved from what it was a year ago, but it's not at the levels that it was the Back in 2019. But many of the areas have come back with strength, certainly as we've seen here in the recent period the Thank you, everyone, for joining us today. We appreciate your time, and we will look forward to providing further updates this upcoming quarter with initiatives and progress for the Q3. Thank you. The conference call. That concludes the Marchex Q2 2021 earnings call. Thank you for your participation and enjoy the rest of your