Earnings Call: Q1 2021

May 13, 2021

Good afternoon. My name is Selene, and I will be your conference operator today. At this time, I would like to welcome everyone to the Marchex First Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Simply press star followed by the number 1 on your telephone keypad. Thank you. Mr. Trevor Khazol, Senior Vice President of Investor Relations, you may begin your conference. Thank you. Good afternoon, everyone. Welcome to Marchex's Business Update Q1 2021 Conference Call. Joining us today Michael Renz and Russell Horowitz, our Co CEOs and Lila Kirschke, our CFO. 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 today's earnings press release 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 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. Earnings press release is available on the Investor Relations section of our website. At this time, I'd like to turn the call over to Mike Aranz. Thank you, Trevor. Good afternoon, and thank you, everyone, for joining us today. In the Q1, we saw the early benefits of greater organizational clarity and singular focus on the conversational analytics and sales engagement opportunity. We began to see initial signs of the pandemic Let me first address total conversation volumes, which increased noticeably near the end of the Q1. Although January was largely consistent with December, Volumes started to pick up in February, and in March, we saw increased volumes that approached 2019 levels. This corresponded with several of our customers experiencing increased consumer activity, while also gradually reopening locations in multiple regions. For instance, we noted measurable improvements in conversation volumes at the end of the quarter in verticals such as auto services, Dental, Home Services and Auto Manufacturing in geographic regions that were reopening. As an example, in home services and healthcare conversion volumes increased nearly 20% in March over the prior year. Again, those numbers are almost in line with 2019 levels. And importantly, We see that some of these trends have continued into the current quarter. Meanwhile, verticals such as travel have remained significantly disrupted in the Q1 relative to historical patterns. However, we hope to see a favorable shift in the coming months as the outlook Before the pandemic improves. We also saw new sales and existing customer interest accelerate in the Q1. In fact, we signed more new customers and upsells than at any point in the last 12 months. These new customers spend multiple product lines across a variety of sectors, including auto, home services and advertising agencies among others. Right now, Businesses increasingly want to understand how to engage customers over text. Brands, especially those that have suffered temporary store closures, Are more open and eager to communicating with their customers through text channels in light of the pandemic, given it is a consumer friendly way to establish a connection and start the relationship building process. Given this renewed We have moved aggressively to accelerate our product and sales efforts in the Q1. We expanded teams in key areas such as texting, And we launched new AI driven products that solve an expanding set of industry specific use cases in verticals such as auto. In addition, the company continued to focus on our integration efforts in order to accelerate our timeline to deliver additional advanced analytics and sales engagement solutions in 2021. Each of these initiatives sets the stage for expanding our opportunity footprint this year and beyond. From the millions of conversational data points we heightened importance in the purchasing process. The pandemic has created significant consumer behavioral changes. Today, consumers perform research online before they initially call or text the business. And by the time they take this step, They are typically armed with robust information and closer to a purchasing decision. As a result, That initial call or text has emerged as a critical interaction for brands to handle successfully. A recent study we conducted on the new pandemic shaped habits of auto shoppers illustrates this. Trust and transparency are paramount. 91% of the shoppers we surveyed said establishing trust through transparency includes disclosing prices beforehand. The old method of enticing a customer to come down to a showroom, test drive a car and negotiate in person does not work for today's highly informed and educated shoppers. This has mostly been replaced by online research and call and text based interactions with the dealer. Through our current product innovation cycle, we are enabling our customers to take advantage of these trends in consumer engagement. Our products give The power to gather the critical actionable insights across voice and text communication channels and the ability to deliver the right customer experience at each point of the selling process. The combination of these value added applications We know what consumers want today, a seamless end to end sales experience. Multichannel cohesion across Voice and text is imperative. Many brands struggle with this given the disparate technology stacks where data lives. Early on, We saw the power of artificial intelligence and invested in centering our technology platform around it. AI can help organize and examine data at a rapid fire rate to help businesses understand in real time which sales and marketing campaigns are working and which are not and also empower them to take the appropriate action to enrich customer engagement and increase sales productivity. In fact, our return to revenue growth is being driven by our AI powered product initiatives that bring together multichannel solutions in voice and text with vertical specific applications that drive increased sales. Our recent launch directly at the dealership level. In the initial trial of this product, we saw significant and demonstrable impact on car sales for the dealerships and are eager to bring the solution more broadly to the entire industry throughout this year and going forward. We are moving aggressively to complete the work to integrate our technology platforms, which we should complete this year. Our new integrated product platform will serve as the foundation for future innovation and will enable the company to simplify product integrations and sell opportunities. And in addition, we continue to anticipate achieving more than $2,000,000 in annualized cost savings on a run rate basis by the end of 2021 through these technology infrastructure initiatives. We are moving to expand our product and sales effort in key areas like texting and launching new products that solve complex problems in multibillion dollar markets like auto. And we're excited by the developments in the Q1, and look forward to updating you more in the coming months. And with that, I'll hand the call to Russ. Thanks, Mike. We're really encouraged to see the initial signs of momentum building in our business since the start of the year. Over the last 12 months, we made the decision to more deeply concentrate on the transformational opportunity in conversational analytics and sales engagement solutions. We're now seeing early evidence of traction in our vision and strategy. We're creating a unified suite sales engagement solutions across voice and text channels, which will empower our customers to capitalize on those actionable insights in real time. We're opening new markets and expanding our addressable market. With our auto dealer product, we will have the opportunity selling to thousands of franchise dealers over the next several years. Through our investments in unifying our infrastructure, We can now take advantage of Marchex's leading conversational data to innovate into the future and create new opportunities to cross sell and upsell with easier integrations for our customers and new channel partnership possibilities. Our plans for 2021 are appropriately ambitious and we intend to execute on all of them. In the Q1, we saw the first signs of acceleration in our business, which demonstrates the strategy while in its early stages is starting to pay off. As a result of this progress, We anticipate growth can sequentially accelerate and be on track to achieve our targets for this year as well as set the stage for a strong long term operating file. As we look at our strategic priorities for 2021, we are focused on making substantial progress in introducing new AI fueled products in driving increased momentum in auto, tech and other core verticals. Furthermore and importantly, We have simplified our business and created organizational clarity. This sets us up to execute well while establishing a leadership role in a very important transformative market. And with that, I will hand the call off to Latelyn. Thank you, Russ. I'm excited to be here today and share my thoughts on our business and our progress so far this year. At high level, while the overall environment continues to be characterized by the impact that COVID-nineteen has had on our lives and those of our customers, We've seen some encouraging signs during the Q1. Most notably, as Mike mentioned, we saw conversation volumes increase over the course of the quarter and positive developments in our sales pipeline. And while we cannot predict when the economy will return to normal, We believe our customers and our prospects businesses will benefit from gradual reopening. That combined with our ongoing product initiatives should provide a tailwind this year and going forward. For today's commentary, I will focus on financial results from continuing operations. On that basis, revenue for the Q1 was $13,000,000 Conversation volumes remained somewhat press during January that started to recover in February, while March saw healthy volumes that approached 2019 levels. Notably, we saw some key customer categories like home services and healthcare experience a healthy growth in March that continued into April. While the COVID environment continues to impact categories like hospitality and dental versus a normalized environment, we didn't see some positive progression in March in those areas. In addition, the gradual reopening of the economy has led to a rise in new customer wins and upsells. In fact, as Mike mentioned, in the Q1, new enterprise customer sales represented a high relative to the last 12 months. As we introduce new products over the course of 2021, we expect that these products who will contribute to further build our sales pipeline. Now let's shift to the P and L for the Q1. Excluding stock based compensation, amortization of intangible assets and acquisition or disposition of related costs, total operating costs continuing operations for the Q1 were $16,300,000 compared to $16,800,000 in the Q1 of 2020. Service costs were $5,400,000 up from $4,800,000 in the Q1 of 2020. Service Costs increased as a percentage of revenue on a year over year basis, largely due to our infrastructure initiatives, which include cloud migration initiatives, certain platform integrations and other technology projects. We anticipate as we complete these infrastructure projects and derive revenue from the launch of our new analytics products and sales engagement solutions, we will see a positive impact on service costs as a percentage of revenue over time. Sales and marketing costs were $3,400,000 This amount was down from the Q1 of 2020. Product development costs were $5,200,000 and were down as a percentage of revenue compared with the Q1 of 2020, reflective of our increased revenue scale as compared to the year ago period. Moving to profitability measures, adjusted operating loss before amortization from continuing operations in the Q1 was $3,400,000 Corresponding adjusted EBITDA with a loss of $3,000,000 improving from the Q4 of 2020's adjusted EBIT loss of 3,200,000 GAAP net loss from continuing operations was $5,300,000 for the Q1 of 2021 or $0.12 per diluted share. This compares to a net loss of $25,500,000 or $0.54 per diluted share for the Q1 of 2020. Adjusted non GAAP loss from continuing operations was $0.08 per share for the quarter compared to an adjusted non GAAP loss continuing operations of $0.07 per share for the Q1 of 2020. Additionally, we ended the Q1 with approximately $23,000,000 in cash on hand net of current debt obligations. Now turning to our outlook. We are generally optimistic about the year and the ultimate recovery of the economy. However, the current environment remains highly fluid in the near term. For example, here in Washington State, we still have several counties stuck in Phase 2 due to rising COVID cases, which implies lowering purchasing capacity in many businesses. We know that in certain regions, we are not out of the woods and quarterly, some of our customer pilots and trials remain on hold. That being said, we continue to have solid engagement with both prospects and our existing customers and the trend looks favorable relative to the year ago period. For the Q2 of 2021, we believe we will make further financial progress both revenue and profitability metrics relative to the Q1. We also believe that our growing sales pipeline and product initiatives should enable us to make progressive sequential financial progress throughout this year. And we continue to believe with an unwinding of the business impact from the pandemic, We can be in a position to reach double digit growth on a run rate basis at some point this year. Now turning to our profitability metrics and our balance sheet. Over the course of this year, we continue to believe we will advance towards our goal of reaching breakeven or better for adjusted EBITDA on a monthly run rate basis by the end of the year. Also similar to the revenue commentary, we believe that we will make sequential progress on our profitability measures throughout this year. We believe our opportunity in the conversational analytics and sales engagement market is significant. This year, we will take significant steps to position Marchex to emerge as a leader in this market. We will launch new AI driven conversational intelligence and sales engagement solutions and convert some prospects which are already in trials into full customers. In the meantime, we're moving aggressively to accelerate our infrastructure initiative, which will open new markets, new partnerships and support our future product innovation and rapidly expanding AI capabilities. Taken together, we believe that these initiatives can drive a strong growth profile this year and can drive significant intermediate and Long Term Operating Leverage. Over the coming months, we expect to have more news to share regarding new products, new partnerships and our expanding AI capabilities. To all of our employees, we thank you. The executive leadership is very appreciative of your hard work and dedication. With that, operator, we'll hand the call back to you. Thank you. At this time, I would like to remind everyone We'll pause for just a moment to compile the Q and A roster. We have our first question coming from the line of Mike Latimore with Marchex. Your line is open. Hi, guys. This is Ansel Cao on for Mike. As people go back to work and stop, That's in healthy volumes generally. Like a key Marchex value is monitoring sales effectiveness from a remote location. In terms of the volumes and Whether we're helping measure sales effectiveness from remote locations, I think the primary focal point is How a consumer engages with the business. And as long as the consumer is engaging with the business through a channel that's Dedicated primarily to a mobile device, whether it's voice or text, we absolutely see those trends benefiting Our volume and we think over the course of 2021 with some of the greater engagement activity between consumers and businesses that we Expect will come with an unwinding of the pandemic. There should be momentum there and volume increases. And I'll just add, this is Russ. One of the elements for us when we look at the last year There's a lot of our customers are service based businesses or national companies that had a distributed national footprint in terms of And they were the first to really face the brunt of shutdowns. What's happening now when you look at reopenings in combination with renewed sales initiatives because once you shut your locations, trying to drive more customers to those locations obviously doesn't make sense. And so That was the disruption we all faced, but we believe we're on the other side of it now. And as those reopenings continue to happen Now those initiatives to drive more customer leads and conversions continue to happen and the volumes move in parallel, that becomes a tailwind that helps us in addition to our product progress and our sales momentum. All right. How are the call volumes tracking in April May? Like is it improving from Q1? Yes, this is Violet. Our car volumes have been pretty steady quarter over quarter, pretty much higher than the prior year and tracking very consistently this current year. Right. And how is your traction with the messaging services? Yes, this is Russ. Yes, texting is one of the catalysts for We see that on the customer front, consumers are driving a real, I'd say, steepening of the adoption curve because Consumers want the ability not just to call, but to text. It ends up being just a much more efficient way to connect either on the consumer inbound basis on the business outreach back to the consumer. And so as businesses see that consumer traction, and as we kind of touched on in the course of our formal presentation. There's an increasing urgency, just given some of the complexity of the existing business infrastructure to find integrated solutions that support both voice and text. And that lines up, it's right in line with what we believed would be a significant opportunity for Marchex. And so when we talk about our catalysts, we hit on the auto vertical as an example and we hit on our text products and our text infused products specifically because of the increased recognition and urgency around adoption and integration. All right. Thank you. Thank you. There are no further questions at this time. I will now turn the call over back to the speakers for additional comments. Hi, this is Russ. Look, I appreciate everyone's participation today. Just a few closing thoughts. That last question on TeX, TeX was really The first product that started to take off this year and we touched on some of the other catalysts that we're seeing unfold. But When we think about some of the key themes that we see, it's really kind of our current view and seeing this convergence of our 3 key positive elements with new product Our increased sales momentum and to give you these macro trends that are leading to overall volume growth. And we think the combination of these three and other elements Are leading to this increasingly positive outlook of increased acceleration in our quarter to quarter growth as well as a bigger opportunity footprint. So Again, it seems down now. We feel really good with the way 2021 is shaping up for us. And we appreciate all your ongoing interest and involvement with Marchex. Thank you.