Marchex, Inc. (NASDAQ:MCHX) Q4 2023 Earnings Call Transcript
Marchex, Inc. (NASDAQ:MCHX) Q4 2023 Earnings Call Transcript March 14, 2024
Marchex, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. Thank you for attending the Marchex Fourth Quarter 2023 Conference Call. My name is Victoria, and I'll be your moderator today. [Operator Instructions] I would now like to pass the conference over to your host, Trevor Caldwell, Senior Vice President, Strategic Initiatives, and Investor Relations with Marchex. Thank you. You may proceed, Trevor.
Trevor Caldwell: Thank you, Victoria. Good afternoon, everyone, and welcome to Marchex' business update and fourth quarter 2023 conference call. Joining us today are Edwin Miller, our CEO; and Holly Aglio, our Chief Financial Officer. 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. 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 website. And at this time, I'm going to turn the call over to Edwin.
Edwin Miller: Thank you, Trevor, and good afternoon, everyone, and thank you for joining us today. I've been on the job for just over a year, and I'd like to begin by telling you I'm as excited as ever about Marchex. From the multitude of conversations I've had with our existing customer base to the strides we've made in leveraging the power of AI, I see a tremendous opportunity for Marchex to build a 9-figure business. Over the past year, we've taken significant steps towards receiving that outcome. Marchex sits on a gold mine of first-party vertical data. We have over 1 billion conversational minutes of data that refreshes every day. In the world of generative AI, having access to this type of first-party data is foundational to delivering unique analytics and insights across valuable markets.
This is key for our current and future success. It allows us to move from diagnostic and descriptive analytics to predictive analytics which, in turn, paves the path to delivering prescriptive analytics, which is our ultimate goal. Using all that AI has to offer, we see Marchex driving the future of conversational intelligence in the most lucrative vertical markets. This includes our current verticals of focus, which are auto, auto services, home services and healthcare. To foster growth, Marchex needs to solve real-world problems for businesses by delivering industry-defining insights and AI signals that can evolve in real time with robust data while adopting large language models company-wide to ingrain an innovative mindset we can take to our clients.
By working to become the trusted source for proprietary predictive insights in our vertical markets, we can empower Fortune 500 companies to thrive in rapidly evolving markets. Each of these vertical markets represent substantial opportunities for Marchex, and we are executing to unlock them. Over the past year, we've moved quickly to concentrate our resources on our core vertical markets while returning the company to a cash-generating business with increasing gross margins. There is much more to do to achieve the threshold of our growth ambitions, but I am proud of the team for its considerable commitment and effort over the last year and moving us well down this path. We have several key initiatives planned for the year ahead. First, we are focused on moving to one stack, our new cloud-based infrastructure.
Our product platforms and data will be united across all verticals, providing Marchex the ability to unleash the power of generative AI as we transition resources from infrastructure to data science and AI model development. In addition, it will enhance our ability to integrate broadly within our vertical market ecosystems through new API capabilities. Having our data in one place and one architecture will enable Marchex to leverage the power of data across all vertical markets, leveraging generative AI models. This will also reduce our long-term infrastructure costs and, just as importantly, help accelerate our pace of innovation and customer adoption. We also anticipate the completion of single sign-on and our single interface by Q3 of this year.
Uniting our products within one interface will allow us to sell more effectively, accelerate adoption of multiple products and improve our ability to onboard new customers more quickly. These initiatives are significant undertakings, and we expect to see key progress achieved throughout the year. The takeaway is that we are on track to capitalize on our tremendous data assets in new and differentiated ways that will drive growth this year and beyond. Throughout the year, we will be launching new products that deliver high-impact solutions for our expanding base of Fortune 500 customers. These solutions will empower clients to unlock new insights and drive operational excellence in their businesses. Consider our most recent product award from the Big Intelligence Group, naming Spotlight for Automotive product of the year.
Marchex Spotlight for Automotive won this award because it empowers OEMs, brands and dealers to make informed data-driven decisions that drive positive business results leading to increased revenue and improved customer satisfaction. We added hundreds of dealers last year and we'll add many more this year. This is an illustrative and repeatable example of how Marchex can win expanding market share by working with vertical market leaders. We are a differentiated player because of our wealth of vertical data and expertise. Today, we work with 22 brands within the auto vertical. With a significant eight-figure business, we believe that our product roadmap will enable us to grow our business in the auto vertical meaningfully over time. Our product plans will open even more opportunities to penetrate that existing base of customers and win new relationships this year.
Our goal is to replicate that success and scale in home services, healthcare and auto services. These verticals share very similar business problems to the auto vertical. This is our roadmap to accelerating growth and building a larger AI and analytics business. We are seeing strong interest from the release of our first AI features, Call Summary and Sentiment. With dozens of current pilots, there is an early demand for these initial AI features, which will open the door to wider adoption by our vertical market customers. We believe that our current customer expansion engagements, coupled with our new and developing customer pipeline and product plans, have established a roadmap for an increasing and accelerating growth profile throughout 2024.
In summary, I and we at Marchex are focused on: one, booking more business and increasing speed and scale of new revenue; two, positioning the business with current and future clients around prescriptive data analytics and AI capabilities; three, our successful migration to one stack by Q3 of this year as one stack is a catalyst for revenue acceleration with our vertical market growth strategy; four, continuing to deliver on operations and technology efficiencies that we anticipate could expand our gross margins and increase free cash flow. With that, I'll hand the call to Holly to walk you through the financials.
Holly Aglio: Thank you, Edwin. For the fourth quarter of 2023, revenue was $12.4 million versus $12.3 million for the same quarter last year and down from third quarter 2023 revenue of $12.8 million. In the fourth quarter, our traction within the automotive vertical led to double-digit growth on an annualized run rate year-over-year basis in that vertical. We saw a positive impact from our OEM wins throughout 2023 and a growing dealer channel in the fourth quarter. We also saw expansion with certain relationships in core verticals like home services. We expect to continue winning more business in the auto and home services verticals in 2024. On a sequential basis, however, the seasonal flow of call volumes decreased in the fourth quarter relative to the third quarter, and we did see continued pressure on conversation volumes on a year-over-year basis, particularly with our small business listing and solutions resellers.
Our business typically sees a decrease in activity of call volumes over the holiday periods relative to other periods for verticals like auto, auto services and home services. With that said, our ability to grow our dealer channel, extend existing customers to multiyear arrangements and expand our footprint of new auto OEM customers in 2023, along with our planned go-to-market initiatives across our other verticals, sets up well to make progress in 2024. This is reinforced by the fact that we already have these core foundational relationships with vertical market leaders in each of auto, home services, healthcare and auto services to build upon. Turning to the P&L for the fourth quarter. Excluding stock-based compensation, amortization of intangible assets and acquisition and disposition-related costs, total operating costs for the fourth quarter were $12.6 million compared to $14.6 million for the fourth quarter of 2022.
Service costs were $4.7 million for the fourth quarter, which decreased as a percentage of revenue from the third quarter of 2023. Over time, we anticipate our service costs as a percentage of revenue to decrease as a result of our current technology infrastructure initiatives. That should enable additional leverage with our gross margins as we see traction in the sales of our new conversational intelligence products and features in 2024 and beyond. Sales and marketing costs were approximately $2.5 million for the fourth quarter. This was down from the fourth quarter of 2022 as we realigned and focused our go-to-market initiatives. Product development costs were $3.2 million for the fourth quarter as we continued to invest in our products and in building AI to expand our conversational intelligence capabilities.
Moving to profitability measures. Adjusted EBITDA was a gain of approximately $100,000 for the fourth quarter. GAAP net loss was $1.1 million for the fourth quarter or a loss of $0.02 per diluted share. This compares to a loss of $3.6 million or a loss of $0.08 per diluted share for the fourth quarter of 2022. Adjusted non-GAAP loss was $0.00 per share or breakeven for the fourth quarter compared to a loss of $0.05 per share for the fourth quarter of 2022. Additionally, we ended the fourth quarter with approximately $14.6 million in cash on hand. Now turning to our 2024 outlook. First, let's discuss revenue. We anticipate Q1 2024 revenue will be somewhat lower than Q4 2023 based on the continuation of certain volume trends from the fourth quarter so far in Q1.
We believe that this includes the impacts from two primary things: first, continued lower volumes from our small business reseller customers; and second, a collection of certain macroeconomic factors across our verticals as consumer traffic is lower across home services and automotive to start the year. From Q1 2024 forward, we anticipate sequential revenue growth during the year. We expect the ramping of existing customer relationships and new wins will result in 2024 revenue growing year-over-year, and we expect to exit 2024 with accelerating growth rates. We have seen positive early adoption of our recently released AI signals by customers. As we expand our products and capabilities in this area, we expect these AI offerings to fuel our growth this year and well into the future.
For adjusted EBITDA, we anticipate breakeven to positive adjusted EBITDA for the year. For Q1, we anticipate somewhat negative adjusted EBITDA with improvement sequentially through the year, which we believe should collectively lead to neutral to positive adjusted EBITDA for the full year. We currently anticipate 2024 year-end cash balances to be at or near year-end 2023 levels. For gross margin, we anticipate that we can increase our gross margins by 5 percentage points or more by the end of 2024 with the successful completion of the one stack initiative and acceleration of our vertical market growth strategy. Even with the noted lower volumes in certain areas to start the year, we believe those factors should be offset by our new customer adoption and previously won relationships ramping over the course of the year.
We anticipate the early traction with our AI product pilots and new customer engagements, combined with execution on go-to-market initiatives, will lead to sequential growth throughout the year and overall revenue growth for 2024. Our existing pipeline across our core verticals looks strong. And as we complete the necessary infrastructure to accelerate cross-selling our products, including our AI signals, we believe we will see favorable impacts from these as well. Additionally, we expect to win more new automotive OEM customers and add meaningfully to our dealer channel as well as win more new relationships in home services and other verticals. Furthermore, our current initiatives to move to one stack, combined with other cost savings initiatives, in tandem with anticipated future revenue growth, should enable greater overall operating leverage in the business and, consequently, improvements in profitability measures into the future.
Thank you. And with that, I'd like to pass the call back to Edwin for closing remarks.
Edwin Miller: Thank you, Holly. I'm excited about where we're heading as a company. I've spent considerable time meeting with customers in the past year. They want us to lean in and do more to help them drive sales, marketing and operational excellence. They need to understand customers' conversations from lead to aftermarket support at a more detailed level and at a scale. Generative AI can help us rapidly advance this goal. These are large diverse businesses with complex technology ecosystems. They need a partner who understands conversational intelligence, AI and data analytics to help them achieve operational excellence. Marchex is ideally positioned here. I believe there is a robust opportunity for our business to grow from our existing customer base and new client wins.
I also believe that we will drive the future of conversational AI and prescriptive data analytics within our vertical markets. This could open new avenues for growth as we launch new offerings throughout the year. I want to thank the team for their hard work and we look forward to accomplishing much together on behalf of our customers and shareholders. Thank you for your time today. With that said, operator, let's move to questions.
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