Q3 2023 Marchex Inc Earnings Call

Participants

Trevor Caldwell; SVP, Strategic Initiatives & IR; Marchex, Inc.

Michael Arends; Vice Chairman; Marchex, Inc.

Holly Aglio; CFO; Marchex, Inc.

Edwin Miller; CEO; Marchex, Inc.

Presentation

Operator

Good afternoon and thank you for joining the Marchex third quarter 2023 earnings call. My name is Kate, and I will be the moderator for today's call. (Operator Instructions)
I would now like to turn the call over to your host, Trevor Caldwell, Senior Vice President of Strategic Initiatives and Investor Relations. You may proceed.

Trevor Caldwell

Thank you, Kate. Good afternoon, everyone, and welcome to Marchex's business update and third quarter 2023 conference call. Joining us today are Edwin Miller, our CEO; Holly Aglio, our Chief Financial Officer; 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 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. The earnings press release is available in the Investor Relations section of our website.
At this time, I want to turn the call over to Edwin.

Edwin Miller

Thank you, Trevor, and good afternoon, everyone. I'd like to thank you all for joining us today for our quarterly earnings conference call. I'm pleased to share our progress with you during this period of transformation. I've been on the job for 275 days, and we are well on our way to positioning Marchex for long-term success.
We're building a culture that's highly committed and fosters innovation and collaboration. We continue to advance our technology in order to deliver new and powerful value creation for our customers and prospects. And we are building out a world-class team to tackle the robust market opportunities in front of us.
We are moving past the company. Furthermore, I'm pleased to share that our progress has enabled us to achieve profitability sooner than expected. We are seizing on this momentum and the big opportunity in front of us, and that is to increase our leadership in the conversational intelligence market.
Today, I'd like to highlight three key initiatives that we believe will thrust us toward being a nine-figure business in this space. These initiatives revolve around creating a world-class team, streamlining and enhancing our technology, and the formation of excellence in our go-to-market motion by vertical markets.
Let's look at our first initiative which is building a world-class team with a world-class culture. When I arrived, we had a high quality teams in our vertical markets with many years of experience. We organize towards shared services to empower our vertical market talent.
This has worked well with client engagement. Further given how quickly the AI landscape has evolved, we have been adding to our talent pool in order to build toward the future and support our growth opportunities.
We're investing in additional leadership in building out our data sciences and AI team to leverage our vertical market understanding and depth. We know, we need to move fast to advance our products and offerings and better serve people who make the difference.
Thus, we are prioritizing and investing in our talent to ensure we capitalize our significant market opportunities and can harvest the revenue opportunities that will drive growth over time.
Our second initiative focuses on continuing to optimize our technology stack to create a unified data pipeline and move up the technology stack.
Marchex possesses a wealth of conversational data across multiple channels and vertical markets. This asset is a powerful differentiator and it holds incredible value for businesses ranging from Fortune 500 companies to individual service providers.
Our future is to continue toward one data pack, one step, one Marchex culture, advanced AI math models tailored to our vertical market clients, advanced data analytics, and creating more AI signals that will allow our clients to derive an end-to-end view of a lead to a client, as well as improving the overall client experience.
We are in the flow of over a billion minutes of conversational data and the potential for mission critical insights for businesses is boundless. Moving to one data pipeline and one technology stack continues to be a significant focus for the business, and we believe it is one that will accelerate our product pipeline and seed innovation in the new world of generative AI.
Given the increased efficiency, we also see these moves as leading to substantial for significant margin improvement in the business over time.
Our third initiative focuses on strengthening our vertical go-to-market approach. We need to leverage all that we've accomplished in the past in building strong relationships with some of the largest companies in the world. This will help us create new relationships in the coming quarters within our selected vertical markets as well as accelerate sales growth through our go-to-market motions and product marketing strategy.
All of this should be done in tandem with and on the back of our moving to a clean one stack of software, which enables us to innovate with new automation tools for increasingly efficient onboarding of clients. These efforts will enable our clients to deliver great customer experiences while allowing us to expand our API capabilities, which we are continually working to improve as part of our integration initiatives.
Every day I'm in this role, I'm reminded of one thing. We are at a pivotal moment in history. The rapid evolution of AI is changing the game. It is poised to usher in significant change at every level of human interaction, but we're ready.
Marchex lives in vertical markets with unique enriched data versus a fin horizontal approach to the market. We strongly believe that the vertical position is the best place to be within the AI market.
Creating a single efficient data pipeline will arm us with the power to unleash deeper and more meaningful insights at a scale we've never seen before. Our customers will up-level their ability to understand and engage their customers in ways they too have never seen before.
On that note, I want to share that we recently launched new AI features to our expanding conversational intelligence software suite, AI call summaries and AI sentiment suite or the first of our expanding generative AI driven capabilities. There will be more to come.
AI call summaries leverage the power of generative AI to transform the way businesses capture and utilize critical insights from customer interactions. This technology gives concise natural language descriptions of what occurred on a call between a consumer and a business.
Sentiment Suite combined structured and unstructured data to provide a holistic view of customer emotions during the conversations. The possibilities in helping businesses to understand and meet the emotions of the customers they engage in business will help sell close rates and we believe will drastically improve the customer experience.
These can be powerful insights for businesses to understand and engage consumers. Our commitment to AI, is the driving force and can unlock the potential for our business on a vast scale. It can help our customers foster better relationships with their consumers and drive meaningful revenue growth. That's why right now we are laser focused on the one data pipeline and one stack initiatives.
In fact, we expect this effort to accelerate our ability to deliver new features and products to our customers and enable Marchex to cross-sell in ways that in the past were not possible. We believe this to be an essential step toward accelerating growth and building a nine-figure revenue business in the future.
Conversational intelligence is a multi-billion-dollar market. Marchex has a significant advantage in several verticals as we have industry leading customers with multiyear contracts who are asking us for more. The initiatives I've outlined will enable us to grow at rates that meet this demand over time and deliver a compelling margin profile to the business.
I'm excited about where we are and also where we're headed. We have a clear vision and we are moving quickly and thoughtfully in all areas of our business. While some of these efforts will take time, I am mindful that we still expect to deliver a compelling financial profile as we do, while keeping an open mind to all potential strategic initiatives that can help us unlock the value of Marchex.
I look forward to updating you on our progress next quarter. With that, I am so excited to welcome the newest member of our team, Holly Aglio. She will walk you through our financials.

Holly Aglio

Thank you, Edwin. I am thrilled to have joined Marchex at this time. For the third quarter, revenue was $12.8 million versus $12.5 million in the second quarter and $13.2 million for the same quarter last year.
From a revenue perspective, on a year-over-year basis, we saw expansion in some key verticals with the auto vertical continuing to see growth, while we saw continued pressure on conversation volumes on a year-over-year basis, with our small business lifting and solution providers that mostly sell marketing services to local businesses.
In the auto vertical, we continue to see expansion of our dealer channel and of our OEM relationship as a key driver of growth. Our ability to win new relationships and extend others into multiyear terms has contributed to Marchex's expanding footprint in this vertical.
In addition, we see significant potential to expand some of our products and the verticals that have similar characteristics and where we already have relationships with many of the vertical market leaders. For example, in the home services vertical, we see expansion of key relationships being helpful to our overall profile.
Turning to the P&L for the third quarter, excluding stock-based compensation, amortization of intangible assets and acquisition and disposition related costs, total operating cost for the third quarter was $13.2 million compared to $13.6 million for the third quarter of 2022.
During the quarter, we incurred certain costs associated with reorganizing and modifying operating activities totaling approximately $300,000.
Service costs were $5.1 million for the third quarter, which decreased as a percentage of revenue from the second quarter of 2023. Over time, we expect our service costs as a percentage of revenue may decrease as a result of our current technology infrastructure initiatives, that should enable an overall improvement with our service cost margin as we sell through our new conversational intelligence products and advance our vertical market initiatives.
Sales and marketing costs were approximately $2.2 million for the third 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 third quarter as we continue to invest in our products and in building AI to expand our conversational intelligence capabilities.
Moving to profitability measures, adjusted operating loss before amortization for the third quarter was $400,000, corresponding adjusted EBITDA was a gain of approximately $370,000. These amounts include approximately $300,000 for certain costs associated with reorganizing and modifying operating activities.
Excluding those amounts, adjusted EBITDA would have been approximately $670,000. GAAP net loss was $1.5 million for the third quarter or $0.04 per diluted share. This compares to a loss of $1.6 million or $0.04 per diluted share for the third quarter of 2022.
Adjusted non-GAAP loss was $0.01 per share for the third quarter compared to a loss of $0.01 per share for the third quarter of 2022. Additionally, we ended the third quarter with approximately $13.7 million in cash on hand.
Now turning to our outlook. We believe revenue in the fourth quarter of 2023 should be at or near third-quarter levels. While the fourth quarter has historical, seasonal downward volume trends, and there are some headwinds in certain verticals previously mentioned, we believe this factor should be offset by the growth driven by new customer adoption and the onboarding of previously won relationships over the course of the year.
In addition, 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 2023 within that vertical. With that progress in mind, we believe that we will continue to be above breakeven on an adjusted EBITDA basis in the fourth quarter.
As we look to 2024, based on current progress with current and new customers, we anticipate revenue growth on a year-over-year basis with sequential progress throughout the year. Furthermore, our current initiatives to move to one data pipe and other cost savings initiatives in tandem with expected future revenue growth initiatives, should enable greater operating leverage in the business. And consequently, we could see improvement in profitability measures in the future.
For 2024, we anticipate adjusted EBITDA to be above breakeven throughout the year.
I'd like to pass the call back to Edwin for closing remarks.

Edwin Miller

Thank you, Holly. Since I've joined Marchex, we've accomplished a lot over a short period of time. We've achieved profitability earlier than planned and put in place a series of initiatives that will enhance the profitability profile of the business well into the future.
In addition, we're supplementing the team with world-class talent that will be the driving force for growth as we launch our go-to-market initiatives in the coming quarters. I've been a part of a lot of technology companies, and I'm excited about what I see here at Marchex.
We have an incredible group of world-class customers who are asking us to do more. We have a world-class team that we are continuing to build out. Just as importantly, we have an underlying data asset that makes the company truly unique with lots of value to unlock in many ways to do so.
AI is here. It's possibilities continue to transform the conversational intelligence market represent a significant and growing opportunity as AI continues to evolve.
In the meantime, we have a clear view of what unlocks the potential of Marchex. Further, we have a path for growing a sustainable and increasingly profitable business. We will continue investing in industry-leading AR capabilities.
I want to thank the team for their hard work and look forward to accomplishing great things together. Thank you for your time today. With that said, operator, let's move to questions.

Question and Answer Session

Operator

Thank you. (Operator Instructions) Mike Latimore, Northland Securities.

Hi, this is Logan on for Mike. Could you guys talk about how call volumes trended in October versus what you saw in Q3?

Michael Arends

Hey, Logan. This is Mike here. So just for reference, our call volumes in from a seasonal perspective are consistent with what we've seen in prior years. Usually, the downward trend is primarily in the November, December timeframe around the holiday, starting more heavily in the holiday timeframe.
There is a seasonal adjustment that does start in the latter part of September, but the heavier part of the downward trend in the fourth quarter is generally around that holiday timeframe.
So we've seen consistency in general across that, but we also have a number of new customers and relationship items that are expanding as well as some of the new onboardings. And those are helping us offset some of the total revenue sequential movement where we think we're still going to be actual very near the levels that we were in the third quarter.

Perfect. Thank you. And one more question, can you talk about the electric vehicle category and how important that is as the growth driver going forward?

Michael Arends

So Logan, this is Mike again. in automotive, it's trending well for us. It's a key part of the overall framework of where we think we're going to be headed on a go-forward basis, and just echoing some of headwinds in Holly's comments there, there's a lot of new product activity that we have especially related to some of the generative AI activity and how that can play out and benefit our customers, but particularly in auto with the EV movement.
EV, it's simply an incredibly intricate and diverse arena that the auto dealers as well as the OEMs are working through. It's giving momentum in the parts for us because it's driving industry needed change to be able to deal with the critical challenges of an electric vehicle world.
And if you think about intricacies and differences, it's demanding data intelligence. It's demanding sentiment. It's demanding signals and insights, and importantly, identification of trends and movements quickly and in real time.
We are in a position with a powerful solution where we can help with SAP across all types of conversations whether it be voice, text, chat prospectively as well as other forms of conversations and engagement with prospects and customers.
And it's not just the automotive arena that we're seeing some of this application in, we've got some very deep and strong relationships with OEMs in the auto vertical. We've expanded some of those relationships, lending multiyear extensions. We've onboarded some new ones.
So we have some other very relevant relationships in other verticals and the applicability of the product to other verticals. Edwin spoke about this in some of the prepared commentary.
We think there's some replication here that we can do in the coming periods with home services with auto services and healthcare to name a few because those are a few that we already have some very entrenched and strong relationships with large conglomerates that are relatable to some of the work that we've been doing in the auto sector.

Edwin Miller

Hi Logan. This is Edwin. I'll add to that. Good question. And it's a very relevant and germane question on timing. What we're seeing -- and we've got a team out in the auto land this week and the conversations around EV are hot. Everybody's trying to get there.
And if you just think about the two things we just launched with AI features around AI call summaries and AI sentiment, think about you walk into a dealership and then the salespeople are used to selling gas or diesel, and now they get to answer questions and understand how to sell EV. The question set is different.
And so understanding the summary of the call and the sentiment of the call and getting ahead of that and being able to foster intelligent conversations at the dealership level and for our large OEMs is powerful.
but again, I'll echo what Mike said, it's not just in the automotive vertical. What we found since I've joined, I've been on 285 days counting weekends because I end up working on weekends too, is that the need of technology and what we provide, from numbers to texts to chat bots to the ability not to have a number and ingest data, it's required across any B2C complex ecosystem.
And it creates very rich deep vertical market data which allows us to build new math models faster than other companies. It allows us to help, I think, get ahead of what is going to be needed based on understanding this conversation.
So we can also become a predictive analytics platform versus prescriptive. I think most of the company -- companies out there live in a prescriptive world. Hey, here's what happened yesterday, out of taxi, I got run over by a car.
Where we want to live is in a world where we tell you the Carson. So I hope that helps, but we're excited about the EV, but we're also excited about all the verticals and the commonality of the needs against the verticals we serve.

Yeah. Thank you. That's very helpful. Congrats on the quarter, guys.

Operator

Thank you. At this time, there are no further questions registered in the queue. So I will turn the call back over to the management team for final closing remarks.

Edwin Miller

Okay. Well, I would like to thank everyone who joined. We thank you for your time, interest in our business, and we look forward to updating you in the future, and we're here to grow the business.
So thank you so much for your time. Appreciate it.

Operator

That concludes today's conference call. Thank you all for your participation, and you may now disconnect your lines.