Q4 2023 Marchex Inc Earnings Call
Participants
Trevor Caldwell; SVP, Strategic Initiatives & IR; Marchex Inc
Edwin Miller; President, CEO, Board Member; Marchex Inc
Holly Aglio; Chief Financial Officer; Marchex Inc
Dillon Heslin; Analyst; ROTH MKM Partners, LLC
Mike Latimore; Analyst; Northland Capital Markets
Presentation
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. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers. At the end I would now like to pass the conference over to your host, Trevor Caldwell, Senior Vice President, Strategic Initiatives and Investor Relations with Marchex. You may proceed, Trevor.
Trevor Caldwell
Thank you, Victoria. Good afternoon, everyone, and welcome to Marchex's Business Update and Fourth 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, 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 am as excited as ever about March from the multitude of conversations I've had with our existing customer base for the strides we've made in leveraging the power of AI. I see a tremendous opportunity for March to build a nine-figure business over the past year, we've taken significant steps toward achieving that outcome. March, it 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 for 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 the 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, Homeowner Services and Healthcare.
Faster growth markets needs to solve real-world problems for businesses by delivering industry-defining insights and AI signals that can 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 opportunity for Marchex, and we are executing to unlock them. Over the past year, we 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 maybe I guess, 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 markets the ability to unleash the power of Gener. Today, I as we transition resources from infrastructure, the 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 unified unit 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 undertaking 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, meaning spotlight for Automotive Product of the Year mark 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 will add many more this year. This is an illustrative and repeatable example of how markets 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 with within the auto vertical with a significant eight figure business.
We believe that our product road map will enable us to grow our business in the auto vertical meaningfully over time. Our product plans to 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, health care and auto services. These vertical share very similar business problems to the auto vertical. This is our road map to accelerating growth and building a larger AI and analytics business.
We are seeing strong interest from the release of our first AI features, cost memories and sentiments with dozens of current pilots. There is an early demand for these initial AI features, which we will open, 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 have one more sector focused on one booking more business and increasing speed and scale of new revenue to 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 set is a catalyst for revenue acceleration with our vertical market growth strategy for 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. And 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 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 and 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 lifting 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 us 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, both care and auto services 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.
Overtime, 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 continue to invest in our products and then building a I. two and 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 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. It's 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 improvements 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 five 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 this factor should be offset by our new customer adoption and previously won relationships ramping over the course of the year. We anticipate that 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 2120 20 for our existing pipeline across our core verticals look strong and as we complete the necessary infrastructure to accelerate cross-selling on 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 on home services and other verticals. Furthermore, our current initiatives to move to ones 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 and profitability measures into the future.
Thank you and wind. 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, generally a I can help us rapidly advance this goal. These are large, diverse businesses with complex patent technology ecosystems.
They need a partner who understands conversational intelligence, AI and data analytics to help them achieve operational excellence. Martech is ideally positioned here. I believe there is a robust, 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 and 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.
Question and Answer Session
Operator
Of course, we will now begin the question and answer session. (Operator Instructions)
Dillon Heslin, ROTH MKM.
Dillon Heslin
Hey, guys. Thanks for taking my questions. First, I guess on your commentary about revenue growth starting in 2Q and beyond. I'm curious how much of that is from existing expansion from 23 clients and or wins versus new customers?
You're going to sign this year? Like said another way, what kind of visibility do you have in that growth beyond that 2Q debt or excuse me, the Q1 debt?
Edwin Miller
Yes. Thanks for the question, Dillon, and good to hear your voice. I know we did a lot of work in 23 in that go-to-market motion and aligning alignment of what I would consider product marketing product management to Dove with output into cells. So and lining all that up and getting the team ready to compete on the field of we've done, which is good We also consolidated how we manage a pipeline and a funnel all into Salesforce.com in a very kind of sequential manner under toward Heartland for their CRO.
So much better understanding of our client base. And I would add, you know, I don't know how many customers I've met with personally probably over 20. And as you meet them three and four times, you begin to get their roadmaps. And that just takes time to build that trust with the team.
So I think we're kind of in the throes of that, we're lining up our product development and or Inge engineering against what our clients have said, are there real pain points that we know we can deliver with their dinner, they eye and our data analytics. And as we move to one stack, it's just going to be much simpler to sell, which is going to create velocity and the single API and is going to I think open second half of the year, the ability to have on channel capabilities for the first time for the Company.
So I think it just all come is all coming together. And I don't know if that answers your question, but it's a lot of the lift in 23 was from Think about it as getting the team in shape and getting ready to in studying the playbook and now we're executing that playbook.
Dillon Heslin
That's helpful. Thanks, Edwin. And then I guess how much of that growth can be achieved with your current our cost structure. I guess that away or said another way, if you start growing more quickly, do you need to add headcount or is existing infrastructures support a much bigger business Another good question and thanks for the thoughtful specific.
Edwin Miller
The cool thing that we've done in the lift in 23 moving to one stack, and we'll get there early two, three is the touch in the business of which helps us see our gross margins. It just gets easier, too. So at speed, it gets easier to onboard at speed and scale. It gets easier to support our clients at scale. And so the we will invest in this business. I think it's a growth business.
I think we're in the right place at the right time. I love the market. I love the talent of around on the field. We have I love the customers. We have just incredible Fortune 500 companies trying to solve big problems on operational excellence, sales and marketing. We're right in the crosshairs of how to help them grow their business. And so I just think it all comes together, the investment in our business will be, as I mentioned, of data science, AI. And we certainly will invest in the go to market as we see from the verticals opening up and driving speed, but will be fiscally responsible and dumb do our best to drive growth in this business and margins of this business as we grow.
Dillon Heslin
And then just one last one for me more financial in nature on the unified stack and the benefit to gross margins you kind of spoke to in the release on the call on when exactly is that going to be complete? And do you need to see revenue growth in order to see gross margin benefit?
Edwin Miller
Good question. The fact that we're bringing together what I think were really good acquisitions and technology stacks into one stack and inevitably alleviate support of multiple systems. And so I like to tell the team and the very first off site in the second half that we had with our executive leadership team and senior leadership teams is that we've got a wagon. It's got a bunch of things to sell on that wagon, and we're going to sell them every day.
And I'm going to be on the front line selling with you right now. We've got some really good cool boxes and shiny boxes in the wagon of the acquisitions that were made over time. And they really were good acquisitions, bringing all those code bases into one stack, one architecture, one API. and just gives us the ability to deliver it with more ease and more scale. So the margins will lift with that touch going down, the volume should lift because we're adding on AI models now so we've got existing customers adopting things like cost memories and sentiments, and that's just an additive purchase by them.
So they're already integrated into our into our data pipe and our stack. And so as we add on more of those models, we can we can add on and layer on additional revenue, which will add on margin. But of course, the more we sell with speed and scale in the go-to-market motion, the higher the margin can go as well. So I think it I think it's coupled, but I don't need the Company to drive a bunch of new revenue in order to decrease the margins, thus operating the Company more effectively and efficiently with one stack.
The but we are definitely focused on that go to market and the verticals we want to replicate what we've done in automotive. And we do, as Holly mentioned, we've got some really strong anchors in home services, health care and what we call auto services. And we're going to we've been out meeting with those clients as well. So as we penetrate all four verticals in more of an equal manner it's just going to drive growth in the business and margin in the business.
Dillon Heslin
Great. Thank you.
Edwin Miller
Yes, you're welcome.
Operator
Mike Latimore, Northland Capital Markets.
Mike Latimore
Great. Yes. Thanks very much. So I guess, Edwin, what when you get back to growth later in the year. You think the growth will come evenly from new logos being layered in versus expansions are a logical that one of those two categories really is the key growth driver later in there.
Edwin Miller
And nice to hear your voice, Mike. Yes, it's a good question that we're focused on new logos and existing. And when you when you're when you have the kind of client base we do in those four verticals, it's kind of hard to ignore them and they're spending money.
Everyone's trying to figure out what to do with AI and done where we're positioning. It is AI. plus prescriptive analytics. It's if you think about the three categories of analytics you can you can be descriptive of what happened yesterday, which is important, right? We all get reports of what happened and you can get descriptive in that report and make good business decisions, I think.
But where you really want to get in the future is descriptive and you basically want to tell them if you do this, this will happen and I think that's going to resonate well, with our existing clients, and it's going to resonate well with our models with new logos.
And I'll add to that the fact who the kind of clients we have and the experience we have in these verticals these data and it's a 1 billion conversations that are refreshing every day, which is insanity NAM for us, it's awesome.
And our understanding of a market and our ability to go talk through what business problems exist and what they're going to look like. It's pretty powerful. So I think it's going to be a mix of both. But you look at our pipeline, it's growing each day. We've got a great sales team aligned with the go to market. We've launched new couple of new AI of modules we're going to launch more. So I think it's going to be both come in throughout the year.
Mike Latimore
And on the small business segment, what percent of revenues is that now?
Edwin Miller
It's around 15%, and we're not ignoring it, but it's not a focus of ours. The Fortune 500, I mean that's a multi-billion dollar on segment to go after. And I just don't see them taking a I. and prescriptive analytics all in-house and trying to solve the problem themselves. They're going to rely on experts. They're going to rely on from a SaaS companies to help them, which is where I'm focused the Company to go.
And so as long as we're delivering new value add in the AI market, and can in all three buckets of analytics, but land on prescriptive, we're going to grow that Fortune 500 footprints from. I'm just going to trying to make it much easier over time for small businesses to consume with very low touch because you're talking very low numbers compared to the focus we have and the ability.
We have the -- so again, landing some of the logos we have in all four board four verticals and good luck the companies trying to penetrate those businesses because they're hard. It takes a long time to build trust and we're embedded so and they're great partners. So just fantastic. We got some of the best logos in the world. So I'm not ignoring that 15% at all. But really focused in the Fortune 500 in the four verticals I mentioned.
Mike Latimore
And then just in terms of how you price for your service, any notable changes there? Do you feel like you have pricing model down?
Edwin Miller
Yes, I think we got the pricing model down is that the if you think about the full stack of what we deliver, whether it's a texting solution or a number solution that's kind of set in the marketplace. The question I've got in my mind is can we what's the model really going to be when we're delivering some SaaS markets as a service with 20 different AI models, and we're driving prescriptive analytics.
So I think there's probably some some if you think about product place, price promotion I think the pricing and promotion, we're going to learn a lot in 20 for going into 25. But I'll echo and I don't know if you've met toward heart with our CRO kind of TTGE. and products within a couple of times when one private one public and he may be the best PR I've seen in the facility is not your normal, what I'd call sells person.
He is a kind of a finance meets engineering mind on any thinks of product in a very distinct way. So and I think the we'll probably learn this year on pricing on things that we're going to launch into the marketplace. And I think that's healthy. But what we've been selling, I think we know extremely well how we add more value around that with an API., um and um, new data models and leveraging Alan's out there. I think that it could shift and that for us is in a positive manner.
Mike Latimore
Okay. And just last on LLM.'s, there's different varieties out there. They all have. I mean, there's a wide spectrum of costs, I guess? And do you kind of leverage any particular elements like Open Source and how do you view the cost involved in this?
Edwin Miller
It was looking at it all the elements. So I'm going to stay away from being specific there. If you don't mind via I'm It is definitely a horse race out there for who can drive the model. What we're focused on is we've got the vertical market market data sets to inform those elements on and make an intelligent. I think I said this on a call on the passing up here in the automotive vertical.
Bronco meets doesn't mean horse, it means a vehicle. But in health health services, Bronco, what mean anything anymore? And that's a trite example. But at the end of the day when you have millions of words being used in your informing those models from, we're going to do our best to say, Ignacio and leverage the best of the best and brightest out there.
Mike Latimore
Yes, thanks.
Edwin Miller
Yes, you're welcome.
Operator
Thank you for your question. There are no additional questions waiting at this time. I would now like to pass the conference back to the management team for any additional remarks.
Edwin Miller
Okay. Well, thank you, everyone, for dialing in and thank you for the questions. We look forward to working hard in the coming quarters for you all and look forward to the next call. Thank you. Bye-bye.
Operator
That concludes today's call. Thank you for your participation and enjoy the rest of your day.
