Marchex Inc
NASDAQ:MCHX
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Marchex Inc
Earnings Call Analysis
Q4-2023 Analysis
Marchex Inc
In the latest earnings call, revenue was a notable point of discussion, highlighting a slight decrease to $12.4 million in the latest quarter from $12.8 million in the previous quarter, though it remained relatively flat year-over-year. Adjusted EBITDA saw some positivity with a small gain of approximately $100,000 for the recent quarter, signaling a step in the right direction towards profitability. The company managed to reduce its GAAP net loss significantly to $1.1 million compared to the $3.6 million loss in the same quarter of the previous year. This improvement also reflected in the non-GAAP earnings, moving from a $0.05 per share loss to a breakeven point. The company's cash position remains solid with $14.6 million in hand providing a cushion for ongoing operations.
For the road ahead, management is cautiously optimistic. They expect a lower Q1 2024 revenue based on current volume trends and broader macroeconomic challenges affecting sectors like home services and automotive. Nevertheless, the team is confident in seeing sequential revenue growth throughout the year and aims for an overall year-end growth. On the profitability front, while adjusted EBITDA might be somewhat negative at the start of the year, improvements are expected sequentially with the goal of neutral to positive adjusted EBITDA by the year-end. Gross margins are projected to increase by over 5 percentage points by the end of 2024, benefitting from strategic growth initiatives and efficiency gains from the completion of their 'one stack' initiative.
The company is pushing for enhanced operational efficiency through a strategic move to one tech stack that simpifies processes and reduces costs. Cost savings initiatives alongside anticipated revenue growth should improve operating leverage and profitability. Furthermore, the company sees the evolution and adoption of its AI capabilities, such as conversational intelligence, to be central to its growth strategy. These should serve as the cornerstone to driving future growth in a competitive marketplace.
Innovation is at the heart of the company's ambitions, with ongoing investments in AI to broaden its conversational intelligence capabilities. As it stands, the product development costs were $3.2 million for the fourth quarter, reflecting the company's enduring commitment to enhancing its product offerings and staying ahead in the marketplace. With a focus on winning more business in auto and home services verticals and the launch of new features, the company anticipates market expansion bolstered by innovative technology.
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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.
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.
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 health care.
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 8-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 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, health care and auto services. These verticals 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, 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 road map 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.
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, health care 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.
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.
[Operator Instructions] Our first question comes from the line of Darren Aftahi with ROTH MKM.
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 on that growth beyond the Q1 dip?
Yes. Thanks for the question and good to hear your voice. We did a lot of work in '23 in that go-to-market motion and alignment of what I would consider product marketing to product management, to dev with output into sells. So lining all that up and getting the team ready to compete on the field, we've done, which is good. We also consolidated how we manage a pipeline and a funnel all into Salesforce.com in a very sequential manner under Troy Hartless who's our CRO, so much better understanding of our client base.
And I would add, I don't know how many customers I've met with personally, probably over 20, and as you meet them 3 and 4 times, you begin to get their road maps. 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 our engineering against what our clients have said are the real pain points that we know we can deliver with our generative AI 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 is going to, I think, open second half of the year the ability to have channel capabilities for the first time for the company.
So I think it's all coming together. I don't know if that answers your question, but a lot of the lift in '23, think about it as getting the team in shape and getting ready and studying the playbook. And now we're executing that playbook.
That's helpful. And then I guess, how much of that growth can be achieved with your current cost structure? I guess, said another way, if you start growing more quickly, do you need to add head count? Or is existing infrastructure support a much bigger business?
Another good question. And thanks for the thought, Paul. The cool thing that we've done in the lift in '23 moving to one stack, and we'll get there early Q3, is the touch in the business, which helps us seize our gross margins. It just gets easier to sell at speed. It gets easier to onboard at speed and scale. It gets easier to support our clients at scale. So 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 on the field we have. I love the customers we have, just incredible Fortune 500 companies trying to solve big problems. Operational excellence, sales and marketing, we're right across the areas, we're helping them grow their business. So I just think it all comes together.
The investment in our business will be, as I mentioned, data science, AI, and we certainly will invest in the go-to-market as we see the verticals opening up and driving speed, but we'll be fiscally responsible and do our best to drive growth in this business and margins on this business as we grow.
Great. 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 and on the call, when exactly is that going to be complete? And do you need to see revenue growth in order to see gross margin benefit?
Good question. The fact that we're bringing together what I think were really good acquisitions and technology stacks into one stack inevitably alleviate support of multiple systems. So I like to tell the team in the very first off-site and the second off-site 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 in that wagon and we're going to sell them every day. And I'm going to be on the frontline selling with you. And 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, 1 API, 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 Call Summary and Sentiment. And that's just an additive purchase by them. So they're already integrated into our data pipe and our stack. So as we add on more of those models, 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's a couple. But I don't need the company to drive a bunch of new revenue in order to increase the margins that's operating the company more effectively and efficiently with one stack. But we are definitely focused on that go-to-market and the verticals. We want to replicate what we've done in automotive. And as Holly mentioned, we've got some really strong anchors in home services, health care and, what we call, auto services. I've been out meeting with those clients as well. So as we penetrate all 4 verticals in more of an equal manner, it's just going to drive growth into the business and margin in the business.
The next question comes from Mike Latimore with Northland Capital Markets.
Great. Yes. So I guess, Edwin, when you get back to growth later in the year, do you think the growth will come evenly from new logos being layered in versus expansions? Or is it logical that one of those two categories really is the key growth driver later in the year?
Nice to hear your voice, Mike. Yes, it's a good question. We're focused on new logos and existing. And when you have the kind of client base we do in those 4 verticals, it's kind of hard to ignore them. And they're spending money. Everyone is trying to figure out what to do with AI. And the way we're positioning it is it's AI plus prescriptive analytics.
If you think about the 3 categories of analytics, you can be descriptive of what happened yesterday, which is important, right? We all want reports of what happened. 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 prescriptive, and you basically want to be able 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 AI models with new logos.
And I'll add to that, the fact that the kind of clients we have and the experience we have in these verticals with deep data, it's 1 billion conversations that are refreshing every day, which is insanity for us, it's awesome. Our understanding of the market and our ability to get 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. If you look at our pipeline, it's growing each day. We've got great sales teams aligned with the go-to-market. We've launched a couple of new AI modules. We're going to launch more. So I think it's going to be both throughout the year.
Got it. And on the small business segment, what percent of revenue is that now?
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-multi-multibillion dollar segment to go after. And I just don't see them taking AI and prescriptive analytics all in-house and trying to solve the problems themselves. They're going to rely on experts. They're going to rely on AI 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 hit all three buckets of analytics but land on prescriptive, we're going to grow that Fortune 500 footprint.
I'm just going to try 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 to sell, again, landing some of the logos we have in all 4 verticals. Good luck to companies trying to penetrate those businesses because they're hard. It takes a long time to build trust. And we're embedded. And they're great partners. So it's just fantastic. We got some of the best logos in the world. So not ignoring that 15% at all but really focused on the Fortune 500 and the 4 verticals I've mentioned.
Got it. And then just in terms of how you price for your service, any notable changes there? Do you feel like you have the pricing model down?
Yes. I think we've got the pricing model down. It's set. 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 what's the model really going to be when we're delivering SaaS, Marchex as a Service, with 20 different AI models. And we're driving prescriptive analytics. So if you think about product place, price, promotion, I think the pricing and promotion, we're going to learn a lot in '24 going into '25.
I don't know if you've met Troy Hartless, our CRO, he's got a seat at GE in products, I've worked with him a couple of times, one private, one public, and he may be the best CRO I've seen in the field. He's not your normal, what I'd call, salesperson. He is kind of a finance meets engineering mind, and he thinks of products in a very distinct way. So I think 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 and new data models and leveraging LLMs out there, I think that could shift a bit for us in a positive manner.
Great. And just last one on LLMs. There's different varieties out there. There's a wide spectrum of cost. I guess, do you kind of leverage any particular LLMs, like open source? And how do you view the cost involved in those?
We're looking at all the LLMs. So I'm going to stay away from being specific there, if you don't mind. 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 data sets to inform those LLMs and make them intelligent.
And I think I said this on the call in the past, if you're in the automotive vertical, Bronco doesn't mean horse, it means a vehicle. But in health services, Bronco wouldn't mean anything to enable them. And that's a trite example. But at the end of the day, when you have millions of words being used and you're informing those models, we're going to do our best to stay agnostic and leverage the best and brightest out there.
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.
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 we look forward to the next call. Thank you. Bye-bye.
That concludes today's call. Thank you for your participation, and enjoy the rest of your day.