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spk01: 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. Thank you. You may proceed, Trevor.
spk02: Thank you, Victoria. Good afternoon, everyone, and welcome to MarchX's 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'd 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. There are any special releases available on the investor relations section of our website. And at this time, I'm going to turn the call over to Edwin.
spk03: 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 X. 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 MarchX to build a nine-figure business. Over the past year, we've taken significant steps toward achieving that outcome. MarchX sits on a goldmine of first-party vertical data. We have over one 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 MarchX 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, MarchX 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 represents substantial opportunity for market checks. 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 OneStack, our new cloud-based infrastructure. Our product platforms and data will be united across all verticals, providing MarchX 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 MarchX 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 commended state asset 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 our 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. MarchX 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 Marchix 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, cost summaries 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 1 March X 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.
spk00: 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 multi-year 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 went 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. Gap net loss was $1.1 million for the fourth quarter or a loss of two cents per diluted share. This compares to a loss of $3.6 million or a loss of eight cents per diluted share for the fourth quarter of 2022. Adjusted non-gap loss was zero cents per share or break even for the fourth quarter compared to a loss of five cents 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 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 growth 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 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 look 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.
spk03: 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. MarTech 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.
spk01: Of course. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. Our first question comes from the line of Barron Afton. with Roth MKM. Your line is now open.
spk04: Hey guys, thanks for checking 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 and you're going to sign this year, like set another way, what kind of visibility do you have in that growth beyond the Q1 dip?
spk03: Yeah, thanks for the question, and good to hear your voice. You know, we did a lot of work in 23 in that go-to-market motion and alignment of what I would consider product marketing, the product management to dev with output into sales. 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 Heartless as our 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 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 was think about it as getting the team in shape. and getting ready and studying the playbook, and now we're executing that playbook.
spk04: That's helpful. Thanks, Edwin. And I guess how much of that growth can be achieved with your current cost structure? I guess said another way, if you start growing –
spk03: uh more quickly do you need to add headcount or is existing infrastructures support a much bigger business uh another good question um and thanks for the softball the cool thing that we've done in the lift in 23 moving to one stack and and we'll get there early q3 is the touch in the business uh which helps us see 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 are right across the areas of how to grow, help 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 march into this business as we grow.
spk04: Great. And 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, when exactly is that going to be complete? And do you need to see revenue growth in order to see gross margin benefit?
spk03: Good question. The fact that we're bringing together what I think were really good acquisitions and technology stacks into one stack inevitably alleviates support of multiple systems. So, you know, I like to tell the team in the very first offsite and the second offsite we had with our executive leadership team and team leadership teams is that, you know, 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 out on the front line 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, one 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 summaries 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 and the go-to-market motion, the higher the margin can go as well. So 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. 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 automotives. And we do, as Polly mentioned, we've got some really strong anchors in home services, healthcare, and what we call auto services. And we're going to, I'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 into the business and margin into the business. Great. Thank you. Yes. You're welcome.
spk01: Thank you for your question. The next question comes from the line of Mike Lattimore with Northland Capital Market. Your line is now open.
spk05: Great. Hi there. Yeah, thanks very much. Yeah, 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 you know, expansions? Or is it logical that, you know, one of those two categories really is the key growth driver later in the year?
spk03: Nice to hear your voice, Mike. Yes, good question. You know, we're focused on new logos and existing. And 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, you know, The way we're positioning it is it's AI plus prescriptive analytics. It's, you know, if you think about the three 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 the kind of clients we have and the experience we have in these verticals with deep data, and it's a billion conversations that are refreshing every day, which is insanity. For us, it's awesome. 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. If 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 a couple of new AI modules. We're going to launch more. So I think it's going to be both throughout the year.
spk05: And on the small business segment, what percent of revenue does that amount?
spk03: It's around 15%, and we're not ignoring it, but it's not a focus of ours. Fortune 500, I mean, that's a multi, multi, multi, multi, multi-billion 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 four 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. They're 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 four verticals I've mentioned.
spk05: And then just in terms of how you price for your service, any notable changes there, or do you feel like you have the pricing model down? Yeah, I think we've got the pricing model down.
spk03: It's set, you know, 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 SaaS, March X as a service, with 20 different AI models? And we're driving prescriptive analytics. So I think there's probably some – if you think about product place price promotion, I think the pricing and promotion, we're going to learn a lot in 2020. going into 25, but I'll echo. I don't know if you've met Troy Hartless, our CRO. He cut his teeth at GE in product. 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 sales person. He is a kind of a finance meets engineering mind, and he thinks of product 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.
spk05: Great, great. And just last on LLMs, you know, there's different varieties out there. They all have a wide spectrum of costs. I guess, you know, do you kind of leverage any particular LLMs, like open source, and how do you view the costs involved in those?
spk03: We're looking at all the LLMs, so I'm going to stay away from being specific there if you don't mind the uh i'm it's 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 mark market data sets to inform those llms um and and make them intelligent and i think i've said this on a call in the past you know if you're in the automotive vertical bronco needs doesn't mean horse it means a vehicle But in health services, bronco wouldn't mean anything to anyone. 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.
spk05: Thanks.
spk03: Yeah, you're welcome. Thank you.
spk01: 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.
spk03: 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.
spk01: That concludes today's call. Thank you for your participation and enjoy the rest of your day.
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