Marchex, Inc.

Hello, everyone. Thank you for attending today's March X Q3 2024 earnings call. My name is Sierra, and I will be your moderator for today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Trevor Caldwell, Senior Vice President of Investor Relations and Strategic Initiatives. Please go ahead.

Thank you, Sierra. Good afternoon, everyone, and welcome to March X's Business Update and Third Quarter 2024 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. The press release is available in the investor relations section of our website. At this time, I'd like to turn the call over to Edwin.

Thank you, Trevor. Good afternoon, everyone, and thank you for joining us today. We appreciate your ongoing interest in MARCHX and the opportunity to update you on the progress we're making toward a strategic vision. During today's call, We'll walk through the highlights of the quarter and give an initial forward look into 2025 and beyond. We'll also provide updates on the steps we're taking to position MarchX as a market leader in prescriptive analytics. The purpose of our company, the reason why we do what we do is to deliver mission critical insights to businesses to achieve operational excellence. Through our AI-driven products, we help our customers build better experiences, generate greater customer loyalty, and most importantly, drive more revenue. We are now doing this across multiple functions with our customers. As we position ourselves for future growth, We are utilizing the power of our vast direct first-party conversational data to expand our capabilities. The future will entail creating more AI signals and AI-driven products to help our customers drive more revenue. In my one-on-one sessions with customers, I consistently hear that they want more of what we can provide. This is an exciting time for MarchX. We are moving at an increasing pace as we put all the pieces in place to accelerate our business. We help our customers transform from being reactive to proactive. By building a company that harnesses the power of vertical market direct first party data sets, we are transforming raw information into high-value impact actions for Fortune 500 companies. Looking ahead to 2025 and beyond, we are focused on growth opportunities. We are pursuing several key initiatives that will expand our market presence and accelerate momentum. First, I would like to talk about our product innovation. We are developing new AI-driven features and enhancements to keep us at the forefront of prescriptive analytics. This includes Sentiment, which we brought to market earlier this year, and the new AI vertical-specific solutions we recently announced that we are launching in Q4 of 2024. These products deliver descriptive and prescriptive insights that enable businesses to improve return on ad spend, understand the preliminary elements driving change in customer behavior, and increase their sales growth. The solutions are tailored for automotive OEMs and dealers, home services, medical, dental, and automotive services protocols. There is more to come. with more than a billion minutes of direct first-party conversations to fuel insights. We are able to provide an expanding menu of prescriptive data insights. Our rich omni-channel data within our vertical markets provides MarchX deep insights into the unique problems and opportunities for our clients. This is a key driver of why our customers are engaging in a cross-functional manner. Second, as we move into 2025, we will look to expand our sales team, evolve our marketing presence, messaging and capabilities, and grow our channel partnerships. We are expanding our go-to-market strategy and diving deeper into our new and existing verticals to open new opportunities. We understand the need to grow and strengthen our team to achieve our revenue growth targets. Last is our single sign-on integration. Simplifying access to our evolved solutions will enhance the customer experience and productivity. We are committed to investing for growth. We anticipate MarchX can form a substantially larger business with new and existing customers. With new sales tools to leverage our API through the channel, an expanded sales team, more innovation with AI signals on our SaaS platform, and go-to-market initiatives that we will launch this quarter and throughout 2025, we believe MarchX will be well positioned to accelerate the overall business and pivot to growth. In the third quarter, we continued to make meaningful progress on OneStack, our customer-facing product initiative to bring a centralized platform into the cloud. This will play a crucial role in our ability to take advantage of our data assets. I mentioned OneStack on our previous calls and the purpose behind it, which is to create a more scalable technical foundation. This progress has already started to free up resources that will allow us to reinvest in initiatives that are key to driving revenue growth in 2025 and beyond. We anticipate that the completion of the one-stack initiative to unify our products, cost stacks, and data pipelines will help accelerate product innovation. This will be a catalyst for revenue growth overall, and specifically an accelerant with our expanded vertical market growth strategy. Also, this movement will provide a streamlined go-to-market process, greater ease of onboarding of our customers and support, and improve account management. It will also allow us to remove costs in the business that will support gross market improvements and free cash flow over time as a SaaS platform. Our work on infrastructure is about building for the future. With this in place, we believe we can move faster, invest smarter, and capitalize on the expanding opportunities to build a 100 million plus business. I'm excited about the momentum we are building this year to modernize our technical foundation, expand our pipeline, and win new relationships. As we scale some of these relationships and launch our go-to-market initiatives, we believe MarchX is in a strong position to transition to a growth company next year. With that, I will hand the call to Holly.

Thank you, Edwin. For the third quarter of 2024, revenue was $12.6 million versus $12.8 million for the same quarter last year. and up from second quarter 2024 revenue of $12.1 million. Revenue in the third quarter was up from the second quarter in part due to slightly improved conversation volumes and in part from the launch of some new customer wins so far this year. We are seeing traction in the auto, auto services, and home services verticals. Similar to last quarter, On a year-over-year basis, we saw continued headwinds from certain customer segments like our small business resellers, though that seemed slightly improved on a sequential basis. In the future, we anticipate the impact of small business reseller volume trends may be mitigated by our launch and sell-through of new products and features into our Fortune 500 customer base. Turning to operating expenses for the third quarter. Excluding stock-based compensation, amortization of intangible assets, and acquisition and disposition related costs, total operating costs for the third quarter of 2024 were $12.8 million compared to $13.2 million for the third quarter of 2023. Service costs were $4.2 million for the third quarter. Service costs as a percentage of revenue trended consistent with Q2 levels, which was a somewhat higher than anticipated result due to timing of certain expense items, including costs related to the execution of our infrastructure initiative. Sales and marketing costs were approximately $3.2 million for the third quarter. This was up slightly from the third quarter of 2023, as we increased our investment in our go-to-market teams. As we complete phases of our infrastructure initiative, we will be balancing profitability goals along with increasing our investment in growth initiatives. Product development costs were $3.1 million for the third quarter as we continue to invest in innovation and leveraging AI to expand our product suite. Moving to profitability measures, Adjusted EBITDA was approximately $300,000 for the third quarter of 2024, which is largely consistent with adjusted EBITDA of approximately $400,000 for the third quarter of 2023, even with our strategic investments in key areas that position us for future growth. Gap net loss was $800,000 for the third quarter of 2024, or two cents per diluted share. This compares to a loss of $1.5 million, or 4 cents per diluted share, for the third quarter of 2023. Adjusted non-GAAP loss was 1 cent per share for the third quarter of 2024, compared to a loss of 1 cent per share for the third quarter of 2023. Additionally, we ended the third quarter with approximately $12.1 million in cash on hand. Now turning to our outlook for the fourth quarter of 2024. First, let's discuss revenue. We anticipate fourth quarter 2024 revenue will be in the range of $12 million due to expected seasonality of call volumes. As a reminder, the fourth quarter typically represents lower sales volumes for many of our customers as call volumes decline during the holidays. For adjusted EBITDA, in the fourth quarter, we anticipate adjusted EBITDA to be a loss in the range of $400,000 due to the overlap in timing of expenses related to the completion of our foundational one-stack initiative. For gross margin, fourth quarter gross margin is anticipated to be slightly lower than Q3 2024, which as previously mentioned, trended consistent with Q2 and was somewhat higher than anticipated due to timing of certain expense items. Turning to our preliminary outlook for 2025. Revenue for the first quarter of 2025 is anticipated to be higher than the first quarter of 2024 and sequentially higher than the fourth quarter of 2024. We anticipate 2025 will be a growth year in revenue relative to 2024. with the opportunity for accelerating sequential growth rates during 2025. We anticipate growth margins for 2025 will be higher than 2024 with the opportunity for improvement during 2025. We also anticipate that Q1 2025 adjusted EBITDA will be improved over Q4 2024. As we look initially into next year, we continue to grow our pipeline of opportunity. We are expanding our product innovation efforts and go to market investments as we transition to the next phase of our infrastructure initiatives. We anticipate these efforts, along with the onboarding of some of our recent new customer wins, can contribute to our anticipated revenue growth throughout 2025. This is something we also believe could continue to drive additional leverage in our gross margin as the cost savings from our one-stack initiatives favorably flow through in the first quarter of 2025, and we see traction in new AI products that we anticipate releasing throughout the year. With that, I'll hand the call back to Edwin.

Thank you, Holly. In closing, we are excited about the road ahead. MarchX is building a market-leading prescriptive analytics company, and our progress this quarter demonstrates that we are well on our way. We remain confident in our strategy and excited about the opportunities in front of us and committed to delivering value for our customers, partners, employees, and shareholders. Thank you to all of the talent at MarchX. It is the team members in each function that make the difference. At this time, I'll pass the call back to the operator and take any questions.

We will now begin the Q&A session. As a reminder, if you would like to ask a question, please press star followed by one. If you would like to remove your question, press star followed by two. And if you are using a speakerphone, Please pick up your handset before asking your question. Our first question today comes from Darren Atassi with Roth Capital Partners. Your line is now open.

Darren, thanks for taking my questions. First, with some of the product rollouts that are happening in 4Q across specific verticals, could you sort of help clarify the timeline on that? When does that start? When do you think it would be complete, or is it sort of an ongoing thing through 2025 and to sort of see the impact of some of those products resulting in increased sales?

Thank you for the question. One, we've already rolled out a couple this year. The ones in the fourth quarter will be rolled out. We've piloted at clients already, so we've tested it. But we'll continue to innovate and productize any AI-driven capabilities and solutions for our clients. So we won't stop doing that. We are freeing up capacity by going to one stack. And being in one stack with one API, one data pipe, will allow us to invest more into two things, the go-to-market motion to sell these signals, spend time with our clients, again, ease of onboarding for our clients. So being able to have our account management group, customer success group easily demonstrate and having in the future we anticipate a click to buy capability off the web and then being leveraging the channel. but we're not going to stop building them, and we are already out in the market talking about them with current clients.

Got it. And maybe you could elaborate on some of your AI capabilities and what you have now and what you're sort of working on, how much of that is sort of, in the pipeline already or that's part of the investments with the product development and sales that you've got to go out and sort of create these products?

We're already down the path. We've got a MindPlus team. It reports to Todd Wilson, which works for Troy Hartless, our CRO and head of product. And so we're down the path and we're building every day. I will go back, I think, March 1 is a big date for us for delivery of items. June 1 is a big date. And going back, you know, the sequence of progress, we believe, has the potential to create an absolute virtuous cycle for the company. And we've got a good strategic plan. We're together with the ELP in the coming months to plan 2025 further. And I feel good about the product team. I feel good about the product marketing team. I feel good about the Eng team. So more to come.

Great. Thank you.

Our next question today comes from Mike Lattimore with Northland Capital Markets. Your line is now open.

Great. Thanks. Good evening. You mentioned a few new customer wins that you've already had this year. Can you just elaborate on, you know, type of customer, how big they are, use case?

Yeah, Mike, good to hear your voice. I hope you're well. And thanks for the question. We have what I call an enterprise group and a commercial group. We're seeing wins in both of those different areas. approaches to market and again going 25 will have a channel approach as well sizes vary it depends on if it's a if it's a commercial group um and the rooftops and the size of those um and the size of the deal with the oem and again it's against all the verticals i mentioned so we're having success um i'm really happy of what true harvest been able to do this year, either in product and in sales. And the Eng team has done a great job of getting us moved to the one stack in progress. But I will say March 1 and June 1 of next year are big dates for us to form scale, ease of use, single sign-on, et cetera. So I just see speed and velocity in the motion.

Yeah. And then on one stack, can you just clarify, when do you expect that to be kind of fully complete?

We are now in the cloud, which is fun to see with scale and efficiency. We will, here in the near term, have no legacy co-locations at all, which is fun to see, and the team's excited about it. We'll have one API, but we won't stop innovating on the AI signals. But we're going to get more efficient each month we breathe, which is fun. And again, we're grabbing billions of minutes of data. We're grabbing data while we're sitting here, and our movement to a SaaS platform and being able to productize prescriptive analytics beyond all the other buckets of analytics, we're seeing a good anticipation from our clients. So I feel good about our progress.

And the March one and June one dates, does that relate to one stack? Does that relate to new applications you're going to release?

It relates mostly to the applications and signals on it, but we'll continue to create scale and manage containers and manage vertical market compliance. So we're making progress across the board. But again, I won't stop innovating. We're in the right place at the right time. We're in a great market. I'm excited about the market. We've got a great team built. I can't say enough about the talent at the company. So my chairman has leaned in hard, which is fun to work with. So we're in a good spot.

Great. And then just on the sales and marketing investment, Do you need to have these new products out or additional progress on one stack before you really make a push? Or is this kind of just to, you know, you're, you're already putting hard now and we'll just kind of build from there.

You know, I, I, when I show up at a company, I always say you got to sell what's in the little red wagon. And so we're able to sell what we have. It's it, we, there were great acquisitions made, um, bringing together as a platform play, uh, is fun. And so we'll be able to, I think, sell at a faster speed. We will invest from the dollars we're saving on moving to one stack with scaling efficiency. And I think that the real breakout moment for us could be channel with some major partners and the API while helping Troy with the go-to-market motion and staffing.

Okay. I guess our last one, just on channel, can you talk about the type of channel partners you're kind of looking at engaging with?

I mean, you can think about any major CRM company. You can think about anyone down in a dealership that's got POS or DMS. So it's a large ecosystem given our ability with data and our ability to share that data and consume that data. So I didn't talk a lot about that on the call, but, you know, we have something I've talked about in the past called MPS where we can actually ingest data from our partners or our clients and compare that data, which is one of the things, and I mentioned cross-functional engagement. We have... multiple functions showing up at meetings now. When I began, we fell into one function. So we're making great progress. And again, under the leadership of the team, it's fun to watch. Yep.

Awesome. Great. Thanks very much.

Oh, you're welcome. Thanks, Mike.

Thank you all for your questions. There are currently no questions in queue, so as a reminder, it is star one to ask a question. It will appear we have no further questions, so I'll pass the conference back to management for any closing or further remarks.

OK, thank you everyone for dialing in. We appreciate your interest in March X. And continued support. We're working hard for the shareholders, Look forward to the next conversations. Thank you.

That will conclude today's conference call. Thank you all for your participation. You may now disconnect your line.