Good afternoon. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the Marchex second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Ethan Caldwell, you may begin your conference.

Good afternoon everyone and welcome to Marchex's business update and second quarter 2016 conference call. Joining us today are Pete Christothoulou, Michael Arends and Gary Nafus. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements, including with respect 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 or Quarterly Report filed with the Securities and Exchange Commission. 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 on the Investor Relations section of our website at marchex.com. At this time, I would like to turn the call over to Pete Christothoulou.

Thanks Ethan and thank you everyone for joining us for our first quarter conference call. Let me start by saying that we are disappointed with our Q2 financial results and revised 2016 outlook, which are driven by a combination of factors. Most significantly, a small number of large clients made adjustments to their marketing budgets, changes which unfortunately reduced that they will likely spend our call marketplace this year. These changes affected us in Q2 and also limit the growth we expected and in the second half of the year. This is the principal reason for our revised 2016 outlook. We have historically relied on a small number of large multimillion dollar clients to generate a significant portion of our revenue. As a result, we are susceptible to marketing budget fluctuations from a handful of clients, which is what impacted our call marketplace. Another contributing factor to our results is that two of these large clients were recently acquired. They remain significant customers, especially of our analytics products and although they have new owners, we work closely with both of them for more than three years and believe we will continue developing our relationships with them. So that's the bad news. Now, we are certainly dissatisfied with the short term setback, it does not impact our belief in the online to offline opportunity we have in front of us or confidence in our ability to help the world's largest brands sell the challenge of connecting and measuring the interaction between the physical and digital worlds. In fact, when you look at the three strategic initiatives we laid out the start of this year, I can confidently say that we have made progress on all fronts. Specifically, we said that during 2016 we would increase enterprise client growth, develop global strategic…

Thanks Pete. For the second quarter, call driven revenues were $34.4 million. We know some investors track our growth without YP, so to help their models with this framework in mind, call driven revenue in the second quarter excluding YP were $26.3 million compared to $24.1 million in the year-ago period. In the second quarter, we saw the benefits of expanding existing enterprise-client relationships in key focus verticals such as financial services and communications, which positively impacted growth on a year-over-year basis. On a sequential basis, our growth rate was primarily influenced by the financial services vertical, a category that is disproportionately weighted to the first quarter versus other periods. Additionally, looking at our strategic initiatives, we continue to build our sales team and feel good about the quality of the team we are building to support our long term growth initiatives. We are just half-a-year into our new sales approach and expect our initiatives to take time to ramp. We are pleased with the quality and experience of our new sales team and they have been successful at adding new clients early in their tenure. Furthermore, the pipeline also continues to quickly build. While we believe these new relationships and an expanded pipeline will ultimately have a meaningful impact on our long term growth, they are not yet at a scale that is impacting our profile. Over time, we expect the investment in our sales initiatives and our continued product momentum to support a larger, faster growing business. Looking further down the P&L for the second quarter. Excluding stock-based compensation and acquisition and disposition related costs, total operating costs for the second quarter were $36 million. Sales and marketing was $5.1 million, which was up year-over-year as we continue to invest in our sales organization. As we have previously…

[Operator Instructions]. Your first question comes from the line of Ross Sandler, Research Analyst. Your line is open.

This is [indiscernible], dialing in for Ross. Thanks for taking the question. So I guess two high-level questions for Pete and then one for Mike. So the first thing is, there's been a big uptick in the analytics around tracking online to offline in-store purchases, especially with something like Google and Facebook using mobile. So when do you think this kind of visibility starts to move the needle on click-to-call spending allocations? So that's number one. And then number two would be, regarding AdBlock, because there's been a lot of chatter in the last few months. So how are ad blockers impacting your business? Are they cutting your display ads that drive click-to-call? Or are they just moving ad budgets altogether? So how does that work? If you can just give us some updates there? Thanks.

Sure, I will answer reverse order. So the first is on ad blockers. We are not seeing really any impact from ad blockers. That tends to have to do more with display and viewability. And our products particularly as you think about calls are really directly attributed to direct response mechanisms today. So ad blockers and viewability aren't really a part of what we are experiencing. As it relates to visibility and analytics, we are in the very early stages of what we think is a tremendous market when you talk about online-to-offline. And we believe that because the customers that we are talking to across all of our core categories, many of which are just the leading global brands in the world, have these specific problems of connecting mobile ads to these offline interactions, whether you are clicking to call or walking into the store. And they are really thinking about how do they tie together a complete picture that gives them a clear understanding of what's happening in each channel and how each media channel impacts ultimately an offline conversion. When you think about how that translates to visibility, we really are looking at the progress that we have with existing clients within our analytics products and our sales, our progress of new sales and the metrics that we are seeing in terms of driving new pipeline development that tells us that we will continue to have increasing analytics visibility as we look out over the next couple of years. So we think that we are in the early stages of market and we are seeing good penetration as it relates to new client development for analytics products specifically.

Okay. Great. And then one question for Mark. Mike, I was wondering if you could talk about how the pricing in unit economics works when you introduce all these new products to Call DNA?

It's a very good question. When we think about the benefits being provided to the customer, we are focused on customer value. Very much value is attributable to the phone calls where the action is that the consumer is taking. So the goal for us is to align the pricing specifically with the value that we are providing to the advertisers. So in this case, if it's on a pay-for call basis, that is the specifics of the incremental charge that we will be providing to the customers. So for the Call DNA Premium, it is based on a unit transactional basis or a pay-for-call basis.

Okay. Great. Thank you.

Your next question comes from the line of Gene Munster, analyst. Your line is open.

Hi. Good afternoon. It's for Pete or Mike. If we look at the YP business in the back half of the year, I guess, Mike you mentioned that that was part of the guidance. Is that basically an add-back from previous guidance? And if so, how much is that add-back? And then second question for Pete is, the sales team goal will still take some time. Is that kind of time through the end of this year or beginning of next year? And then will this increased investment be going to continue into next year? And last question is, you have $105 million in cash and you have investment in the product. Is that the best way to think about use of cash and investment in products? Thanks.

Hi, Gene. This is Mike. I will take the first part of the question related to YP. And I think from a guidance perspective, what we did is we updated the model to include both the enterprise revenue streams and the YP revenue streams for the annual period. And part of the reason we did that was because we are having discussions about extending the relationship with YP into 2017 and potentially beyond. And as part of that, we have been able to get better visibility and a higher level of comfort over the remainder of 2016. So we included YP as part of the overall updated annual forecast that we put in there. The enterprise amounts are included as well. We also believe for both of those particular streams, we do have a range of possible outcomes. And how we built the updated forecast that we put out today, we believe that it is the lower part of the range that the numbers reflect today and we will see how it plays out.

Hi, Gene. This is Pete. I will answer to the cash question and then I will turn it over to Gary to answer the sales question. In regard to the $106 million on the balance sheet, I would say that we are obviously comfortable with that cash position. We like the flexibility it brings us. And we are heads down on investing in our business and building the right products for our clients. And we think we have a very good handle on what that is based on feedback directly from our clients. To the extent we see something that accelerates our position, drives higher market share with our clients, we will certainly take a look at that. But right now, there's nothing on the table.

Hi, Gene. This is Gary. Just to talk about the sales ramp. So we have been rebuilding the sales force. That has been a continuous process since January. And so we have hired continually month-by-month through the year and expect the ramp to take some time as we are hiring in a tight labor market as well as need to bring folks up to speed on our products and value propositions.

Okay. So it would be does it safe to say that as we think about the investment that you made in 2016 that equal amount of investment will be in 2017? Or is this a more robust investment year?

Gene, this is Mike again. I do think this is a more robust investment year. And I also think just with our updated profile and outlook, we are looking at different ways to find efficiencies and we are working on those quickly in the relatively near term.

Okay. Great. Thank you.

Your next question comes from the line of Brett Huff, Equity Research. Your line is open.

Good afternoon and thanks for taking my call. A quick question on the budget. I think you sort of talked about the revenue issue that you guys are seeing in two different buckets. Bucket number one is a couple of clients that got bought and then it sounds like there's some budget things going on there. But then also there some other clients that didn't get bought, it just sounds like they either shifted their budget into something another kind of marketing or it got cut. Can you give us a sense of what they are shifting to if you have that insight? And what the rationale is for cutting in the non-purchased large clients.

Sure, Brett. This is Pete. The first thing is, just to reiterate, this is a small number of clients that are primarily focused on our marketplace. As you highlighted, two of them were acquired and are going through the process in evolving their own media tactics and as a result have slowed down materially to focus on some of the combined company initiatives that they have. Both of which, as we said, we remain close with and they are still our live and operating and they have integrated several of our other products, including analytics. The others I would attribute to back half of the year planning and internal business initiatives and priority adjustments from those clients. And in a couple of cases, there are some reduced budgets predominantly as well as revising media tactics generally for the back half of the year based on their own internal priorities. And it's really, I think is, as much as we know we can communicate. Again we have good relationships with all of them. We continue to find opportunities to integrate other analytics products and they remain in close relationships of ours.

Great. That's helpful. And then in terms of, Mike, an opportunity for cost cuts. Can you just give us a flavor for what those might be? I know you guys are probably going through the process of determining those now. But is it real estate? Is it that kind of thing? Or any sort of high level color end that?

I think it's really too early to say at this point. It could be some minor efficiencies that we look to. We do think there's viability in some of the forecasts that we have put out today. And I will reiterate that we do think that those forecasts are the lower end of the range. So we will see how it plays out. But we are planning on taking some initiatives and looking at things in the relatively near term.

Those were the two questions I had. Thanks for your help.

Thanks Brett.

[Operator Instructions]. Your next question comes from the line of Darren Aftahi, Equity Research. Your line is open.

Hi guys. This is Nolan, on for Darren. Thanks for taking my questions. First, how is the YP G relationship going? Are you seeing any traction with new accounts in the quarter? And second, what verticals are you seeing over index growth?

Nolan, this is Mike. Let me take the first part of the question. And Pete, maybe you can dovetail on with the verticals. In terms of YP, there's a couple of things we are seeing. From discussions and extending the relationship, we think that there's an opportunity for account volumes based on certain initiatives that can potentially stabilize as we move into the 2017 period. At this point in time, we still think there's going to be a sequential decline in the YP revenues in the next quarter of this year and we will see how that plays out. We don't have a lot more information to provide at this time.

And regarding the traction of verticals, we mentioned a couple on our call today, particularly travel where we are now working with many of the world's largest brands in the hotel category as well as predominantly all the top cruise lines. So that's a very strong category for us. We think one that will be a big driver in the future. Other categories that we are seeing good traction include communications. For example, Vonage is a recent customer addition. And auto, we are very excited about as well, particularly with the new client development we see there. Those are three that we are really focused on right now.

[Operator Instructions]. There are no further questions at this time.

Thank you everybody for joining us today. We are excited to keep pushing forward here. We feel good about our business and look forward to updating you in the coming quarter on our progress. Thank you.

This concludes today's conference. You may now disconnect.