Ladies and gentlemen, good afternoon and thank you for attending today's Marchex Q4 2021 Earnings Call. My name is Sam, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. At this time, I'd now like to turn the call over to our host, Trevor Caldwell, Senior Vice President of Strategic Initiatives. Please proceed.

Good afternoon, everyone and welcome to Marchex's business update and fourth quarter 2021 conference call. Joining us today are Michael Arends and Russell Horowitz, our Co-CEOs. 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 or quarterly report filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements for subsequent events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The earnings press release is available on the Investor Relations section of our website. At this time, I'd like to turn the call over to Mike Arends.

Thanks everyone for the call. The fourth quarter was characterized by continued progress, including dynamics that we believe will favorably impact our going forward opportunity as well as the sequential and long-term growth of the business. The recent months have continued to see suppressed conversation volumes due to the pandemic and the ongoing impacts our customers face from labor shortages, as well as supply chain disruptions, something I'll discuss more in a moment. Now despite these headwinds, our business has continued to make strides with our product innovation, which is opening more opportunities with existing customers and new ones as well. The demand for conversational intelligence and sales engagement products is both real and growing. While the pandemic has had lingering effects on our growth over recent periods, we are seeing active engagement with our products by many of our largest customers. And we have also won various new large enterprise customers. We believe that this will define our opportunity and growth well into the future. Another reason we are optimistic is that the data from the fourth quarter of 2021 and into February illustrates that we are seeing a return to a more normal purchasing cycle from many enterprise customers. As these businesses look to the future, they see how Marchex's sales engagement products and tech solutions can elevate their sales and marketing strategies. What they want and need is to close the loop on every dollar of their media spent. And our technology allows them to do that. From a marketing dollar spent to drive prospects to the performance of individual locations or stores and selling to those prospects, Marchex has the solution set available to help businesses understand performance in ways that have not been previously possible. This is a significant development in the sales conversations we…

Thanks, Mike. In the fourth quarter of 2021 through today Marchex continues to put together the key ingredients to capitalize on the opportunity in conversational intelligence. Through expanding our opportunities with market leading customers and developing industry leading products, Marchex is putting the pieces in place to drive meaningful sequential progress and significant long-term growth. This year, we will continue to invest in leveraging the growing base of billions of minutes of conversational data that flow through our platform to solve an increasing array of mission critical problems for our customers. This has enabled Marchex to create an expanding base of first ever AI driven sales engagement signals, which are available in our products and also available for businesses to purchase on a standalone basis via our channel partners through our cloud-based integrations hub. While we have been focused on this opportunity for some time, in many ways, we are just beginning to see it really open up through these initiatives now and going forward, Marchex products will be available through additional direct and indirect sales channels into a much broader base of businesses than ever before. We look forward to seeing these initiatives enhance our overall financial profile. With that, I'll hand the call back to Mike.

Thank you, Russ. At a high level, and as I previously mentioned, our fourth quarter 2021 results continued to be influenced by the pandemic and typical seasonal flow of conversation volumes. These factors were offset to a degree by wins with new customers in verticals such as Home Services, an expansion of existing relationships in verticals like automotive and automotive services, which we believe will benefit our long-term growth outlook, something I will cover in more detail in a moment. Although the pandemic has continued to impact our business, we have seen very recent signs of progress and are encouraged by the trends at present. And looking more closely at the fourth quarter, October remained largely consistent with the suppressed conversation volumes of August and September. As the quarter progressed, typical seasonal patterns emerged as conversation volumes for our largest verticals were lower, which was consistent with the impact we typically see around the holiday periods. On the favorable side, we continue to see consistent sell through on new products with new and existing customers. And overall, we feel very good about our long-term customer and prospect pipeline, and its ability to drive our growth profile. For the quarter on a year-over-year adjusted basis when excluding certain pandemic-related revenue, timing and pricing adjustments that were made during 2020, in order to support impacted customers, revenue grew in the mid-single digit percentages. Conversation volumes make up a significant component of our growth profile, in the last several months continued to be characterized by pandemic-suppressed volumes as that potentially unwinds in the future. We expect it will have a beneficial impact to the business as it did in the second quarter of last year, when volumes combined with new customer traction helped Marchex achieve accelerating double-digit growth for the first time since…

Thank you, Michael. We will now begin the Q&A session. We will now take our first question from the line of Darren Aftahi of ROTH Capital Partners. Darren, please proceed.

So, couple of questions here. So first on the Fortellis integration, just kind of comparing that to VinSolutions. Can you just kind of talk about, kind of general scale of that partnership. And then, when we possibly could see impact from both of those relationships on the P&L? That's something that's going to happen in fiscal '22, first question. And the second one, on the last call, you guys mentioned, Sonar, is one of the fastest growing pieces of business of adding new customers. I'm just curious how that trend was in the fourth quarter and what you're seeing in Q1 thus far. And then, Mike, you talked about your operating costs, if I recall them 3 million year-over-year. So if the pandemic does unwind, or softens, where things are kind of getting some more liquidity, and then you see faster growth, does that marginal growth all down to the bottom-line most of it just kind of give us some general sense for what's the marginal flow through if you see higher growth prospects going forward. Thanks.

Thanks, Darren. This is Mike. Appreciate the question. So let's start with the first one, which is the CRM edition. There are a variety of CRM integrations within the auto industry, and many of them are very specific to the auto industry. We are now working with several of the largest and most impactful ones within the auto industry. The Fortellis integration is significant. It has a meaningful market share across dealerships across the United States. We are engaged already and have already released one of our prior integrations. So the coverage that we have for all auto dealership accessibility through the CRM integrations today sits at the vast majority of the total population of auto dealership, and there's still more to come in terms of some of the integrations that we're working on. But what that Fortellis integration does is, it opens up a meaningful share, because they have such a meaningful share of the auto dealership market, it opens up a lot more simplistic access where a dealership can engage with our technology and our solutions on a simplistic way without having to move away from their existing CRM system, they can use that and see that within the compelling dashboard. So it makes it a very simple add-on use case, which opens up a much more viable way that we can have the dealership engage in a more voluminous fashion with our conversation activity.

Hey, Darren. And just to add to that, this is Russ. It's reflective of the theme between the two integrations, you're in more than 50% of the auto market. And the broader theme you've heard us talk about and what's coming to fruition is, we got really unique value-added applications, historically, our products have required customers to really lean into, to kind of co-development around integrations because that telephony component was necessary to get the benefits. Now, by bringing our products to the system they already use, whether it's vertical specific integrations or through Marchex Anywhere, we're taking the obstacles and friction out of the process, so that they can easily adopt our value-added applications, get these signals around their conversations, whether it's the calls or the texts, or other communications channels, they may want to integrate, and do so again, in a way where it's comparatively simple, straightforward, and overtime will be quicker, which benefits them and obviously will benefit us.

Darren, this is Mike. Let's go back to your second question, which was our technical solutions. One of the key themes that we had, when we looked at acquiring the technology with Sonar was how do we take the texting solution and add it to a platform and allow for conversations not just via the phone, but also from a text messaging standpoint, and create a view where the business could actually see consumer interactions across more than the one channel of the conversation call coming in. And that's one of the big things that we've been working on from a technology perspective is enabling our platform with the Sonar technology to allow the business to be able to see those conversations and then deal with it in a robust manner. That continuation of technology integration occurred in the third quarter of last year, in the fourth quarter, we are still working on some of those integration components. We think it is a robust level of interest from our existing customers, in terms of how they see consumer conversations, both from a phone call and a texting perspective, we don't think that's going to change. On a go forward basis, we think that there to stay within texting solutions is something that is going to continue to grow in terms of volume, and our business customers are going to continue to be more interested in it. So from that perspective, we've seen as a key product and strategic initiative of something that we want to have integrated and have put a lot of work on the technology front to be able to do so. The last question I think you had was on the -- in terms of just additive revenue, and volumes, and what that means, from an operating leverage standpoint. We do think from an operating -- the cost of operating and our profile. Naturally, there are inflationary pressures that every company, especially in North America is seen at this point right now, and we're not immune to those inflationary pressures on the cost side. But at the same time, if you remove that, from the equation, what we do see is every dollar in revenue will provide a higher level of percentage contribution dropping to the bottom-line, then what our current gross margin is, and that's a good thing, because we have some economies of scale that could benefit us from a leverage standpoint, significantly. Some of the choices then give us an opportunity to redeploy those additive operating leverage dollars in the form of sales and marketing for accelerating some the growth opportunity or potentially additive to the product number line for, to some extent, naturally, that could drop to the bottom line and create a higher level of profitability margin. So to be determined, as we see progression there on the revenue front.

Our next question is from Sharon Kiruba of Northland Capital Markets.

Hi, guys. This is Sharon on behalf of Mike Latimore. So you have announced several innovations over time? How would you rank conversation DNA among your innovation? And then I have a follow up.

Yes, Sharon. This is Russ. Thanks for the question. Conversation DNA is foundational to how we think about our strategic growth opportunity. And when we talk about, the value-added applications and all the different ways we can deliver them, Marchex Anywhere, being one of those or marketing edge as our foundational product. Conversation DNA allows us to ingest the conversations, calls, texts, et cetera. And continue to leverage the benefits we have given our volume scale of existing conversations to create these outcomes or classifications. And our press release gets into some of the ones that we're highlighting but our vertical specific data that are vertical specific relationships allow us to do this in a way that we believe is unique and haven't really seen any other company able to do. And we've been able to validate it with our existing market leading customers, when we look at what those strategic insights mean, the actions they take, and the resulting sales impact at the house. So it's highly impactful. And it's one of the reasons why we are so optimistic about what growth can look like going forward as we continue to sequentially execute.

Okay. And then now that a lot of business is opening up nicely as we come out of the COVID pandemic, how might this affect your volumes, and which verticals are improving or slowing down?

So this is Mike, thanks for the question. The good news that we saw in the second quarter of 2021, where we saw conversation volumes increase anywhere from 5% to 12% in aggregate, came very much as a result of more consumer activity like businesses and conversations occurring. We think the levels in some of the different verticals would be significantly varied. So for instance, in the hospitality sector, the travel sector, if there was real unwinding, and a changed consumer behavior at the levels that we think it could, that's an area that you could see exponential growth multiples of some of the volumes where it is today. But in aggregate, if you just look at supply chain disruption unwinding and some of the different areas like the automotive sector that can have a lift the activity where conversations increase, whether it's in health care, whether it's in communications, automotive services, auto home services, those are some of the areas we see a generic lift will occur. It may be single-digit percentages, in some areas will be higher than others. But we do see there's going to be aggregate left across the board, as there's more consumer activity and just conversations occurring, especially with the service-based businesses that we're primarily focused on as part of our engagement.

Thank you, Sharon. There are no additional questions waiting at this time. .

Yes, this is Russ. I just want to thank everybody for their involvement in the call today. Just with a couple of closing thoughts. We look at the macro issues and it's important to understand them, how that impacts volumes, whether it's COVID, or supply chain, et cetera. But we're really focused on the items that we can most influence or control. And kind of through that lens, we believe we've got the catalysts continue to establish ourselves as a market leader, and a significant growth company. And those ingredients, as we mentioned, they have been assembled. Those elements are coming together to do what we believe is create a virtuous cycle, based on our team's, our products and innovation, the ways our customers are leaning in, and really validating those, our emerging sales channel. We really do think these are all coming together in terms of building momentum, demonstrable progress, and what we believe will be validating growth, that we'll be able to demonstrate, Sharon. And so while we're managing through some macro elements, and that's beyond us, and we do think those could be net benefactors to us, when we look at the potential kind of benefits versus risks. We are focused more on the controllables and influentiables. And we have the elements in place to be able to continue to innovate and drive growth and validate the opportunity we've gotten. We just want to thank you all for continuing to be involved as we execute and deliver that. Thank you.

That concludes the Q4 2021 Marchex earnings call. Thank you all for your participation. You may now disconnect your lines.