Good afternoon, ladies and gentlemen. Thank you for joining today's Marchex’s Fourth Quarter Earnings Conference Call. My name is Tia and I will be your moderator for today's call. [Operator Instructions] I will now like to pass the conference over to your host, Trevor Caldwell, Senior Vice President, Strategic Initiatives and Investor Relations. Please proceed.

Thank you, Tia. Thanks for your help. Good afternoon, everyone and welcome to Marchex’s business update and fourth quarter 2022 conference call. Joining us today are Edwin Miller, our CEO; Michael Arends, our Vice Chairman. 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. 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 Edwin.

Thank you, Trevor, and good afternoon, everyone. Thank you for joining us today. This is my first earnings call as the CEO, as a new CEO for Marchex. I do have a long history of leading and scaling technology companies. And I'm excited to join Marchex because it's world class solutions, and exceptionally talent team. I'm eager to build on the work been done prior. While I see myself providing the most value is through my operational experience of turning strategies and tentative results. I want to lead us in this space and do everything to help us get there. In the March since I joined Marchex I've been orienting myself in the business, meeting many of our talented people. As you know Marchex has been at the forefront of an exciting opportunity in the conversation intelligence market. From my vantage point, our shot is clear. Marchex sits at the confluence of conversational data and artificial intelligence at the very moment that our largest commercial customers need to streamline to transform complex and outdated technology ecosystems. We are helping these companies adapt to a data science and AI driven future. The future sales will require understanding of your customers or prospects and their needs at the moment the business interacts with them. Sales and training processes will have to be augmented if not reimagined. The fact is real, and has the potential to transform the financial characteristics of Marchex. Not only that, conversational intelligence has the power to transform the way businesses function. It will change the way businesses sell and deliver customer services experience. From an operation standpoint, I see this as a tectonic shift and we're committed to being at the forefront of this endeavor. So far, I've observed how Marchex has built foundational relationships with leaders across…

Thank you, Edwin. We're very glad to welcome you and to have you on board. We'll talk more and a little bit about that. But first, the financial results for the fourth quarter of 2022. Results were mixed. Revenue was $12.3 million versus $12.8 million for the same quarter last year. We saw continued pressure on conversation volumes due to the macroeconomic environment impacting certain customer types along with the typical seasonal flow of call volumes impacting the sequential and annual comparisons. For instance, there was pressure with portions of our smaller customers, as well as with our small business listing and solution providers that mostly sell marketing services to local businesses as they faced greater customer churn compared to 2021. That trend manifested over the latter part of 2022 and is one that we're watching closely as the new year begins. At the same time we continue to sign new customers across several verticals and signed our longest multi year term commitment from a Fortune 500 customer in our history. Looking ahead, we see several expansion opportunities in certain verticals for 2023 and beyond. I'll dive into this more in a moment when I discuss our initial guidance for 2023. But first turning to the P&L for the fourth quarter. Excluding stock based compensation, amortization of intangible assets and acquisition or disposition related costs total operating costs for the fourth quarter were $14.6 million compared to $13.1 million in the fourth quarter of 2021. Service costs were $5.6 million for the fourth quarter. Service costs and increase on a year-over-year and sequential basis in part due to increased data and labor costs associated with customer migrations on to new product platforms and increased staging investment in our AI technology initiatives as we prepare for new product launches scheduled for…

We will now begin the Q&A session. [Operator Instructions] The first question comes from the line of Mike Latimore with Northland Capital Market. Please proceed.

Thank you. Good afternoon and congrats on the new position, Edwin.

Thank you.

In terms of the auto vertical, can you remind me roughly what percent of revenue auto is today?

This is Mike. The automotive vertical is our largest vertical today and it represents near 25% of our total revenues as we operate. We did speak in some of the prepared commentary of notes that the auto verticals is one of the areas we actually see some of the opportunity for meaningful growth. And we do think by the end of this year, it has the opportunity for double digit and accelerating growth profile on a year-over-year basis.

Great. And then, in terms of areas of weakness, you call that smaller customers are those in the marketing. Can you just elaborate a little bit more on the vertical there what you're seeing there?

The primary areas that we see is the small business and the listing solution providers that work with local businesses. Those resellers or listing providers to local businesses on a year-over-year basis had more decline, more churn than in any of the other areas we had on a year-over-year basis. So sequentially and we also had seasonality impact the business as we normally do. Service based conversations declined generally in the fourth quarter around the holiday timeframe. So that was another reason for some of the sequential decrease from the Q3 to Q4 time.

Okay. And then you talked a little bit about seeing maybe sequential growth throughout the year. Is that largely tied to these new customer ads? Or are you expecting some macro improvement?

So there's multiple parts to it. The first part, I think I'll answer and I'll just be very direct with the macro environment, we're not actually anticipating in some of the comments and remarks with the go forward any updates or improvements in a service from a macroeconomic environment, we do think that could be a lift or an opportunity if that does play out. One of the things we have is we've been staging and putting different things together from our infrastructure investment, getting some of our existing customers where we think we've got some very robust conversations to expand the relationship onto our platforms that allow for access to our new features, as well as the new products that are coming to market. And we have several new products that are slated in particular, in the first half of the year, we have pilots that are scheduled, and those pilots are initiation opportunities for a go forward growth opportunity where we can monetize those new products if we're able to onboard and execute towards getting those customers to sign up. We have deep investment with some of the OEM relationships in the auto vertical. There's not just expansion of existing relationships, there's also new relationships we have. We spoke in prepared commentary about channel relationships in the auto dealer sales initiative. And auto dealers as an example they go back just a couple of years ago, we saw that as an opportunity to take some of our product opportunities and go directly to the dealer versus just the OEM and we started staging that a number of years ago and this past year, we put a lot of effort into a direct sales initiative as well as channel partnership opportunities. And to that end, we were successfully able during 2022 to be able to deploy over 300 individual dealer relationship engagements through both the direct sales efforts as well as the channel partnering opportunities. It is those areas that we actually think we'll be able to continue furthering our growth opportunity in 2023 and we see it as a big area of investment, not just for this current year, but for how that stages on a go forward basis. The other thing that Edwin will note, I think, is one of the prepared remarks he spoke about was an opportunity where he sees growth for the business. And I think Edwin, it would be helpful for you to give some of the added context about why you feel over the next number of years there is actually some of the robust growth opportunity.

Yes, happy to. So although I've only been here, less than 30 days, what I've learned so far, the opportunity of businesses is extremely real. I spent close to 75 days ahead of joining, learning about the business and getting excited about the talent and the customers. This is the future. All businesses that I'm seeing need help with sales and marketing. AI is the future. The amount of conversation intelligence we have, as datasets, is really strong, so the ability to for us to go and continue to engender trust and grow existing relationships and find new ones based on the size of companies you've already signed, it's absolutely astonishing opportunity for it right in front of us.

Great. And then just on the AI topic generative AI has gotten a lot of attention lately and rightly so. But do you see a way to build on that or leverage that in your business over the next year or so?

Absolutely. So I come out of a technology background, I've been at it for a little over 30 years, and the ability to build math and modalities around what we currently do, and help clients, our customers monetize their relationships is a real path forward. And I've probably had, I don't know 45 plus conversations individuals I've met the entire product management team, impressive group of people, real skills in and around AI and math and machine learning. So I'm very excited about that future.

Great, thanks.

You're welcome.

Thank you. The next question comes from the line of [indiscernible] please proceed.

Hi, it’s Dillon on for Darren, thanks for taking questions. First, if you look at sort of the volumes that are down overall on a year-over-year but then you talk about some emerging verticals being up. Can you sort of talk to the split between those like, I mean, I'm assuming that's as a percentage of total volume and not revenue. But I guess like, how big of an impact are the smaller verticals having as a drag on the ones where you're seeing growth?

Hi, Dillon this is Mike. Thanks for the question. A couple of notations and some of this may be regurgitated from our prepared comments. But if you look at the conversation volumes, there's the smaller customers and then the small business listing the providers that work in large part with some of the local accounts, those providers and all around they had a meaningful decrease on a sequential basis, which are affected seasonality, but also on a year-over-year basis. And in some cases, especially with the small business listing solution providers to local businesses, they were down well over 20% when we look at those comparative periods. In addition to that, we have the seasonality and the opportunity with seasonality in the fourth quarter with service based businesses is muted around the holiday season particular when consumers engaging with service based businesses isn't as robust as other times of the year. And so that historically on a Q3 to Q4 basis, is seen in that 10% to 15% aggregate range. Now, what we saw contrasting that was not only some of our volumes in a couple of the verticals like automotive and home services staying relatively stable, even though there was the seasonality levels. But furthering and part of the reason for our outlook on a sequential revenue growth basis right now is our long term pipeline expanded and we had more discussions about staging for some of our new product pilots. We have more incubation of those test pilots stage for the first part of the year than we did in the middle part of 2022. So those trends from a volume perspective we'll see how it plays out but we are forecasting right now sequential movement and the revenue upwards as we progress through 2023.

Thank you. And then with the research and development you sort of spoke to some of those starting to pay dividends in terms of product launches in the first half of this year AI. Do you think that there's more investment that you need to make to get you back to growth? Or is it some of it, or the bulk of it already done?

So, in our remarks, we've indicated some of the thoughts about the fourth quarter and what we think in the first quarter, those investments are continuing. We're working diligently. We move some customers over onto our primary platforms that allows for the upside of them getting access and then ultimately us being able to monetize when they engage with our new features as well as the new products. In some of our remarks, the large customers in some cases have migrated already here as we sit here in the first quarter. And so they are in a position to be able to pilot and take charge of getting access to those features. And we'll see how that goes from an execution standpoint. But again, it's part of the reason why we think the revenue opportunity has room for sequential growth. We also think onboarding some of the existing auto dealer relationships at the dealer level, onto our platform with over 300 here in this past 12 month period. And that opportunity gives access to new product features as well and potential upsells to that existing client base that we already have in the auto dealer body. So in terms of investment, what I would say is, we're staged and stable for the time being. We actually have some things from an operating perspective that are fixed in nature. So with the sell through, we actually see some pretty significant operating leverage and gross margin leverage as we progress with revenue progress over the course of '23 and more importantly, that stages beyond 2023, as well.

Got it. Thank you. And one, if I mean when you talk about adjusted EBITDA a potential return to breakeven or maybe better in the second half is that a reported quarter? Or is that just sort of a monthly number that you're getting back to?

We haven't given any more specific specificity other than we're looking to be at or near breakeven in the latter part of the year. That's the forecast and the guidance. We obviously think with increased revenue and monetization, adoption of some of our new products as we mentioned, some of the new products have literally 80% plus gross margin characteristics. It doesn't take that much from a revenue side to be able to get to that breakeven leverage. And as we near 60 million in annualized revenue run rate, that should put us in that position to be able to achieve those breakeven levels. And we do see moving towards that as we progress in the latter half of the year.

Great. Thank you.

I can add one thing that that and part of what I've learned here early on is there's a real opportunity to scale the existing relationships and new clients with our go-to-market motion. So I'm incredibly encouraged what I've learned early on. So I think the second half of the year should be a very good time for us.

Thank you. There are no additional questions at this time. I will now hand it back to the management team for closing remarks.

I wanted to thank you again everyone joining us today. We really appreciate the time. I wanted, again to welcome Edwin and we'll be providing further updates as we progress throughout the course of the year and I look forward to that. Thank you.

That concludes today's conference call. Thank you. You may now disconnect your lines.