Good afternoon, and thank you for joining the Marchex Third Quarter 2023 Earnings Call. My name is Kate, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call, with the question-and-answer session at the end. I would now like to turn the call over to your host, Trevor Caldwell, Senior Vice President of Strategic Initiatives and Investor Relations. You may proceed.

Thank you, Kate. Good afternoon, everyone, and welcome to Marchex's Business Update and Third Quarter 2023 Conference Call. Joining us today are Edwin Miller, our CEO, and Holly Aglio, our Chief Financial Officer; 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 more 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 in the Investor Relations section of our website. At this time, I want to turn the call over to Edwin.

Thank you, Trevor, and good afternoon, everyone. I'd like to thank you all for joining us today for our quarterly earnings conference call. I'm pleased to share our progress with you during this period of transformation. I've been on the job for 275 days and we are well on our way to positioning Marchex for long-term success. We're building a culture that's highly committed and fosters innovation and collaboration. We continue to advance our technology in order to deliver new and powerful value creation for customers and prospects, and we are building out a world-class team to tackle the robust market opportunities in front of us. We are moving fast as a company. Furthermore, I’m pleased to share to share that our progress has enabled us to achieve profitability sooner than expected. We are seizing on this momentum and the big opportunity in front of us, and that is to increase our leadership in the conversational intelligence market. Today, I'd like to highlight three key initiatives that we believe will thrust us towards being a nine figure business in this space. These initiatives revolve around creating a world-class team, streamlining and enhancing our technology, and the formation of excellence in our go-to-market motion by vertical market. Let's look at our first initiative, which is building a world-class team with a world-class culture. When I arrived, we had high-quality teams in our vertical markets with many years of experience. We organized towards shared services to empower our vertical market talent. This has worked well with client engagement. Further, given how quickly the AI landscape has evolved, we have been adding to our talent pool in order to build towards the future and support our growth opportunities. We're investing in additional leadership and building out our data sciences and AI teams to…

Thank you, Edwin. I am thrilled to have joined Marchex at this time. For the third quarter, revenue was $12.8 million versus $12.5 million in the second quarter and $13.2 million for the same quarter last year. From a revenue perspective, on a year-over-year basis, we saw expansion in some key verticals with the auto vertical continuing to see growth while we saw continued pressure on conversation volumes on a year-over-year basis with our small business listing and solution providers that mostly sell marketing services to local businesses. In the auto vertical, we continue to see expansion of our dealer channel and of our OEM relationships as a key driver of growth. Our ability to win new relationships and extend others into multiyear terms has contributed to Marchex's expanding footprint in this vertical. In addition, we see significant potential to expand some of our products into verticals that have similar characteristics and where we already have relationships with many of the vertical market leaders. For example, in the home services vertical, we see expansion of key relationships being helpful to our overall profile. Turning to the P&L 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 were $13.2 million compared to $13.6 million for the third quarter of 2022. During the quarter, we incurred certain costs associated with reorganizing and modifying operating activities totaling approximately $300,000. Service costs were $5.1 million for the third quarter, which decreased as a percentage of revenue from the second quarter of 2023. Over time, we expect our service costs as a percentage of revenue may decrease as a result of our current technology infrastructure initiatives. That should enable an overall improvement with our service cost margin as we sell through…

Thank you, Holly. Since I've joined Marchex, we've accomplished a lot over a short period of time. We've achieved profitability earlier than planned and put in place a series of initiatives that will enhance the profitability profile of the business well into the future. In addition, we're supplementing the team with world-class talent that will be the driving force for growth as we launch our go-to-market initiatives in the coming quarters. I've been a part of a lot of technology companies, and I'm excited about what I see here at Marchex. We have an incredible group of world-class customers who are asking us to do more. We have a world-class team that we are continuing to build out. Just as importantly, we have an underlying data asset that makes the company truly unique with lots of value to unlock in many ways to do so. AI is here. Its possibilities to continue transforming the conversational intelligence market represent a significant and growing opportunity as AI continues to evolve. In the meantime, we have a clear view of what unlocks the potential of Marchex. Further, we have a path to growing a sustainable and increasingly profitable business. We will continue investing in industry-leading AI capabilities. I want to thank the team for their hard work. I look forward to accomplishing great things together. Thank you for your time today. With that said, operator, let's move to questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question will be from the line of Mike Latimore with Northland Securities. Your line is now open.

Hi. This is Logan on for Mike. Could you guys talk about how call volumes trended in October versus what you saw in Q3?

Hey, Logan. This is Mike here. So just for reference, call volumes from a seasonal perspective are consistent with what we've seen in prior years. Usually, the downward trend is primarily in the November, December time frame, around the holidays, starting more heavily in the holiday time frame. There is a seasonal adjustment that does start in the latter part of September, but the heavier part of the downward trend in the fourth quarter is generally around that holiday time frame. So we've seen consistency in general across that. But we also have a number of new customers and relationship items that are expanding as well as some of the new onboardings, and those are helping us offset some of the total revenue sequential movement where we think we're still going to be at or very near the levels that we were in the third quarter.

Perfect. Thank you and one more question. Can you talk about the electric vehicle category and how important that is to the growth driver going forward?

So this is -- Logan, this is Mike again. Automotive, it's trending well for us. It's a key part of the overall framework of where we think we're going to be headed on a go-forward basis. And just echoing some of Edwin's and Holly's comments there. There's a lot of new product activity that we have, especially related to some of the generative AI activity and how that can play out and benefit our customers, but particularly in auto with the EV movement. EV is simply an incredibly intricate and diverse arena that the auto dealers as well as the OEMs are working through. It's giving momentum in the part for us because it's driving industry-needed change to be able to deal with the critical challenges of an electric vehicle world. And if you think about intricacies and differences, it's demanding data intelligence. It's demanding sentiment, it's demanding signals and insights, and importantly, identification of trends and movements quickly and in real time. We are in a position with a powerful solution where we can help with that across all types of conversations, whether it be voice, text, chat, prospectively as well as other forms of conversations and engagement with prospects and customers. And it's not just the automotive arena that we're seeing some of this application in. We've got some very deep and strong relationships with OEMs in the auto vertical. We've expanded some of those relationships, landing multiyear extensions. We've onboarded some new ones. But we have some other very relevant relationships in other verticals. And the applicability of the product to other verticals, Edwin spoke about this in some of the prepared commentary. We think there's some replication here that we can do in the coming periods with home services, with auto services, and health care, to name a few, because those are a few that we already have some very entrenched and strong relationships with large conglomerates that are relatable to some of the work that we've been doing in the auto sector.

Thank you. I'll add to that. Good question, and it's a very relevant and germane question on timing. The -- what we're seeing, and we've got a team out in AutoLand (ph) this week. And the conversations around EV are hot. Everybody is trying to get there. And if you just think about the two things we just launched with AI features around AI Calls Summaries and AI Sentiment, think about you walk into a dealership and the salespeople are used to selling gas or diesel, and now they got to answer questions and understand how to sell EV, the question set is different. And so understanding the summary of a call and the sentiment of the call and getting ahead of that and being able to foster intelligent conversations at the dealership level and for our large OEMs is powerful. But again, I'll echo what Mike said, it's not just in the automotive vertical. What we found since I've joined, I've been on 275 days, counting weekends because I ended up working on weekends, too, but is that the need of technology and what we provide from numbers to text, to chatbots, to the ability to not even have a number and ingest data, it's required across any B2C complex ecosystem, and it creates very rich deep vertical market data, which allows us to build new math models faster than other companies and allows us to help, I think, get ahead of what is going to be needed based on understanding those conversations. So we can also become a predictive analytics platform versus prescriptive. I think most of the companies out there live in a prescriptive world. Hey, here's what happened yesterday. Thanks. Yes. I got run over by a car. Where we want to live is in a world where we tell you the cars in. So I hope that helps, but we're excited about the EV, but we're also excited about all the verticals and the commonality of the needs against the verticals we serve.

Yeah. That was very helpful. Congrats on the quarter, guys.

Thank you. At this time, there are no further questions registered in the queue, so I will turn the call back over to the management team for a final closing remarks.

Okay. Well, I would like to thank everyone who joined. We thank you for your time, interest in our business and we look forward to updating you in the future, and we're here to grow the business. So thank you so much for your time. Appreciate it.

That concludes today's conference call. Thank you all for your participation and you may now disconnect your lines.