Business Context and Reporting Period
Company: Marchex, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: Marchex is a local online advertising company and publisher of local content. It operates a proprietary Local Content Network (over 200,000 websites) and provides search- and call-based advertising solutions. Revenue is generated primarily through performance-based advertising (pay-per-click, pay-per-phone-call) and search marketing services distributed via search engines (e.g., Yahoo!, Google) and its own network.
Key Financial Metrics (Year Ended Dec 31, 2007)
| Metric | 2007 | 2006 | 2005 |
|---|---|---|---|
| Total Revenue | $139.4 million | $127.8 million | $95.0 million |
| Net Income (Loss) | $(1.5) million | $(0.4) million | $3.9 million |
| Net Income (Loss) to Common Stockholders | $(1.4) million | $2.8 million | $1.5 million |
| Operating Income (Loss) | $(3.0) million | $0.6 million | $4.8 million |
| Cash and Cash Equivalents | $36.5 million | $46.1 million | $63.1 million |
| Working Capital | $41.2 million | $56.8 million | $70.3 million |
| Total Assets | $320.2 million | $333.4 million | $334.4 million |
| Total Liabilities | $18.3 million | $16.2 million | $13.8 million |
| Service Costs (% of Revenue) | 51% | 47% | 51% |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 9% to $139.4 million in 2007 compared to 2006. Growth was driven by an increase in the number of accounts, more distribution partners adopting the third-party content platform, and the acquisition of VoiceStar in September 2007.
- Profitability Decline: The company reported a net loss of $1.5 million in 2007, a significant deterioration from a net loss of $0.4 million in 2006 and net income of $3.9 million in 2005. Net income applicable to common stockholders swung from a $2.8 million profit in 2006 to a $1.4 million loss in 2007.
- Expense Increases: Service costs rose 17% to $70.9 million, and General and Administrative expenses increased 31% to $17.8 million. These increases were partially offset by a 17% decrease in amortization of intangible assets ($16.9 million in 2007 vs. $20.5 million in 2006).
- Cash Position: Cash and cash equivalents decreased by approximately $9.6 million to $36.5 million, primarily due to investing activities (acquisitions and domain purchases) and financing activities (share repurchases and dividends).
Guidance, Outlook, and Risks
- Management Commentary: Management attributes the 2007 revenue increase to the VoiceStar acquisition and growth in proprietary traffic sources. However, the shift in revenue mix toward partner sources (which have higher distribution costs) contributed to the increase in service costs as a percentage of revenue.
- Dividends and Repurchases: The company maintains a quarterly cash dividend on common stock ($0.02 per share) and preferred stock. In 2007, it repurchased approximately 2.2 million shares of Class B common stock for $22.1 million. The board authorized an increase in the repurchase program in February 2008.
- Key Risks:
- Concentration Risk: Significant dependence on Yahoo! (approx. 31% of revenue from Yahoo! portfolio domains and 7% from distribution). Loss of this partner could materially harm the business.
- Competition: Intense competition from larger search engines (Google, Yahoo!) and traditional media.
- Regulatory: Uncertainty regarding internet regulations, privacy laws (COPPA, CAN-SPAM), and domain name regulations.
- Acquisition Integration: Risks associated with integrating acquired companies (VoiceStar, Name Development, etc.) and potential goodwill impairment.
- Unusual Items: The 2006 financials included a one-time gain of $5.8 million from the discount on preferred stock redemption, which significantly boosted 2006 net income applicable to common stockholders. This non-recurring item is not present in 2007.
Investor Verification Checklist
- Yahoo! Dependency: Verify the stability of the relationship with Yahoo! and the terms of the distribution agreements, given the high revenue concentration.
- Service Cost Trends: Monitor the ratio of service costs to revenue, particularly as the company shifts toward partner-sourced traffic which carries higher variable costs.
- Stock-Based Compensation: Review the impact of SFAS 123R adoption on future earnings, as stock-based compensation remains a significant expense ($10.3 million in 2007).
- Intangible Asset Amortization: Assess the remaining useful life of acquired intangible assets and the risk of future impairment charges on the $204.8 million goodwill balance.
- Cash Burn vs. Generation: Evaluate the sustainability of the dividend and share repurchase programs given the net loss in 2007 and the decline in cash reserves.