Marchex, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2021. Financial statements are unaudited and presented under U.S. GAAP. Marchex provides conversational analytics, call and text analytics, AI-enabled conversation intelligence, messaging, call monitoring and sales-engagement solutions. In October 2020, the Company divested its Local Leads Platform, Call Marketplace and related non-core assets; those activities are reported as discontinued operations for prior periods.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $14.0 million in 2021; $12.7 million in 2020 | $27.0 million in 2021; $24.7 million in 2020 |
| Loss from continuing operations | $0.3 million in 2021; $5.7 million in 2020 | $5.7 million in 2021; $31.2 million in 2020 |
| Net loss applicable to common stockholders | $0.3 million, or $0.01 per share, in 2021; $4.5 million, or $0.09 per share, in 2020 | $5.7 million, or $0.13 per share, in 2021; $29.4 million, or $0.62 per share, in 2020 |
| Loss from operations | $2.9 million, approximately 20% of revenue | $8.1 million, approximately 30% of revenue |
| Operating cash flow | Not separately provided for the quarter | $(5.7) million in 2021; $(0.1) million including discontinued operations in 2020 |
- Revenue increased 10% year over year in the second quarter and 9% for the first six months. Management attributed the improvement primarily to reduced pandemic-related customer discounts, credits and usage effects.
- Service costs were 39% of second-quarter revenue and 40% of six-month revenue, unchanged as a percentage of revenue from the comparable periods.
- Sales and marketing declined to 19% of second-quarter revenue and 23% of six-month revenue, compared with 38% and 36%, respectively, in 2020. Product development declined to 34% and 38% of revenue, compared with 42% and 43%.
- Second-quarter interest income and other, net included a $2.5 million contractual settlement related to previously divested properties. This substantially reduced the quarterly pretax loss.
- Cash and cash equivalents were $27.8 million at June 30, 2021, down from $33.9 million at December 31, 2020. Accounts receivable increased to $8.7 million from $6.3 million.
- Total assets were $70.2 million and stockholders’ equity was $48.5 million at June 30, 2021, compared with $76.9 million and $52.7 million, respectively, at December 31, 2020. Accumulated deficit was $304.4 million.
- The Company had $5.1 million of current loan obligations under CARES Act loans, bearing 1% annual interest and maturing in the second quarter of 2022. Marchex applied for forgiveness in June 2021, but the timing and amount of forgiveness remain uncertain.
- Operating lease liabilities totaled $4.1 million, including $1.8 million current and $2.3 million long-term. Total future contractual commitments were approximately $6.1 million, including $4.4 million of facility and other operating leases.
Material Changes Versus the Prior Comparable Period
- Revenue improved while continuing-operations losses narrowed substantially, principally because 2020 included $14.7 million of goodwill impairment and $5.0 million of acquired-intangible impairment. No comparable impairment was recorded in 2021.
- Sales and marketing expense fell $2.7 million for the six-month period, while general and administrative expense fell $1.2 million. Product development expense declined $0.6 million.
- Operating cash flow deteriorated from $3.4 million used by continuing operations in the first six months of 2020 to $5.7 million used in 2021. The 2020 total operating cash flow benefited from $3.3 million generated by discontinued operations and $5.1 million of CARES Act loan proceeds.
- Cash declined by $6.0 million during the first six months of 2021, compared with a $4.3 million increase during the 2020 comparable period.
- The Company received $2.5 million from a contractual settlement and $299,000 of foreign government paycheck and rent subsidies during the first six months of 2021.
- Support-services fee recoveries related to the divestiture were $2.9 million for the first six months and $1.7 million for the second quarter of 2021. A net $404,000 was due from the related-party purchaser at June 30, 2021.
Outlook, Commentary, Risks and Unusual Items
- Management observed an improving U.S. economy and elevated conversational activity in the second quarter, but cautioned that the improvement may be temporary as the COVID-19 pandemic evolves.
- Near-term revenue is expected to be similar to or modestly higher than the most recent quarter, although pandemic-related customer disruption, delayed sales cycles, lower customer spending, payment delays and credit losses could reduce revenue and cash flow.
- Management expects continued investment in infrastructure, product development, sales and marketing and personnel. Property and equipment purchases are expected to be modestly higher in the near and intermediate term.
- Management believes existing resources will fund operations and strategic investments for at least twelve months. It also states that additional equity or debt financing may be needed for acquisitions, long-term obligations or other corporate needs, with no assurance that financing would be available on acceptable terms.
- Goodwill remained $17.6 million and acquired intangible assets were $6.6 million at June 30, 2021. Future impairment charges remain possible if operating performance, projected cash flows, market conditions, stock price or market capitalization deteriorate.
- The Company maintains a 100% valuation allowance against its U.S. deferred tax assets, totaling approximately $47.2 million at June 30, 2021, reflecting uncertainty regarding future taxable income.
- No material legal proceedings were reported. Ordinary-course indemnification, earnout and other contingencies could result in material payments, although no related liability was recorded and management did not identify a currently pending matter expected to materially affect financial condition, results or liquidity.
- Key risks include COVID-19 and macroeconomic uncertainty, recurring losses and cash burn, customer concentration, dependence on telecommunications and cloud providers, cybersecurity and privacy exposure, telecommunications and messaging regulation, competition, seasonal call volumes, potential additional funding needs and the possibility of future asset impairments.
- The five largest customers represented approximately 30% of revenue in both the quarter and six months ended June 30, 2021. One customer represented 15% of accounts receivable at June 30, 2021.
- The founder beneficially owned 100% of Class A common stock, representing approximately 75% of voting power. Class A shares carry 25 votes per share, compared with one vote per Class B share.
Facts Investors Should Verify
- Reconcile the $2.5 million contractual settlement and related support-services fees to recurring operating performance and cash generation.
- Monitor operating cash burn, the decline in cash balances and the Company’s ability to fund operations without additional financing.
- Verify the status, eligibility and potential forgiveness amount of the $5.1 million CARES Act loan balance before its 2022 maturity.
- Assess whether revenue growth is sustained after pandemic-related comparisons normalize and whether customer concentration or delayed payments increase credit risk.
- Evaluate the carrying value of the $17.6 million goodwill balance and $6.6 million of acquired intangible assets against actual operating results and market capitalization.
- Review the related-party divestiture, contingent consideration, purchaser investment, support-services arrangement and governance implications.
- Consider the effect of dual-class voting control, regulatory requirements for call and text services, privacy obligations and cybersecurity risks on shareholder value.