Marchex, Inc. 2020 Q2 Form 10-Q Summary
Business Context and Reporting Period
Marchex is a conversational analytics and communications company providing call and text analytics, speech analytics, call monitoring, pay-for-call advertising, and related lead-generation services. The filing covers the quarter and six months ended June 30, 2020, with comparisons to the corresponding 2019 periods. Results were materially affected by COVID-19, reduced customer advertising activity, customer credit deterioration, and related non-cash impairment charges.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | 6M 2020 | 6M 2019 |
|---|---|---|---|---|
| Revenue | $25.8 million | $26.3 million | $50.6 million | $52.7 million |
| Net loss | $4.5 million | $1.1 million | $29.4 million | $2.4 million |
| Net loss per share | $0.09 | $0.02 | $0.62 | $0.05 |
| Operating loss | $4.6 million | $1.3 million | $30.3 million | $2.9 million |
| Operating expenses | $30.4 million | $27.6 million | $60.8 million | $55.6 million |
| Operating cash flow | Not separately provided | Not separately provided | $(0.1) million | $5.0 million |
Performance-based advertising generated $25.2 million, or approximately 97% of Q2 revenue, and $49.1 million, or approximately 97% of six-month revenue. Local leads revenue was $676,000 in Q2 and $1.5 million for the six months.
- Q2 service costs were $15.2 million, or 58% of revenue, versus 53% in the prior-year quarter, implying a gross margin of approximately 42% versus 47%.
- Six-month service costs were $29.7 million, or 58% of revenue, versus 54% in the prior-year period, implying a gross margin of approximately 41% versus 46%.
- Q2 operating margin was approximately negative 18%, compared with negative 5% in Q2 2019. Six-month operating margin was approximately negative 60%, compared with negative 6% in the prior-year period.
- Cash and cash equivalents were $46.8 million at June 30, 2020, compared with $42.5 million at December 31, 2019.
- Current debt was $5.3 million at June 30, 2020, consisting primarily of CARES Act loans. The loans carry a 1% fixed interest rate, mature in the second quarter of 2022, and had a six-month payment deferral period.
- Total liabilities were $33.2 million and stockholders’ equity was $72.4 million at June 30, 2020. The accumulated deficit was $289.6 million.
- Accounts receivable declined to $16.1 million from $17.8 million at December 31, 2019, while the allowance for doubtful accounts and advertiser credits increased in response to customer credit risks.
Material Changes Versus the Prior Comparable Period
- Q2 revenue declined 2%; six-month revenue declined 4%, primarily due to lower call analytics usage, customer distress, pricing concessions, fewer local leads accounts, and COVID-19-related reductions in advertising spending.
- Net loss increased substantially, primarily because of higher operating costs and, for the six-month period, $14.2 million of goodwill impairment and $5.9 million of acquired intangible-asset impairment recorded in the first quarter.
- Service costs increased 9% in Q2 and 5% for the six-month period, driven by higher distribution-partner payments, communication and network costs, infrastructure investment, and the Sonar acquisition.
- Sales and marketing expense increased 33% in Q2 and 27% for the six-month period, reflecting increased personnel, outside service-provider, and stock-based compensation costs.
- Product development expense increased 18% in Q2 and 25% for the six-month period, primarily due to Sonar-related costs, increased staffing, and a strategic technology initiative.
- General and administrative expense decreased 13% in Q2 and was approximately flat for the six-month period; higher bad-debt expense was offset by lower personnel and service-provider costs.
- Operating cash flow deteriorated from $5.0 million provided in the first six months of 2019 to $121,000 used in the first six months of 2020, despite significant non-cash impairment and other adjustments.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects revenue to remain below recent quarterly levels in the near term and stated that COVID-19 may continue to affect the business in the intermediate and long term through lower customer spending, delayed sales cycles, delayed launches, payment delays, and customer closures.
- Management expects service costs as a percentage of revenue to remain elevated because of lower revenue and relatively fixed infrastructure costs. Sales and marketing and product development expenses are expected to remain relatively stable to modestly higher.
- Thryv represented 26% of revenue in both Q2 and the six-month period. Its local leads agreement expires December 31, 2020, and accounts may migrate or wind down earlier. State Farm represented 16% of revenue for the six-month period, and management expects related campaign spending to decline.
- The five largest customers represented approximately 51% of six-month revenue. Resolution Media represented 16% of six-month revenue, and one advertising agency represented 26% of accounts receivable at June 30, 2020. These concentrations increase exposure to customer reductions, cancellations, payment delays, and credit losses.
- The company recorded $20.1 million of first-quarter non-cash impairment charges, consisting of $14.2 million for goodwill and $5.9 million for acquired intangible assets. Management stated that additional impairment may be recorded if operating performance, cash flows, stock price, or market conditions deteriorate.
- Marchex obtained $5.3 million of CARES Act loans and received approximately $252,000 under a foreign wage subsidy program. Loan forgiveness remains uncertain and could be subject to government review.
- The company committed $2.5 million to a strategic technology initiative in 2020. In the third quarter, it announced a proposed related-party divestiture of the Local Leads Platform, Call Marketplace, and other non-core assets. The transaction is subject to shareholder approval and other closing conditions. Management disclosed expected minimum cash consideration of $2.25 million, plus non-cash and contingent consideration, but there is no assurance the transaction will close.
- Lease liabilities totaled $7.5 million at June 30, 2020, including $1.7 million current and $5.8 million non-current. Total gross future operating lease payments were $9.0 million.
- Management believes existing resources are sufficient to fund operations for at least twelve months, but cautioned that the severity and duration of COVID-19 could materially affect liquidity. Additional financing may be required for acquisitions, strategic initiatives, or long-term obligations.
- The company reported no material legal proceedings and stated that disclosure controls and procedures were effective as of June 30, 2020.
Most Important Facts for Investors to Verify
- Whether COVID-19-related revenue declines, customer pricing concessions, credit losses, and payment delays continue or worsen.
- The renewal, migration, or termination of Thryv arrangements after December 31, 2020 and the resulting impact on revenue and profitability.
- The sustainability of State Farm and other concentrated customer spending, including the effect of expected campaign reductions.
- Whether additional goodwill or intangible-asset impairment charges are required before or during the November 2020 annual impairment test.
- The amount of CARES Act loan forgiveness, repayment obligations, and any related government review or penalties.
- Whether the proposed related-party divestiture closes, the actual cash and non-cash consideration received, and the effect on Marchex’s ongoing revenue, expenses, working capital, and strategic focus.
- Whether operating cash flow improves from the six-month 2020 usage of $121,000 and whether the $46.8 million cash balance remains adequate as debt repayments and strategic commitments begin.