Marchex, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018; filed August 6, 2018. Marchex provides call analytics, speech analytics, omnichannel analytics, pay-for-call advertising, and local-leads services. The company operates as one reportable segment and adopted ASC 606 using the modified retrospective method on January 1, 2018.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $20.2 million | $22.0 million | $42.1 million | $46.4 million |
| Loss from operations | $(0.9) million | $(1.3) million | $(2.1) million | $(4.8) million |
| Net loss | $(0.7) million | $(1.3) million | $(1.6) million | $(4.8) million |
| Net loss per share | $(0.02) | $(0.03) | $(0.04) | $(0.11) |
| Operating margin | (4.5%) | (5.9%) | (4.9%) | (10.4%) |
| Net margin | (3.3%) | (5.8%) | (3.8%) | (10.3%) |
Revenue mix: Performance-based advertising generated $18.5 million in Q2 and $38.4 million for the six months. Local-leads services generated $1.7 million and $3.7 million, respectively. Performance-based advertising exceeded 80% of revenue in all periods presented.
Expenses: Q2 service costs declined 6% to $11.4 million, but increased to 56% of revenue from 55%. Sales and marketing declined 4% to $3.3 million and remained 16% of revenue. Product development declined 10% to $3.9 million, or 19% of revenue. General and administrative expense declined 25% to $2.5 million, or 13% of revenue. Total operating expenses were 104% of revenue versus 106% in the prior-year quarter.
Cash flow and liquidity: Six-month operating cash flow was $1.7 million, compared with $(0.6) million in 2017. Investing cash outflow was $1.6 million, including $1.0 million of property and equipment purchases and a $575,000 certificate of deposit. Financing cash outflow was $27.5 million, primarily reflecting the $21.9 million special dividend and $5.7 million share repurchase. Cash and cash equivalents were $76.8 million at June 30, 2018, down from $104.2 million at December 31, 2017.
Balance sheet and obligations: Accounts receivable were $15.3 million and total liabilities were $13.2 million at June 30, 2018. No debt balance is reported in the condensed balance sheet. Contractual obligations totaled $14.2 million, including $10.7 million of facility lease commitments and $3.5 million of other contractual obligations. A $575,000 certificate of deposit collateralized a letter of credit for the Seattle lease.
Material changes versus the prior comparable period
- Revenue decreased 8% in Q2 and 9% for the six months, primarily due to fewer local-leads accounts, lower reseller-partner pay-for-call revenue, and reduced advertiser budgets.
- Operating and net losses narrowed substantially as personnel and other operating costs declined, partially offsetting lower revenue.
- Sales and marketing, product development, and general and administrative expenses declined by 4%, 10%, and 25%, respectively, in Q2.
- Operating cash flow improved from an outflow of $624,000 to an inflow of $1.7 million for the six months.
- Stock-based compensation declined to $682,000 in Q2 and $1.6 million for the six months, from $981,000 and $2.3 million, respectively.
- The company repurchased approximately 2.3 million Class B shares for $5.7 million from a former director and retired the shares. The repurchase was outside the publicly announced program.
- The company paid the $21.9 million special dividend declared in December 2017.
- ASC 606 adoption resulted in a $189,000 increase to accumulated deficit at January 1, 2018; the reported effect on Q2 and six-month 2018 net loss was not significant.
Outlook, commentary, and risks
- Management expects revenue to be lower in the near term because of declining small-business accounts on the local-leads platform and reduced demand for call advertising.
- Primary YP/local-leads and related pay-for-call agreements expire December 31, 2018. YP may migrate accounts to itself or another provider and has termination rights with four months’ notice.
- DexYP represented 22% of Q2 revenue and 20% of six-month revenue. State Farm represented 19% of Q2 revenue and 23% of six-month revenue; management expects State Farm campaign spending to decline in the near to intermediate term.
- The five largest customers accounted for approximately 51% of six-month revenue. Concentration creates material exposure to customer budget reductions, contract expirations, payment delays, or customer financial distress.
- Management expects service costs to be stable to modestly higher, while sales and marketing and product development are expected to remain relatively stable in the near and intermediate term.
- The company believes its resources are sufficient to fund operations for at least twelve months, but states that additional equity or debt financing may be needed for acquisitions, long-term obligations, or other strategic initiatives.
- Key risks include continued operating losses, dependence on major reseller partners and advertising agencies, competitive pressure for distribution traffic, seasonality, advertiser credit and collection risk, telecommunications and privacy regulation, call-quality and fraud issues, cybersecurity, intellectual-property claims, and technology or third-party service interruptions.
- The company maintains a full valuation allowance against deferred tax assets and reported $1.1 million of uncertain tax positions at June 30, 2018.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material legal proceedings were reported.
Important facts for investors to verify
- Whether YP/DexYP agreements are renewed, on what terms, and how quickly accounts migrate from Marchex’s local-leads platform.
- Whether State Farm and other concentrated customers reduce campaign spending as management anticipates.
- Revenue stabilization, customer-account trends, and progress toward operating profitability.
- Cash usage after the special dividend and share repurchase, including the funding capacity for acquisitions or further shareholder returns.
- Accounts-receivable concentration and collectability, particularly the reported 37% exposure to a single advertiser at June 30, 2018.
- Future distribution-partner economics, service-cost trends, and the effect of ASC 606 and forthcoming lease accounting adoption.