Marchex, Inc. 2016 Form 10-K Summary
Business context and reporting period
Marchex is a mobile advertising analytics company focused on connecting digital advertising activity with offline consumer actions, particularly phone calls. Its principal offerings include call analytics, search, display and video analytics, call marketplace services, and a local leads platform for reseller partners. The filing covers the fiscal year ended December 31, 2016, with comparative results for 2014 and 2015. The company operated primarily through its Call-driven business after selling the remaining Archeo operations in 2015.
Key financial metrics
| Metric | 2015 | 2016 | Change |
|---|---|---|---|
| Revenue | $143.0 million | $129.5 million | Down 9% |
| Loss from operations | $0.5 million loss | $83.9 million loss | Primarily reflects $63.3 million goodwill impairment |
| Loss from continuing operations | $0.6 million | $84.1 million | Significant deterioration |
| Net income (loss) | $26.7 million | $(84.1) million | Prior year benefited from Archeo disposition gain |
| Basic and diluted loss per share | $0.65 income | $(2.01) loss | Declined materially |
| Cash flow from operations | $12.8 million provided | $3.7 million used | Negative in 2016 |
| Cash and cash equivalents | $109.2 million | $104.0 million | Down $5.2 million |
| Working capital | $118.8 million | $109.6 million | Down $9.2 million |
Service costs were $77.0 million, or 59% of revenue, compared with $78.8 million, or 55% of revenue, in 2015. Revenue less service costs was approximately 41% of revenue in 2016, before sales, development, administrative and other expenses. Sales and marketing expenses increased 36% to $22.3 million, while product development expenses decreased 8% to $28.4 million and general and administrative expenses increased 18% to $21.8 million. Stock-based compensation was $10.2 million.
The company recorded a $63.3 million goodwill impairment charge in the second quarter, eliminating all goodwill from the balance sheet. The impairment reflected a sustained decline in the stock price and market capitalization, lower projected revenue growth and lower expected profitability.
Investing cash use was $1.2 million, primarily for $986,000 of property and equipment purchases. Financing cash use was $312,000, primarily reflecting $365,000 of Class B share repurchases and $297,000 of tax withholding payments, partly offset by $350,000 of employee equity proceeds. The company terminated its unused $30 million revolving credit facility in December 2016 and had no borrowings under it. Total liabilities were $15.0 million at year-end, including $9.2 million of contractual obligations, and the filing states that available resources were expected to fund operations for at least twelve months.
Fourth-quarter 2016 results
Fourth-quarter revenue was $28.4 million, down from $34.9 million in the fourth quarter of 2015. The company reported a $5.7 million loss from continuing operations and a $5.7 million net loss. Fourth-quarter operating expenses were $34.1 million, excluding the second-quarter goodwill impairment.
Material changes versus prior periods
- Revenue declined from $143.0 million in 2015 to $129.5 million in 2016, primarily due to lower pay-for-call advertiser budgets, fewer YP small-business accounts and the absence of Archeo revenue.
- Call-driven revenue declined 7%, from $139.9 million to $129.5 million.
- The 2015 results included $27.3 million of discontinued-operations income, including a $22.2 million after-tax gain from the sale of Archeo domain assets; no corresponding discontinued-operations income was recorded in 2016.
- Service costs increased as a percentage of revenue because distribution partner payments increased and local-leads revenue, which has comparatively lower service costs, represented a smaller share of revenue.
- Sales and marketing spending increased substantially despite lower revenue, reflecting a larger sales force, higher personnel costs and employee separation-related costs.
- Chief Executive Officer Peter Christothoulou resigned in October 2016, and former Executive Chairman Clark Kokich also left the board. An Interim Office of the CEO was established while the company searched for a permanent CEO.
- YP agreements were extended through December 31, 2018, but YP retained flexibility to migrate active accounts and termination rights beginning January 1, 2018 with four months’ notice.
- Quarterly dividends were discontinued after the second quarter of 2015, and the company did not expect to resume dividends in the foreseeable future.
Guidance, outlook, risks and unusual items
Management expected revenue to remain lower in the near and intermediate term because of fewer small-business accounts on the local leads platform and reduced demand for call advertising. Management also expected State Farm campaign spending to be lower than in prior periods. The company planned to develop additional call analytics and omnichannel products, including its February 2017 launch of Marchex Omnichannel Analytics Cloud and expanded display, video and social analytics capabilities.
YP represented 23% of 2016 revenue. State Farm represented 23% of revenue, primarily through Resolution Media and related agency relationships. The five largest customers represented approximately 60% of revenue, creating substantial customer concentration and exposure to budget reductions, contract cancellations, account migration and changes in agency relationships.
Other significant risks include continued operating losses, an accumulated deficit of $247.6 million, negative operating cash flow, dependence on mobile advertising adoption and third-party distribution partners, competitive pressure, traffic quality and fraud, privacy and call-recording regulation, cybersecurity and service interruptions, intellectual-property claims, and the need for possible future financing. The company recorded approximately $1.6 million of employee separation and facility termination costs in the third quarter of 2016, with approximately $354,000 accrued at year-end, and approximately $800,000 of additional employee separation costs in January 2017.
The company had $44.5 million of deferred tax assets fully offset by a valuation allowance and approximately $63.5 million of federal net operating loss carryforwards. A securities class action filed in 2015 was voluntarily dismissed without prejudice in April 2016. The company reported no material pending legal proceedings and no material costs from its indemnification obligations, although potential future indemnification payments could be material.
Important facts for investors to verify
- Whether revenue and contribution from YP, State Farm, Resolution Media and other concentrated customers continued to decline after 2016.
- Whether the company achieved sustainable positive operating cash flow without relying on asset sales or additional capital.
- The effect of the goodwill impairment and subsequent operating performance on the company’s remaining asset values.
- Execution of the Omnichannel Analytics Cloud and newer display, video and social analytics products, including customer adoption and margins.
- The company’s ability to replace or diversify revenue from large customers and third-party distribution partners.
- Cash usage, contractual obligations, employee separation costs and any need for additional equity or debt financing.
- Future changes to YP’s account migration and termination rights beginning in 2018.
- Potential effects of the adoption of revenue-recognition, lease, stock-compensation and credit-loss accounting standards identified in the filing.