Marchex, Inc. 2017 Form 10-K Summary
Business Context and Reporting Period
Marchex is a call analytics and performance-based advertising company that helps businesses measure, optimize and convert consumer phone calls. Its offerings include call analytics, speech analytics, omnichannel analytics, audience targeting, pay-for-call advertising and a local leads platform.
This filing reports the fiscal year ended December 31, 2017, with comparative results for 2016 and 2015. The filing also provides unaudited fourth-quarter 2017 results. Marchex operated as a single segment in 2017.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $90.3 million | $129.5 million | Down 30% |
| Loss from operations | $(6.4) million | $(83.9) million | Improved primarily because 2016 included a $63.3 million goodwill impairment |
| Net loss | $(6.1) million | $(84.1) million | Improved |
| Net loss applicable to common stockholders | $(6.4) million | $(84.1) million | Improved |
| Class B diluted loss per share | $(0.15) | $(2.01) | Improved |
| Operating expenses | $96.7 million | $150.1 million | Down 36% |
| Cash flow from operations | $1.7 million | $(3.7) million | Improved |
| Capital expenditures and other investing uses | $(1.6) million | $(1.2) million | Higher cash use |
| Cash and cash equivalents | $104.2 million | $104.0 million | Essentially flat |
| Working capital | $88.4 million | $109.6 million | Down 19% |
Reported operating margin was approximately negative 7.0%, and net margin was approximately negative 6.7%. The filing does not provide a clear gross margin or EBITDA measure.
Fourth-quarter 2017 revenue was $21.8 million, compared with $28.4 million in fourth-quarter 2016. Fourth-quarter operating loss was $0.7 million and net loss was $0.5 million.
Service costs were $49.3 million, or 55% of revenue, compared with 59% in 2016. Sales and marketing expense was $15.7 million, product development expense was $18.1 million, and general and administrative expense was $13.6 million. Stock-based compensation declined to $4.6 million from $10.2 million.
Marchex had no outstanding borrowings at year-end. Its $30 million revolving credit facility was terminated in December 2016, and the company had never borrowed under it.
Material Changes Versus the Prior Comparable Period
- Revenue declined by $39.3 million, primarily because of lower advertiser budgets for pay-for-call services and fewer Yellowpages.com small-business accounts.
- Management substantially reduced operating costs, including distribution partner payments, personnel costs, outside service provider costs and stock-based compensation.
- 2016 results included a $63.3 million goodwill impairment charge; no comparable impairment was recorded in 2017. Goodwill was zero at December 31, 2017.
- Operating cash flow improved from a $3.7 million use in 2016 to $1.7 million provided in 2017, but the business remained loss-making.
- Marchex declared a special cash dividend of $0.50 per share in December 2017, totaling approximately $21.9 million, payable March 21, 2018. The amount was recorded as a dividend payable at year-end.
- Marchex launched Speech Analytics, Social Analytics and Audience Targeting during 2017 and continued developing its Omnichannel Analytics Cloud.
- Employee separation-related costs were approximately $0.7 million in 2017 as part of cost-reduction measures.
Liquidity, Outlook, Risks and Unusual Items
Management stated that existing resources were expected to fund operations for at least twelve months. Year-end cash was $104.2 million, but the company expected to use cash for operating losses, capital expenditures, product development and the special dividend. Contractual obligations totaled $14.8 million, including $11.3 million of operating lease commitments; approximately $1.1 million of tax contingencies was excluded from that table.
Management expected revenue to remain lower in the near and intermediate term than in the comparable prior-year periods because of declining small-business accounts on the local leads platform and reduced demand for call advertising. It expected service costs, sales and marketing, product development and general and administrative expenses to be generally stable or modestly higher in the near term, subject to changes in revenue and growth initiatives. No quantified revenue or earnings guidance was provided.
- Customer concentration: DexYP represented 21% of 2017 revenue, State Farm represented 17%, and the five largest customers represented approximately 52%. Many customer and agency arrangements are short term or allow spending reductions.
- YP/DexYP contract risk: Key local leads and pay-for-call agreements with YP expire December 31, 2018. YP had termination and account-migration rights beginning January 1, 2018, and management expected lower future contribution from YP-related accounts.
- Profitability risk: Marchex had an accumulated deficit of $253.7 million at December 31, 2017 and had incurred substantial historical losses.
- Regulatory and privacy risk: Call recording, telephone consumer protection, data privacy, telemarketing and telecommunications laws could increase costs or create liability, particularly as the EU General Data Protection Regulation became effective in May 2018.
- Technology and third-party dependency: The company relies on telecommunications carriers, hosting providers, distribution partners and other vendors. Service interruptions, cybersecurity incidents or unfavorable partner terms could adversely affect results.
- Tax items: Marchex recorded a full valuation allowance against $32.7 million of deferred tax assets. Federal net operating loss carryforwards were approximately $75.4 million and federal research and development credit carryforwards were approximately $5.0 million, subject to limitations.
- Accounting changes: Marchex adopted the new revenue standard on January 1, 2018 using the modified retrospective approach and estimated an insignificant cumulative effect. It expected future lease accounting adoption to affect the balance sheet.
- Legal matters: The company reported no material pending legal proceedings, but it has indemnification obligations in certain contracts for which the maximum future exposure could be material.
The company received unqualified audit opinions on its financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective as of December 31, 2017.
Important Facts for Investors to Verify
- Whether YP/DexYP renewed or modified its agreements after December 31, 2018 and the resulting effect on revenue, contribution and cash flow.
- Whether revenue declines stabilized and whether the newly launched analytics products generated material recurring revenue.
- Whether Marchex achieved sustained positive operating cash flow and reduced its accumulated deficit.
- The cash balance after payment of the approximately $21.9 million special dividend and the company’s capacity to fund losses, capital expenditures and potential acquisitions.
- The collectability of concentrated accounts receivable, including exposure to State Farm, DexYP and advertising agencies.
- Changes in call advertising demand, distribution partner economics, advertiser budgets and competitive pressure from larger platforms.
- Compliance costs and potential liabilities associated with call recording, privacy, cybersecurity and telecommunications regulations.
- The effect of the 2017 Tax Cuts and Jobs Act and the company’s ability to use its tax carryforwards.