Marchex, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. The unaudited statements cover Marchex, a mobile advertising analytics and performance-based pay-for-call company, with Call-Driven and Archeo operating segments.
Business Context and Reporting Period
- Marchex provides call analytics, call tracking, pay-for-call advertising, local leads, search marketing, and related performance-based advertising services.
- Call-Driven generated more than 90% of consolidated revenue in the second quarter.
- In April 2015, the company sold certain Archeo domain-operation assets, including most of its domain portfolio. Related results are presented as discontinued operations.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $35.3 million in 2015 versus $47.0 million in 2014 | $71.3 million in 2015 versus $95.1 million in 2014 |
| Operating income (loss) | $(1.5) million versus $0.1 million | $(1.8) million versus $0.1 million |
| Net income (loss) from continuing operations | $(1.3) million versus $(0.1) million | $(1.6) million versus $(0.2) million |
| Net income | $20.9 million versus $1.0 million | $25.5 million versus $1.8 million |
| Net income per share | $0.50 versus $0.02 | $0.62 versus $0.05 |
| Operating cash flow | Not separately provided | $4.4 million versus $11.4 million |
- Revenue declined 25% year over year in both the quarter and six-month period.
- Service costs declined to 56% of quarterly revenue and 55% of six-month revenue, versus 67% and 66%, respectively, in the prior-year periods.
- Sales and marketing expense increased 56% in the quarter and 31% for the six-month period, while product development expense increased 8% and 5%, respectively.
- Call-Driven revenue decreased 25% to $34.5 million for the quarter and 24% to $69.5 million for the six-month period. Call-Driven segment profit declined to $1.4 million and $4.0 million, respectively.
- Archeo revenue decreased 26% to $0.9 million for the quarter and 53% to $1.8 million for the six-month period. Archeo reported segment losses of $81,000 for the quarter and $222,000 for the six-month period.
- Cash and cash equivalents were $104.4 million at June 30, 2015, compared with $80.0 million at December 31, 2014. Accounts receivable increased to $30.5 million from $25.9 million.
- Total liabilities were $23.5 million and stockholders’ equity was $184.2 million at June 30, 2015.
- The company had no borrowings under its $30 million senior secured revolving credit facility. The facility matures April 1, 2017.
- Contractual obligations totaled approximately $10.8 million, including $6.4 million of facility leases and $4.4 million of other contractual obligations.
Material Changes Versus the Prior Comparable Period
- The principal revenue decline resulted from the termination of the Allstate pay-for-call arrangement in September 2014. Allstate contributed $33.4 million of revenue in the first six months of 2014; the company does not expect significant future Allstate purchases.
- Lower revenue was partly offset by increased national advertiser budgets and reduced distribution-partner payments, which improved the service-cost ratio.
- Net income increased primarily because the company recognized a $22.0 million after-tax gain from the sale of Archeo domain operations. The gain is non-recurring and substantially drove reported earnings growth.
- The domain-operations sale generated $28.1 million of cash proceeds at closing, or $25.8 million net of costs in investing cash flow, and included potential contingent earn-out payments.
- The company repurchased approximately 304,000 Class B shares for $1.3 million during the first six months and paid $1.7 million of dividends. Management does not anticipate further dividends in the foreseeable future.
- Goodwill declined by $2.4 million, to $63.3 million, following the Archeo asset sale. Management reported no goodwill impairment through June 30, 2015, but continued to monitor impairment indicators.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management believes available cash, credit capacity, and operating cash flow are sufficient to fund operations for at least twelve months, but additional financing could be needed for acquisitions, long-term obligations, or business needs.
- Yellowpages.com, or YP, represented 31% of first-half revenue and 30% of second-quarter revenue. YP agreements were extended through December 31, 2016, with minimum fee commitments from July 1, 2015 through June 30, 2016, but YP may migrate accounts to itself or another provider.
- Resolution Media represented 19% of first-half revenue. State Farm represented 18% of first-half revenue and 20% of second-quarter revenue. The five largest customers accounted for 63% of first-half revenue.
- Accounts receivable concentration was significant: YP balances totaled $10.1 million, while State Farm represented 31% of accounts receivable at June 30, 2015.
- The company maintains a 100% valuation allowance against $35.1 million of deferred tax assets because realization was not considered more likely than not. Tax contingencies of $717,000 were excluded from the contractual-obligations schedule.
- Management identified risks from customer and partner concentration, loss of distribution or reseller relationships, advertising-budget reductions, competition, seasonality, traffic quality, privacy and telecommunications regulation, intellectual-property claims, cybersecurity, third-party service providers, and potential goodwill impairment.
- The company has indemnification obligations in certain contracts. No material costs have been incurred to date, but the maximum potential future payments could be material.
- Quarterly results may be affected by seasonal declines in mobile and Internet usage during spring and summer and lower call demand late in the fourth quarter.
- Disclosure controls and procedures were assessed as effective, and no material change in internal control over financial reporting was reported during the quarter.
Most Important Facts for Investors to Verify
- Whether Call-Driven revenue can stabilize or grow after the loss of Allstate and whether national advertiser growth offsets that concentration risk.
- The sustainability and contractual economics of the YP relationship, including minimum commitments, account migration rights, and expiration in December 2016.
- Whether revenue concentration with YP, Resolution Media, State Farm, and other major customers affects collections, working capital, or future revenue.
- Underlying recurring profitability excluding the $22.0 million gain from discontinued operations and other discontinued-operation earnings.
- Whether cash generation remains sufficient after the one-time domain-sale proceeds are exhausted and dividends cease.
- Potential future goodwill impairment, particularly given the $63.3 million Call-Driven goodwill balance and management’s comments regarding stock price and book value.
- The impact of future distribution-partner costs, product-development spending, customer acquisition, and potential financing or acquisition activity.