Marchex, Inc. Form 10-Q Summary
Business Context and Reporting Period
Marchex is a mobile and call advertising technology company providing pay-for-call advertising, call analytics, local leads, performance-based online advertising, and domain-name services through its Call-driven and Archeo segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, with comparisons to the same periods in 2013.
Financial Performance and Position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $49.7 million | $37.6 million | $100.2 million | $72.3 million |
| Income from operations | $1.7 million | $(0.1) million | $3.1 million | $0.2 million |
| Net income (loss) | $1.0 million | $(0.4) million | $1.8 million | $(0.3) million |
| Net income applicable to common stockholders | $0.9 million | $(0.4) million | $1.8 million | $(0.3) million |
| Operating margin | 3.4% | (0.3)% | 3.1% | 0.3% |
| Net margin | 2.0% | (0.9)% | 1.8% | (0.4)% |
| Operating cash flow | Not separately provided | Not separately provided | $11.4 million | $3.2 million |
Revenue increased 32% year over year in the quarter and 39% for the six-month period. Call-driven revenue increased 35% in Q2 and 41% year to date, primarily from higher national advertiser budgets and additional small-business accounts using the call analytics platform. Archeo revenue increased 21% year to date, although its segment profit declined modestly.
Service costs rose to 65% of revenue in both Q2 and the first six months, compared with 60% and 59%, respectively, in the prior-year periods. The increase primarily reflected higher distribution-partner payments, personnel costs, stock-based compensation, and domain-renewal fees. Sales and marketing, product development, and general and administrative expenses declined as percentages of revenue.
At June 30, 2014, cash and cash equivalents were $75.0 million, compared with $30.9 million at December 31, 2013. Accounts receivable were $34.7 million and total assets were $208.6 million. Total liabilities were $32.1 million and stockholders’ equity was $176.5 million. The company had no borrowings under its $30 million senior secured revolving credit facility, whose maturity was extended to April 1, 2017.
Six-month investing cash flow was $(1.4) million, principally reflecting $1.2 million of capital expenditures. Financing cash flow was $34.0 million, primarily from $32.7 million of net proceeds from the April follow-on offering and $3.4 million from employee equity exercises, partially offset by dividends and tax-withholding payments.
Material Changes Versus the Prior Comparable Period
- Revenue grew from $37.6 million to $49.7 million in Q2 and from $72.3 million to $100.2 million for the first six months.
- The company moved from operating and net losses to operating income and net income in both comparative periods.
- Call-driven segment profit increased 92% in Q2 and 84% year to date.
- Domain-name sales shifted from gains on disposal of intangible assets to revenue following the September 2013 launch of the Domains Marketplace. Domain-name revenue was $2.2 million in Q2 and $4.1 million for the first six months of 2014.
- Prior-year gains on intangible-asset sales were $1.3 million in Q2 and $2.7 million year to date; no comparable gain was recorded in 2014 because the related sales were recognized as revenue.
- Amortization of acquired intangible assets fell to $31,000 in Q2 and $434,000 year to date, compared with $736,000 and $1.8 million, respectively, primarily because certain Jingle-related intangible assets became fully amortized.
- Stock-based compensation increased to $3.1 million in Q2 and $6.0 million year to date, compared with $2.6 million and $4.5 million, respectively.
- Cash increased substantially following the equity offering; the offering included 3.4 million newly issued Class B shares sold by the company at $10.50 per share. Selling stockholders sold an additional 3.2 million shares, with no proceeds to the company.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal numerical revenue or earnings guidance. Management expects sales and marketing, product development, and general and administrative expenses to remain relatively stable to modestly higher in the near term, while service costs may increase as a percentage of revenue because of distribution-partner economics and network investment. Management expects annual dividends to be approximately $0.08 per share, subject to capital availability, but states that future dividends are not assured.
Management believes existing cash, credit availability, and operating cash flow are sufficient to fund operations for at least twelve months. It also notes that additional financing may be needed for acquisitions, long-term obligations, or expansion and may not be available on satisfactory terms.
- Customer and partner concentration is significant. YP represented 22% of Q2 revenue and 21% of six-month revenue; Allstate represented 33% of both Q2 and six-month revenue. The five largest customers represented approximately 67% of six-month revenue. YP and Allstate represented 28% and 32%, respectively, of accounts receivable at June 30, 2014.
- The company has $13.6 million of contractual obligations, including $8.7 million of facility leases and $4.9 million of other contractual commitments.
- The company maintains $24.3 million of net deferred tax assets and a $23.1 million valuation allowance. Changes in projected taxable income could affect the valuation allowance and earnings.
- Goodwill totaled $65.7 million, primarily related to the Call-driven segment. Future declines in operating performance, cash flows, stock price, or market conditions could require impairment testing and potentially material charges.
- The company remains exposed to loss or renegotiation of distribution partners, advertiser budget reductions, competition, seasonality, mobile and Internet market changes, traffic quality and advertiser-credit risks, technology outages, cybersecurity incidents, intellectual-property claims, and telecommunications and privacy regulation.
- The July 2013 sale of certain pay-per-click assets is presented as discontinued operations. The 2014 six-month discontinued-operations result was a $9,000 gain, compared with a $31,000 loss in the prior-year period.
- The company states that it is not party to material legal proceedings, although ordinary-course claims and indemnification obligations could produce material future payments.
- The board declared a $0.02-per-share quarterly dividend in July 2014, expected to require approximately $854,000 in cash.
Most Important Facts for Investors to Verify
- Whether Call-driven growth and the addition of small-business accounts are sustainable after the reported increase in national advertiser budgets.
- The durability and economics of the YP and Allstate relationships, including contract terms, renewal prospects, and receivable collectability.
- Whether rising distribution-partner payments will continue to pressure service-cost and operating margins.
- The recurring versus transactional nature of Archeo revenue, particularly domain-name sales recognized after the Domains Marketplace launch.
- The realizability of deferred tax assets and the potential for future valuation-allowance or goodwill-impairment charges.
- Future capital-allocation decisions, including dividends, the unused revolving facility, potential acquisitions, and any additional equity or debt financing.
- The effect of seasonality, advertiser spending changes, traffic quality, regulatory developments, and technology or cybersecurity events on future results.