Marchex, Inc. 2015 Form 10-K Summary
Business context and reporting period
Marchex is a mobile advertising analytics company focused on pay-for-call advertising, call tracking, call analytics, call marketplaces, and local-lead services. The filing covers the fiscal year ended December 31, 2015, with comparative results for 2013 and 2014. The company operated primarily in the United States and had 375 full-time employees at year-end.
Marchex sold certain Archeo domain assets in April 2015 and sold its remaining Archeo operations in December 2015. The April transaction was classified as discontinued operations; the December transaction remained in continuing operations. Marchex does not expect significant Archeo revenue after 2015.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $143.0 million | $173.6 million | Down 18% |
| Operating loss | $0.5 million | $0.2 million | Worsened modestly |
| Loss from continuing operations | $0.6 million | $22.8 million | Improved substantially |
| Net income | $26.7 million | $19.1 million loss | Improved |
| Net income applicable to common stockholders | $26.7 million | $19.2 million loss | Improved |
| Basic and diluted EPS | $0.65 | $(0.48) | Improved |
| Cash flow from operations | $12.8 million | $22.4 million | Down 43% |
| Cash and cash equivalents | $109.2 million | $80.0 million | Up $29.1 million |
| Working capital | $118.8 million | $85.8 million | Up $33.0 million |
| Total liabilities | $17.5 million | $24.5 million | Down $7.0 million |
Reported net income was approximately 18.7% of revenue, but this result was primarily driven by a $22.2 million after-tax gain from the April 2015 sale of Archeo domain operations. Continuing operations remained loss-making, with a margin of approximately negative 0.4% of revenue. The filing does not present a consolidated gross margin.
Call-driven revenue was $139.9 million, down 17% from $168.1 million in 2014. Call-driven segment profit was $7.8 million, compared with $11.1 million in 2014. Archeo revenue was $3.1 million, down 44%, and Archeo segment profit was $0.4 million.
Operating expense details for 2015 included service costs of $78.8 million, sales and marketing of $16.5 million, product development of $31.1 million, general and administrative expense of $18.5 million, and stock-based compensation of $10.0 million. Service costs declined to 55% of revenue from 64% in 2014, while sales and marketing and product development increased to 11% and 22% of revenue, respectively.
Fourth-quarter information
For the quarter ended December 31, 2015, revenue was $34.9 million, compared with $31.2 million in the fourth quarter of 2014. Operating income was $1.2 million, including a $1.5 million gain on the sale of remaining Archeo assets. Income from continuing operations was $1.2 million, and net income was $1.3 million. The fourth quarter benefited from the Archeo disposition and should not be viewed as representative of recurring profitability.
Liquidity, cash flow, debt, and capital allocation
- Cash from operations was $12.8 million in 2015. Investing activities provided $21.8 million, primarily from the Archeo asset sales, partly offset by $4.1 million of capital expenditures.
- Financing activities used $5.5 million, including $1.7 million of dividends and $3.8 million for repurchases of approximately 924,000 Class B shares.
- Marchex had no borrowings under its $30 million senior secured revolving credit facility. The full $30 million was available at December 31, 2015, and the facility matures in April 2017.
- Contractual obligations totaled $9.9 million, including $5.3 million of operating leases and $4.6 million of other contractual obligations. Approximately $6.2 million was due within one year.
- The company paid $0.04 per share in 2015 dividends, representing payments in February and May. Management stated that it did not anticipate further dividends in the foreseeable future.
- Management believed existing cash, credit availability, and operating cash flow were sufficient to fund operations for at least twelve months, while noting that additional financing could be needed for acquisitions, long-term obligations, or other strategic needs.
Material changes versus the prior comparable period
- Revenue declined primarily because Allstate ended its pay-for-call arrangement in September 2014. Allstate contributed $48.8 million of 2014 revenue and only $0.5 million in final 2015 revenue.
- YP remained the largest reseller partner and represented 29% of 2015 revenue, up from 25% in 2014. Resolution Media represented 18% of 2015 revenue, with most of that amount related to State Farm, which represented 19% of total revenue.
- The five largest customers accounted for 61% of 2015 revenue, down from 66% in 2014, but customer concentration remained significant.
- Service costs fell faster than revenue because of lower distribution-partner payments and a greater contribution from lower-cost local-lead revenue.
- Sales and marketing expense increased 40%, while product development increased 5%; both rose materially as a percentage of revenue.
- Continuing-operations losses narrowed substantially because the 2014 period included a $22.3 million increase in the deferred-tax valuation allowance. The 2015 tax expense from continuing operations was only $27,000.
- Goodwill declined from $65.7 million to $63.3 million following the Archeo domain asset sale. No goodwill impairment was recorded, although the Call-driven reporting unit had only approximately 40% excess fair value over carrying value at November 30, 2015.
Outlook, commentary, risks, and unusual items
Management did not provide quantified revenue or earnings guidance in the filing. Its strategy emphasizes expanding mobile performance advertising and call analytics, building agency and reseller relationships, international expansion, increasing the advertiser base, and selectively pursuing acquisitions. Management expected near-term sales and marketing and general and administrative expenses to increase, product development spending to remain stable to modestly higher, and service costs as a percentage of revenue to be modestly higher than the most recent quarterly period.
- Customer and partner concentration: YP contracts were extended through December 31, 2016, but YP may migrate accounts to itself or another provider. The primary arrangement included minimum fee commitments through the first half of 2016 but also provided migration flexibility.
- Business-model transition: The loss of Allstate revenue and the Archeo divestitures materially changed the revenue base. Future results will depend more heavily on the Call-driven business and a limited number of customers and agencies.
- Profitability risk: Marchex has historically incurred losses and had an accumulated deficit of $163.5 million at year-end 2015. Continuing operations were still unprofitable despite the reported consolidated net income.
- Goodwill risk: The company carries $63.3 million of Call-driven goodwill. A sustained decline in stock price, cash flows, customer activity, or operating performance could result in an impairment charge.
- Legal contingency: A purported shareholder filed a securities class action in November 2015 alleging federal securities-law violations and seeking unspecified damages. Management stated that it expected to defend the case and did not expect a material financial effect.
- Tax assets: Marchex had $34.5 million of deferred tax assets fully offset by a valuation allowance and approximately $40.0 million of federal net operating loss carryforwards. The company concluded realization was not more likely than not.
- Regulatory and technology exposure: Risks include call-recording and privacy laws, telecommunications regulation, data security, intellectual-property claims, dependence on third-party carriers and hosting providers, traffic quality, call fraud, and changing mobile advertising regulation.
- Governance and ownership: Executive founders controlled approximately 79% of combined voting power through high-vote Class A shares, limiting the influence of Class B shareholders.
Most important facts for investors to verify
- Whether recurring Call-driven revenue and segment profit stabilize or grow after the loss of Allstate and the Archeo divestitures.
- Whether YP renews its arrangements after December 2016 and how much account migration reduces revenue, contribution, and advertiser scale.
- Whether State Farm and Resolution Media maintain their 2015 spending levels, given their material revenue concentration.
- Operating cash flow excluding asset-sale proceeds and whether ongoing operations can support product development, sales expansion, and capital expenditures.
- The availability and covenant compliance of the $30 million revolving facility when it matures in April 2017.
- Potential goodwill impairment indicators, particularly given the $63.3 million Call-driven goodwill balance and subsequent stock-price pressure.
- The outcome and possible cost of the securities class action and any indemnification obligations.
- Whether the company resumes dividends or continues share repurchases, since management did not expect further dividends in the foreseeable future.