Marchex, Inc. Form 10-Q Summary
Business context and reporting period
Marchex is a mobile and call advertising company providing pay-for-call, call tracking and analytics, local leads, pay-per-click and cost-per-action advertising through partner and proprietary web traffic sources. This unaudited filing covers the three and nine months ended September 30, 2012, with comparisons to the corresponding 2011 periods.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $34.8 million | $39.9 million | $104.3 million | $107.7 million |
| Operating income (loss) | $(0.5) million | $2.2 million | $(0.0) million | $4.0 million |
| Net income (loss) | $(0.5) million | $1.3 million | $(0.9) million | $2.0 million |
| Net loss applicable to common stockholders | $(0.7) million | $1.2 million | $(1.1) million | $1.8 million |
| Diluted EPS | $(0.02) | $0.03 | $(0.03) | $0.05 |
| Operating cash flow | Not separately provided | Not separately provided | $15.6 million | $13.1 million |
Q3 revenue declined 13% year over year, while nine-month revenue declined 3%. Partner and other revenue was $32.8 million in Q3 and $95.3 million for nine months; proprietary website traffic revenue was $2.0 million and $9.0 million, respectively. Q3 service costs were 59% of revenue versus 55% in the prior year; total operating expenses were 103% of revenue versus 100%.
- Q3 sales and marketing expense declined 39% to $2.8 million, while product development declined 10% to $5.5 million and general and administrative expense declined 2% to $5.7 million.
- Stock-based compensation was $3.7 million in Q3 and $12.4 million for nine months, compared with $4.0 million and $11.4 million, respectively, in 2011.
- Gain on sales and disposals of intangible assets was $0.7 million in Q3 and $5.4 million for nine months, down from $2.5 million and $7.1 million in the comparable periods.
- Cash and cash equivalents were $35.5 million at September 30, 2012, compared with $37.4 million at December 31, 2011. Total assets were $206.8 million and total liabilities were $41.1 million.
- The company had no borrowings under its $30 million senior secured revolving credit facility and reported $30 million of availability at September 30, 2012. The facility matures April 1, 2014.
Material changes versus the prior comparable period
- Revenue pressure was concentrated in pay-per-click services and proprietary website traffic. Q3 pay-per-click revenue decreased approximately $2.9 million, while proprietary website traffic revenue decreased approximately $3.0 million.
- Nine-month partner and other revenue increased $3.4 million, partly reflecting the April 2011 Jingle acquisition, but this was more than offset by a $6.8 million decline in proprietary website traffic revenue and a $5.9 million decline in pay-per-click revenue.
- The company moved from net income to net loss in both Q3 and the first nine months, primarily because of lower revenue and lower gains on intangible-asset sales. Lower operating expenses and income tax expense partially offset the decline.
- Operating cash flow improved by $2.5 million to $15.6 million, supported by non-cash expenses, stock-based compensation and working-capital changes.
- Financing cash outflows increased to $20.6 million, primarily because of a $16.5 million cash payment on the first deferred Jingle acquisition payment, $2.8 million of dividends and $1.6 million of share repurchases.
- The company paid approximately $17.9 million in cash in October 2012 for the final deferred Jingle acquisition payment, reducing liquidity after the reporting date.
Guidance, outlook, risks and unusual items
- Management stated that existing cash, credit availability and operating cash flow should fund operations for at least twelve months, but additional financing could be required for acquisitions, separation activities, long-term obligations or other needs.
- On November 1, 2012, the board authorized pursuit of a proposed tax-free separation into Marchex, focused on mobile and call advertising, and Archeo, focused on domains and advertising marketplaces. Management expected completion by the end of the third quarter of 2013, subject to board approval, regulatory approvals, favorable tax rulings or opinions, further diligence and SEC filings.
- The proposed separation is expected to create additional professional, governance, reporting and other public-company costs and may affect the realizability of deferred tax assets. Separation costs were $296,000 in Q3 2012.
- YP was the largest reseller partner and contributed 26% of Q3 revenue and 27% of nine-month revenue. YP accounts receivable was $8.2 million, and the company disclosed that the five largest customers represented approximately 50% of nine-month revenue.
- Management noted that AT&T’s sale of a majority interest in YP Holdings could alter the commercial relationship and materially reduce revenue.
- Hurricane Sandy caused reduced call volume and telecommunications disruption in late October 2012. Management expected a short-term, non-recurring effect on fourth-quarter 2012 results but could not quantify the impact.
- Goodwill was $82.6 million and net deferred tax assets were $48.1 million at September 30, 2012. The company identified potential impairment and valuation-allowance risk if operating results, cash-flow projections or stock price deteriorate.
- The quarterly dividend was increased from $0.02 to $0.035 per share, implying an annual rate of $0.14 per share, or approximately $5.3 million, subject to capital availability. Future dividends are not assured.
- Total minimum contractual obligations were $35.9 million, including $12.5 million of operating leases and deferred acquisition obligations. Legal proceedings were not considered material, although indemnification exposure could be material in the future.
Important facts for investors to verify
- Whether the proposed Marchex-Archeo separation receives required approvals, tax opinions and SEC effectiveness, and its final allocation of assets, liabilities, costs and dividends.
- The effect of the YP ownership change on contract terms, revenue, receivables and customer concentration.
- The sustainability of operating cash flow after the $17.9 million October Jingle payment, ongoing dividends, repurchases and separation costs.
- Whether declining pay-per-click and proprietary website traffic revenue stabilizes or continues to pressure consolidated revenue and margins.
- Potential goodwill impairment or deferred tax asset valuation allowances, particularly given the accumulated deficit of $138.6 million and the company’s disclosed stock-price and forecast sensitivities.
- The impact of Hurricane Sandy and normal seasonal weakness on fourth-quarter 2012 call volume and advertising demand.