Marchex, Inc. — Form 10-Q Summary
Business context and reporting period
Marchex is a mobile advertising technology company focused on delivering customer calls to businesses and analyzing those calls. Its Archeo division provides performance-based online advertising and domain-name services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
In July 2013, Marchex sold certain pay-per-click advertising assets, which are presented as discontinued operations. In September 2013, the company discontinued plans to separate Archeo and will continue operating it as a division while evaluating strategic alternatives. Marchex also launched its Domains Marketplace on September 10, 2013.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $40.6 million | $33.7 million | $112.9 million | $100.4 million |
| Income from operations | $1.0 million | $(0.4) million | $1.2 million | $0.1 million |
| Net income from continuing operations | $0.6 million | $(0.5) million | $0.4 million | $(0.8) million |
| Net income | $1.5 million | $(0.5) million | $1.2 million | $(0.9) million |
| Net income per share | $0.04 | $(0.02) | $0.03 | $(0.03) |
| Operating cash flow | Not separately provided | Not separately provided | $7.5 million | $15.6 million |
Q3 2013 operating margin was approximately 2.5%, versus negative 1.3% in Q3 2012. Nine-month operating margin was approximately 1.1%, versus approximately 0.1% in the prior-year period. Q3 2013 net margin was approximately 3.6%, compared with negative 1.6% in Q3 2012.
- Q3 revenue increased 20% year over year, driven primarily by call advertising and additional small-business accounts using call analytics. Nine-month revenue increased 13%.
- Partner and other revenue increased to $37.4 million in Q3 and $105.7 million for the first nine months. Proprietary website and other revenue was $3.1 million in Q3 and $7.1 million year to date.
- Service costs rose to 62% of Q3 revenue from 59% and to 60% of nine-month revenue from 57%, primarily because of higher distribution-partner payments.
- Stock-based compensation declined to $2.4 million in Q3 and $6.9 million year to date, compared with $3.7 million and $12.4 million, respectively, in the prior-year periods.
- Q3 discontinued operations included a $0.9 million after-tax gain on the sale of the pay-per-click assets. The nine-month after-tax gain was also $0.9 million, partly offset by operating losses from the divested business.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $25.2 million at September 30, 2013, up from $15.9 million at December 31, 2012.
- Accounts receivable increased to $30.8 million from $26.0 million, while total assets increased to $159.9 million from $149.1 million.
- Total liabilities were $28.0 million, including $25.8 million of current liabilities. Stockholders’ equity was $131.9 million.
- Marchex had no borrowings under its $30 million senior secured revolving credit facility and reported $30 million of availability. The facility matures April 1, 2014 and is secured by substantially all company assets.
- Contractual obligations totaled $14.8 million, including $10.3 million of operating leases and $4.5 million of other contractual obligations.
- 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, long-term obligations or other strategic needs.
Material changes versus the prior comparable period
- Call-driven revenue increased to $35.7 million in Q3 and $100.7 million for nine months, from $29.3 million and $83.4 million, respectively.
- Call-driven segment profit declined 23% in Q3 to $1.7 million because distribution-partner payments increased as a percentage of revenue; nine-month segment profit increased 17% to $4.5 million.
- Archeo revenue declined for the nine-month period to $12.2 million from $16.9 million, and nine-month segment profit declined 44% to $7.0 million. Q3 Archeo segment profit increased to $2.7 million, aided by domain sales and gains on intangible-asset sales.
- Gain on sales and disposals of intangible assets declined to $3.7 million for nine months from $5.4 million, partly because domain-name sales began being recognized as revenue after the Domains Marketplace launch.
- Amortization of acquired intangible assets declined 32% for nine months to $2.5 million as certain Jingle-related intangibles became fully amortized.
- Operating cash flow declined $8.1 million year over year, primarily because of lower non-cash adjustments and a $6.3 million use of cash from accounts receivable changes.
- Revenue concentration remained significant: YP represented 25% of nine-month revenue and ADT represented 14%; the five largest customers represented approximately 61% of revenue. YP and ADT represented 32% and 17% of accounts receivable, respectively.
Outlook, commentary, risks and unusual items
- Management expected near-term sales and marketing spending to remain relatively stable to modestly higher, product development spending to remain relatively stable, and general and administrative expenses to remain stable or modestly decrease.
- Management expected distribution-partner payments and service costs to increase as the company expands its partner-based business and network infrastructure. Profitability may be pressured if partner terms become less favorable.
- Management expected domain-name revenue to be higher after the third quarter because sales through the Domains Marketplace are recognized as revenue rather than as gains on intangible-asset sales.
- The company expects a $0.02 per-share quarterly dividend in the first quarter of 2014, subject to cash availability, but stated that future dividends are not assured.
- Goodwill was $65.7 million at September 30, 2013. The company recorded a $16.7 million Archeo goodwill impairment in the fourth quarter of 2012 and warned that further impairment could result from weaker performance, cash flows, market conditions or stock-price declines.
- Net deferred tax assets were $27.6 million, offset by a $22.8 million valuation allowance. Changes in expected taxable income could produce additional valuation allowances and tax expense.
- Material risks include dependence on distribution partners and major customers, advertising-budget volatility, seasonality, competition from larger technology and search companies, traffic quality and click fraud, data security, telecommunications and privacy regulation, intellectual-property claims, customer credit risk, and the ability to retain key personnel.
- The company reported no material legal proceedings and stated that no pending claims were expected to have a material adverse effect, although indemnification obligations could potentially be material.
- Disclosure controls and procedures were considered effective, and no material change in internal control over financial reporting was reported during the quarter.
Investor verification checklist
- Verify the sustainability of revenue growth from call advertising and the impact of higher distribution-partner payments on gross and operating margins.
- Monitor YP, ADT and other large-customer spending, contract terms, receivable concentrations and collection trends.
- Assess whether the Domains Marketplace can generate recurring revenue and how domain sales affect reported revenue versus gains on asset sales.
- Confirm the April 1, 2014 maturity, covenant terms and renewal or refinancing status of the $30 million credit facility.
- Evaluate the recoverability of goodwill and deferred tax assets, including the potential for future impairment charges or valuation-allowance increases.
- Distinguish continuing operating performance from the $929,000 after-tax gain on the divestiture of discontinued operations.
- Track the future dividend policy, acquisition plans, capital expenditures and any need for additional financing.