Marchex, Inc. — Q3 2011 Form 10-Q Summary
Business context and reporting period
Marchex is a call advertising and small-business marketing company providing pay-for-call, pay-per-click, call tracking, analytics, search marketing, and publishing-network services to tens of thousands of advertisers. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
On April 7, 2011, Marchex acquired Jingle Networks, a provider of mobile voice-search performance advertising and technology solutions in North America.
Financial performance and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $39.9 million, up 65% from $24.2 million | $107.7 million, up 55% from $69.6 million |
| Net income (loss) | $1.3 million, versus a $0.5 million loss | $2.0 million, versus a $3.7 million loss |
| Net income applicable to common stockholders | $1.2 million, versus a $0.5 million loss | $1.8 million, versus a $3.8 million loss |
| Diluted earnings per share | $0.03, versus a $0.02 loss | $0.05, versus a $0.12 loss |
| Income from operations | $2.2 million, versus a $0.5 million loss | $4.0 million, versus a $4.7 million loss |
| Operating margin | 6%, versus negative 2% | 4%, versus negative 7% |
| Net cash provided by operating activities | Not separately reported | $13.1 million, versus $3.5 million |
Service costs were $21.8 million in the quarter and $60.2 million year to date, representing 55% and 56% of revenue, respectively, compared with 60% and 59% in the prior-year periods. Total operating expenses were $40.1 million in the quarter and $110.8 million year to date. Gains on sales and disposals of intangible assets contributed $2.5 million in the quarter and $7.1 million year to date.
Stock-based compensation was $4.0 million in the quarter and $11.4 million year to date. Amortization of acquisition-related intangible assets was $1.7 million in the quarter and $3.8 million year to date. The filing does not present EBITDA or adjusted EBITDA.
Liquidity, capital resources, and debt
- Cash and cash equivalents were $35.5 million at September 30, 2011, compared with $37.3 million at December 31, 2010.
- Accounts receivable increased to $29.3 million from $20.2 million, reflecting growth and payment terms with large reseller partners.
- Total liabilities were $62.1 million, including $35.0 million of deferred acquisition payments related to Jingle: $17.4 million current and $17.6 million non-current.
- Marchex had no borrowings under its senior secured revolving credit facility and reported $30 million of availability as of September 30, 2011. The facility matures April 1, 2014.
- Year-to-date investing cash outflow was $11.3 million, including $15.8 million paid for Jingle, partly offset by $7.2 million of proceeds from intangible-asset sales.
- Year-to-date financing cash outflow was $3.6 million, including $3.2 million for repurchases of 424,000 Class B shares and $2.2 million of dividends.
- Total contractual obligations were approximately $53.0 million, including $35.6 million of deferred Jingle consideration and $14.6 million of facility leases.
- Management stated that existing cash, credit availability, and operating cash flow should fund operations for at least twelve months, but additional financing may be needed for acquisitions, long-term obligations, or other strategic needs.
Material changes versus the prior comparable period
- Revenue growth was driven principally by partner and other revenue sources, which rose to $91.9 million year to date from $49.9 million, and by the Jingle acquisition. Proprietary website traffic revenue declined to $15.8 million from $19.7 million.
- AT&T accounted for 31% of third-quarter revenue and 30% of nine-month revenue. The five largest customers represented 51% of nine-month revenue; AT&T represented 42% of accounts receivable at September 30, 2011.
- The Jingle acquisition added approximately $58.9 million of preliminary purchase consideration, including $15.8 million of cash, $7.6 million of Class B stock, and $34.7 million of deferred consideration. It added $50.0 million of goodwill and approximately $12.0 million of acquired intangible assets.
- Total assets increased to $219.3 million from $159.7 million, primarily because of the Jingle acquisition. Goodwill increased to $85.3 million from $35.3 million.
- Revenue growth exceeded expense growth, reducing service costs, sales and marketing, product development, and general and administrative expenses as percentages of revenue. However, absolute expenses increased due partly to Jingle-related personnel, infrastructure, and operating costs.
- The company’s accumulated deficit was approximately $138.8 million at September 30, 2011, despite the return to profitability in the quarter and year to date.
Guidance, outlook, risks, and unusual items
- Management expected fourth-quarter AT&T revenue to be higher than in the fourth quarter of 2010 because of additional advertiser accounts. No formal revenue or earnings guidance was provided.
- Management expected near-term product-development and general-and-administrative spending to be relatively stable, fewer outside marketing programs in the fourth quarter, and higher infrastructure and development spending over the longer term.
- Results are subject to seasonality, with the second and third quarters generally experiencing lower mobile and Internet usage than the first and fourth quarters.
- Future service costs may rise as a percentage of revenue if partner-network revenue becomes a larger portion of the business or distribution-partner terms become less favorable.
- Jingle generated approximately $5.8 million of revenue and an estimated $2.2 million pretax loss in the third quarter from the acquisition date; year-to-date figures were $11.4 million of revenue and a $3.6 million pretax loss. Purchase-price allocation remained preliminary.
- No goodwill or intangible-asset impairment was identified in 2011, but the substantial goodwill balance is sensitive to operating performance, forecasts, cash flows, economic conditions, and the company’s stock price.
- The company recognized $1.8 million of income-tax expense year to date and carried approximately $47.1 million of net deferred tax assets, subject to realization assumptions. A $4.3 million valuation allowance covered certain state and foreign tax attributes.
- Risks include dependence on AT&T and other large customers, distribution-partner concentration, advertiser credit and collection risk, competition from major search and advertising platforms, traffic quality and click fraud, technology and telecommunications outages, intellectual-property litigation, regulatory changes, acquisition integration, and potential future financing needs.
- The company reported no material pending legal proceedings and stated that its disclosure controls and procedures were effective as of the evaluation date.
Most important facts for investors to verify
- Whether Jingle can reduce its reported pretax losses and generate sustainable operating cash flow.
- The timing and settlement method—cash, Class B stock, or a combination—for the $35.6 million of deferred Jingle consideration, including the 5% increase if paid in shares.
- AT&T’s continuing contribution to revenue and receivables, and the renewal and pricing terms of the AT&T relationship through June 30, 2015.
- Collectability of the $29.3 million accounts-receivable balance, particularly the $12.3 million owed by AT&T and the concentration among the largest customers.
- Whether cash generation can support dividends, share repurchases, lease obligations, acquisition payments, and planned capital expenditures without additional financing.
- The recoverability of $85.3 million of goodwill and $9.8 million of acquisition-related intangible assets, along with the realization of approximately $47.1 million of net deferred tax assets.
- The filing’s stated risks regarding distribution-partner renewals, advertising demand, seasonality, traffic quality, telecommunications regulation, intellectual property, and acquisition integration.