Marchex, Inc. 2019 Q2 Form 10-Q Summary
Business context and reporting period
Marchex is a call analytics and communications company providing call and text analytics, speech analytics, call monitoring, pay-for-call advertising, local leads, and related marketing services. The filing covers the quarter and six months ended June 30, 2019, compared with the corresponding 2018 periods. The November 2018 acquisitions of Telmetrics and Callcap contributed materially to 2019 results.
Key financial metrics
| Metric | Q2 2018 | Q2 2019 | Six months 2018 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $20.2 million | $26.3 million | $42.1 million | $52.7 million |
| Loss from operations | $(0.9) million | $(1.3) million | $(2.1) million | $(2.9) million |
| Net loss | $(0.7) million | $(1.1) million | $(1.6) million | $(2.4) million |
| Basic and diluted loss per share | $(0.02) | $(0.02) | $(0.04) | $(0.05) |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $1.7 million | $5.0 million |
- Q2 revenue increased 30%; six-month revenue increased 25%.
- Operating expense was $27.6 million in Q2 and $55.6 million for the six months, equal to approximately 105% and 106% of revenue, respectively. Operating margins were approximately negative 5% in Q2 and negative 6% for the six months.
- Service costs were 53% of Q2 revenue and 54% of six-month revenue, compared with 56% and 57% in the prior-year periods.
- Performance-based advertising revenue was $25.3 million in Q2 and $50.4 million for the six months. Local leads revenue was $1.1 million and $2.3 million, respectively.
- Cash and cash equivalents were $51.0 million at June 30, 2019, compared with $45.2 million at December 31, 2018.
- Accounts receivable was $16.5 million at June 30, 2019. Total assets were $122.8 million and stockholders’ equity was $95.7 million.
- The filing reports no conventional borrowings. Lease liabilities totaled $7.9 million, including $1.5 million current and $6.4 million non-current.
- Operating cash flow of $5.0 million exceeded net loss primarily because of $4.1 million of depreciation and amortization, stock-based compensation, acquisition-related adjustments, and working-capital inflows.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by the Telmetrics and Callcap acquisitions and increased pay-for-call revenue from reseller partners, including Thryv. Growth was partially offset by fewer local-leads accounts and lower local-leads revenue.
- Operating losses widened because 2019 included $3.1 million of amortization for acquisition-related intangible assets, including $1.6 million in Q2, while the comparable 2018 periods had none.
- Service costs increased in dollars but declined as a percentage of revenue, reflecting greater contribution from call analytics and lower relative contribution from pay-for-call services.
- Sales and marketing, product development, and general and administrative expenses increased in dollars, primarily due to personnel, facility, and other costs associated with the acquisitions.
- Acquisition-related costs were a benefit of $0.3 million for the six months and $0.5 million for Q2, primarily reflecting a reduction in the estimated Telmetrics contingent consideration liability.
- Cash from operations improved from $1.7 million to $5.0 million, while investing cash use declined from $1.6 million to $0.9 million. The 2018 period included a $21.9 million special dividend and approximately $5.7 million of share repurchases; there were no comparable dividend payments or program repurchases in 2019.
- The company adopted ASC 842 on January 1, 2019, recognizing approximately $7.4 million of right-of-use assets and $8.7 million of operating lease liabilities at adoption.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects near-term revenue to decline from recent quarters because of fewer small-business accounts on the local leads platform, seasonal reductions in call volume, and reduced or changing customer budgets.
- Thryv represented 26% of total revenue for both Q2 and the six months ended June 30, 2019. Certain Thryv agreements expire December 31, 2019, and permit account migration or termination on notice. Management expects Thryv-related revenue and contribution to decline.
- State Farm represented 14% of six-month revenue and 26% of accounts receivable through agency relationships. Management expects related campaign spending to be lower in the near to intermediate term.
- The five largest customers represented approximately 50% of six-month revenue. Customer concentration, short-term campaigns, and reseller or agency credit exposure create material revenue and collection risks.
- The company committed $2.5 million through the first quarter of 2020 for a strategic technology initiative and had approximately $12.0 million of current and long-term contractual obligations, including $9.4 million of facility lease payments.
- Telmetrics earnout obligations may require up to $3.0 million in cash; the recorded fair value was approximately $1.1 million at June 30, 2019.
- The company has an accumulated deficit of $258.6 million and has historically incurred losses. Management believes existing resources can fund operations and strategic investments for at least twelve months, but additional financing could be needed for acquisitions, long-term obligations, or expanded operations.
- A full valuation allowance has been recorded against deferred tax assets. Uncertain tax positions totaled approximately $1.2 million.
- No material legal proceedings were reported, and management identified no goodwill or intangible-asset impairment through June 30, 2019. The filing highlights risks related to customer concentration, distribution partners, competition, privacy and telecommunications regulation, cybersecurity, intellectual property, seasonality, and acquisition integration.
- Disclosure controls and procedures were assessed as effective, with no material change in internal control over financial reporting during the six months.
Important facts for investors to verify
- Whether Thryv renews, reduces, or migrates accounts under agreements expiring December 31, 2019.
- The pace and magnitude of the expected reduction in State Farm campaign spending.
- Revenue retention, margins, and cash contribution from the Telmetrics and Callcap acquisitions after including recurring intangible amortization.
- Progress toward operating profitability given continued losses and planned technology investment.
- Accounts receivable collectability and exposure to concentrated customers, agencies, and reseller partners.
- Future cash requirements for the Telmetrics earnout, Callcap share issuances, leases, acquisitions, and strategic initiatives.
- Potential impairment of acquisition-related goodwill and intangible assets if operating performance, cash flows, or the stock price deteriorate.