Marchex, Inc. Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended June 30, 2012; filed August 8, 2012. The unaudited statements cover Marchex’s mobile call and online advertising, local leads, pay-per-click, call analytics, and proprietary web-site traffic businesses. Marchex reports as one operating segment, principally in the United States.
Financial Performance and Position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $34.0 million | $38.8 million | $69.5 million | $67.8 million |
| Income from operations | $1.1 million | $1.1 million | $0.5 million | $1.8 million |
| Operating margin | 3.2% | 2.8% | 0.7% | 2.7% |
| Net income (loss) | $0.4 million | $0.1 million | $(0.3) million | $0.7 million |
| Net income (loss) applicable to common stockholders | $0.3 million | $0.1 million | $(0.5) million | $0.6 million |
| Diluted EPS | $0.01 | $0.00 | $(0.01) | $0.02 |
- Revenue mix: Partner and other revenue was $31.1 million in Q2 and $62.5 million year to date; proprietary web-site traffic revenue was $2.9 million in Q2 and $7.0 million year to date.
- Expenses: Q2 service costs were $19.2 million, sales and marketing $4.6 million, product development $5.8 million, general and administrative $5.5 million, and acquisition-related intangible amortization $1.1 million. Total operating expenses were $36.2 million, or 106% of revenue, partly offset by a $3.3 million gain on intangible-asset sales and disposals.
- Cash flow: Six-month operating cash flow was $11.9 million, compared with $8.2 million in the prior-year period. Investing activities provided $3.2 million, primarily because $4.7 million of intangible-asset sale proceeds exceeded $1.5 million of capital expenditures. Financing activities used $19.0 million, including a $16.5 million payment related to the Jingle acquisition, $1.5 million of dividends, and $1.3 million of share repurchases.
- Liquidity: Cash and cash equivalents were $33.6 million at June 30, 2012, down from $37.4 million at December 31, 2011. Accounts receivable was $26.1 million. The company reported $30.0 million of availability under its senior secured revolving credit facility and no borrowings during the six months.
- Debt and obligations: Current liabilities included $17.9 million of deferred acquisition payments. A final $18.0 million Jingle payment was due on the 18-month anniversary of closing and could be settled in cash, Class B common stock, or a combination. Total contractual obligations were $37.3 million, including $13.0 million of operating leases.
- Balance sheet: Total assets were $207.5 million and stockholders’ equity was $164.2 million at June 30, 2012. Goodwill was $82.6 million, and deferred tax assets were substantial; management reported $48.0 million of net deferred tax assets and a $4.9 million valuation allowance against certain state, city, and foreign tax assets.
Material Changes Versus Prior Comparable Period
- Q2 revenue declined 12%, primarily because pay-per-click revenue fell $2.9 million and proprietary web-site traffic revenue fell $2.5 million. Digital call advertising increased modestly.
- Year-to-date revenue increased 2%, principally from higher digital call advertising revenue, including the contribution from the April 2011 Jingle acquisition, partly offset by a $3.9 million decline in pay-per-click revenue and a $3.8 million decline in proprietary web-site traffic revenue.
- Q2 operating income was broadly stable despite lower revenue because service costs declined 11%, acquisition-related costs were absent, and the gain on intangible-asset sales increased. The operating margin improved modestly to 3.2%.
- Year-to-date operating income declined to $0.5 million from $1.8 million. Higher stock-based compensation, Jingle-related amortization, sales and marketing costs, and non-cash interest accretion offset revenue growth.
- Year-to-date net income applicable to common stockholders shifted from $0.6 million of income to a $0.5 million loss. Stock-based compensation increased to $8.7 million from $7.5 million, while acquisition-related costs changed from $1.5 million of expense to a $0.1 million benefit.
- The company paid approximately $16.9 million in cash in April 2012 for the first anniversary Jingle consideration and repurchased approximately 284,000 Class B shares for $1.3 million during the first six months.
- YP, the company’s largest reseller partner, represented 28% of Q2 and year-to-date revenue and 34% of accounts receivable at June 30, 2012. The filing highlights uncertainty following AT&T’s sale of a majority stake in YP Holdings.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects lower proprietary web-site traffic revenue in the near term because resellers are reducing cost-per-action budgets, particularly for local search and directory sites.
- Service costs may rise as a percentage of revenue if the company increases reliance on distribution partners or renews agreements on less favorable terms. Product development and general and administrative spending were expected to remain relatively stable in the near term, excluding potential volatility in stock-based compensation.
- Management expects the annual dividend to be approximately $0.14 per share, or $5.3 million, subject to capital availability, but states that future dividends are not assured. In August 2012, the board approved an increase in the quarterly dividend from $0.02 to $0.035 per share.
- The company stated that cash, operating cash flow, and available credit were expected to fund operations for at least twelve months. It also noted that additional financing could be required for acquisitions, long-term obligations, and other needs.
- Goodwill of $82.6 million and other acquired intangible assets are subject to impairment risk. The company’s stock price approached or traded below book value during the period, and management stated that a sustained decline or weaker projected earnings and cash flows could require an impairment charge.
- Customer and partner concentration is significant: the five largest customers generated 49% of year-to-date revenue, and amounts owed by YP were $8.9 million. Advertiser and reseller financial distress, delayed payments, reduced budgets, or contract changes could affect liquidity and results.
- Other principal risks include dependence on distribution partners, competition from larger digital advertising platforms, seasonality, economic weakness in advertising spending, traffic quality and click fraud, telecommunications and privacy regulation, intellectual-property claims, technology outages and security breaches, and risks associated with acquisitions.
- The filing reports no material legal proceedings and no known material costs from indemnification provisions, although potential future indemnification payments could be material.
Facts Investors Should Verify
- Whether YP revenue and accounts receivable exposure remain stable following AT&T’s transaction involving YP Holdings.
- The timing and settlement method for the remaining $18.0 million Jingle deferred acquisition payment, including potential Class B share issuance and dilution.
- Whether declining pay-per-click and proprietary web-site traffic revenue continues and whether digital call advertising growth offsets those declines.
- The realizability of the company’s deferred tax assets and the potential for additional valuation allowances or tax expense.
- Potential goodwill or intangible-asset impairment, particularly if operating performance or the stock price weakens.
- Whether operating cash flow remains sufficient to fund dividends, contractual obligations, capital expenditures, and strategic initiatives without additional financing.
- The sustainability of the increased dividend and ongoing share repurchases given the company’s year-to-date net loss applicable to common stockholders and significant contractual obligations.