Marchex, Inc. 2019 Q3 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, and local lead-generation services. The filing covers the three and nine months ended September 30, 2019, with comparative periods ended September 30, 2018. The statements are unaudited. Telmetrics and Callcap, acquired in November 2018, contributed materially to 2019 results.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Revenue | $24.8 million | $20.0 million | +24% |
| Loss from operations | $(1.3) million | $(0.7) million | Higher loss |
| Net loss | $(1.2) million | $(0.5) million | Higher loss |
| Net loss per share | $(0.03) | $(0.01) | Lower |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | — |
| Metric | Nine months 2019 | Nine months 2018 | Change |
|---|---|---|---|
| Revenue | $77.5 million | $62.1 million | +25% |
| Loss from operations | $(4.2) million | $(2.8) million | Higher loss |
| Net loss | $(3.6) million | $(2.0) million | Higher loss |
| Operating cash flow | $6.8 million | $4.1 million | +68% |
| Capital expenditures | $1.5 million | $1.6 million | Lower |
Q3 operating margin was approximately (5.4%), compared with approximately (3.7%) in the prior-year quarter. Nine-month operating margin was approximately (5.4%), compared with approximately (4.5%) in 2018. Q3 net margin was approximately (4.9%), compared with approximately (2.3%).
- Performance-based advertising revenue was $24.8 million in Q3 and $77.5 million for nine months, versus $18.4 million and $56.9 million, respectively, in the comparable 2018 periods.
- Local leads revenue declined to $1.0 million in Q3 and $3.3 million for nine months, versus $1.6 million and $5.2 million, respectively.
- Service costs declined to 51% of revenue in Q3 and 52% for nine months, from 54% and 56%, respectively.
- Product development increased to 21% of Q3 revenue and 19% for nine months, from 19% and 18%, respectively.
- Acquisition-related intangible amortization was $1.6 million in Q3 and $4.7 million for nine months, with no comparable expense in 2018.
- Cash and cash equivalents were $52.5 million at September 30, 2019, compared with $45.2 million at December 31, 2018. Accounts receivable was $14.1 million.
- Total liabilities were $23.7 million, including $7.5 million of operating lease liabilities. The filing does not report funded debt.
- Total contractual obligations were approximately $12.0 million, including $9.0 million of facility lease payments and $3.1 million of other contractual commitments.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by the Telmetrics and Callcap acquisitions and, to a lesser extent, higher pay-for-call revenue from reseller partners.
- Net losses increased because of acquisition-related intangible amortization and higher operating expenses, partially offset by higher revenue, improved service-cost leverage, and a $0.5 million reduction in estimated Telmetrics contingent consideration during Q3.
- Sales and marketing, product development, and general and administrative expenses increased in dollars, largely reflecting the acquired businesses and continued product investment.
- Operating cash flow improved despite higher net losses, aided by non-cash depreciation and amortization, stock-based compensation, and working-capital changes.
- The company adopted ASC 842 on January 1, 2019, recognizing right-of-use assets and lease liabilities. At September 30, 2019, the right-of-use asset was $6.1 million and lease liabilities totaled $7.5 million.
- During the nine months, employees exercised options and other equity awards generated $1.8 million of financing cash flow. No repurchases were made under the authorized repurchase program.
Guidance, outlook, risks, and unusual items
- Management expects near-term revenue to be similar to or modestly higher than recent quarters, supported by certain large advertiser budgets and trials of new features.
- Management expects lower revenue from the local leads platform and fewer small-business accounts, particularly as Thryv accounts migrate or wind down under agreements expiring December 31, 2019.
- Management expects seasonal declines in call volume and advertiser demand in the latter part of the fourth quarter. Service costs as a percentage of revenue are expected to be modestly higher in the near and intermediate term.
- Marchex launched Sales Edge Enterprise in 2019 and expected Sales Edge Local to be available by year-end 2019. The company committed $2.5 million to a strategic technology initiative through the first quarter of 2020.
- Thryv represented 29% of Q3 revenue and 27% of nine-month revenue. The five largest customers represented approximately 48% of nine-month revenue. State Farm represented 12% of nine-month revenue.
- The Telmetrics earnout can require up to $3.0 million in cash; its estimated fair value was $631,000 at September 30, 2019.
- The company had a $100% valuation allowance against deferred tax assets and reported $1.2 million of uncertain tax positions.
- Management believes existing resources will fund operations and strategic initiatives for at least twelve months, but additional financing may be needed for acquisitions, long-term obligations, or sustained losses.
- Key risks include customer and reseller concentration, Thryv contract migration or nonrenewal, dependence on distribution partners, advertising-budget volatility, seasonality, competition, cybersecurity and privacy regulation, telecommunications and call-recording regulation, intellectual-property claims, acquisition integration, goodwill or intangible-asset impairment, and continued operating losses.
- Management reported no material legal proceedings, effective disclosure controls, and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether Thryv renews, terminates, or migrates accounts after the December 31, 2019 contract expiration and the resulting revenue and margin impact.
- Organic revenue, retention, and profitability excluding the Telmetrics and Callcap acquisitions.
- The sustainability of operating cash flow while the company remains loss-making and continues investing in products and technology.
- Future amortization expense and potential impairment of the $16.0 million of acquired intangible assets and $24.5 million of goodwill.
- The status and eventual payout of the Telmetrics earnout and the remaining share issuance obligations related to Callcap.
- Customer concentration, especially Thryv and State Farm, and the collectability of accounts receivable.
- Whether management achieves the expected Sales Edge product launches, adoption, and return on investment.
- Future financing needs, acquisition activity, dividends, and the company’s ability to reach profitability.