Marchex, Inc. 2018 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Marchex is a call analytics and performance-based advertising company providing call tracking, speech and omnichannel analytics, pay-for-call advertising, and local lead-generation services. The filing covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. The financial statements are unaudited.
The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. The adoption resulted in a $189,000 reduction to accumulated deficit, and management stated that the effect on first-quarter 2018 earnings and the March 31, 2018 balance sheet was not significant.
Financial Performance and Liquidity
| Metric | Q1 2017 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $24.4 million | $21.9 million | Down 10% |
| Service costs | $13.6 million | $12.8 million | Down 6% |
| Total operating expenses | $27.9 million | $23.1 million | Down 17% |
| Loss from operations | $(3.5) million | $(1.2) million | Improved |
| Net loss | $(3.5) million | $(0.9) million | Improved |
| Basic and diluted loss per share | $(0.08) | $(0.02) | Improved |
| Operating cash flow | $(0.9) million | $3.0 million | Improved |
- Performance-based advertising revenue was $19.9 million and local leads revenue was $2.0 million in Q1 2018.
- Operating expenses were 105% of revenue versus 114% in the prior-year quarter. Service costs increased to 59% of revenue from 56%; sales and marketing declined to 16% from 20%, product development to 17% from 22%, and general and administrative to 13% from 16%.
- Cash and cash equivalents were $84.6 million at March 31, 2018, down from $104.2 million at December 31, 2017, primarily because of a $21.9 million special dividend paid during the quarter.
- Accounts receivable were $14.9 million, and total liabilities were $14.2 million. The filing does not disclose outstanding borrowings or a material debt balance.
- Total contractual obligations were $14.8 million, including $11.1 million of facility lease commitments and $3.8 million of other contractual obligations. Uncertain tax contingencies of $1.1 million were excluded from this schedule.
- Management stated that available resources are expected to fund operations for at least twelve months and potential strategic initiatives, including acquisitions, although additional financing could be required for acquisitions or longer-term needs.
Material Changes Versus the Prior Comparable Period
- Revenue declined by $2.5 million, primarily because of fewer accounts and lower performance-based advertising and platform revenue from reseller partners, including DexYP, and lower pay-for-call advertiser budgets.
- Operating loss narrowed by $2.4 million and net loss narrowed by $2.6 million, principally because of lower personnel and other operating costs. The prior-year period included approximately $700,000 of employee separation costs, including $307,000 in sales and marketing and $358,000 in product development.
- Stock-based compensation declined from $1.4 million to $1.0 million.
- Operating cash flow improved from an outflow of $878,000 to an inflow of $3.0 million, aided by working-capital changes and the lower net loss.
- Investing cash outflows increased to $769,000 from $6,000, primarily for property and equipment purchases.
- Financing cash outflows were $21.9 million because of the special dividend; no Class B shares were repurchased during either comparable period.
Guidance, Outlook, Risks, and Unusual Items
- No formal financial guidance was provided. Management expects revenue to be lower in the near term, with fewer small-business accounts on the local leads platform and reduced demand for call advertising.
- The primary YP local-leads arrangement expires December 31, 2018. YP may migrate accounts to itself or another provider and has termination rights with four months’ notice. DexYP represented 18% of Q1 2018 revenue, down from 22% in Q1 2017.
- State Farm represented 27% of Q1 2018 revenue and 39% of accounts receivable through arrangements involving Resolution Media and OMD Digital. Management expects State Farm campaign spending to be lower in the near to intermediate term.
- The five largest customers represented approximately 53% of Q1 2018 revenue. Advertising agency and reseller arrangements may be short term, cancellable, or subject to reduced budgets, creating significant concentration and collection risk.
- Management expects service costs as a percentage of revenue to be stable to modestly higher, while sales and marketing, product development, and general and administrative expenses are expected to be relatively stable in the near and intermediate term.
- The company paid a $0.50-per-share special dividend totaling $21.9 million. There is no assurance that dividends will continue.
- In April 2018, the company issued a $575,000 letter of credit for its Seattle office lease and pledged a $575,000 certificate of deposit as collateral.
- The company has an accumulated deficit of $254.4 million, continues to report net losses, and maintains a full valuation allowance against deferred tax assets. Uncertain tax positions totaled approximately $1.1 million.
- Key risks include dependence on major advertisers, reseller and distribution partners; declining local-leads accounts; competition; seasonal advertising demand; customer credit and receivable concentration; telecommunications, privacy, call-recording and data-security regulation; cybersecurity and service-provider disruptions; intellectual-property claims; and the need to retain key personnel.
- Management reported no material legal proceedings and concluded that disclosure controls and procedures were effective as of March 31, 2018.
Important Facts for Investors to Verify
- Whether YP/DexYP renews or migrates local-leads accounts after December 31, 2018 and the resulting effect on revenue and contribution.
- Whether State Farm campaign reductions occur as expected and how quickly the company can diversify its customer base.
- Revenue concentration, accounts-receivable aging, collection performance, and exposure to agency payment terms of 60 to 120 days or longer.
- Cash usage after the special dividend, operating cash-flow durability, and whether acquisitions or losses require additional debt or equity financing.
- Progress toward profitability as service costs remain elevated and revenue declines.
- Future dividend policy and any activity under the authorization to repurchase up to 3 million Class B shares; 1,319,128 shares remained available under the plan at quarter-end.