Marchex, Inc. 2016 Q3 Form 10-Q Summary
Business Context and Reporting Period
Marchex provides mobile advertising analytics, call analytics, pay-for-call advertising, call marketplace services, and local-leads technology for businesses that rely on consumer phone calls. The filing covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. The company primarily operates in its Call-driven segment following the sale of its remaining Archeo operations in December 2015.
Financial Performance and Position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $30.7 million | $36.9 million | $101.1 million | $108.1 million |
| Service costs | $18.5 million | $20.0 million | $61.0 million | $59.2 million |
| Service-cost margin | 40% | 46% | 40% | 45% |
| Total operating expenses | $36.6 million | $36.8 million | $116.0 million | $109.9 million |
| Operating income (loss) | $(5.8) million | $0.01 million | $(78.2) million | $(1.8) million |
| Net income (loss) | $(5.9) million | $0.01 million | $(78.3) million | $25.5 million |
| Basic and diluted loss per share | $(0.14) | $0.00 | $(1.88) | $0.62 |
- Q3 operating margin was approximately negative 19%; nine-month operating margin was approximately negative 77%, primarily because of the $63.3 million goodwill impairment charge recorded in Q2 2016.
- Q3 2016 included approximately $1.6 million of employee separation and facility-termination costs.
- Stock-based compensation was $1.8 million in Q3 and $7.2 million for the nine months, compared with $2.4 million and $7.8 million, respectively, in the prior-year periods.
- Cash and cash equivalents were $105.3 million at September 30, 2016, compared with $109.2 million at December 31, 2015. Accounts receivable were $21.6 million.
- Net cash used in operating activities was $2.9 million for the nine months, compared with $12.0 million provided in the prior-year period. Capital expenditures were $0.6 million.
- The company had no borrowings under its $30 million senior secured revolving credit facility. The facility matures April 1, 2017 and is secured by substantially all company assets.
- Total contractual obligations were $9.6 million, including $3.5 million of facility leases and $6.1 million of other contractual obligations. The company stated that existing resources and operating cash flow should fund operations for at least twelve months, but additional financing could be required for acquisitions or longer-term needs.
Material Changes Versus the Prior Comparable Period
- Revenue declined 17% in Q3 and 6% for the nine months, primarily because of lower Call-driven revenue, reduced advertiser budgets, fewer YP small-business accounts, and the absence of Archeo revenue in 2016.
- Service costs declined in dollars in Q3 but increased for the nine-month period; service costs rose to 60% of revenue from 54% in Q3 and from 55% to 60% for the nine months, largely due to higher distribution-partner payments and an unfavorable revenue mix.
- Sales and marketing expense increased 30% in Q3 and 40% for the nine months, reflecting higher personnel, sales-force, travel, and separation-related costs.
- General and administrative expense increased 13% in Q3 and 6% for the nine months. Product development expense declined 12% in Q3 and 7% for the nine months.
- Goodwill declined from $63.3 million at December 31, 2015 to zero after the company recorded a $63.3 million impairment charge in Q2 2016. Management attributed the impairment principally to a sustained decline in share price and market capitalization, lower projected revenue growth, and reduced profitability expectations.
- The prior-year nine-month results included $27.3 million of discontinued-operations income, including a $22.2 million gain on the sale of Archeo domain operations. No comparable discontinued-operations benefit was recorded in 2016.
- The company discontinued common-stock dividends after Q2 2015 and does not expect to pay dividends in the foreseeable future.
Guidance, Outlook, Risks, and Unusual Items
- Management expects revenue to remain lower in the near and intermediate term, citing fewer local-leads accounts, lower demand for call advertising, and expected seasonal softness in late Q4.
- YP represented 22% of Q3 revenue and 23% of nine-month revenue. The YP arrangements were scheduled to expire December 31, 2016; management warned that YP could migrate accounts to itself or another provider and that any renewal could be on less favorable terms.
- State Farm represented 22% of Q3 revenue, 24% of nine-month revenue, and 20% of accounts receivable at September 30, 2016. The five largest customers represented approximately 61% of nine-month revenue, creating significant customer-concentration risk.
- On October 3, 2016, Peter Christothoulou resigned as chief executive officer, and Clark Kokich resigned as executive chairman and a director. An Interim Office of the CEO was established while the company searched for a permanent CEO.
- Management expects service costs as a percentage of revenue to remain stable to modestly higher in the near term, while sales and marketing and product development spending are expected to be stable to modestly lower in the near and intermediate term.
- The company carries a full valuation allowance against $43.4 million of deferred tax assets and reported approximately $1.0 million of uncertain tax positions. Federal net operating loss carryforwards were approximately $52.5 million.
- A shareholder securities class action filed in 2015 was voluntarily dismissed without prejudice in April 2016. Management reported no pending legal proceedings expected to have a material adverse effect, while noting ordinary-course indemnification and litigation risks.
- Key ongoing risks include continued losses, customer and agency concentration, dependence on distribution partners, declining advertising budgets, seasonality, competition, technology and telecommunications disruptions, data privacy and regulatory exposure, intellectual-property claims, and the need for potential additional financing.
Important Facts for Investors to Verify
- Whether YP agreements were renewed after December 31, 2016 and on what economic terms.
- Whether revenue declines and higher distribution costs continued in subsequent quarters, particularly in the Call-driven business.
- Whether the company generated positive operating cash flow after September 30, 2016 and maintained sufficient liquidity without drawing on its credit facility.
- Whether customer concentration, especially State Farm and YP, changed materially or affected collections and revenue stability.
- Whether the CEO search and interim leadership structure resulted in additional executive turnover or changes in strategy.
- Whether the goodwill impairment reflected a continuing decline in expected operating performance and whether further impairments or restructuring charges occurred.
- Whether the $43.4 million deferred tax asset valuation allowance changed as profitability expectations evolved.