MARCHEX INC quarterly report, Q1 FY2015

Marchex, Inc. — Q1 2015 Form 10-Q Summary

Business context and reporting period

Marchex provides mobile advertising analytics, call tracking, call quality and performance-based pay-for-call advertising services. Its two operating segments are Call-Driven and Archeo, which included online advertising and domain-name operations during the quarter. The filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. Financial statements are unaudited.

Financial performance and liquidity

Metric	Q1 2015	Q1 2014	Change
Revenue	$42.6 million	$50.5 million	Down 16%
Income from operations	$4.6 million	$1.4 million	Up 221%
Operating margin	10.8%	2.8%	Improved
Net income	$4.6 million	$0.9 million	Up 436%
Net income applicable to common stockholders	$4.6 million	$0.8 million	Up 458%
Diluted earnings per share	$0.11	$0.02	Improved
Cash flow from operations	$6.2 million	$8.1 million	Down 23%

Service costs declined to $20.7 million from $32.4 million, reducing service costs as a percentage of revenue to 49% from 64%.
Sales and marketing expense increased 8% to $3.7 million; product development increased 2% to $7.7 million; general and administrative expense increased 6% to $5.7 million.
Stock-based compensation was $2.8 million, compared with $2.9 million in the prior-year quarter.
Call-Driven revenue declined 23% to $35.0 million, while Archeo revenue increased 50% to $7.5 million, primarily because of higher domain-name sales.
Cash and cash equivalents were $83.7 million at March 31, 2015, compared with $80.0 million at December 31, 2014. Accounts receivable were $27.9 million.
Total liabilities were $24.6 million and stockholders’ equity was $161.8 million at March 31, 2015.
The company had no borrowings under its $30 million senior secured revolving credit facility. The facility matures April 1, 2017.
Capital expenditures were $0.9 million. Financing cash outflows included approximately $0.8 million of dividends and $0.9 million of Class B share repurchases.
Total contractual obligations were $11.4 million, including $7.0 million of operating leases and $4.5 million of other contractual obligations.

Material changes versus the prior comparable period

Revenue declined primarily because Allstate ceased purchasing pay-for-call services in September 2014. Allstate contributed only $0.5 million of revenue in Q1 2015, compared with a materially larger contribution in Q1 2014.
The decline in revenue was more than offset at the operating-income level by lower distribution-partner payments and a more favorable revenue mix.
Archeo’s domain-name revenue increased to approximately $6.4 million from $1.9 million, but this source is not expected to remain significant after the subsequent sale of most of the domain portfolio.
Income tax expense fell to $5,000 from $588,000. The company maintains a full valuation allowance against approximately $42.9 million of deferred tax assets, limiting recognition of tax benefits.
The company repurchased approximately 238,000 Class B shares for $0.9 million during the quarter and retired approximately 470,000 treasury shares.

Guidance, outlook, risks and unusual items

No formal numerical revenue or earnings guidance is provided. Management expects sales and marketing, product development and general and administrative expenses to be stable to modestly higher in the near term, while general and administrative expense may be modestly lower.
In April 2015, the company sold certain Archeo domain assets, including most of its domain portfolio, for $28.1 million in cash plus contingent earn-out consideration. Management preliminarily estimated a pretax gain of approximately $22 million and expects the divestiture to be classified as discontinued operations in Q2 2015.
Following the sale, management does not expect significant domain-name sales revenue; this is expected to reduce future operating cash flow.
Contracts with Yellowpages.com LLC, which generated 26% of Q1 2015 revenue, expire in June 2015. Renewal is not assured and could occur on less favorable terms.
Revenue concentration is significant: Resolution Media represented approximately 16% of Q1 revenue and State Farm approximately 18%. The five largest customers represented approximately 52% of revenue.
Management expects no additional Allstate pay-for-call purchases in the foreseeable future, which is expected to have a material adverse effect on future operating results.
Goodwill totaled $65.7 million, including $63.3 million in Call-Driven. No impairment was recorded, but management is monitoring performance, stock price and other impairment indicators before the annual November 2015 test.
Management believes existing cash, credit availability and operating cash flow will fund operations for at least twelve months, but additional financing may be required for acquisitions or longer-term needs.
The company declared a $0.02 per-share dividend payable in May 2015 and stated that it does not currently anticipate paying dividends after that payment in the foreseeable future.
Key risks include customer and distribution-partner concentration, contract renewals, declining advertising budgets, seasonality, competition, traffic quality and refunds, data security, telecommunications and privacy regulation, intellectual-property claims, and potential goodwill impairment.

Important facts investors should verify

Whether the Yellowpages.com agreements were renewed after their June 2015 expiration and on what economic terms.
The final accounting, tax impact and discontinued-operations presentation for the April 2015 domain-asset sale.
The extent to which Call-Driven revenue and margins replaced the lost Allstate business.
Whether customer concentration, particularly involving YP, Resolution Media and State Farm, has declined or increased.
Subsequent goodwill impairment testing results and any changes in the valuation allowance against deferred tax assets.
Whether the company resumed, suspended or permanently ended quarterly dividends after the May 2015 payment.