Business Context and Reporting Period
Company: Marchex, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: Marchex is a call advertising and small business marketing company delivering call and click-based advertising products to tens of thousands of advertisers. The company operates as a single segment, primarily in domestic markets.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $29,079,855 | $24,001,981 |
| Net Income (Loss) | $576,438 | $(67,774) |
| Net Income Applicable to Common Stockholders | $512,933 | $(111,348) |
| Diluted EPS | $0.01 | $(0.00) |
| Operating Cash Flow | $2,519,054 | $3,019,044 |
| Cash and Cash Equivalents (End of Period) | $40,049,068 | $33,838,311 |
| Total Assets | $166,374,596 | $159,689,743 |
| Total Liabilities | $23,305,927 | $19,997,820 |
| Stockholders' Equity | $143,068,669 | $139,691,923 |
Debt and Liquidity: As of March 31, 2011, the company had no borrowings under its $30 million senior secured revolving credit facility. The facility was amended in Q1 2011 to extend maturity to April 1, 2014. The company maintains a strong liquidity position with over $40 million in cash.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 21% to $29.1 million, driven primarily by a $6.8 million increase in partner and other revenue sources (call advertising and small business marketing products). This was partially offset by a $1.7 million decrease in proprietary traffic revenue.
- Profitability: The company returned to profitability, reporting net income of $576,438 compared to a net loss of $67,774 in the prior year. This turnaround was aided by revenue growth, a gain on sales of intangible assets ($1.9 million), and a tax benefit of $181,000 from the conclusion of federal tax audits.
- Expense Increases: Service costs rose 32% to $16.7 million (57% of revenue) due to higher distribution partner payments and personnel costs. General and administrative expenses increased 34% to $5.2 million, largely due to stock-based compensation. Sales and marketing expenses decreased 31% to $2.7 million.
- Acquisition Activity: The company incurred $402,123 in acquisition-related costs in Q1 2011, primarily for the acquisition of Jingle Networks, Inc., which closed in April 2011 (subsequent to the reporting period).
Guidance, Outlook, and Risks
Management Commentary: Management expects service costs to increase as a percentage of revenue in the near term due to the mix of revenue sources (higher proportion of partner revenue). They anticipate seasonality, with lower usage typically in spring and summer months. The company expects to invest in working capital and capital expenditures to support expansion.
Subsequent Events:
- Acquisition: In April 2011, Marchex acquired Jingle Networks, Inc. for approximately $16.7 million in cash plus stock, with future consideration of up to $36 million payable in cash or stock.
- Dividends: A quarterly dividend of $0.02 per share was declared in April 2011, payable in May 2011.
Risks and Contingencies:
- Customer Concentration: AT&T accounted for 31% of total revenue and 52% of accounts receivable. The five largest customers accounted for 58% of revenue.
- Goodwill and Intangibles: The company holds significant goodwill ($35.3 million) and intangible assets. Impairment risks exist if performance declines or stock price drops significantly.
- Deferred Tax Assets: The company has net deferred tax assets of $51.3 million. Realization depends on future taxable income; a valuation allowance of $4.0 million was recorded for state and foreign NOLs.
- Legal: No material legal proceedings are pending, though the company faces potential indemnification liabilities and intellectual property claims.
Investor Verification Checklist
- AT&T Dependency: Verify the stability of the relationship with AT&T, which represents nearly one-third of revenue and over half of receivables.
- Jingle Acquisition Integration: Assess the financial impact and integration progress of the Jingle Networks acquisition, including the $36 million in future contingent consideration.
- Service Cost Margins: Monitor the trend of service costs as a percentage of revenue, which increased to 57% in Q1 2011, potentially pressuring operating margins.
- Deferred Tax Asset Realization: Review future projections for taxable income to ensure the $51.3 million in deferred tax assets remain realizable without further valuation allowances.
- Seasonality Impact: Evaluate Q2 and Q3 results for expected seasonal declines in internet and mobile usage.