Business Context and Reporting Period
Company: Marchex, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
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 through a distribution network of search engines, directories, and its own proprietary publishing network of over 200,000 locally-focused websites.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2010 |
Three Months Ended June 30, 2010 |
|---|---|---|
| Total Revenue | $45,395 | $21,393 |
| Net Loss | $(3,195) | $(3,128) |
| Net Loss Applicable to Common Stockholders | $(3,287) | $(3,176) |
| Net Cash Provided by Operating Activities | $4,270 | Not explicitly stated for 3 months |
| Cash and Cash Equivalents (Ending) | $32,903 | $32,903 |
| Total Assets | $155,456 | $155,456 |
| Total Liabilities | $17,948 | $17,948 |
| Stockholders' Equity | $137,508 | $137,508 |
Debt and Liquidity: The company has a $30 million senior secured revolving credit facility maturing in April 2011. As of June 30, 2010, there were no borrowings under this facility. The company maintains a strong liquidity position with approximately $32.9 million in cash and cash equivalents.
Material Changes vs. Prior Period
- Revenue: For the six months ended June 30, 2010, revenue decreased 5% to $45.4 million from $47.7 million in the prior year period. For the three months ended June 30, 2010, revenue increased 1% to $21.4 million from $21.1 million.
- Profitability: Net loss increased to $3.2 million for the six months ended June 30, 2010, compared to $2.8 million in the prior year. The loss for the three months ended June 30, 2010, was $3.1 million, compared to $1.2 million in the prior year.
- Service Costs: Service costs increased significantly as a percentage of revenue (from 48% to 58% for the six months) due to higher distribution partner payments and pricing incentives provided to a major reseller partner (AT&T).
- Amortization: Amortization of intangible assets from acquisitions decreased 59% for the six months ended June 30, 2010, to $1.4 million from $3.5 million, as certain assets were fully amortized.
- Discontinued Services: The company discontinued its feed management and related services effective December 31, 2009, following Yahoo!'s decision to partner with Microsoft. This resulted in a revenue decrease of approximately $4.3 million for the six-month period compared to the prior year.
Guidance, Outlook, and Risks
Management Commentary:
- AT&T Agreement: The company signed an extension of its arrangement with AT&T through June 30, 2015. This agreement includes pricing reductions and incentives that reduced second-quarter revenues but are expected to scale upwards in the latter portion of the year.
- Seasonality: Management anticipates seasonality, with lower Internet usage typically occurring in the spring and summer months compared to the fourth quarter.
- Dividends: The company declared a quarterly dividend of $0.02 per share in July 2010, payable in August 2010. The company expects to pay approximately $2.8 million in annual dividends for the foreseeable future, subject to capital availability.
- Share Repurchases: During the six months ended June 30, 2010, the company repurchased 715,000 shares of Class B common stock for approximately $3.7 million.
Risks and Contingencies:
- Customer Concentration: AT&T accounted for 22% of total revenues for the six months ended June 30, 2010. The five largest customers accounted for 46% of revenue.
- Goodwill and Intangibles: The company holds significant goodwill ($35.4 million) and intangible assets. Future impairment charges could occur if operating results or stock price decline significantly.
- Deferred Tax Assets: The company has net deferred tax assets of $51.9 million. Realization depends on future taxable income; a valuation allowance of $3.6 million has been recorded against state and foreign net operating loss carryforwards.
- Legal Proceedings: The company is not aware of any pending legal proceedings that would have a material adverse effect, though it faces potential indemnification liabilities related to advertiser activities.
Investor Verification Checklist
- AT&T Revenue Impact: Verify the long-term revenue trajectory following the pricing incentives and exclusivity provisions in the new AT&T agreement.
- Service Cost Margins: Monitor the trend of service costs as a percentage of revenue, particularly regarding distribution partner payments and the mix of pay-per-click vs. proprietary traffic.
- Deferred Tax Asset Realization: Assess the company's ability to generate sufficient future taxable income to realize the $51.9 million in net deferred tax assets.
- Goodwill Impairment Risk: Evaluate the sensitivity of goodwill and intangible asset valuations to changes in stock price and operating forecasts.
- Customer Concentration: Review the dependency on the top five customers (46% of revenue) and the potential impact of losing or reducing spend from any single major partner.