Business Context and Reporting Period
Company: Marchex, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Marchex is a local search and performance advertising company providing search- and call-based marketing solutions. Its services include a Local Search Network, private-label search marketing platforms, pay-per-click advertising, and feed management services. The company operates as a single segment primarily in the United States.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2008 | Three Months Ended Sep 30, 2009 | Three Months Ended Sep 30, 2008 |
|---|---|---|---|---|
| Total Revenue | $69.8 million | $111.6 million | $22.2 million | $37.2 million |
| Net Income (Loss) | ($2.1 million) | $0.6 million | $0.7 million | $1.4 million |
| Operating Income (Loss) | ($4.5 million) | $1.0 million | ($0.6 million) | $1.8 million |
| Cash from Operating Activities | $13.6 million | $19.4 million | Not provided for 3-month period | Not provided for 3-month period |
| Cash and Cash Equivalents (Sep 30, 2009) | $33.0 million | |||
| Total Assets (Sep 30, 2009) | $157.3 million | |||
| Total Liabilities (Sep 30, 2009) | $14.3 million | |||
| Stockholders' Equity (Sep 30, 2009) | $143.0 million |
Margins (Nine Months 2009 vs 2008):
- Service Costs: 50.0% of revenue (2009) vs 46.4% (2008).
- Operating Margin: -6.3% (2009) vs 0.9% (2008).
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 37% for the nine months ended September 30, 2009, and 40% for the three-month period. This was driven by a significant drop in partner network revenues (down over $13 million for the nine months) due to fewer advertisers and lower spend budgets. Proprietary traffic revenue also declined, partly due to reduced click-throughs from Yahoo! and lower cost-per-action revenues from resellers.
- Profitability Shift: The company reported a net loss of $2.1 million for the nine months ended September 30, 2009, compared to net income of $0.6 million in the prior year period. This was primarily due to the revenue decline, partially offset by lower operating expenses.
- Expense Reductions: Service costs decreased 32% ($51.7M to $34.9M) and Sales & Marketing expenses decreased 38% ($23.3M to $14.5M) for the nine-month period. However, as a percentage of revenue, service costs increased from 46% to 50% due to the mix of revenue sources.
- Amortization: Amortization of intangible assets from acquisitions decreased 57% to $4.7 million for the nine months ended September 30, 2009, as certain assets were fully amortized.
- Share Repurchases: The company repurchased 2.1 million shares of Class B common stock for approximately $7.5 million during the nine months ended September 30, 2009.
Guidance, Outlook, Risks, and Unusual Items
- Yahoo! Feed Management Termination: Yahoo! plans to discontinue its feed management service relationship with Marchex effective December 31, 2009. Marchex generated $5.2 million in revenue from this service in the first nine months of 2009 and expects Q4 2009 results to be impacted as advertisers reduce utilization.
- Customer Bankruptcies: Major resellers Idearc Media Corp. and R.H. Donnelley Corporation filed for Chapter 11 reorganization. Marchex did not recognize $1.6 million in revenue related to services delivered to these entities due to collectibility concerns. Future revenue recognition depends on cash collection.
- Goodwill Impairment Risk: The company noted that its stock price approached or dropped below book value per share during the period. If this trend continues or economic conditions worsen, the company may need to recognize an impairment charge on goodwill or intangible assets.
- Dividends: The company declared a quarterly dividend of $0.02 per share in October 2009, payable in November 2009. The company expects to pay approximately $2.9 million in annual dividends for the foreseeable future, subject to capital availability.
- Liquidity: As of September 30, 2009, the company had $30 million of availability under its senior secured revolving credit facility. Management believes existing resources and cash flow are sufficient to fund operations for at least twelve months.
Key Facts for Investor Verification
- Revenue Concentration: The five largest customers accounted for 53% of total revenue for the nine months ended September 30, 2009. AT&T and Yahoo! individually represented 20% and 11% of revenue, respectively.
- Unrecognized Revenue: Verify the status of the $1.6 million in revenue not recognized due to the bankruptcy filings of Idearc and R.H. Donnelley.
- Yahoo! Partnership: Monitor the impact of the termination of the Yahoo! feed management service on Q4 2009 and full-year 2009 revenue.
- Goodwill Valuation: Assess the risk of future goodwill impairment charges given the stock price performance relative to book value.
- Share Repurchase Program: Confirm the remaining capacity under the share repurchase program (up to 9 million shares aggregate) and the impact on cash flow.