Business Context and Reporting Period
Company: Marchex, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: Marchex is a local advertising company and publisher of local content, delivering search- and call-based marketing products and services. The company operates a network of over 200,000 vertical and local websites and provides services including pay-per-click, pay-per-phone-call, feed management, and bid management.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Revenue | $33.49 million | $102.38 million |
| Net Loss | $(1.52) million | $(0.75) million |
| Net Loss Applicable to Common Stockholders | $(1.54) million | $(0.64) million |
| Operating Cash Flow | N/A | $27.57 million |
| Cash and Cash Equivalents (Sep 30, 2007) | $37.20 million | |
| Total Assets | $328.31 million | |
| Total Liabilities | $18.63 million | |
| Stockholders' Equity | $309.68 million |
Margins: Operating loss for the three months ended September 30, 2007, was approximately 6.3% of revenue. Service costs represented 56.2% of revenue for the quarter, an increase from 47.0% in the prior year quarter.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 4% to $33.49 million for the three months ended September 30, 2007, compared to $32.33 million in the same period in 2006. For the nine months, revenue increased 8% to $102.38 million from $95.15 million.
- Profitability: The company reported a net loss of $1.52 million for the quarter, compared to a net loss of $0.01 million in the prior year quarter. The increase in loss was driven by higher service costs, product development, and general and administrative expenses, partially offset by lower sales and marketing costs.
- Service Costs: Service costs increased 24% to $18.82 million for the quarter, primarily due to increased distribution partner payments and internet domain amortization.
- Acquisitions: On September 19, 2007, the company acquired VoiceStar, Inc., a provider of call-based advertising services, for approximately $13.6 million in cash and restricted stock. This acquisition added call-based services to the company's platform.
- Stock Repurchases: During the quarter, the company repurchased 1.43 million shares of Class B common stock for approximately $13.6 million.
Guidance, Outlook, and Risks
Management Commentary: Management attributes revenue growth to an increase in the number of accounts on the platform and more distribution partners adopting the third-party content platform. However, proprietary traffic revenues decreased by $2.3 million, attributed to reduced sales and marketing expenditures.
Liquidity: The company had $37.2 million in cash and cash equivalents as of September 30, 2007. Management believes existing resources and cash flow from operations will be sufficient to fund operations for at least twelve months. However, additional equity or debt financing may be needed to support the acquisition strategy.
Risks and Contingencies:
- Concentration Risk: One distribution partner (Yahoo!) represented approximately 35% of revenue for the nine months ended September 30, 2007. One merchant advertiser represented approximately 33% of outstanding accounts receivable.
- Seasonality: The company expects seasonal fluctuations, with lower internet usage typically occurring in the spring and summer months compared to the fourth quarter.
- Intangible Assets: The company holds significant goodwill ($204.9 million) and intangible assets ($28.1 million). Impairment charges could materially affect financial results if fair values decline.
- Regulatory: The company faces potential risks related to government regulation of the internet, including privacy laws, telecommunications regulations, and potential taxation of electronic commerce.
Key Facts for Investor Verification
- Revenue Concentration: Verify the stability of the relationship with Yahoo!, which accounted for 35% of revenue in the first nine months of 2007.
- Service Cost Trends: Monitor the rising service cost ratio (56.2% of revenue in Q3 2007 vs. 47.0% in Q3 2006) and its impact on operating margins.
- Acquisition Integration: Assess the integration and performance contribution of the VoiceStar acquisition completed in September 2007.
- Cash Burn vs. Generation: While operating cash flow was positive ($27.6 million for nine months), significant cash was used for acquisitions ($12.9 million) and stock repurchases ($13.6 million) in the quarter.
- Dividend Obligations: Note the quarterly dividend obligations on preferred stock ($2.97 per share) and common stock ($0.02 per share), which impact cash flow.