MCHX

Business Context and Reporting Period

Company: Marchex, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007
Business Overview: Marchex is a local advertising company and publisher of local content. It operates a platform delivering search marketing products and services (pay-per-click, cost-per-action, feed management) to local and national advertisers through a network of over 200,000 vertical and local Web sites and third-party distribution partners.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 10% year-over-year for the six months ended June 30, 2007 ($68.9M vs. $62.8M) and 9% for the three-month period ($34.7M vs. $31.7M). Growth was primarily driven by proprietary traffic sources.
• Profitability: The company reported a net income of $772,052 for the six months ended June 30, 2007, compared to a net income of $108,166 in the same period in 2006. Net income applicable to common stockholders improved significantly from a loss of $1.8 million in 2006 to income of $902,082 in 2007.
• Expense Trends:
  • Service Costs: Increased 7% to $32.0M (six months) due to higher distribution partner payments and facility costs, though they decreased as a percentage of revenue (46% vs. 48%) due to a higher mix of proprietary traffic.
  • Sales and Marketing: Increased 30% to $14.6M (six months) and 32% for the quarter, driven by increased online marketing and customer acquisition activities.
  • Amortization: Decreased 14% to $8.6M (six months) as certain intangible assets from prior acquisitions were fully amortized.
• Stock-Based Compensation: Decreased to $5.2M for the six months ended June 30, 2007, compared to $6.9M in the prior year period.

Guidance, Outlook, Risks, and Unusual Items

• Subsequent Events:
  • Acquisition: On August 9, 2007, Marchex entered into an agreement to acquire VoiceStar, a provider of call-based advertising services, for approximately $12.9 million in cash and $7.1 million in restricted stock. Closing is expected by October 1, 2007.
  • Dividends: The Board declared a quarterly dividend of $0.02 per common share and $2.97 per preferred share, payable August 15, 2007.
  • Yahoo! Agreement: Entered into a new master agreement with Yahoo! extending through June 30, 2009.
• Unusual Items:
  • Facility Relocation: Recognized $121,124 in facility relocation costs in Q2 2007 related to subleasing an office location.
  • Preferred Stock Redemption: Repurchased 3,734 shares of preferred stock in the first six months of 2007, recording a discount on redemption of $164,000.
• Risks and Contingencies:
  • Concentration Risk: One merchant advertiser represented approximately 38% of revenue for the six months ended June 30, 2007, and 46% of accounts receivable. Yahoo! is a significant distribution partner and customer.
  • Seasonality: The company notes that Internet usage is typically lower in the spring and summer months compared to the fourth quarter.
  • Intangible Assets: Significant goodwill ($195.7M) and intangible assets ($27.9M) are subject to impairment testing and amortization.

Investor Verification Checklist

• Customer Concentration: Verify the stability of the single merchant advertiser representing ~38% of revenue and ~46% of receivables.
• Acquisition Integration: Monitor the closing and integration of the VoiceStar acquisition announced in August 2007.
• Domain Name Valuation: Review the $10.0 million acquisition of Spanish-language domain names in Q2 2007 and their amortization schedule.
• Preferred Stock Obligations: Confirm the remaining quarterly dividend obligations on the ~6,024 outstanding preferred shares.
• Yahoo! Dependency: Assess the impact of the new Yahoo! master agreement on future revenue streams and distribution costs.