Marchex, Inc. Q3 2021 Form 10-Q Summary
Business context and reporting period
Marchex provides conversational analytics, call and text analytics, AI-powered conversation intelligence, messaging, call monitoring and sales-engagement solutions. The filing covers the unaudited quarter and nine months ended September 30, 2021. Results reflect continuing operations following the October 2020 divestiture of the Local Leads Platform, Call Marketplace and related assets to a related party.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $13.7 million | $13.8 million | $40.7 million | $38.5 million |
| Service costs | $5.5 million | $5.6 million | $16.4 million | $15.4 million |
| Service-cost margin | 60% | 59% | 60% | 60% |
| Operating loss | $1.9 million | $5.7 million | $10.0 million | $38.3 million |
| Operating margin | (14%) | (41%) | (25%) | (99%) |
| Income from continuing operations | $3.3 million | $(5.1) million | $(2.4) million | $(36.3) million |
| Net income (loss) applicable to common stockholders | $3.3 million | $(3.7) million | $(2.4) million | $(33.0) million |
| Basic and diluted EPS | $0.07 | $(0.08) | $(0.05) | $(0.70) |
| Cash flow from operations | Not separately provided | Not separately provided | $(5.8) million | $(2.0) million |
Operating expense reductions were significant. For the nine months, sales and marketing declined 21% to $10.2 million, product development declined 16% to $13.3 million, and general and administrative expense declined 29% to $7.0 million. Q3 product development and general and administrative expenses declined 38% and 46%, respectively.
Q3 results included a $5.2 million gain from extinguishment of CARES Act loans after SBA forgiveness approval. Nine-month 2021 results also included $2.5 million of cash proceeds from a contractual settlement related to previously divested properties and $400,000 from the sale of the Company's 10% equity interest in the divestiture purchaser.
Cash and cash equivalents were $27.8 million at September 30, 2021, compared with $33.9 million at December 31, 2020. Accounts receivable increased to $8.6 million from $6.3 million. Total assets were $68.6 million and stockholders' equity was $52.6 million. No loan obligations remained at September 30, 2021; operating lease liabilities totaled $3.7 million, including $1.9 million long term.
Material changes versus the prior comparable period
- Nine-month revenue increased 6%, while Q3 revenue decreased 1%. Management attributed the quarterly decline partly to $776,000 of revenue recognized in Q3 2020 that had previously been reserved and noted that conversational channels declined modestly from Q2 2021.
- Losses narrowed substantially year over year because 2020 included $14.7 million of goodwill impairment and $5.0 million of acquired-intangible impairment; no comparable impairment was recorded in 2021.
- Q3 2021 turned profitable primarily because of the $5.2 million CARES Act loan-extinguishment gain and lower product development and general and administrative expenses.
- Cash used in operations worsened to $5.8 million for the first nine months of 2021 from $2.0 million in the prior-year period, despite improved reported earnings. Working-capital outflows included higher accounts receivable and other current assets and lower accrued liabilities.
- Support-service fee recoveries from the related-party divestiture purchaser totaled $2.2 million in Q3 and $5.1 million for the nine months, offsetting expenses across multiple operating categories. A net $604,000 was due from the purchaser at September 30, 2021.
Guidance, outlook, commentary and risks
Management did not provide specific numerical revenue or earnings guidance. It expects near-term revenue to be slightly lower than recent quarters because of seasonal call-volume declines, particularly late in the fourth quarter. Management remains cautious about the unpredictable COVID-19 recovery, although it continues to add customers, launch products and invest in infrastructure, AI, data science and machine learning.
Management stated that available resources are expected to fund operations and strategic investments for at least twelve months. It also stated that additional equity or debt financing could be needed for acquisitions, long-term obligations or other business needs, and that financing may not be available on acceptable terms.
- COVID-19 may reduce customer spending, call volumes, collections and operating cash flow and may increase customer credit losses.
- The company remains loss-making over the longer term, with an accumulated deficit of $301.0 million at September 30, 2021.
- Five largest customers represented approximately 30% of revenue, and one customer represented 19% of accounts receivable, creating concentration risk.
- Goodwill of $17.6 million remained on the balance sheet. Future declines in operating results, cash flows, stock price or market capitalization could trigger additional impairment.
- The company recorded a 100% valuation allowance against substantially all deferred tax assets, totaling approximately $32.0 million at September 30, 2021.
- Material risks include competition, telecommunications and privacy regulation, TCPA and call-recording compliance, cybersecurity and third-party infrastructure dependence, seasonal demand, customer credit quality and potential litigation related to the related-party divestiture.
- The filing states that no material legal proceedings were pending and that disclosure controls and procedures were effective as of the evaluation date.
Important facts for investors to verify
- Whether the Q3 profit is sustainable after excluding the $5.2 million nonrecurring loan-forgiveness gain and other settlement-related items.
- Whether revenue growth resumes after seasonal and pandemic-related volume pressures and whether new products generate material recurring revenue.
- Whether operating cash burn improves, particularly as accounts receivable, accrued liabilities and customer collections change.
- The extent and duration of support-service fees and other economic arrangements with the related-party divestiture purchaser.
- Potential additional goodwill or intangible-asset impairments and the assumptions used in future impairment tests.
- Whether the $27.8 million cash balance is sufficient if losses, customer concentration issues or the need for additional strategic investment persist.