Business Context and Reporting Period
Marchex, Inc. is a call analytics and performance-based advertising company that helps businesses measure and convert customer interactions across phone and text channels. Its offerings include call analytics, speech analytics, text communications, call monitoring, omnichannel analytics, pay-for-call advertising, and local lead-generation services.
This Form 10-K covers the fiscal year ended December 31, 2018, with comparative results for 2017. The filing is not a quarterly report; fourth-quarter information is included only through annual disclosures. Marchex operated as a single reporting segment and generated 99% of revenue from the United States.
Financial Results and Key Metrics
| Metric | 2017 | 2018 | Change |
|---|---|---|---|
| Revenue | $90.3 million | $85.3 million | Down 6% |
| Service costs | $49.3 million | $47.8 million | Down 3% |
| Operating expenses | $96.7 million | $89.1 million | Down 8% |
| Loss from operations | $(6.4) million | $(3.9) million | Improved |
| Net loss | $(6.1) million | $(2.7) million | Improved |
| Net loss per Class B share | $(0.15) | $(0.06) | Improved |
| Cash flow from operations | $1.7 million | $5.1 million | Improved |
| Cash and cash equivalents | $104.2 million | $45.2 million | Down $59.0 million |
- Performance-based advertising generated $78.7 million, or approximately 92% of 2018 revenue; local leads services generated $6.6 million.
- Approximate service-cost-adjusted margin was 44% in 2018 versus 45% in 2017. Operating margin was approximately negative 5% in 2018 versus negative 7% in 2017; net margin was approximately negative 3% versus negative 7%.
- Interest income and other income increased to $1.1 million from $0.3 million.
- The 2018 income tax benefit was $156,000, compared with $42,000 of tax expense in 2017. Deferred tax assets of approximately $35.1 million were fully offset by a valuation allowance, excluding certain insignificant Canadian assets.
- The filing does not report conventional funded debt. Acquisition-related liabilities totaled $1.7 million at year-end, including a $1.5 million estimated Telmetrics earnout liability. Contractual obligations totaled $17.4 million, including $10.2 million of facility lease obligations and up to $3.0 million of Telmetrics contingent cash consideration.
- Accounts receivable increased to $16.2 million from $14.9 million. State Farm represented approximately 20% of 2018 revenue and 31% of year-end accounts receivable.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of fewer reseller accounts, lower DexYP local-leads platform revenue, and reduced advertiser budgets for pay-for-call services. These factors partially offset higher call analytics revenue.
- Expenses declined broadly: sales and marketing fell 12%, product development fell 15%, and general and administrative expense fell 20%. Stock-based compensation declined from $4.6 million to $3.0 million.
- Net loss narrowed by $3.4 million, while operating cash flow increased by $3.4 million, reflecting lower operating costs, non-cash adjustments, and working-capital contributions.
- Marchex acquired Telmetrics in November 2018 for $10.1 million in cash at closing, plus potential earnout consideration of up to $3.0 million. It acquired Callcap for approximately $35.0 million, consisting of approximately $25.0 million in cash and approximately $10.0 million of Class B stock to be issued over four years.
- The acquisitions added $24.4 million of goodwill and $20.7 million of net identifiable intangible assets at year-end. They contributed approximately $2.4 million of revenue after the acquisition dates in 2018 and were not significant to consolidated net loss.
- Cash used in investing activities increased to $36.6 million, primarily because of the acquisitions. Cash used in financing activities was $27.4 million, including the $21.9 million payment of the special dividend declared in December 2017 and a $5.7 million repurchase of approximately 2.3 million Class B shares.
- Marchex adopted ASC 606 on January 1, 2018 using the modified retrospective method, recording a $189,000 cumulative-effect increase to accumulated deficit. The reported effect on 2018 net loss was not significant.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected near-term revenue to be modestly higher than recent quarters because of the Telmetrics and Callcap acquisitions, partly offset by fewer small-business accounts on the local leads platform.
- Management expected service costs, sales and marketing, product development, and general and administrative expenses to be stable to modestly higher in the near term because of the acquisitions. Management also committed $2.5 million during the first quarter of 2019 for a strategic technology initiative over the following 12 months.
- The primary YP/DexYP local-leads arrangements expire December 31, 2019. DexYP accounted for 23% of 2018 revenue and may migrate accounts, reduce spending, terminate arrangements, or renegotiate on less favorable terms.
- Customer concentration is material: the five largest customers represented approximately 51% of 2018 revenue. Resolution Media represented 14%, and State Farm represented approximately 20%. Campaigns are generally short term and customers may reduce or stop spending with limited notice.
- Management stated that cash resources were expected to fund operations and strategic initiatives for at least 12 months, but additional equity or debt financing could be needed for acquisitions, long-term obligations, or business needs. Failure to generate revenue or obtain capital could impair the company’s ability to pursue its objectives and continue as a going concern.
- Goodwill impairment testing identified no impairment in 2018. However, the $24.4 million goodwill balance and $20.7 million of acquired intangible assets are sensitive to customer losses, lower forecasts, competitive pressures, stock-price declines, and weaker cash flows. Estimated amortization expense on acquired intangibles is $6.2 million in 2019 and $5.7 million in 2020.
- Seasonality, advertising-budget reductions, dependence on third-party distribution partners, traffic quality, telecommunications availability, cybersecurity, privacy and call-recording laws, intellectual-property claims, and evolving telecommunications regulation could materially affect results.
- The company adopted the new lease standard on January 1, 2019 and expected to record approximately $8.5 million of additional operating lease liabilities and approximately $7.4 million of right-of-use assets.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded Telmetrics and Callcap from the 2018 internal-control assessment because of the timing of the acquisitions; together they represented approximately 3% of consolidated assets and revenue.
Most Important Facts for Investors to Verify
- Whether DexYP renews or materially changes the arrangements expiring December 31, 2019, and the effect on local-leads revenue and profitability.
- Whether State Farm, Resolution Media, and other concentrated customers maintain recent spending levels.
- Post-acquisition revenue growth, customer retention, integration costs, cash earnout obligations, and the planned issuance of approximately 3.4 million Class B shares for Callcap.
- Cash utilization after the acquisitions, special dividend, share repurchase, and 2019 strategic technology investment, including whether external financing becomes necessary.
- Progress toward profitability and whether operating cash flow remains positive despite revenue pressure and expected higher acquisition-related expenses.
- Potential impairment of goodwill and acquired intangible assets, including the timing and magnitude of future amortization.
- Execution of the new lease accounting standard and the company’s continuing exposure to regulatory, privacy, call-recording, cybersecurity, traffic-quality, and indemnification risks.