Marchex, Inc. — Form 10-Q Summary
Business context and reporting period
Marchex provides call analytics, speech analytics, pay-for-call advertising, call marketplace, and local-leads services. The filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. The financial statements are unaudited.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $22.0 million | $34.4 million | $46.4 million | $70.4 million |
| Loss from operations | $(1.3) million | $(68.7) million | $(4.8) million | $(72.4) million |
| Net loss | $(1.3) million | $(68.8) million | $(4.8) million | $(72.5) million |
| Net loss per share | $(0.03) | $(1.65) | $(0.11) | $(1.75) |
| Cash flow from operations | Six-month measure: $(0.6) million | 2016 six-month measure: $(2.7) million |
- Q2 revenue declined 36%; six-month revenue declined 34% year over year.
- Operating expenses were $23.3 million in Q2 and $51.2 million for the six months, versus $39.8 million and $79.5 million, respectively, in the comparable periods.
- Operating expense margin improved to 106% of revenue in Q2 and 110% for the six months, from 116% and 113%, respectively. The company remained loss-making because operating expenses exceeded revenue.
- Service costs declined to 55% of Q2 revenue and 56% of six-month revenue, compared with 60% in both prior-year periods.
- Cash and cash equivalents were $102.4 million at June 30, 2017, down from $104.0 million at December 31, 2016. Accounts receivable were $15.5 million.
- Total liabilities were $12.4 million and stockholders’ equity was $110.8 million at June 30, 2017. The filing does not report outstanding debt; disclosed obligations are primarily leases and other contractual commitments.
- Total contractual obligations were $16.6 million, including $12.1 million of operating leases and $4.5 million of other contractual obligations. Tax contingencies of $1.1 million were excluded from this table.
Material changes versus the prior comparable period
- Revenue decreased primarily because advertisers reduced pay-for-call budgets and reseller partners, particularly YP, had fewer accounts and lower performance-based advertising and platform revenue.
- State Farm represented 17% of six-month revenue and 27% of accounts receivable at June 30, 2017. Management expected State Farm campaign spending to decline from prior periods.
- YP, including Dex, represented 22% of Q2 and six-month revenue, compared with YP at 24% in the comparable 2016 periods. Management expected YP-related revenue and local-leads platform activity to decline.
- Operating costs fell substantially due to lower personnel costs, distribution-partner payments, stock-based compensation, communications and network costs, and other operating expenses.
- The prior-year results included a $63.3 million goodwill impairment charge that reduced goodwill to zero. No comparable impairment was recorded in 2017, explaining most of the reduction in net loss.
- Stock-based compensation declined to $1.0 million in Q2 and $2.3 million for the six months, from $3.5 million and $5.5 million, respectively.
- The company incurred approximately $700,000 of employee-separation costs in the first quarter of 2017; substantially all previously accrued 2016 separation and facility-termination costs were paid in the first half of 2017.
Guidance, outlook, risks and unusual items
- Management expected revenue to remain lower in the near term because of fewer small-business accounts, lower YP/local-leads activity, reduced advertiser budgets and lower demand for call advertising.
- Management expected near- and intermediate-term operating expenses to be stable to lower, while noting that distribution-partner costs could increase as a percentage of revenue if business mix shifts toward pay-for-call services.
- YP’s agreements extend through December 31, 2018, but YP may migrate accounts to itself or a third party and has termination rights beginning January 1, 2018 with four months’ notice. YPG local-leads revenue could cease by the end of 2017.
- Revenue and receivables are concentrated. The five largest customers generated approximately 54% of six-month revenue. YP/Dex, State Farm, advertising agencies and T-Mobile are material exposures.
- The company depends on distribution partners, advertisers, agencies, telecommunications carriers, technology vendors and third-party traffic. Loss of partners, unfavorable contract terms, lower traffic quality, service outages or reduced advertiser spending could materially affect results.
- Management stated that cash resources should fund operations for at least twelve months, but additional equity or debt financing may be needed for acquisitions, long-term obligations or operating needs. There is no assurance such financing would be available on acceptable terms.
- Deferred tax assets of $48.5 million were fully offset by a valuation allowance. Federal net operating loss carryforwards were approximately $71.3 million, and state, city and foreign carryforwards were approximately $6.5 million.
- The company plans to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method; its impact had not yet been determined. Lease accounting adoption was planned for January 1, 2019 and is expected to affect the balance sheet.
- No material legal proceedings were reported. The company disclosed ordinary-course indemnification and litigation risks, but no pending matter was expected to have a material adverse effect based on current knowledge.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue declines from YP/Dex, YPG, State Farm and other large advertisers continue or stabilize.
- The timing and extent of YP account migrations, termination rights and any effect of Dex’s ownership of YP Holdings.
- Customer concentration, receivable collectability and the exposure represented by State Farm’s 27% share of accounts receivable.
- Cash burn, operating cash flow and whether the $102.4 million cash balance remains sufficient under the company’s acquisition and operating plans.
- Future operating-cost reductions, employee-separation costs and the company’s path toward profitability.
- The impact of adopting ASC 606, particularly the principal-versus-agent assessment and gross-versus-net revenue presentation.
- Potential lease liabilities following the Seattle lease extension through March 2025 and the planned 2019 lease-accounting adoption.
- Risks involving data privacy, call recording consent, telecommunications regulation, intellectual property, cybersecurity, traffic quality and third-party service providers.