Marchex, Inc. Form 10-Q Summary
Business context and reporting period
Marchex is a mobile and online advertising company providing digital call advertising, pay-per-click advertising, local leads, call tracking and analytics, and proprietary local-information websites. This unaudited quarterly report covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011. The company reports as a single operating segment, primarily serving U.S. advertisers.
Financial performance and position
| Metric | Q1 2011 | Q1 2012 |
|---|---|---|
| Revenue | $29.1 million | $35.5 million |
| Income (loss) from operations | $0.7 million | $(0.6) million |
| Net income (loss) | $0.6 million | $(0.7) million |
| Net income (loss) applicable to common stockholders | $0.5 million | $(0.8) million |
| Basic EPS | $0.02 | $(0.02) |
| Cash flow from operating activities | $2.5 million | $4.0 million |
| Cash and cash equivalents at period end | $40.0 million | $41.3 million |
Revenue increased 22% year over year. Partner and other revenue increased from $23.7 million to $31.4 million, primarily reflecting growth in digital call advertising and the contribution of the April 2011 Jingle acquisition. Proprietary website traffic revenue declined from $5.3 million to $4.0 million.
Operating margin declined from approximately 2.5% to negative 1.7%, while net margin declined from approximately 2.0% to negative 2.0%. Operating expenses rose 24% to $37.5 million, exceeding revenue and representing 106% of revenue. The principal cost increases were service costs, sales and marketing, product development, general and administrative expenses, and acquisition-related amortization.
Service costs were $19.9 million, or 56% of revenue, compared with $16.7 million, or 57%, in the prior-year period. Stock-based compensation increased to $3.9 million from $3.5 million. Amortization of acquired intangible assets increased to $1.5 million from $0.5 million, primarily because of Jingle.
Cash flow from operations increased to $4.0 million despite the net loss, supported by $3.9 million of stock-based compensation, $2.6 million of depreciation and amortization, and other non-cash items. Investing cash flow was $1.2 million, including $0.8 million of capital expenditures and proceeds from intangible-asset sales. Financing cash flow used $1.3 million, including $0.7 million of dividends and $0.7 million of Class B share repurchases.
At March 31, 2012, total assets were $222.4 million, total liabilities were $61.6 million, and stockholders’ equity was $160.8 million. Current liabilities included $34.9 million of deferred acquisition payments. The company had no borrowings under its $30 million senior secured revolving credit facility and reported full availability as of March 31, 2012. The facility matures April 1, 2014 and is secured by substantially all company assets.
Material changes versus the prior comparable period
- Revenue increased 22%, driven primarily by digital call advertising and the Jingle acquisition.
- Proprietary website traffic revenue decreased approximately $1.3 million, primarily because of lower cost-per-action revenue from resellers.
- The company moved from operating income of $0.7 million to an operating loss of $0.6 million and from net income of $0.6 million to a net loss of $0.7 million.
- Amortization of acquired intangible assets increased by approximately $1.1 million year over year.
- Interest and line-of-credit expense increased to $0.2 million, primarily from accretion of interest related to Jingle’s deferred acquisition consideration.
- Cash from operations increased by approximately $1.4 million, while cash increased by approximately $3.9 million during the quarter to $41.3 million.
- The company repurchased approximately 136,000 Class B shares under its repurchase program for approximately $0.7 million and paid approximately $0.7 million in quarterly dividends. The share-repurchase activity table also includes restricted equity shares repurchased upon employee terminations.
Guidance, outlook, risks and unusual items
Management did not provide formal revenue or earnings guidance. It expects near-term sales and marketing expenses to remain relatively similar in absolute dollars, product-development spending to remain relatively stable, and general and administrative expenses to modestly decrease. Management expects longer-term expenses to rise as the company expands its platforms, network infrastructure, personnel and acquisition activities.
In April 2012, the company paid approximately $16.9 million in cash, net of adjustments, for the first deferred consideration payment related to Jingle. A remaining payment of approximately $18.0 million is due on the 18-month anniversary of the acquisition and may be paid in cash, Class B shares, or a combination; shares used for settlement would be increased by 5%. The filing states that existing cash, credit availability and operating cash flow are expected to fund operations for at least twelve months, but additional financing may be required for acquisitions and long-term obligations.
Management is evaluating strategic alternatives for certain pay-per-click products and websites, which could result in divestitures and near-term cash proceeds but may reduce future operating cash flow. The company also declared a subsequent quarterly dividend of $0.02 per share, expected to require approximately $0.7 million.
AT&T accounted for 28% of Q1 2012 revenue and 32% of accounts receivable at March 31, 2012. AT&T’s proposed sale of a majority stake in its yellow-pages business could change the relationship and materially reduce revenue. The five largest customers represented approximately 47% of Q1 2012 revenue.
Goodwill was $82.6 million and net acquired intangible assets were $6.6 million at March 31, 2012. Management noted that the stock price approached book value during the quarter and that a sustained decline, weaker projected earnings or adverse industry conditions could trigger impairment testing and a material impairment charge. Net deferred tax assets were $49.1 million, including a $4.7 million valuation allowance for certain state, city and foreign tax assets.
Other principal risks include dependence on distribution partners and large reseller customers, seasonality and advertising-budget reductions, competition from larger technology and media companies, traffic quality and click fraud, credit and collection risk, telecommunications and privacy regulation, intellectual-property claims, cybersecurity and service interruptions, acquisition integration, and the need for additional financing. The company reported no material legal proceedings and stated that its disclosure controls were effective.
Most important facts for an investor to verify
- Whether AT&T’s planned transaction affects the company’s contract, revenue concentration, receivables collection, or future local-leads revenue.
- The cash impact and settlement form of the remaining approximately $18.0 million Jingle deferred acquisition payment.
- Whether revenue growth can continue while proprietary website revenue declines and distribution-partner costs increase.
- Potential goodwill, acquired-intangible, or deferred-tax-asset impairment charges.
- Liquidity after the April 2012 Jingle payment, dividends, repurchases, capital expenditures and any acquisitions or divestitures.
- Customer concentration, including the 47% contribution from the five largest customers and AT&T’s 32% share of accounts receivable.
- The sustainability of quarterly dividends and share repurchases given the Q1 net loss and substantial contractual obligations.