Marchex, Inc. — Form 10-Q Summary
Business context and reporting period
Marchex is a call advertising and small-business marketing company providing call- and click-based advertising, pay-per-call, pay-per-click, search marketing, call analytics, and publishing-network services. This unaudited Form 10-Q covers the three and six months ended June 30, 2011, compared with the same periods in 2010.
On April 7, 2011, Marchex acquired Jingle Networks, a provider of mobile voice-search performance advertising and technology solutions in North America.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $38.8 million | $21.4 million | $67.8 million | $45.4 million |
| Income (loss) from operations | $1.1 million | $(4.4) million | $1.8 million | $(4.1) million |
| Net income (loss) | $141,000 | $(3.1) million | $718,000 | $(3.2) million |
| Net income (loss) applicable to common stockholders | $80,000 | $(3.2) million | $593,000 | $(3.3) million |
| Basic and diluted EPS | $0.00 | $(0.10) | $0.02 | $(0.10) |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $8.2 million | $4.3 million |
Revenue increased 81% year over year in the second quarter and 49% for the six-month period. Partner and other revenue increased to $57.1 million for the first half, while proprietary web-site traffic revenue declined to $10.8 million. Operating margin improved to approximately 3% in both the quarter and six-month period, compared with negative margins in the prior-year periods. Net income included gains on sales and disposals of intangible assets of $2.7 million in the quarter and $4.6 million for the six months.
Q2 2011 operating expenses were $40.4 million, or 104% of revenue, compared with $26.5 million, or 124%, in Q2 2010. Six-month operating expenses were $70.7 million, or 104% of revenue, compared with $51.6 million, or 114%, in the prior-year period. Stock-based compensation increased to $3.9 million in Q2 and $7.5 million for the six months, from $2.6 million and $5.0 million, respectively.
Cash, debt, liquidity, and capital structure
- Cash and cash equivalents were $28.3 million at June 30, 2011, down from $37.3 million at December 31, 2010.
- Accounts receivable increased to $29.7 million from $20.2 million at year-end; approximately $12.0 million was owed by AT&T.
- Operating cash flow was $8.2 million for the first six months, compared with $4.3 million in 2010.
- Investing cash use was $13.2 million, principally reflecting $15.8 million of cash paid for Jingle and $2.0 million of capital expenditures, partly offset by $4.7 million of proceeds from intangible-asset sales.
- Financing cash use was $4.0 million, including $3.1 million for repurchases of 409,000 Class B shares and $1.5 million of dividends.
- Marchex had no borrowings under its $30 million senior secured revolving credit facility and reported $30 million of availability at June 30, 2011. The facility maturity was extended to April 1, 2014.
- Total contractual obligations were $54.4 million, including $35.6 million of deferred Jingle acquisition payments and $15.1 million of operating leases.
- The company believed cash, operating cash flow, and available credit were sufficient to fund operations for at least twelve months, but noted that additional financing could be needed for acquisitions, long-term obligations, or expansion.
Material changes versus the prior comparable period
- The Jingle acquisition added approximately $5.6 million of revenue from pre-existing Jingle customers during the quarter and six-month period, but also contributed estimated pretax losses of approximately $1.4 million.
- The acquisition created $50.0 million of goodwill, approximately $12.0 million of acquired intangible assets, and $34.7 million of discounted future consideration. Acquisition-related costs were $1.0 million in Q2 and $1.5 million for the first six months.
- AT&T represented 29% of Q2 revenue, 30% of six-month revenue, and 40% of accounts receivable at June 30, 2011. The five largest customers represented 53% of first-half revenue.
- Partner and other revenue grew substantially, while proprietary web-site revenue declined by $1.0 million in Q2 and $2.7 million for the six months, primarily because of lower cost-per-action revenue.
- Service costs increased in dollars but declined as a percentage of revenue to 56% in Q2 and 57% for the six months, compared with 64% and 58%, respectively, in 2010.
- The company declared a regular $0.02-per-share quarterly dividend in July 2011, expected to require approximately $739,000.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide formal numerical revenue or earnings guidance. It expected near-term sales and marketing, product development, and general and administrative expenses to remain stable or increase modestly, with longer-term increases as the business expands. Management also expected distribution-partner costs to rise if partner-based revenue becomes a larger share of activity and stated that seasonality typically reduces mobile and Internet usage in the second and third quarters.
- Revenue and liquidity are concentrated among major customers and reseller partners, particularly AT&T, and depend on maintaining distribution agreements and favorable revenue-share terms.
- Accounts receivable and collection risk could increase if large advertisers or reseller partners reduce spending, experience financial distress, or delay payment.
- Jingle integration, vendor dependence, intellectual-property claims, telecommunications regulation, privacy requirements, traffic quality, fraud, cybersecurity, and service interruptions could adversely affect results.
- Goodwill was $85.3 million at June 30, 2011, including $50.0 million from Jingle. No goodwill or intangible-asset impairment had been identified, but future impairment charges remain possible if operating performance or forecasts deteriorate.
- Net deferred tax assets were approximately $47.5 million. Realization depends on future taxable income; the company maintained a $4.0 million valuation allowance against certain state and foreign tax assets.
- Jingle’s acquired federal net operating losses may be substantially limited under tax rules, and the purchase-price allocation remained preliminary.
- The company reported no material pending legal proceedings and no known material indemnification costs, although potential indemnification exposure could be material.
- Disclosure controls and procedures were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth from Jingle and AT&T is sustainable after pricing incentives and acquisition-related effects.
- Progress in integrating Jingle and the company’s ability to fund approximately $35.6 million of deferred acquisition payments when due, including the potential dilution if paid in stock.
- Customer and accounts-receivable concentration, particularly AT&T’s 30% revenue contribution and 40% receivable balance.
- Underlying operating cash generation excluding gains on intangible-asset sales and non-cash stock compensation.
- Future goodwill and intangible-asset impairment testing, including the significant goodwill balance added through Jingle.
- Continued payment of the quarterly dividend and share repurchases given cash balances, contractual obligations, and acquisition strategy.