Marchex, Inc. Form 10-Q Summary
Business Context and Reporting Period
Marchex provides mobile advertising analytics, pay-for-call advertising, call tracking, call quality and performance measurement services. Its principal segment is Call-Driven; the smaller Archeo segment provides click-based advertising and website monetization. This unaudited filing covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
In April 2015, Marchex sold certain Archeo domain-operation assets, including most of its domain portfolio. Related results are presented as discontinued operations.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $36.9 million | $47.2 million | $108.1 million | $142.4 million |
| Operating income (loss) | $12,000 | $193,000 | $(1.8) million | $297,000 |
| Net income (loss) | $9,000 | $(21.5) million | $25.5 million | $(19.7) million |
| Net income (loss) per share | $0.00 | $(0.52) | $0.62 | $(0.50) |
| Cash flow from operations | Not provided for the quarter | Not provided for the quarter | $12.0 million | $18.1 million |
Q3 revenue declined 22%; nine-month revenue declined 24%. Call-Driven revenue fell 22% in Q3 and 23% for the nine-month period. Archeo revenue declined 17% in Q3 and 46% for the nine-month period.
Operating margin was approximately 0% in Q3 2015 and negative 2% for the nine-month period, compared with approximately 0% in both comparable 2014 periods. Service costs improved to 54% of revenue in Q3 and 55% for nine months, versus 66% in both 2014 periods, but sales and marketing and product development represented a larger percentage of revenue.
Q3 2015 net income was approximately break-even despite a $191,000 tax expense. Nine-month net income primarily reflects a $22.2 million after-tax gain on the sale of discontinued operations and $5.1 million of discontinued-operation income.
- Cash and cash equivalents were $108.9 million at September 30, 2015, up from $80.0 million at December 31, 2014.
- Total assets were $206.7 million and total liabilities were $22.0 million at September 30, 2015.
- Stockholders’ equity was $184.8 million; accumulated deficit was $164.8 million.
- The company had no borrowings under its $30 million secured revolving credit facility during the nine-month periods. The facility matures April 1, 2017.
- Capital expenditures were $3.6 million for the first nine months of 2015.
- Contractual obligations totaled $10.3 million, including $5.8 million of facility leases.
- Stock-based compensation was $7.8 million for the first nine months of 2015 and $2.4 million in Q3.
Material Changes Versus the Prior Comparable Period
- The loss of the Allstate pay-for-call relationship was the principal driver of the revenue decline. Allstate contributed $15.4 million of Q3 2014 revenue and $48.8 million for the first nine months of 2014; Marchex does not expect meaningful future Allstate pay-for-call revenue.
- YP represented 28% of Q3 revenue and 30% of nine-month revenue. The YP agreements were extended through December 31, 2016, but YP may migrate accounts to itself or a third party and its small-business account base has declined.
- State Farm, through Resolution Media and OMD Digital, represented 20% of nine-month revenue and 18% of accounts receivable at September 30, 2015.
- The sale of the Archeo domain assets generated $28.1 million of cash consideration at closing and reduced Archeo goodwill by $2.4 million. The transaction produced a $22.2 million after-tax gain.
- During the first nine months, Marchex repurchased approximately 781,000 Class B shares for $3.2 million. The company paid $1.7 million of dividends and does not anticipate further dividends in the foreseeable future.
- The company increased sales and marketing spending 37% for the nine months and product development spending 4%, while general and administrative expenses decreased 7%.
Outlook, Commentary, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management expects near-term service costs as a percentage of revenue to be stable to modestly higher, sales and marketing expense to be relatively stable, product development expense to be stable to modestly lower, and general and administrative expense to be stable to modestly lower. Longer-term spending may increase as the company expands its sales force, platforms and international operations.
Management believes existing cash, credit availability and operating cash flow are sufficient to fund operations for at least twelve months, but additional financing could be required for acquisitions, long-term obligations or business expansion. The company states that additional financing may not be available on acceptable terms.
- Revenue is highly concentrated: the five largest customers represented approximately 61% of nine-month 2015 revenue. Customer advertising budgets may be reduced or terminated with limited notice.
- YP, advertising agencies and distribution partners are strategically important; contract renewals, account migration and less favorable terms could materially affect revenue and margins.
- The company relies on third-party distribution networks, telecommunications carriers, hosting providers and other technology vendors. Service interruptions, traffic-quality problems, fraud, security breaches or loss of access could reduce revenue and cause liabilities.
- Goodwill totaled $63.3 million, all associated with the Call-Driven reporting unit. The stock price approached or fell below book value at times, creating a potential impairment indicator. Management planned its annual goodwill review for November 30, 2015.
- Deferred tax assets of $34.8 million were fully reserved because management concluded realization was not more likely than not. Tax uncertainties totaled $717,000.
- Future minimum payments for contingent royalties based on certain gross revenues are excluded from the contractual-obligation table.
- The company has indemnification obligations in certain contracts. No material costs have been incurred to date, but potential future payments could be material.
- The company is exposed to seasonality, economic pressure on advertising budgets, competition, regulatory changes affecting call recording and telecommunications, intellectual-property claims, and risks associated with international expansion.
Most Important Facts for Investors to Verify
- Whether Call-Driven revenue stabilizes after the loss of Allstate and whether new advertiser budgets offset the decline.
- YP account retention, migration activity, minimum-fee commitments and the terms of agreements expiring in December 2016.
- Revenue and accounts-receivable concentration involving YP, State Farm, Resolution Media and other large customers.
- The sustainability of operating cash flow after the one-time domain-sale proceeds and discontinued-operation benefits are excluded.
- The outcome of the November 2015 goodwill impairment review and any effect on the $63.3 million goodwill balance.
- Whether the company maintains sufficient liquidity without additional debt or equity financing, particularly if it resumes acquisitions.
- The impact of ending dividends and continued share repurchases on capital allocation and shareholder returns.
- The potential realization of tax attributes, including the fully reserved deferred tax assets and available federal net operating losses.