Marchex, Inc. 2014 Form 10-K Summary
Business context and reporting period
Marchex is a mobile advertising technology company focused on pay-for-call advertising, call analytics, local leads and performance-based digital marketing. Its Archeo segment operates pay-per-click advertising and a domain marketplace. The filing covers the fiscal year ended December 31, 2014, including fourth-quarter results. Call-driven revenue represented more than 84% of total revenue.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $182.6 million | $152.6 million | +20% |
| Operating income | $5.0 million | $2.7 million | Improved |
| Income from continuing operations | $(19.4) million | $1.0 million | Declined |
| Net income (loss) | $(19.1) million | $1.8 million | Declined |
| Net loss applicable to common stockholders | $(19.2) million | $1.8 million | Declined |
| Basic and diluted loss per share | $(0.48) | $0.05 income | Declined |
| Cash flow from operations | $22.4 million | $13.6 million | +65% |
| Cash and cash equivalents | $80.0 million | $30.9 million | +159% |
| Total liabilities | $24.5 million | $27.4 million | Decreased |
Operating margin was approximately 2.7% in 2014 versus 1.8% in 2013. Total operating expenses were $177.7 million, or 97% of revenue, compared with $153.6 million, or 101% of revenue, in 2013. Service costs increased to $114.6 million, or 63% of revenue, from $91.9 million, or 60%, primarily because of higher distribution-partner payments and personnel costs. Stock-based compensation was $11.9 million.
Fourth-quarter revenue was $33.3 million, compared with $39.7 million in the fourth quarter of 2013. Fourth-quarter operating income was $590,000 and net income was $570,000, compared with 2013 fourth-quarter operating income of $1.5 million and net income of $605,000. Fourth-quarter 2014 results were affected by the loss of Allstate pay-for-call spending.
Call-driven revenue increased 24% to $168.1 million, and segment profit increased 76% to $11.1 million. Archeo revenue decreased 16% to $14.6 million, while Archeo segment profit decreased 36% to $6.1 million. Domain name sales recognized as revenue were $7.3 million in 2014, compared with $2.4 million in 2013.
Material changes versus the prior comparable period
- Revenue growth was concentrated in the Call-driven segment, primarily from higher national-advertiser budgets for pay-for-call services.
- Allstate represented 27% of 2014 revenue, or $48.8 million, but ceased pay-for-call purchases in September 2014. Substantially all related revenue and distribution-partner payments occurred during the first nine months.
- Yellowpages.com, or YP, represented 24% of 2014 revenue, compared with 25% in 2013. YP’s principal local-leads and pay-for-call arrangements expire in June 2015.
- Archeo performance weakened because of lower cost-per-action revenue, fewer advertisers and lower pay-per-click spending, partly offset by higher domain sales.
- The company recorded a $24.3 million income-tax expense, including a $22.3 million increase in the valuation allowance on deferred tax assets. At year-end, all $44.8 million of deferred tax assets were subject to a valuation allowance.
- Goodwill and acquisition-related intangible assets were tested for impairment in 2014; no impairment was recorded. Goodwill totaled $65.7 million at year-end.
- Cash increased primarily because of $32.5 million of net proceeds from an April 2014 follow-on equity offering and stronger operating cash flow. The company repurchased approximately 669,000 Class B shares for $2.5 million and paid $3.3 million of dividends.
Guidance, outlook, risks and unusual items
Management stated that existing cash, operating cash flow and available credit were expected to fund operations for at least twelve months. The company had no borrowings under its $30 million senior secured revolving credit facility, which matures in April 2017, leaving $30 million available at December 31, 2014.
Management expected an annual dividend of approximately $0.08 per share, or about $3.4 million, subject to capital availability, but provided no formal revenue or earnings guidance. Product development and sales and marketing spending were expected to remain stable or increase modestly in the near term, while service costs could rise as a percentage of revenue because of distribution-partner economics.
- Customer concentration: YP and Allstate accounted for 24% and 27% of 2014 revenue, respectively. The five largest customers represented 62% of revenue.
- Revenue loss risk: Management did not expect meaningful additional Allstate pay-for-call revenue and expected the related analytics relationship to cease in the first quarter of 2015.
- Contract renewal risk: YP agreements expiring in June 2015 could be renewed on less favorable terms or not renewed.
- Profitability and tax risk: The company has an accumulated deficit of $190.2 million and has incurred substantial historical losses. Future taxable income may be insufficient to realize deferred tax assets.
- Operating risks: The business depends on mobile and online advertising demand, distribution partners, traffic quality, telecommunications carriers, third-party hosting and rapidly changing technology.
- Legal and regulatory risks: Call recording, privacy, telemarketing, telecommunications, intellectual-property and online advertising regulations could increase costs or create liability. No material legal proceedings were reported.
- Seasonality: Call volume and advertiser demand generally decline in the latter part of the fourth quarter, while mobile and Internet usage is generally lower in the spring and summer.
- Unusual items: The 2014 net loss was driven largely by the non-cash deferred-tax valuation allowance. Discontinued operations contributed $287,000, including a $278,000 after-tax gain from an earn-out related to the 2013 sale of certain pay-per-click assets.
Most important facts for investors to verify
- Whether YP renewed or replaced the arrangements expiring in June 2015 and on what economic terms.
- The post-2014 revenue trajectory following Allstate’s exit from pay-for-call services.
- Revenue and contribution-margin trends in the Call-driven segment excluding Allstate.
- Whether Archeo’s declining advertising business and domain sales are sustainable.
- Cash conversion, accounts-receivable concentration and collection exposure, particularly the $10.7 million YP receivable at year-end.
- Future deferred-tax valuation allowances and the potential effect on reported earnings.
- Goodwill impairment sensitivity, given the $65.7 million goodwill balance and the company’s reduced market capitalization.
- Actual dividend and share-repurchase decisions relative to cash needs, acquisitions and available liquidity.