Business Context and Reporting Period
Company: Marchex, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Marchex is a local search and performance advertising company providing search- and call-based marketing solutions. Its services include a Local Search Network, private-label search marketing platforms, pay-per-click advertising, call-based advertising, and feed management services.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Revenue | $26,570,949 | $37,042,327 |
| Net Loss | $(1,673,037) | $(1,246,341) |
| Net Loss per Share (Basic & Diluted) | $(0.05) | $(0.03) |
| Operating Cash Flow | $4,173,782 | $6,657,174 |
| Cash and Cash Equivalents (End of Period) | $25,762,291 | $34,452,286 |
| Total Assets | $170,269,787 | $160,873,238 |
| Total Liabilities | $20,962,035 | $18,042,940 |
| Stockholders' Equity | $149,307,752 | $142,830,298 |
Liquidity: The company maintains a $30 million senior secured revolving credit facility with no borrowings outstanding as of March 31, 2009.
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 28% to $26.6 million from $37.0 million. This was driven by a $6.0 million decrease in pay-per-click revenues due to fewer advertisers and lower spend budgets, and a $2.0 million decrease in traffic volume from domain name owners.
- Expense Reductions: Service costs decreased 37% to $11.9 million, primarily due to lower distribution partner payments. Amortization of intangible assets dropped 47% to $2.1 million as certain assets were fully amortized.
- Increased Loss: Net loss widened to $1.7 million from $1.2 million, primarily due to the revenue decline, partially offset by lower operating expenses and a gain on the sale of intangible assets ($930,000 in 2009 vs. $145,000 in 2008).
- Share Repurchases: The company repurchased 1.6 million shares of Class B common stock for approximately $5.6 million during the quarter.
Guidance, Outlook, and Risks
- Outlook: Management expects revenue for the second quarter of 2009 to be down from the first quarter due to deteriorating economic conditions and typical seasonality (lower internet usage in spring/summer).
- Customer Concentration Risk: The five largest customers accounted for 56% of revenue in Q1 2009. Significant revenue is derived from enterprise partners like AT&T, Yahoo!, and Idearc Media Corp.
- Contingency - Idearc Bankruptcy: Idearc Media Corp. filed for Chapter 11 reorganization on March 30, 2009. Idearc accounted for $2.1 million in revenue for the quarter. Marchex did not recognize an additional $1.1 million in revenue due to collectibility concerns and expects to recognize such amounts only upon cash collection.
- Goodwill Impairment Risk: The company noted that its stock price approached or dropped below book value per share during the quarter. Continued economic deterioration or stock price declines could trigger additional impairment charges on goodwill and intangible assets.
- Dividends: A quarterly dividend of $0.02 per share was declared in April 2009, payable in May 2009.
Investor Verification Checklist
- Idearc Collectibility: Verify the status of Idearc's bankruptcy reorganization plan and the likelihood of collecting the $1.1 million in unrecognized revenue and outstanding receivables.
- Customer Concentration: Assess the stability of the top five customers (56% of revenue) and the risk of budget cuts or contract terminations given the economic climate.
- Goodwill Valuation: Monitor stock price trends relative to book value to gauge the risk of future non-cash impairment charges on the $35.5 million goodwill balance.
- Cash Burn vs. Repurchases: Evaluate the sustainability of the $5.6 million share repurchase program and $741,000 dividend payment against the widening net loss and declining operating cash flow.
- Revenue Mix Shift: Confirm the trend of shifting revenue from partner networks (higher service costs) to proprietary traffic (lower service costs) and its impact on future margins.