Marchex, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. The filing was submitted November 6, 2017. Marchex operates primarily as a call analytics and performance-based, pay-for-call advertising company serving businesses that use inbound calls to generate sales, appointments, and reservations.
Financial Results and Position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $22.1 million, down 28% year over year | $68.4 million, down 32% year over year |
| Loss from operations | $0.9 million | $5.7 million |
| Net loss | $0.8 million, or $0.02 per share | $5.6 million, or $0.13 per share |
| Operating expense ratio | 104% of revenue | 108% of revenue |
| Operating cash flow | Not separately provided for the quarter | $1.7 million provided |
- Service costs were $11.9 million in the quarter and $37.7 million year to date, representing 54% and 55% of revenue, respectively, compared with 60% in each comparable 2016 period.
- Sales and marketing expense was $3.6 million in the quarter and $12.1 million year to date. Product development expense was $4.3 million and $13.8 million, respectively. General and administrative expense was $3.1 million and $10.6 million, respectively.
- Stock-based compensation was $1.2 million in the quarter and $3.5 million year to date, down from $1.8 million and $7.2 million in the comparable 2016 periods.
- Cash and cash equivalents were $104.4 million at September 30, 2017, compared with $104.0 million at December 31, 2016.
- Accounts receivable declined to $14.9 million from $18.9 million at year-end 2016. Total assets were $124.1 million and total liabilities were $12.9 million.
- The filing does not disclose outstanding borrowings or debt; liabilities primarily consist of accounts payable, accrued liabilities, deferred revenue, and other non-current liabilities.
- Accumulated deficit was $253.2 million at September 30, 2017. The company had approximately $47.5 million of deferred tax assets fully offset by a valuation allowance.
Material Changes Versus Prior Comparable Period
- Revenue declined primarily because of larger advertiser budget reductions in pay-for-call services and fewer accounts and lower performance-based advertising and platform revenue from reseller partners, including YP.
- Operating losses improved substantially because the prior-year results included a $63.3 million goodwill impairment charge. Goodwill was reduced to zero during the second quarter of 2016.
- Excluding the goodwill impairment, the year-over-year improvement also reflected lower personnel, distribution partner, network, outside service provider, and other operating costs. These savings were partly offset by lower revenue and approximately $700,000 of employee separation costs incurred in the first quarter of 2017.
- Operating cash flow improved from $2.9 million used in the first nine months of 2016 to $1.7 million provided in the first nine months of 2017, despite the continuing net loss.
- The company launched Social Analytics in February 2017, Speech Analytics in April 2017, and Audience Targeting in July 2017, in addition to expanding its display, video, and omnichannel analytics products.
Guidance, Outlook, Risks, and Unusual Items
- Management expects revenue to remain lower in the near term because of fewer small-business accounts on the local leads platform and reduced demand for calls from call advertising customers.
- YP, including Dex, represented 21% of third-quarter revenue and 22% of nine-month revenue. Management expects YP-related revenue and contribution to decline. YP may migrate accounts to itself or another provider and has termination rights beginning January 1, 2018 with four months’ notice.
- State Farm represented 15% of third-quarter revenue and 16% of nine-month revenue through agency relationships. Management expects related campaign spending to be lower than in prior periods.
- The five largest customers represented approximately 53% of nine-month revenue. Customer concentration, short-term campaign commitments, reduced advertising budgets, acquisitions of customers, and delayed collections could materially affect results.
- Contractual obligations totaled approximately $16.4 million, including $12.1 million of facility lease commitments and $4.3 million of other contractual obligations. The company also reported $1.1 million of uncertain tax positions, excluded from the contractual-obligation table.
- The company entered into a Seattle office lease amendment extending the lease through March 31, 2025, reducing leased space, and providing a potential termination option in 2023 subject to conditions and an approximately $671,000 termination fee.
- Management believes existing resources are sufficient to fund operations for at least twelve months and potential strategic initiatives. However, additional equity or debt financing may be needed for acquisitions, long-term obligations, or other business needs.
- The company did not repurchase Class B shares during the first nine months of 2017; 1,319,128 shares remained available under the repurchase authorization at September 30, 2017.
- Key ongoing risks include dependence on major reseller partners and advertisers, competition, declining or seasonal advertising demand, distribution and telecommunications providers, data privacy and security, call-quality and fraud issues, intellectual-property claims, regulatory changes, customer credit risk, and continued operating losses.
- The company will adopt the new revenue recognition standard on January 1, 2018 using the modified retrospective method. Its assessment of the impact was not complete at the filing date. Lease accounting adoption is planned for January 1, 2019 and is expected to affect the balance sheet.
- No material legal proceedings were reported. Management stated that no pending claims were expected to have a material adverse effect, although indemnification obligations could be material in the future.
Investor Verification Checklist
- Verify the sustainability of the revenue base following the expected declines in YP/Dex, State Farm, YPG, and other concentrated customer spending.
- Assess whether expense reductions can offset continued revenue contraction and support a path to operating profitability.
- Review the impact of the January 1, 2018 revenue recognition adoption, particularly principal-versus-agent presentation and related disclosures.
- Confirm cash consumption, working-capital requirements, and the company’s ability to fund operations, lease commitments, product investment, and potential acquisitions without new financing.
- Monitor accounts receivable concentration, customer payment timing, and exposure to advertiser credits or doubtful accounts.
- Evaluate the effect of the Seattle lease amendment and future lease liabilities, including the planned $575,000 letter of credit in March 2018.
- Consider the implications of the founders’ control: holders of Class A common stock held approximately 77% of combined voting power as of September 30, 2017.