Business Context and Reporting Period
Marchex, Inc. is a conversational analytics and solutions company providing AI-enabled voice and text analytics, call tracking, sales engagement, messaging, and customer-conversation insights. The company operates as one segment, primarily in the United States, and filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022.
Financial Results and Key Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $13.2 million | $13.7 million | $39.9 million | $40.7 million |
| Loss from operations | $(1.6) million | $(1.9) million | $(4.6) million | $(10.0) million |
| Net income (loss) | $(1.6) million | $3.3 million | $(4.7) million | $(2.4) million |
| Basic and diluted loss per share | $(0.04) | $0.07 | $(0.11) | $(0.05) |
| Cash flow from operations | Not separately provided for the quarter | $(1.8) million | $(5.8) million |
- Q3 revenue declined 4% year over year; nine-month revenue declined 2%.
- Operating margin was approximately negative 12% in Q3 2022 and negative 12% for the first nine months, compared with negative 14% and negative 25%, respectively, in the comparable 2021 periods.
- Service costs declined 9% in Q3 and 10% for the nine-month period, benefiting from lower network costs and cloud and infrastructure initiatives. Product development expense increased 11% in Q3 but declined 21% year to date.
- Cash and cash equivalents were $23.3 million at September 30, 2022, down from $27.1 million at December 31, 2021.
- Total assets were $61.0 million and stockholders’ equity was $48.9 million at September 30, 2022.
- The filing reports no conventional debt balance. Lease liabilities totaled $2.0 million, including $1.5 million current and $0.4 million non-current.
- Total contractual commitments were approximately $4.9 million, including $2.0 million for facilities and other operating leases.
- Accounts receivable were $8.4 million. One customer represented 20% of accounts receivable, compared with 11% at December 31, 2021; no customer exceeded 10% of revenue.
Material Changes Versus the Prior Comparable Period
- Revenue decreased because of lower conversation volumes and continued effects from COVID-19-related disruption, supply-chain constraints, inflation, and labor shortages.
- Operating loss improved by $5.4 million for the nine months, primarily due to lower product development and service costs and substantially lower amortization expense.
- Net results deteriorated despite the improved operating loss because the prior-year periods included a $5.2 million gain from CARES Act loan extinguishment and a $2.5 million contractual settlement payment; these benefits did not recur in 2022.
- Operating cash use improved to $1.8 million from $5.8 million, while investing cash use increased to $2.0 million from $0.5 million due primarily to technology infrastructure purchases and capitalized software development.
- Amortization of acquired intangible assets declined to $1.6 million from $3.7 million for the nine months. The related intangible asset balance declined to $3.1 million from $4.7 million at year-end 2021.
- Support service fee recovery from the related-party purchaser was $5.4 million for the nine months, compared with $5.1 million in 2021, and $1.8 million in Q3, compared with $2.2 million.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expects near-term revenue to be slightly lower than the most recent quarter because of seasonal reductions in call volume, particularly late in the fourth quarter. Management expects near-term results to remain volatile.
- The company expects service costs to be similar to or modestly higher than the most recent period, product development expense to remain relatively stable, and sales and marketing expense to be similar to or modestly higher, depending on marketing activity.
- Management believes new product launches, including Conversation DNA, and broader adoption of conversation intelligence and sales engagement products could support longer-term revenue growth.
- Management stated that existing resources should fund operations and strategic investments for at least twelve months. However, additional equity or debt financing may be needed for acquisitions, long-term obligations, or other needs, and financing may not be available on acceptable terms.
- After quarter-end, the company paid $1.5 million and incurred an obligation to remit $335,000 in cash or equipment in 2023 in partial settlement of a contractual matter.
- The Seattle headquarters lease will terminate in March 2023 after notice was provided in September 2022; the company expects to pay approximately $671,000 and procure alternative office space.
- The company maintains a 100% valuation allowance against deferred tax assets, reflecting uncertainty regarding future taxable income. The valuation allowance was $54.7 million at September 30, 2022.
- Key risks include continued COVID-19 and macroeconomic disruption, customer concentration and spending reductions, recurring losses and cash consumption, dependence on third-party telecommunications and cloud providers, cybersecurity and privacy exposure, telecommunications and messaging regulation, competition, intellectual-property claims, and potential impairment of goodwill or acquired intangible assets.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the nine months ended September 30, 2022.
Important Facts for Investors to Verify
- Whether conversation volumes and revenue stabilize or continue to decline during the seasonal fourth quarter and into 2023.
- The company’s ability to convert new product trials and Conversation DNA initiatives into recurring revenue and improved operating margins.
- Cash burn after the $1.5 million contractual settlement payment and the additional $335,000 2023 obligation.
- Whether the stated twelve-month liquidity assessment remains valid under weaker revenue or customer-spending conditions.
- The concentration of revenue among the five largest customers, approximately 30%, and the 20% accounts-receivable exposure to one customer.
- The timing and cost of relocating from the Seattle headquarters and the company’s remaining lease and contractual commitments.
- Potential goodwill or intangible-asset impairment, given continued operating losses and the remaining $17.6 million of goodwill.