Marchex, Inc. 2020 Q1 SEC Filing Summary
Business context and reporting period
Marchex is a call analytics and conversational solutions company providing call and text analytics, pay-for-call advertising, call monitoring, speech analytics, and local lead-generation services. The unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. The company operated as one reportable segment and generated approximately 98% of revenue from the United States.
Key financial metrics
| Metric | Q1 2019 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $26.4 million | $24.8 million | Down 6% |
| Service costs | $14.3 million | $14.5 million | Up 2% |
| Total operating expenses | $28.0 million | $30.4 million | Up 9% |
| Loss from operations | $(1.6) million | $(25.7) million | Materially higher loss |
| Net loss | $(1.3) million | $(24.9) million | Materially higher loss |
| Basic and diluted loss per share | $(0.03) | $(0.53) | Lower |
| Operating cash flow | $5.6 million provided | $1.7 million used | Down $7.3 million |
| Cash and cash equivalents | $42.5 million at Dec. 31, 2019 | $40.3 million at Mar. 31, 2020 | Down $2.2 million |
Revenue comprised $24.0 million from performance-based advertising services and $826,000 from local leads services in Q1 2020, compared with $25.2 million and $1.2 million, respectively, in Q1 2019. Operating expenses were 123% of revenue in Q1 2020 versus 106% in Q1 2019. Net loss margin was approximately negative 100% in Q1 2020 versus negative 5% in Q1 2019, primarily because of non-cash impairment charges.
At March 31, 2020, total assets were $100.1 million, including $40.3 million of cash, $16.8 million of accounts receivable, $19.1 million of goodwill, and $11.8 million of acquired intangible assets. Total liabilities were $24.0 million and stockholders’ equity was $76.0 million. The filing does not show conventional bank debt outstanding at quarter-end; liabilities primarily consisted of operating lease liabilities and acquisition-related liabilities.
Material changes versus the prior comparable period
- Revenue declined 6%, driven primarily by lower call analytics and local leads activity, customer budget reductions, and COVID-19-related disruption in March.
- Service costs increased to 59% of revenue from 54%, while sales and marketing increased to 20% from 16%, product development to 24% from 17%, and general and administrative expense to 15% from 13%.
- The company recorded a preliminary $14.2 million goodwill impairment and a $5.9 million impairment of acquired intangible assets. These charges were non-cash and had no corresponding amounts in Q1 2019.
- Stock-based compensation increased from $545,000 to $1.1 million, and amortization of acquired intangibles increased from $1.6 million to $1.8 million.
- Acquisition-related costs changed from $182,000 of expense to a $635,000 benefit, primarily due to a $716,000 reduction in the fair value of contingent consideration liabilities.
- Operating cash flow shifted from $5.6 million provided to $1.7 million used. Working capital and customer-collection trends deteriorated, including higher provisions for doubtful accounts and advertiser credits.
- The company acquired Sonar in December 2019, contributing to higher expenses, amortization, and product-development costs in Q1 2020.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects revenue to remain below recent quarterly levels in the near term and potentially beyond because of COVID-19-related customer shutdowns, lower advertising budgets, delayed sales cycles, delayed pilots, payment delays, and reduced customer ability to pay.
- Management expects operating cash flow and liquidity to be adversely affected by lower revenue and weaker receivable collectability. The company stated that existing resources were expected to fund operations for at least twelve months, but noted that the duration and severity of COVID-19 could materially change that assessment.
- Thryv represented 26% of Q1 2020 revenue. The company’s local leads agreement with Thryv expires December 31, 2020 and may be terminated or migrated earlier, creating a material revenue and profitability risk.
- State Farm represented 17% of Q1 2020 revenue and approximately 40% of accounts receivable through agency relationships. Management expected related campaign spending to decline in the near to intermediate term.
- The five largest customers represented approximately 53% of Q1 2020 revenue, creating significant customer-concentration risk.
- The company committed $2.5 million to a strategic technology initiative during 2020 and expected infrastructure and data-center expenditures to increase modestly.
- Future contractual commitments included approximately $9.3 million of facility lease payments and $2.1 million of other contractual obligations. Telmetrics contingent cash consideration had a maximum payout of approximately $1.8 million at March 31, 2020. Sonar contingent consideration could require issuance of up to 389,000 Class B shares.
- During Q2 2020, the company obtained a $4.0 million government-program promissory note and subsidiaries obtained approximately $1.3 million of similar loans. The loans bear 1% interest, mature in two years, include a six-month payment deferral, and may be partially forgivable if program requirements are met.
- Additional impairment charges remain possible because impairment testing depends on forecasts, discount rates, stock price, market capitalization, revenue growth, and profitability assumptions.
- The company maintained a full valuation allowance against its U.S. deferred tax assets and reported approximately $1.4 million of uncertain tax positions as of March 31, 2020.
- Other significant risks include dependence on distribution partners, reseller and agency relationships, customer credit deterioration, telecommunications and privacy regulation, TCPA and call-recording compliance, cybersecurity, intellectual-property claims, competition, seasonality, and the need for potential future financing.
- Management reported that disclosure controls and procedures were effective as of March 31, 2020 and that no material change occurred in internal control over financial reporting.
Most important facts for an investor to verify
- Whether COVID-19-related revenue declines, customer losses, payment delays, and bad-debt expense persisted or worsened after March 31, 2020.
- The subsequent performance and collectability of the largest exposures, particularly Thryv and State Farm-related receivables.
- Whether the Thryv agreements were renewed, migrated, terminated, or renegotiated after their December 31, 2020 expiration date.
- Whether additional goodwill or acquired-intangible impairments were recorded after the preliminary Q1 charges.
- The amount ultimately drawn, forgiven, or repaid under the approximately $5.3 million of government-program loans obtained in Q2 2020.
- Cash burn, operating cash flow, remaining liquidity, and any subsequent equity or debt financing.
- Progress and financial contribution from Sonar, the $2.5 million strategic technology initiative, and planned infrastructure investments.
- Changes in customer concentration, contingent acquisition payments, lease commitments, and regulatory or litigation exposure.