Business Context and Reporting Period
Marchex, Inc. is a call analytics and performance-based advertising company providing call, text, speech, monitoring, and omnichannel analytics services, together with pay-for-call and local leads products. This unaudited Form 10-Q covers the three months ended March 31, 2019, with comparison to March 31, 2018. Marchex operates as a single reporting segment and generated approximately 99% of revenue in the United States.
The quarter included the first full period following the November 2018 acquisitions of Telmetrics and Callcap, which expanded call tracking, text communications, call monitoring, and analytics capabilities.
Financial Results and Key Metrics
| Metric | Q1 2018 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $21.9 million | $26.4 million | +21% |
| Service costs | $12.8 million | $14.3 million | +11% |
| Total operating expenses | $23.1 million | $28.0 million | +22% |
| Loss from operations | $(1.2) million | $(1.6) million | Loss increased |
| Net loss | $(0.9) million | $(1.3) million | Loss increased |
| Basic and diluted loss per share | $(0.02) | $(0.03) | Worsened |
| Cash flow from operations | $3.0 million | $5.6 million | +$2.6 million |
Service costs declined to 54% of revenue from 59%, implying an approximately 46% service-cost-adjusted margin before other operating expenses, compared with approximately 41% in the prior-year quarter. The operating loss margin was approximately 6% in 2019 versus 5% in 2018, and the net loss margin was approximately 5% versus 4%.
Performance-based advertising revenue increased to $25.2 million from $19.9 million, while local leads revenue declined to $1.2 million from $2.0 million. Stock-based compensation declined to $545,000 from $951,000.
At March 31, 2019, cash and cash equivalents were $50.9 million, compared with $45.2 million at December 31, 2018. Accounts receivable were $14.7 million and total assets were $122.8 million. The company reported $28.3 million of total liabilities and $94.5 million of stockholders’ equity.
The filing does not identify conventional funded debt. The balance sheet includes $8.3 million of operating lease liabilities, consisting of $1.5 million current and $6.8 million non-current, plus $1.8 million of acquisition-related liabilities, including approximately $1.6 million of estimated Telmetrics contingent consideration.
Material Changes Versus the Prior Comparable Period
- Revenue grew 21%, primarily from call analytics growth, higher pay-for-call advertiser budgets, and contributions from Telmetrics and Callcap.
- Revenue growth was partly offset by fewer local leads accounts and lower local leads revenue from reseller partners, including DexYP.
- Operating expenses grew faster than revenue, mainly because Q1 2019 included $1.6 million of amortization from acquired intangible assets and $182,000 of acquisition-related costs; neither category was recorded in Q1 2018.
- Product development expense increased 25% to $4.6 million, while sales and marketing increased 14% to $4.1 million and general and administrative expense increased 12% to $3.3 million, primarily reflecting the acquisitions and related personnel costs.
- Operating cash flow improved to $5.6 million from $3.0 million, supported by working-capital changes, including higher deferred revenue and deposits and collections of accounts receivable.
- Q1 2018 financing cash flow included payment of a $21.9 million special cash dividend. No comparable dividend was paid in Q1 2019.
- Marchex adopted ASC 842 leases on January 1, 2019, recognizing a $7.1 million right-of-use asset and $8.3 million of lease liabilities at March 31, 2019.
Outlook, Commentary, Risks, and Unusual Items
Management expects revenue to be modestly higher in the near term because of the Telmetrics and Callcap acquisitions, partly offset by declining local leads activity. Management expects service costs as a percentage of revenue to remain relatively stable to modestly higher, while sales and marketing, product development, and general and administrative expenses are expected to be stable to modestly higher.
Management expects State Farm campaign spending to be modestly lower in the near to intermediate term. State Farm represented 15% of Q1 2019 revenue and 35% of accounts receivable. DexYP represented 27% of revenue, and the five largest customers represented approximately 51% of revenue. These concentrations create material customer-retention, budget, collection, and renewal risks.
The primary local leads agreement with YP expires December 31, 2019. YP may migrate accounts to itself or a third party and has termination rights with four months’ notice. Management expects YP and local leads revenue to represent a lower proportion of future revenue.
Marchex committed $2.5 million over the following 12 months for a strategic technology initiative. The Telmetrics earnout may require cash payments of up to $3.0 million, with an estimated fair value of approximately $1.6 million at March 31, 2019. Future contractual commitments totaled approximately $12.7 million, including $9.8 million for facilities leases.
Management believes existing resources will fund operations and strategic investments for at least twelve months, but states that additional equity or debt financing may be needed for acquisitions, long-term obligations, or other needs. The company has incurred losses for much of its history and had an accumulated deficit of $257.5 million at March 31, 2019. No material legal proceedings were reported, and no goodwill or intangible-asset impairment was identified during the quarter.
Material risks include continued operating losses, dependence on large customers and distribution partners, customer and advertiser concentration, declining local leads activity, competition, seasonality, traffic quality and advertiser credits, collections and credit risk, technology and cybersecurity failures, telecommunications and privacy regulation, intellectual-property claims, acquisition integration, potential impairment charges, and the need for additional capital.
Most Important Facts to Verify
- Whether revenue growth from Telmetrics and Callcap offsets expected declines in YP/DexYP local leads activity and lower State Farm spending.
- Renewal terms and account migration decisions under the YP agreements expiring December 31, 2019.
- Progress and returns from the $2.5 million strategic technology initiative.
- Cash requirements and timing for the Telmetrics earnout, Callcap share issuances, lease commitments, and other contractual obligations.
- Whether operating expenses, particularly acquired-intangible amortization and product development costs, decline sufficiently to support a return to profitability.
- Customer concentration, accounts receivable collectability, and exposure to State Farm, DexYP, agencies, and other major counterparties.
- Future goodwill and intangible-asset impairment testing, given the acquired asset balances and continuing operating losses.
- Future dividend policy and potential equity or debt financing needs; the filing provides no commitment to future dividends.