Marchex, Inc. 2018 Q3 Form 10-Q Summary
Business context and reporting period
Marchex provides call analytics, speech analytics, omnichannel analytics, pay-for-call advertising, call marketplace, and local leads services. The filing covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. The financial statements are unaudited and reflect adoption of ASC 606 on January 1, 2018 using the modified retrospective method; comparative periods remain under ASC 605.
Financial performance and condition
| Metric | Three months ended Sept. 30 | Change | Nine months ended Sept. 30 | Change |
|---|---|---|---|---|
| Revenue | $20.0 million | Down 9% | $62.1 million | Down 9% |
| Loss from operations | $0.7 million | Improved from $0.9 million loss | $2.8 million | Improved from $5.7 million loss |
| Net loss | $0.5 million | Improved from $0.8 million loss | $2.0 million | Improved from $5.6 million loss |
| Net loss per share | $0.01 | Improved from $0.02 | $0.05 | Improved from $0.13 |
| Operating cash flow | Not separately provided | — | $4.1 million | Up from $1.7 million |
- Performance-based advertising revenue was $18.4 million in the third quarter and $56.9 million for the nine-month period. Local leads revenue was $1.6 million and $5.2 million, respectively.
- Operating expenses declined to $20.7 million in the third quarter and $64.9 million for the nine-month period, from $22.9 million and $74.1 million, respectively. Nine-month service costs were 56% of revenue, sales and marketing 17%, product development 18%, and general and administrative 13%.
- Revenue declined primarily because of fewer accounts and lower pay-for-call and platform revenue from reseller partners, including DexYP, and reductions in advertiser budgets.
- Cash and cash equivalents were $78.6 million at September 30, 2018, down from $104.2 million at December 31, 2017. Total assets were $98.3 million and total liabilities were $13.4 million.
- The filing does not identify outstanding debt. Contractual obligations totaled approximately $13.3 million, including $10.3 million of facility lease obligations.
- Accounts receivable were $13.6 million. Cash was concentrated primarily with two financial institutions.
Cash flow, capital allocation, and liquidity
- Operating cash flow of $4.1 million was supported by noncash expenses, including $2.3 million of stock-based compensation, and working-capital activity.
- Investing cash outflows were $2.2 million, including $1.6 million for property and equipment and $575,000 for a certificate of deposit securing a lease-related letter of credit.
- Financing cash outflows were $27.5 million, consisting principally of the $21.9 million special cash dividend paid in the first quarter and a $5.7 million repurchase of approximately 2.3 million Class B shares in May 2018.
- Management stated that available resources should fund operations for at least twelve months and potentially support strategic initiatives, including acquisitions. Management also noted that additional equity or debt financing could be required for larger acquisition activity or long-term obligations.
Material changes versus the prior comparable period
- Revenue fell 9% in both the quarter and nine-month period, while operating and net losses narrowed because of lower personnel, stock compensation, professional services, facilities, and other operating costs.
- Operating margin improved from approximately negative 4% to negative 3% in the quarter and from negative 8% to negative 4% for the nine-month period.
- Operating cash flow increased by approximately $2.4 million year over year for the nine-month period.
- Stock-based compensation declined from $3.5 million to $2.3 million for the nine-month period.
- The company paid the previously declared $0.50-per-share special dividend and completed a substantial Class B share repurchase.
- Class B shares outstanding declined from approximately 38.7 million at December 31, 2017 to approximately 36.8 million at September 30, 2018.
Guidance, outlook, risks, and unusual items
- Management expected near-term revenue to be modestly higher than recent quarters following the November 2018 Telmetrics acquisition, partly offset by continued declines in small-business accounts on the local leads platform.
- On November 5, 2018, Marchex acquired Telmetrics for $10.1 million in cash, with up to $3.0 million of contingent cash consideration and approximately $500,000 of equity awards to certain Telmetrics employees. This is a subsequent event and is not reflected in the September 30 financial statements.
- Management expected service costs to be stable to modestly higher, with potential pressure from distribution-partner pricing and a changing revenue mix. Sales and marketing, product development, and general and administrative expenses were expected to be stable to modestly higher in the near to intermediate term.
- DexYP represented 22% of nine-month revenue and 25% of third-quarter revenue. State Farm represented 21% of nine-month revenue and 16% of third-quarter revenue. The five largest customers represented approximately 51% of nine-month revenue.
- The YP/local leads arrangements expire December 31, 2019 and permit account migration and certain termination rights. Management expects YP-related revenue and account volumes to decline.
- State Farm campaign spending was expected to be modestly lower or similar to prior quarters. Many large customer and agency arrangements are short term and permit spending reductions or cancellation.
- The company remains loss-making, with an accumulated deficit of $255.6 million and a full valuation allowance against deferred tax assets. Uncertain tax positions totaled approximately $1.1 million.
- Key risks include customer and reseller concentration, dependence on distribution partners, advertiser budget reductions, seasonality, competition, telecommunications and call-recording regulation, privacy and cybersecurity exposure, intellectual-property claims, technology outages, and acquisition integration risk.
- The company reported no material pending legal proceedings and concluded that disclosure controls and procedures were effective as of September 30, 2018.
Important facts for investors to verify
- Whether Telmetrics produces the expected revenue, growth, and cost synergies and whether the contingent consideration becomes payable.
- Renewal and migration outcomes for the YP/local leads contracts before their December 31, 2019 expiration.
- Revenue retention and spending trends for DexYP, State Farm, and other concentrated customers and agencies.
- Whether revenue growth can resume while service costs and distribution-partner payments remain controlled.
- Cash usage after the special dividend, share repurchase, Telmetrics acquisition, capital expenditures, and potential future acquisitions.
- Whether the company can achieve sustained profitability without materially reducing investment in product development, sales, and marketing.
- The effect of ASC 606 adoption, the planned lease-standard adoption on January 1, 2019, and other accounting changes on reported results and liquidity.