Marchex, Inc. 2016 Q2 Form 10-Q Summary
Business context and reporting period
Marchex provides mobile advertising analytics, call analytics, pay-for-call advertising, call marketplace, and local leads services for businesses dependent on consumer phone calls. The filing covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. Following the 2015 sale of its Archeo operations, substantially all 2016 activity was in the Call-driven segment.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $34.4 million, versus $35.3 million | $70.4 million, versus $71.3 million |
| Operating expenses | $39.8 million, or 116% of revenue, versus 104% | $79.5 million, or 113% of revenue, versus 102% |
| Goodwill impairment | $63.3 million | $63.3 million |
| Loss from operations | $68.7 million, or approximately negative 200% margin | $72.4 million, or approximately negative 103% margin |
| Net loss | $68.8 million, or $(1.65) per share | $72.5 million, or $(1.75) per share |
| Net cash from operating activities | Not separately provided in the filing excerpt | $(2.7) million, versus $4.4 million provided |
| Cash and cash equivalents | $105.8 million at June 30, 2016, versus $109.2 million at December 31, 2015 |
Service costs were $20.5 million in the second quarter and $42.5 million for the first six months, representing 60% of revenue in both periods. Sales and marketing costs increased to $5.6 million in the quarter and $11.2 million year to date. Product development costs were $7.6 million in the quarter and $15.0 million year to date. Stock-based compensation was $3.5 million in the quarter and $5.5 million year to date.
The company had no borrowings under its $30 million senior secured revolving credit facility. The facility matures April 1, 2017, is secured by substantially all company assets, and was amended in June 2016 to revise fees, covenants, permitted indebtedness, and payment restrictions. Contractual obligations totaled $9.0 million, including $4.2 million of facility leases. Current liabilities were $17.5 million at June 30, 2016.
Material changes versus the prior comparable period
- Revenue declined 3% in both the quarter and six-month period. Call-driven revenue was approximately flat in the quarter and increased year to date, but the gains were offset by the elimination of Archeo revenue following its 2015 disposition.
- The company recorded a preliminary $63.3 million non-cash goodwill impairment charge after a sustained decline in share price and market capitalization and lower projected revenue growth and profitability. The analysis was not final at filing and could be adjusted in the third quarter.
- Operating expenses increased to 116% of quarterly revenue and 113% of year-to-date revenue, compared with 104% and 102%, respectively, in 2015. Distribution partner payments and network and communication costs increased, while sales and marketing spending rose materially.
- Net income in the 2015 periods benefited from discontinued operations and a $22.0 million gain on the sale of Archeo domain operations. No corresponding discontinued-operation benefit occurred in 2016.
- Cash declined $3.4 million during the first six months of 2016. Investing cash use was $0.6 million, and financing cash use was $0.1 million. The company discontinued common-stock dividends after the second quarter of 2015.
- Accounts receivable increased to $25.3 million from $24.6 million at year-end 2015, while stockholders’ equity fell to $120.3 million from $187.5 million, primarily reflecting the goodwill impairment and year-to-date loss.
Guidance, outlook, commentary, risks, and unusual items
Management expects service costs as a percentage of revenue to be stable to modestly higher in the near term, with longer-term increases as traffic, calls, network infrastructure, and platform investment expand. Sales and marketing expense is expected to be relatively stable near term and higher over the longer term as the company expands its sales force, marketing initiatives, and international activities. Product development and general and administrative costs are expected to be stable to modestly lower near term.
Management believes existing cash resources and operating cash flow will fund operations for at least twelve months, but states that additional equity or debt financing may be needed for acquisitions, long-term obligations, or other needs. There is no assurance that financing will be available on acceptable terms.
- Customer concentration is significant: YP represented 24% of first-half 2016 revenue, State Farm represented 24%, and the five largest customers represented 62%. YP agreements expire December 31, 2016, and YP may migrate accounts to itself or another provider.
- Advertising agencies and reseller partners generally may reduce spending, delay payments, or terminate campaigns. Partner and agency arrangements represented 62% of first-half revenue and $15.4 million of accounts receivable.
- Management cites risks from distribution partner losses or less favorable terms, competition, seasonality, advertiser budget reductions, low-quality or fraudulent traffic, telecommunications and privacy regulation, cybersecurity, technology outages, intellectual property claims, and international expansion.
- The company maintains a 100% valuation allowance against $41.4 million of deferred tax assets and reported $998,000 of uncertain tax positions.
- A securities class action filed by Steven Porter was dismissed without prejudice on April 22, 2016. Management reported no pending legal matter expected to have a material adverse effect, although indemnification obligations could potentially be material.
- The filing states that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter.
Investor verification checklist
- Verify the final third-quarter 2016 goodwill impairment analysis and any adjustment to the preliminary $63.3 million charge.
- Assess underlying Call-driven revenue growth, advertiser retention, customer concentration, and the renewal or restructuring of YP agreements after December 2016.
- Reconcile operating cash flow with reported losses, including the impact of non-cash impairment and stock-based compensation.
- Review liquidity relative to the April 2017 credit-facility maturity, revised covenants, contractual obligations, and potential financing needs.
- Evaluate whether higher distribution partner payments and sales and marketing spending can be supported by revenue growth and improved operating margins.
- Monitor accounts receivable collection risk, particularly balances associated with State Farm, YP, advertising agencies, and other concentrated customers.