Marchex, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Marchex provides mobile advertising analytics, call analytics, speech and call-tracking technology, pay-for-call advertising, and local leads services. The filing covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. The company primarily operated as one reporting segment.
During the quarter, Marchex launched its Omnichannel Analytics Cloud and Social Analytics products. Speech Analytics launched in April 2017, after the reporting period. The company’s chief executive officer responsibilities were being performed by an office of the CEO following senior executive turnover.
Key financial metrics
| Metric | Q1 2016 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $36.0 million | $24.4 million | Down 32% |
| Service costs | $22.0 million | $13.6 million | Down 38% |
| Total operating expenses | $39.6 million | $27.9 million | Down 30% |
| Loss from operations | $(3.7) million | $(3.5) million | Improved $0.1 million |
| Net loss | $(3.7) million | $(3.5) million | Improved $0.2 million |
| Basic and diluted loss per share | $(0.09) | $(0.08) | Improved $0.01 |
| Operating cash flow | $(2.3) million | $(0.9) million | Improved $1.4 million |
Revenue and net loss margins were approximately negative 10% in Q1 2016 and negative 14% in Q1 2017. Service costs declined to 56% of revenue from 61%, while sales and marketing increased to 20% from 15%, product development to 22% from 21%, and general and administrative costs to 16% from 13%.
Cash and cash equivalents were $103.1 million at March 31, 2017, compared with $104.0 million at December 31, 2016. Total assets were $124.8 million and total liabilities were $13.6 million. The filing does not identify outstanding debt or borrowings; liabilities consisted primarily of current operating obligations. Stockholders’ equity was $111.1 million, and accumulated deficit was $251.1 million.
Accounts receivable declined to $16.7 million from $18.9 million at year-end 2016. Contractual obligations totaled $7.3 million, including $2.4 million of operating leases and $4.9 million of other contractual obligations. Management stated that existing resources should fund operations for at least twelve months, although additional financing could be required for acquisitions, long-term obligations, or business needs.
Material changes versus the prior comparable period
- Revenue fell primarily because of advertiser budget reductions in pay-for-call services and fewer accounts and lower performance-based advertising and platform revenue from reseller partners, including YP.
- Service costs decreased more rapidly than revenue because of lower distribution partner payments, personnel costs, stock-based compensation, communications and network costs, and outside service-provider fees.
- Sales and marketing, product development, and general and administrative expenses declined in dollars but increased as a percentage of revenue because of the revenue contraction.
- Operating and net losses improved modestly despite the revenue decline, partly due to lower personnel and operating costs. Q1 2017 included approximately $700,000 of employee separation costs.
- Operating cash use improved to $878,000 from $2.3 million, aided by a $1.9 million favorable change in accounts receivable and lower losses.
- Stock-based compensation declined to $1.4 million from $2.0 million. The company adopted ASU 2016-09 and recorded a $37,000 increase to accumulated deficit for forfeiture accounting and a $3.7 million adjustment related to previously unrecognized excess tax benefits, offset by a valuation allowance with no net equity effect from the latter adjustment.
- The company made no repurchases under its 2014 share repurchase program during the quarter. Approximately 1.3 million Class B shares remained available for repurchase.
Guidance, outlook, risks, contingencies, and unusual items
Management expects revenue to remain lower in the near and intermediate term than in recent quarters, citing fewer small-business accounts on the local leads platform and reduced demand for call advertising. Management also expects near- and intermediate-term operating expenses to be stable to lower in absolute dollars, but does not provide quantitative revenue, earnings, or margin guidance.
- YP represented 22% of Q1 2017 revenue. Its small-business account base using Marchex’s platform has declined, YP may migrate accounts to itself or another provider, and its agreement provides certain termination rights beginning January 1, 2018.
- State Farm represented 17% of Q1 2017 revenue, and management expects related campaign spending to be lower than in prior periods. T-Mobile represented 10% of revenue, while Resolution Media represented 11%.
- The five largest customers represented approximately 56% of Q1 2017 revenue. Concentration creates exposure to budget reductions, contract cancellations, customer financial distress, delayed collections, and changes in agencies or marketing strategies.
- YPG local leads platform revenue is expected to decline and may cease by the end of 2017.
- Management expects seasonal fluctuations in mobile and internet usage and advertiser demand, with potentially lower activity during spring and summer and late fourth quarter periods.
- The company has a full valuation allowance against $48.4 million of deferred tax assets and reported $1.1 million of uncertain tax positions. Federal net operating loss carryforwards were approximately $67.0 million and state, city, and foreign carryforwards approximately $6.5 million.
- The company reported no material legal proceedings and no known indemnification events requiring recorded liabilities, but potential future indemnification payments could be material.
- Management identified risks relating to distribution partners, advertiser concentration, competition, traffic quality and fraud, telecommunications and privacy regulation, intellectual property, cybersecurity and service interruptions, third-party vendors, acquisitions, and senior management turnover.
- The company plans to adopt the new revenue recognition standard on January 1, 2018 and currently expects to use the modified retrospective approach, although the adoption method and financial statement impact had not been finalized.
Most important facts for investors to verify
- Whether revenue stabilizes after the substantial 32% year-over-year decline and whether the company can return to profitability.
- Current and future revenue and receivable exposure to YP, State Farm, T-Mobile, YPG, and other major customers.
- Whether YP migrates local leads accounts or exercises termination rights beginning in 2018, and whether YPG revenue ends by year-end 2017.
- Cash burn, working-capital requirements, and the need for future equity or debt financing, particularly if acquisitions continue.
- The impact of employee reductions, leadership turnover, new product launches, and cost reductions on operating performance.
- The eventual effect of ASC 606 revenue recognition and principal-versus-agent determinations on reported revenue and margins.
- Execution against risks involving customer concentration, distribution partner access, traffic quality, regulatory compliance, data security, and intellectual property.