Marchex, Inc. — Q1 2014 Form 10-Q Summary
Business context and reporting period
Marchex is a mobile and call advertising technology company operating through two segments: Call-driven, which provides pay-for-call advertising, call analytics and lead-generation services; and Archeo, which includes click-based advertising, owned websites and domain-name activities. The filing covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. Financial statements are unaudited.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $50.5 million | $34.7 million | Up 45% |
| Income from operations | $1.4 million | $0.3 million | Improved |
| Operating margin | 2.8% | 0.9% | Improved |
| Net income | $0.9 million | $0.1 million | Improved |
| Net income applicable to common stockholders | $0.8 million | $0.1 million | Improved |
| Net income margin | 1.7% | 0.2% | Improved |
| Diluted earnings per share | $0.02 | $0.00 | Improved |
| Cash flow from operating activities | $8.1 million | $2.1 million | Up $5.9 million |
| Cash and cash equivalents | $38.5 million | $17.1 million at prior-year quarter-end | Higher |
Call-driven revenue was $45.5 million, up 46%, and Archeo revenue was $5.0 million, up 38%. Call-driven revenue represented approximately 90% of total revenue in both periods. Service costs increased 61% to $32.4 million and rose to 64% of revenue from 58%, primarily because of higher distribution-partner payments. Total operating expenses were $49.1 million, or 97% of revenue, versus $35.8 million, or 103%, in the prior-year quarter.
Segment profit increased to $2.4 million from $1.4 million for Call-driven and to $2.3 million from $2.2 million for Archeo. Stock-based compensation increased to $2.9 million from $1.9 million. Amortization of acquired intangible assets declined to $0.4 million from $1.1 million, and separation-related costs declined to zero from $0.3 million.
Cash used in investing activities was $0.8 million, including $0.7 million of capital expenditures. Financing activities provided $0.3 million; the company paid $0.8 million in common-stock dividends. The company had no borrowings under its $30 million senior secured revolving credit facility, whose maturity was extended to April 1, 2017.
At March 31, 2014, total assets were $174.1 million, total liabilities were $35.2 million and stockholders’ equity was $138.9 million. Contractual obligations totaled $13.9 million, including $9.3 million of facility leases and $4.6 million of other obligations.
Material changes versus the prior comparable period
- Revenue growth was driven principally by larger national-advertiser budgets and thousands of additional small-business accounts using the call analytics platform.
- Archeo revenue benefited from $1.9 million of domain-name sales recognized as revenue after the September 2013 launch of the Domains Marketplace. Comparable 2013 domain transactions of $1.4 million were reported as gains on asset sales rather than revenue.
- Archeo pay-per-click revenue declined by approximately $0.5 million because fewer advertisers used the service and advertiser spending was lower.
- The July 2013 sale of certain pay-per-click assets resulted in discontinued operations. Discontinued operations contributed $9,000 after tax in Q1 2014 versus a $31,000 loss in Q1 2013.
- Customer concentration increased in significance: YP represented 21% of Q1 2014 revenue and Allstate represented 34%. The five largest customers represented approximately 69% of revenue.
- The company adopted ASU 2013-11 prospectively; management stated that the adoption did not materially affect the financial statements.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue or earnings guidance. Management expects sales and marketing, product development and general and administrative expenses to remain relatively stable to modestly higher in the near term, with longer-term increases possible as the company expands its platforms and operations. Management expects service costs to increase in absolute dollars and potentially as a percentage of revenue as distribution-partner payments and network investment rise.
Management believes cash, available credit and operating cash flow are sufficient to fund operations for at least twelve months. The company expects an annual dividend of approximately $0.08 per share, subject to capital availability, but states that future dividends are not assured. A quarterly dividend of $0.02 per share was declared for payment in May 2014.
Subsequent to quarter-end, Marchex completed a follow-on offering of 3.4 million Class B shares and received net proceeds of $32.5 million. Selling stockholders sold an additional 3.2 million shares, from which the company received no proceeds.
Key risks include dependence on distribution partners and major customers, unfavorable changes in partner economics, advertiser credit and collection risk, seasonality, competition from large search and advertising platforms, mobile-market adoption, traffic quality and fraud, telecommunications and privacy regulation, intellectual-property claims, cybersecurity and service interruptions, and potential impairment of $65.7 million of goodwill. Net deferred tax assets were approximately $25.0 million, including a $23.0 million valuation allowance; changes in projected taxable income could affect future tax expense or equity.
The company disclosed no material legal proceedings and stated that it was not aware of pending claims expected to have a material adverse effect. Indemnification obligations exist under certain contracts, although no material costs have been recorded.
Important facts for investors to verify
- Whether the Q1 revenue increase, particularly the 46% Call-driven growth, is sustainable and how much depends on Allstate, YP and other concentrated customers.
- Whether rising distribution-partner payments will continue to pressure service-cost ratios and operating margins.
- The recurring versus non-recurring nature of domain-name sales and their effect on Archeo results and cash flow classification.
- The collectability of $24.4 million of net receivables from YP and Allstate and the adequacy of allowances for doubtful accounts and advertiser credits.
- The terms, dilution impact and use of proceeds from the April 2014 equity offering.
- The realizability of deferred tax assets and the potential effect of future valuation-allowance changes.
- Potential goodwill impairment if operating performance, expected cash flows, market capitalization or the stock price deteriorate.
- Compliance exposure related to call recording, telecommunications, privacy, consumer-protection and intellectual-property requirements.