Marchex, Inc. 2013 Form 10-K Summary
Business context and reporting period
Marchex is a mobile and call advertising technology company offering pay-for-call advertising, call analytics, local-lead services, pay-per-click advertising and domain-name monetization. Operations are organized into Call-driven and Archeo segments. This Form 10-K covers the fiscal year ended December 31, 2013; the fourth-quarter data below is unaudited.
Call-driven revenue represented approximately 89% of total revenue in 2013, compared with 84% in 2012. The company operates primarily in the United States, which generated approximately 95% of revenue.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $152.6 million | $132.8 million | 15% increase |
| Income from operations | $2.7 million | $(17.2) million | Improved |
| Net income | $1.8 million | $(35.2) million | Improved |
| Net income per Class A and Class B share | $0.05 | $(1.06) and $(1.05) | Improved |
| Cash flow from operations | $13.6 million | $19.9 million | 29% decrease |
| Cash and cash equivalents | $30.9 million | $15.9 million | Increase of $15.0 million |
| Working capital | $39.7 million | $21.7 million | Increase |
| Total liabilities | $27.4 million | $26.2 million | Increase |
Service costs increased to $91.9 million, or 60% of revenue, from $75.9 million, or 57%, in 2012. Sales and marketing expense declined to $11.2 million, product development increased to $27.3 million, and general and administrative expense declined to $19.4 million. Reported operating margin was approximately 1.8% and net margin approximately 1.2%.
Call-driven revenue rose to $135.1 million from $111.9 million, and segment profit increased to $6.3 million from $5.1 million. Archeo revenue declined to $17.4 million from $20.9 million, while segment profit declined to $9.5 million from $14.6 million.
The company had no borrowings under its $30 million senior secured revolving credit facility at December 31, 2013 and therefore had $30 million of availability. The facility was subsequently amended in the first quarter of 2014 to extend maturity to April 1, 2017. Contractual obligations totaled $15.1 million, including $9.7 million of operating leases and $5.5 million of other contractual obligations.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher call-advertising revenue, increased national advertiser budgets and additional small-business accounts using call analytics.
- Pay-per-click revenue declined by approximately $4.2 million because of fewer advertisers and lower advertiser spending.
- Distribution-partner payments drove most of the increase in service costs and reduced operating leverage.
- The 2012 results included a $15.8 million non-cash goodwill impairment charge and a $16.4 million deferred-tax valuation allowance; neither comparable charge was recorded in 2013.
- Stock-based compensation declined to $9.2 million from $15.6 million, and acquired-intangible amortization declined to $2.9 million from $4.7 million.
- In July 2013, Marchex sold certain pay-per-click assets. The discontinued operation generated a $930,000 after-tax gain on sale, partly offset by a $70,000 operating loss, for total discontinued-operation income of $860,000.
- In September 2013, the company launched its Domains Marketplace. Approximately $2.5 million of domain sales were recognized as revenue after launch; prior domain transactions had generally been recorded as gains on disposal of intangible assets.
- Management suspended the planned Archeo spin-off and is evaluating strategic alternatives while continuing Archeo as a division.
Fourth-quarter 2013 performance
| Metric | Q4 2013 | Q4 2012 |
|---|---|---|
| Revenue | $39.7 million | $32.4 million |
| Income from operations | $1.5 million | $(17.4) million |
| Net income | $605,000 | $(34.3) million |
| Net income applicable to common stockholders | $605,000 | $(34.7) million |
Q4 2013 revenue increased approximately 22% year over year. The Q4 2012 loss reflected the $15.8 million goodwill impairment charge and related tax effects.
Guidance, outlook, commentary and risks
Management stated that existing cash, credit availability and operating cash flow were expected to fund operations for at least twelve months. It also expected near-term service costs to rise as a percentage of revenue because of distribution-partner economics and investment in network infrastructure. Sales and marketing and general and administrative expenses were expected to be relatively stable or modestly higher, while product-development spending was expected to be modestly higher.
- Customer concentration is substantial: the five largest customers generated approximately 61% of 2013 revenue. YP represented 25%, ADT 13% and Allstate 12%.
- YP accounted for $12.4 million of accounts receivable at year-end; YP, ADT and Allstate together represented 66% of 2013 revenue and $23.8 million of net receivables.
- Seasonality, lower fourth-quarter call demand, changes in advertising budgets and the timing of domain sales may cause significant quarterly volatility.
- Competition from major search engines, mobile-advertising networks and call-analytics providers may pressure pricing, traffic access and distribution terms.
- The company relies on third-party distribution partners, telecommunications carriers, hosting providers, technology vendors and domain registrars. Service interruptions, unfavorable contract changes or loss of partners could materially affect results.
- Call recording, privacy, telemarketing, telecommunications, data-security and online-advertising regulations could increase costs or create liability. Indemnification obligations exist under certain contracts, although no material related liability was recorded.
- Goodwill was $65.7 million at year-end, including $63.3 million assigned to Call-driven. Future declines in operating performance, cash flows or market value could result in impairment charges.
- Net deferred tax assets were $26.2 million, with valuation allowances of $23.0 million against federal deferred tax assets and $6.0 million against certain state, city and foreign tax attributes.
- Management reported no material legal proceedings, and KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether Call-driven growth can offset declining Archeo and pay-per-click activity.
- Whether the higher distribution-partner cost structure permits sustainable operating-margin expansion.
- The durability of revenue and receivable concentrations involving YP, ADT and Allstate, including the effect of the amended YP fee arrangements.
- Future domain-sale volumes and the effect of the Domains Marketplace revenue-recognition change on comparability.
- Availability and covenant requirements of the $30 million revolving facility after the 2014 maturity extension.
- The recoverability of goodwill and deferred tax assets and the potential for future impairment or valuation-allowance charges.
- The outcome of management’s strategic review of the Archeo assets and any effect on capital allocation, dividends and share repurchases.