Marchex, Inc. — Form 10-Q Summary
Business context and reporting period
Marchex is a mobile performance advertising company focused on driving and analyzing consumer calls to businesses, with additional pay-per-click, cost-per-action, local leads, call-tracking, and proprietary website advertising services. The filing covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. Results are unaudited.
The company reports two segments: Call-driven and Archeo. Marchex was pursuing a proposed tax-free separation of these businesses into two publicly traded companies, subject to board, regulatory, tax, SEC filing, and other conditions.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Change |
|---|---|---|---|
| Revenue | $39.0 million | $34.0 million | +15% |
| Operating income (loss) | $(0.1) million | $1.1 million | Down $1.2 million |
| Net income (loss) | $(0.4) million | $0.4 million | Down $0.8 million |
| Net income (loss) per share | $(0.01) | $0.01 | Declined |
| Operating margin | Approximately (0.3%) | Approximately 3.2% | Down approximately 3.5 points |
| Metric | Six months 2013 | Six months 2012 | Change |
|---|---|---|---|
| Revenue | $75.2 million | $69.5 million | +8% |
| Operating income | $0.2 million | $0.5 million | Down $0.3 million |
| Net loss | $(0.3) million | $(0.3) million | Improved by $0.1 million |
| Operating margin | Approximately 0.2% | Approximately 0.7% | Down approximately 0.5 points |
| Net cash from operating activities | $3.2 million | $11.9 million | Down $8.8 million |
Q2 revenue growth was driven primarily by call advertising and increased national advertiser budgets and small-business accounts using the call analytics platform. Partner and other revenue increased to $36.9 million from $31.1 million, while proprietary website traffic revenue declined to $2.1 million from $2.9 million. For the six-month period, partner and other revenue increased to $71.3 million from $62.5 million, while proprietary website traffic revenue fell to $4.0 million from $7.0 million.
Service costs increased to 61% of Q2 revenue from 57% in the prior-year quarter and to 60% from 56% for the six-month period, primarily because of higher distribution-partner payments. Product development increased to 18% of revenue from 17%. Sales and marketing declined to 8% of revenue from 13%, and general and administrative declined to 14% from 16%. Stock-based compensation declined to $2.6 million in Q2 and $4.5 million for the six-month period, compared with $4.8 million and $8.7 million, respectively.
Cash and cash equivalents were $18.7 million at June 30, 2013, compared with $15.9 million at December 31, 2012. Accounts receivable increased to $34.1 million from $26.0 million. Total assets were $159.3 million and total liabilities were $32.1 million. The company had no borrowings under its $30 million senior secured revolving credit facility and reported $30 million of availability. The facility matured April 1, 2014.
Six-month investing cash flow was positive $1.0 million, including $2.7 million of proceeds from intangible-asset sales, offset partly by $1.7 million of capital expenditures. Financing cash flow was negative $1.3 million, primarily from $1.6 million of tax withholding payments on restricted stock and $0.1 million of share repurchases. Contractual obligations totaled $15.8 million, including $10.8 million of facility leases and $5.0 million of other obligations.
Material changes versus the prior comparable period
- Revenue grew, but profitability weakened in Q2 because service costs and other operating expenses increased faster than revenue and gains from intangible-asset sales declined.
- Q2 changed from $0.4 million of net income to a $0.4 million net loss. The six-month net loss narrowed modestly to $0.3 million from $0.5 million attributable to common stockholders.
- Operating cash generation fell substantially, primarily because accounts receivable used $9.0 million of cash in 2013 versus providing $3.1 million in 2012.
- Interest expense declined materially because deferred consideration related to the Jingle acquisition had been paid in 2012.
- Amortization of acquired intangible assets declined to $1.8 million for six months from $2.6 million as certain assets became fully amortized.
- Call-driven six-month revenue increased to $65.0 million from $54.1 million, while Archeo revenue declined to $10.2 million from $15.3 million. Archeo’s prior-year results included a larger gain on sales of intangible assets.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management expects near-term service costs to rise in absolute dollars and potentially as a percentage of revenue as distribution-partner payments and network investment increase. Sales and marketing and general and administrative expenses were expected to remain relatively stable or modestly change, while product development spending was expected to remain relatively stable in the near term.
In July 2013, Marchex sold certain pay-per-click assets. Those assets contributed a preliminary $2.9 million of revenue and $62,000 of operating profit during the first six months of 2013. The company was assessing whether the divestiture should be reported as discontinued operations. The company also amended its YP arrangement, lowering certain agency fees beginning July 1, 2013, while extending a separate pay-for-call relationship through June 2015.
- Revenue and receivables are concentrated: YP represented 24% of six-month revenue and ADT represented 14%; the five largest customers represented 59% of six-month revenue. YP and ADT represented 29% and 22%, respectively, of accounts receivable at June 30, 2013.
- Distribution-partner renewals, pricing, traffic volume, advertiser budgets, traffic quality, click fraud, and seasonality could materially affect results.
- Accounts receivable collection risk is significant given customer concentration and payment terms. Management reported no material legal proceedings but disclosed indemnification obligations whose maximum potential exposure could be material.
- Goodwill was $65.8 million, including $63.3 million in the Call-driven segment and $2.5 million in Archeo. The company recorded a $16.7 million Archeo goodwill impairment charge in the fourth quarter of 2012 and warned that further impairment could occur if forecasts, cash flows, market conditions, or the stock price deteriorate.
- Net deferred tax assets were $28.5 million, with a $22.6 million valuation allowance. Changes in projected taxable income could produce additional tax expense or changes in equity.
- Management stated that existing cash, credit availability, and operating cash flow should fund operations for at least twelve months, but additional financing may be needed for acquisitions, long-term obligations, or the proposed separation.
- The proposed separation could increase costs, disrupt operations, change the company’s financial profile, and may not be completed on the expected timeline or at all.
Investor verification items
- Verify the final accounting treatment, proceeds, and ongoing revenue and profit impact of the July 2013 pay-per-click asset sale.
- Monitor the amended YP contract, reduced agency fees, renewal terms, and concentration of revenue and receivables with YP and ADT.
- Reconcile operating cash flow to the sharp increase in accounts receivable and assess collection trends.
- Review the status, costs, tax treatment, and post-separation allocation of cash flows, liabilities, employees, and dividends for the proposed Marchex-Archeo separation.
- Assess whether higher distribution-partner costs are structurally reducing gross and operating margins.
- Track goodwill and deferred tax asset impairment indicators, including operating forecasts, Archeo performance, valuation allowances, and market capitalization.
- Confirm the credit facility’s maturity, covenant compliance, renewal or replacement financing, and the sustainability of dividends and share repurchases.