Marchex, Inc. 2020 Q3 Form 10-Q Summary
Business context and reporting period
Marchex is a conversational analytics and communications company providing call analytics, speech analytics, text messaging, call monitoring, and AI-enabled sales solutions. The filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Results were materially affected by COVID-19, customer spending reductions, credit deterioration, and non-cash impairment charges.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $26.5 million | $24.8 million | $77.1 million | $77.5 million |
| Loss from operations | $(3.7) million | $(1.3) million | $(34.0) million | $(4.2) million |
| Net loss | $(3.7) million | $(1.2) million | $(33.0) million | $(3.6) million |
| Net loss per share | $(0.08) | $(0.03) | $(0.70) | $(0.08) |
| Cash from operating activities | Not separately provided | Not separately provided | $(2.0) million | $6.8 million |
- Q3 revenue increased 7% year over year, primarily from higher pay-for-call revenue and the Sonar acquisition, partly offset by lower local leads and call analytics revenue.
- Nine-month revenue declined 1% year over year. Performance-based advertising revenue was $75.0 million versus $74.3 million; local leads revenue was $2.1 million versus $3.3 million.
- Service costs increased to 58% of revenue in Q3 from 51% and to 57% for the nine-month period from 52%. The resulting service-cost margins were pressured by higher distribution, communications, and network costs.
- Operating loss margin was approximately 14% in Q3 2020 versus 5% in Q3 2019, and approximately 44% for the first nine months versus 5% in the prior-year period. Net loss margin was approximately 14% in Q3 and 43% year to date.
- Nine-month operating cash flow declined to an outflow of $2.0 million from $6.8 million of operating cash flow in 2019. Investing cash outflow was $1.2 million, primarily for property and equipment.
- Cash and cash equivalents were $44.6 million at September 30, 2020, compared with $42.5 million at December 31, 2019. Current assets were $63.5 million and current liabilities were $26.9 million.
- The company had $5.3 million of current loan obligations at September 30, 2020 from CARES Act-related promissory notes bearing 1% annual interest, with two-year maturities and principal and interest payments beginning after a six-month deferral period.
- Total assets declined to $100.3 million from $124.5 million at year-end 2019, primarily due to a $14.2 million goodwill impairment and a $5.9 million acquired-intangible impairment. Stockholders’ equity declined to $69.7 million from $99.8 million.
Material changes versus the prior comparable period
- COVID-19 reduced customer usage, advertising budgets, sales activity, and collections and led to price concessions and increased credit-loss reserves.
- Q3 operating expenses increased to $30.2 million from $26.1 million. For the nine months, expenses increased to $91.0 million from $81.8 million.
- Nine-month sales and marketing expense increased 21% to $14.7 million, and product development expense increased 20% to $17.7 million, reflecting expanded personnel, Sonar integration, and strategic technology initiatives.
- Goodwill declined from $33.4 million to $19.1 million, while acquired intangible assets declined from $19.5 million to $9.4 million after the first-quarter impairment testing.
- Stock-based compensation increased to $2.8 million for the first nine months from $2.2 million.
- Accounts receivable declined to $16.6 million from $17.8 million at year-end, but the company recorded increased allowances related to advertiser credit deterioration. One advertiser represented 32% of accounts receivable at September 30.
Guidance, outlook, risks, contingencies, and unusual items
- No quantitative revenue or earnings guidance was provided. Management expects revenue to remain below recent-quarter levels in the near term because of COVID-19, delayed sales cycles, lower customer budgets, payment delays, and customer closures.
- In October 2020, Marchex sold its Local Leads Platform, Call Marketplace, and other non-core assets for approximately $2.3 million in cash at closing, plus contingent consideration and a minority equity interest in the buyer. The company expects the transaction to be classified as discontinued operations beginning in the fourth quarter of 2020.
- The divestiture also included cancellation of options covering 1.5 million shares held by two involved officers and a support-services agreement with guaranteed payments during the first two years. Management expects the divestiture to reduce revenue and contribution, although lower service costs and support fees may partially offset the impact.
- In October 2020, the company completed a joint tender offer with Edenbrook Capital for 10 million Class B shares at $2.15 per share. Marchex repurchased 5 million shares for approximately $10.8 million.
- Management committed $2.5 million to a strategic technology initiative in 2020. The filing states that the divestiture included the related business technology initiative.
- Acquisition-related liabilities were reduced to approximately $74,000 at September 30, 2020. Remaining contingent consideration includes up to $1.8 million of cash for Telmetrics and up to 389,000 Class B shares for Sonar.
- Management states that cash resources should fund operations and strategic investments for at least twelve months, but warns that the duration and severity of COVID-19 could materially change this assessment. Additional financing may be required.
- Key risks include customer and reseller concentration, COVID-19-related revenue and collection declines, dependence on distribution partners and telecommunications providers, competition, cybersecurity and privacy regulation, TCPA and call-recording compliance, potential additional impairment charges, and the loss of diversification following the divestiture.
- Thryv represented 26% of nine-month revenue, State Farm represented 16%, and the five largest customers represented approximately 52%. The company does not expect future pay-for-call revenue from State Farm after the divestiture, and the Thryv local leads agreement was scheduled to expire December 31, 2020.
- The company reported no material legal proceedings, and management concluded that disclosure controls and procedures were effective as of September 30, 2020.
Important facts for investors to verify
- Whether COVID-19 effects, customer concentration, and the divestiture produce further revenue declines or collection losses.
- The final accounting treatment and operating impact of the October 2020 divestiture, including discontinued-operations presentation and support-service payments.
- The effect of the $10.8 million tender-offer repurchase on cash, liquidity, share count, and future capital needs.
- Whether the CARES Act loans qualify for forgiveness and the resulting repayment obligation.
- Whether additional goodwill or intangible-asset impairment is recorded following the November 2020 annual impairment review.
- The renewal or termination of Thryv-related agreements and the sustainability of revenue from major advertisers and agencies.
- Progress toward profitability and positive operating cash flow after removing the divested businesses and continuing investment in conversational analytics.