Marchex, Inc. 2019 Form 10-K Summary
Business context and reporting period
Marchex is a conversational analytics and solutions company providing call analytics, speech analytics, text and messaging analytics, call monitoring, pay-for-call advertising, and AI-enabled sales acceleration products. The filing covers the fiscal year ended December 31, 2019, with comparisons to 2018. Marchex operated as a single reportable segment and generated approximately 98% of revenue from the United States.
Key 2019 developments included the launch of Marchex Sales Edge and the December 2019 acquisition of Sonar Technologies, an enterprise text and messaging sales engagement and analytics company. The Company had 291 full-time employees at year-end.
Financial performance and liquidity
| Metric | 2018 | 2019 | Change |
|---|---|---|---|
| Revenue | $85.3 million | $106.1 million | Up 24% |
| Performance-based advertising revenue | Not separately provided | $102.0 million | More than 80% of total revenue |
| Local leads revenue | Not separately provided | $4.1 million | Less than 20% of total revenue |
| Service costs | $47.8 million | $56.5 million | Up 18% |
| Service-cost ratio | 56% | 53% | Improved 3 percentage points |
| Loss from operations | $(3.9) million | $(6.5) million | Loss increased |
| Operating margin | (4.6%) | (6.1%) | Declined |
| Net loss | $(2.7) million | $(4.0) million | Loss increased |
| Net loss per share | $(0.06) | $(0.09) | Loss increased |
| Net cash provided by operating activities | $5.1 million | $5.1 million | Essentially flat |
| Cash and cash equivalents | $45.2 million | $42.5 million | Down $2.7 million |
Calculated gross margin, based only on revenue less reported service costs, improved from approximately 43.9% in 2018 to 46.7% in 2019. Net margin declined from approximately (3.1%) to (3.8%). Performance-based advertising revenue increased primarily because of the full-year contribution from the Telmetrics and Callcap acquisitions and higher pay-for-call revenue, partially offset by declining local leads accounts and revenue from certain reseller partners.
Operating expenses totaled $112.6 million in 2019, or 106% of revenue, compared with $89.1 million, or 105% of revenue, in 2018. Product development increased 30% to $20.1 million, sales and marketing increased 21% to $16.7 million, general and administrative expense increased 24% to $13.5 million, and acquisition-related intangible amortization increased to $6.3 million from $0.8 million. Stock-based compensation was $3.1 million.
Cash used in investing activities was $9.7 million in 2019, including $7.9 million of cash paid for acquisitions and $1.7 million of capital expenditures. Financing activities provided $1.9 million, primarily from stock option exercises and equity issuances. The filing does not disclose outstanding conventional borrowings or a credit facility; reported obligations primarily comprise operating leases and acquisition-related liabilities.
Material changes versus the prior comparable period
- Revenue increased $20.9 million, or 24%, to $106.1 million.
- Service costs grew more slowly than revenue, reducing the service-cost ratio to 53% from 56%.
- Operating loss widened to $6.5 million, primarily because of higher operating expenses and acquisition-related amortization.
- Net loss increased to $4.0 million from $2.7 million despite higher revenue and a $1.7 million income tax benefit.
- Operating cash flow remained approximately $5.1 million, but accounts receivable increased to $17.8 million from $16.2 million.
- Goodwill increased to $33.4 million from $24.4 million, primarily from the Sonar acquisition. Acquired intangible assets totaled $19.5 million at year-end.
- Adoption of ASC 842 added $5.8 million of right-of-use lease assets and $7.2 million of lease liabilities to the balance sheet at December 31, 2019.
- The Company completed the Sonar acquisition for approximately $13.3 million of total consideration, consisting of $8.5 million in cash, approximately $3.8 million of deferred Class B stock issuance, and approximately $1.0 million of contingent consideration.
Guidance, outlook, risks, contingencies, and unusual items
Management expected near-term revenue to decline because of lower spending by certain large advertisers, reduced pay-for-call demand, fewer small-business accounts on the local leads platform, and expected disruptions from the emerging COVID-19 outbreak. Management anticipated delays in sales cycles, customer launches and pilots, payment delays, higher bad-debt expense, and lower operating cash flow during 2020. No formal quantitative revenue or earnings guidance was provided.
- Thryv accounted for 26% of 2019 revenue, and its local leads and related agreements were scheduled to expire on December 31, 2020. Thryv could migrate accounts or terminate portions of the relationship, creating a material revenue and profitability risk.
- State Farm accounted for 15% of 2019 revenue, and management expected related campaign spending to decline in the near to intermediate term.
- The five largest customers represented approximately 50% of 2019 revenue. Resolution Media represented 13% of revenue, and the majority of that relationship related to State Farm.
- Accounts receivable concentration was significant: State Farm-related receivables represented approximately 41% of year-end accounts receivable, and Thryv receivables totaled $1.8 million.
- Contractual obligations included approximately $9.6 million of facility lease payments, up to $1.8 million of remaining Telmetrics cash earnout payments, and up to 389,000 Class B shares tied to Sonar performance targets. The Company also committed $2.5 million to a strategic technology initiative expected to be funded in 2020.
- The Company reported an accumulated deficit of $260.2 million and has incurred substantial historical losses. Management believed available resources were sufficient to fund operations for at least twelve months, but noted that additional equity or debt financing could be needed for acquisitions and long-term obligations.
- No goodwill or intangible-asset impairment was recorded in 2019. Management cautioned that COVID-19-related declines in operating performance, cash flows, stock price, or market capitalization could trigger future impairment testing and charges.
- Federal, state, and foreign privacy, telecommunications, call-recording, text-messaging, TCPA, CCPA, GDPR, cybersecurity, and intellectual-property requirements could increase compliance costs or expose the Company to fines, claims, or litigation.
- The Company reported no material legal proceedings and received unqualified audit opinions on its financial statements and internal control over financial reporting. Management excluded Sonar from its internal-control assessment because of the timing of the acquisition; Sonar represented less than 1% of consolidated assets and revenue.
Most important facts for investors to verify
- Whether Thryv agreements were renewed or migrated after December 31, 2020 and the resulting revenue and margin impact.
- Whether State Farm and other major advertisers reduced spending as anticipated and whether customer concentration declined.
- Post-filing revenue trends, operating cash flow, accounts receivable aging, collections, and bad-debt expense following COVID-19 disruption.
- Sonar integration progress, revenue contribution, earnout outcomes, and dilution from deferred or contingent Class B share issuances.
- Whether goodwill or acquired intangible assets required impairment charges after year-end.
- The Company’s path toward profitability, including the effect of infrastructure investments, product development spending, acquisition amortization, and distribution-partner costs.
- Availability of liquidity for operating losses, the $2.5 million strategic initiative, lease obligations, earnouts, and potential future acquisitions.