Marchex, Inc. — Form 10-Q Summary
Business context and reporting period
Marchex provides mobile advertising analytics, call analytics, pay-for-call advertising, call marketplace, and local-leads services for businesses that rely on consumer phone calls. The report covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015. Following the 2015 sale of its Archeo operations, results are primarily attributable to the Call-driven segment.
Financial performance and position
| Metric | Q1 2015 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $35.916 million | $35.985 million | Flat; approximately 0.2% increase |
| Service costs | $19.366 million | $21.982 million | 14% increase |
| Sales and marketing | $3.458 million | $5.522 million | 60% increase |
| Product development | $7.693 million | $7.472 million | 3% decrease |
| General and administrative | $5.699 million | $4.662 million | 18% decrease |
| Loss from operations | $(0.300) million | $(3.657) million | Higher operating loss |
| Net income (loss) | $4.583 million | $(3.677) million | Turned to loss |
| Net income (loss) per share | $0.11 | $(0.09) | Declined |
| Net cash from operating activities | $6.200 million | $(2.267) million | Cash use in 2016 |
Operating expenses were 110% of revenue in Q1 2016 versus 101% in Q1 2015. Service-cost margin increased to 61% of revenue from 54%, sales and marketing increased to 15% from 10%, and product development remained 21%. The resulting operating margin was approximately negative 10% versus negative 1%.
At March 31, 2016, cash and cash equivalents were $106.603 million, accounts receivable were $26.497 million, total assets were $204.386 million, total liabilities were $18.429 million, and stockholders’ equity was $185.957 million. The company had no borrowings under its $30 million senior secured revolving credit facility and reported $30 million of availability. The facility matures April 1, 2017.
Cash decreased by $2.552 million during the quarter. Investing cash use was $0.475 million, including $0.248 million of property and equipment purchases and $0.224 million related to the sale of remaining Archeo assets. Financing activities provided $0.190 million, principally from employee equity exercises and the employee stock purchase plan. Contractual obligations totaled approximately $9.385 million, including $4.703 million of facility leases and $4.682 million of other obligations.
Material changes versus the prior comparable period
- Call-driven revenue increased approximately 3%, from $35.029 million to approximately $36.0 million, primarily from larger advertiser budgets for pay-for-call and call analytics services. This was offset by the reduction in Archeo revenue following its sale.
- Service costs increased by $2.616 million, principally because of higher distribution-partner payments and communications and network costs.
- Sales and marketing increased by $2.064 million due primarily to higher personnel, travel, outside-service, stock-based compensation, and marketing costs.
- General and administrative expenses declined by $1.037 million, primarily because of lower personnel costs and stock-based compensation.
- Q1 2015 included $4.913 million of income from discontinued operations related to Archeo domain assets; Q1 2016 included no discontinued-operations income. The prior-period discontinued operations materially benefited reported net income.
- Stock-based compensation declined from $2.791 million to $1.966 million.
- No dividend was declared or paid in Q1 2016. Management does not anticipate paying dividends in the foreseeable future.
Guidance, outlook, risks, contingencies, and unusual items
Management expects near-term service costs as a percentage of revenue to be stable to modestly higher, sales and marketing expense to remain higher, product development expense to be stable to modestly higher, and general and administrative expense to be modestly higher. The filing does not provide formal revenue or earnings guidance.
Management believes existing cash and cash flow resources will fund operations for at least twelve months, but notes that additional financing could be needed for acquisitions, long-term obligations, or other corporate needs. The company cautions that additional financing may not be available on acceptable terms.
- Customer concentration is significant: YP represented 24% of Q1 2016 revenue, State Farm represented 26%, and the five largest customers represented 63%. Resolution Media represented 22% of revenue, with most of that amount related to State Farm.
- YP agreements run through December 31, 2016, include minimum fee commitments through the first half of 2016, and permit migration of certain active accounts to YP or third parties. Reduced YP spending, migration, or unfavorable renewal terms could materially affect results.
- Distribution-partner costs and dependence on mobile, online, and telecommunications traffic may pressure margins and revenue. The company also faces risks from traffic quality, fraud, refunds, carrier availability, network scalability, and service interruptions.
- Goodwill was $63.305 million. The stock price approached or fell below book value at points from April 1 through May 6, 2016; management will monitor for impairment indicators before the scheduled November 2016 review. No impairment charge was recorded in the quarter.
- Deferred tax assets of $35.2 million were fully offset by a valuation allowance. Uncertain tax positions totaled $0.943 million, and federal and state or foreign net operating loss carryforwards totaled approximately $39.6 million and $6.2 million, respectively.
- The securities class action filed by Steven Porter was voluntarily dismissed without prejudice on April 22, 2016. Management reported no pending legal matter expected to have a material adverse effect, although indemnification obligations could potentially be material.
- The company’s founders controlled approximately 79% of combined voting power, creating substantial voting concentration and potential governance and takeover risks.
Most important facts for investors to verify
- Whether revenue growth in the Call-driven business can offset the loss of Archeo revenue and support a return to positive operating cash flow.
- Whether higher distribution-partner payments and sales and marketing investment stabilize or further compress operating margins.
- The sustainability of revenue from YP, State Farm, Resolution Media, and other concentrated customers, particularly as YP contracts approach expiration.
- Whether the $106.6 million cash balance and unused $30 million credit facility remain sufficient if operating losses or acquisition spending continue.
- Whether deteriorating operating results or stock-price weakness triggers a goodwill impairment charge.
- The future impact of revenue-recognition, lease, and stock-compensation accounting standards that were under evaluation.