Marchex, Inc. 2012 Form 10-K Summary
Business context and reporting period
Marchex is a mobile performance advertising company focused on driving customer calls to businesses and analyzing those calls. Its products include digital call advertising, call analytics, local leads, pay-per-click advertising, and proprietary local-information websites. The filing covers the fiscal year ended December 31, 2012, including fourth-quarter results. In November 2012, Marchex announced plans to separate its call-driven business from its click-based advertising and domain business, to be named Archeo.
Financial performance and liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $138.3 million | $146.7 million | Down 6% |
| Operating income (loss) | $(18.2) million | $6.0 million | Declined $24.2 million |
| Net income (loss) | $(35.2) million | $3.0 million | Declined $38.2 million |
| Net loss applicable to common stockholders | $(35.9) million | $2.7 million | Declined $38.6 million |
| Class B loss per share | $(1.05) | $0.08 | Declined $1.13 |
| Cash flow from operations | $19.9 million | $16.8 million | Increased $3.1 million |
| Cash and cash equivalents | $15.9 million | $37.4 million | Down $21.5 million |
Revenue was $138.3 million, with partner and other sources contributing $127.4 million and proprietary website traffic contributing $10.9 million. Call-driven revenue increased to $111.9 million from $101.8 million, while Archeo revenue declined to $26.4 million from $44.9 million. Service costs were $80.6 million, or 58% of revenue; total operating expenses were $146.1 million, or 106% of revenue. Reported operating and net margins were approximately negative 13% and negative 25%, respectively.
Fourth-quarter 2012 revenue was $34.0 million versus $39.0 million in fourth-quarter 2011. Fourth-quarter operating loss was $18.2 million versus operating income of $2.0 million, and fourth-quarter net loss was $34.3 million versus net income of $1.0 million. Fourth-quarter results included a $16.7 million goodwill impairment charge and $16.1 million of income tax expense.
Operating cash flow was supported substantially by non-cash items, including $15.7 million of stock-based compensation, $16.7 million of goodwill impairment, $16.6 million of deferred tax expense, and $8.5 million of depreciation and amortization. Investing activities provided $3.3 million, primarily because proceeds from intangible-asset sales exceeded capital expenditures. Financing activities used $44.7 million, including $33.9 million of deferred Jingle acquisition payments, $9.4 million of dividends, and $1.7 million of share repurchases.
Marchex had no borrowings under its $30 million senior secured revolving credit facility and reported the full $30 million as available at December 31, 2012. The facility matures in April 2014. Working capital was $21.7 million, total liabilities were $26.2 million, and stockholders’ equity was $122.9 million. Contractual obligations totaled $17.4 million, including $11.9 million of operating leases. 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.
Material changes versus the prior comparable period
- Revenue decreased 6%, primarily because pay-per-click revenue fell $9.2 million and proprietary website traffic revenue fell $9.6 million. Call advertising revenue increased by approximately $1.2 million.
- Archeo revenue fell approximately 41%, while Call-driven revenue increased approximately 10%.
- Service costs decreased modestly in dollars but increased to 58% of revenue from 56%, reflecting the lower contribution from higher-margin proprietary website traffic revenue.
- Sales and marketing expense declined 11%; product development increased 3%; general and administrative expense was broadly stable; and acquisition and separation-related costs declined to $753,000 from $1.9 million.
- The company recorded a $16.7 million non-cash goodwill impairment charge in Archeo after revising reporting units and reducing projected revenue growth and profitability assumptions.
- Income tax expense increased to $16.6 million from $2.6 million, principally because of a $16.4 million partial valuation allowance on federal deferred tax assets and non-deductible goodwill impairment.
- Cash declined by $21.5 million, primarily due to the $33.9 million cash settlement of deferred consideration from the 2011 Jingle acquisition, increased dividends, and share repurchases.
- The annual dividend was increased to $0.14 per share. The company paid $5.3 million on December 31, 2012 for all four 2013 quarterly dividends, subject to capital availability and continuation by the appropriate entity following separation.
Guidance, outlook, risks, and unusual items
The filing does not provide formal numerical revenue or earnings guidance. Management expected near-term proprietary website traffic revenue to be modestly lower to similar, sales and marketing and product development spending to be relatively stable to modestly higher, and general and administrative expense to decrease modestly due to lower stock-based compensation. Management also expected distribution-partner costs to increase as a percentage of revenue as call-based and other partner revenue grows.
The proposed separation remained subject to board approval, regulatory approvals, favorable tax rulings or opinions, further due diligence, and effective SEC filings. Management expected completion during 2013 but stated that completion, timing, and terms were not assured. The separation could increase costs, distract management, alter the company’s financial profile, reduce diversification, and require additional financing.
Key business risks include substantial customer concentration, dependence on distribution and reseller partners, competitive pressure from larger technology and advertising companies, volatility in mobile and online advertising demand, seasonality, traffic quality and advertiser-credit risks, telecommunications and call-recording regulation, privacy and data-security exposure, intellectual-property claims, reliance on third-party technology providers, and potential future impairment of goodwill or other intangible assets. YP accounted for 27% of 2012 revenue and 36% of accounts receivable at year-end; the five largest customers accounted for approximately 51% of revenue.
The company reported an accumulated deficit of $173.0 million at year-end and has incurred net losses in most years since inception. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management concluded that disclosure controls and internal controls were effective as of December 31, 2012.
Most important facts for investors to verify
- Whether the proposed Marchex-Archeo separation was completed, on what terms, and how assets, liabilities, cash flows, dividends, and credit arrangements were allocated.
- Whether call-driven revenue growth offset continued declines in pay-per-click and proprietary website traffic revenue.
- The sustainability and collectability of YP-related revenue and receivables, including YP’s 27% revenue concentration and $9.5 million receivable balance.
- Whether operating cash flow remains positive after excluding non-cash impairment, deferred tax, and stock-based compensation items.
- Whether additional goodwill impairment or deferred-tax valuation allowances are required based on Archeo and company-wide operating performance.
- Liquidity after the April 2014 credit-facility maturity, ongoing lease obligations, dividends, share repurchases, and any separation-related costs.
- The effect of $15.7 million of annual stock-based compensation and the remaining unrecognized equity-compensation expense on future earnings and dilution.